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track writers and the contribution of revenues of $18.4 million from sales of automation technologyfollowing the acquisition of the business of ZT Automation LLC on February 23, 2004. The increase inthe sales of production test systems reflected the requirements of our major customers for additionalmanufacturing capacity, partly to support their new product introductions. Sales of servo track writerswere lower in our 2004 fiscal year than in our 2003 fiscal year, partly because of equipmentreplacement by one of our major customers. As described above, our revenues from our StorageInfrastructure products are subject to significant fluctuations resulting from our major customers’capital expenditure decisions.Cost of Revenues and Gross ProfitThe increase in cost of revenues and gross profit in our 2004 fiscal year compared to our 2003fiscal year was primarily related to our growth in revenues. As a percentage of revenues, excludingnon-cash equity compensation expense, our gross profit increased to 22.3% in our 2004 fiscal year from22.1% for our 2003 fiscal year, reflecting increased gross margins for our Storage Infrastructuresegment, partially offset by a 0.4% decrease attributable to the increased proportion of revenues fromthe sales of lower margin Storage and Network Systems products. The gross margin for our Storageand Network Systems products was substantially unchanged at 17.7% in our 2004 fiscal year comparedto 17.6% in our 2003 fiscal year. The positive effects of component cost savings and operatingefficiencies associated with the higher volumes were partially offset by changes in product mix,particularly the increasing proportion of the lower margin products addressing the NAS and Nearlinemarket segments. The gross margin for Storage Infrastructure products increased to 32.9% in our 2004fiscal year from 31.0% in our 2003 fiscal year primarily as a result of relatively higher margins for ourautomation products.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 and $0.7 million for our2003 fiscal year. See Note 16 to our consolidated financial statements included elsewhere in thisAnnual Report for a description of our segments and how we measure segment performance.Research and Development—Development ArrangementAs described above, in our 2002 fiscal year, as part of a development arrangement with a supplier,we loaned $6.0 million and paid additional amounts totaling $1.8 million in connection with thedevelopment of components to be included in certain of our products and recorded these amounts asan expense. In August 2004 the loan of $6.0 million became collectible and was repaid, together withinterest of $1.1 million. Accordingly, we recorded a reduction in research and development expensesand interest costs for these amounts in our 2004 fiscal year. We do not believe that the other paymentof the additional $1.8 million will have any significant future benefit.Research and Development—OtherThe $7.6 million increase in other research and development expenses in our 2004 fiscal yearcompared to our 2003 fiscal year primarily reflected increased investment of approximately $4.1 millionin a number of projects to enhance and test the technology content of our storage subsystems,particularly for our RAID product line. In addition, $1.5 million relates to automation technologyfollowing the acquisition of the business of ZT Automation LLC and $0.5 million relates to opticaltechnology following the purchase of intellectual property from Beyond3.51