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The $123.9 million increase in revenues from sales of Storage Infrastructure products primarilyresulted from increases of $74.4 million in revenues from the sale of production test systems and$41.0 million in revenues from the sale of media process technology, including the contribution of$35.3 million from sales of media cleaning equipment following our acquisition of Oliver Design onMay 23, 2005. Also in comparing these periods, revenues from the sale of servo track writers increasedby $8.5 million. The changes in sales of these products relate to the requirements of our major diskdrive customers for these products which have been affected by the growth in demand for disk drivesthose customers are experiencing, both in terms of volume and individual disk drive storage capacity.As described above, our revenues from our Storage Infrastructure products are subject to significantfluctuations, particularly between quarters, resulting from our major customers’ capital expendituredecisions and installation schedules.Cost of Revenues and Gross ProfitThe increase in cost of revenues and gross profit in our 2005 fiscal year compared to our 2004fiscal year was primarily related to our growth in revenues. As a percentage of revenues, excluding thenon-cash equity compensation expense, our gross profit was 21.2% in our 2005 fiscal year compared to22.3% for our 2004 fiscal year. This reflects decreases in the gross margin for both our Storage andNetwork Systems and our Storage Infrastructure products, partially offset by an increase of 1.3%resulting from an increased proportion of higher margin Storage Infrastructure revenues.The gross margin for our Storage and Network Systems products decreased to 15.6% in our 2005fiscal year from 17.7% in our 2004 fiscal year, primarily as a result of changes in product and customermix, in particular the increasing proportion of lower margin products incorporating low cost disk drivetechnology and a reduction in sales of subsystems incorporating RAID technology, which attract ahigher margin. In addition, the inclusion in our 2004 fiscal year of sales of a discontinued highermargin networking product and the timing of increases in manufacturing expenses associated with newcapacity also contributed to the decrease in gross margin.The gross margin for Storage Infrastructure products decreased to 30.1% in our 2005 fiscal yearfrom 32.9% in our 2004 fiscal year. This was primarily the result of changes in product mix, including areduced proportion of higher margin component sales relative to integrated system sales and a reducedproportion of higher margin automation products. These were partially offset by a 0.8% increase inmargin as a result of operating efficiencies associated with the higher volumes.In measuring the performance of our business segments from period to period without variationscaused by special or unusual items, we focus on gross profit by product group, which excludes anon-cash equity compensation charge of $7.8 million for our 2004 fiscal year. See Note 16 to ourconsolidated financial statements included elsewhere in this Annual Report for a description of oursegments and how we measure segment performance.Research and Development—development arrangementIn our 2002 fiscal year, as part of a development arrangement with a supplier, Chaparral NetworkStorage Inc, or Chaparral, we loaned $6.0 million to Chaparral in connection with the development ofRAID controller components to be included in certain of our products. Because we believed that therepayment of these amounts was dependent on the successful efforts of the related research anddevelopment, the amounts were recorded as expense in 2002.In February 2004, Dot Hill Systems Corp. acquired Chaparral and, based on the financial positionof Dot Hill, we determined that the $6.0 million loan plus $0.9 million of accrued interest wascollectible. Accordingly, we recorded a reduction in research and development expenses and additionalinterest income for these amounts in our 2004 fiscal year. In August 2004, Dot Hill repaid the loan andaccrued interest in full.47