Xyratex (XRTX)

Liquidity and Capital Resources

We finance our operations primarily through cash balances and cash flow from operations. We also have available bank facilities from HSBC.

Cash flows

Net cash provided by operating activities was $22.6 million for the nine months ended August 31, 2009 compared to net cash used in operating activities of $21.7 million for the nine months ended August 31, 2008.

Cash provided by operating activities of $22.6 million for the nine months ended August 31, 2009 resulted primarily from a reduction in inventories of $28.1 million.  Inventories had risen above historical levels in 2008 to mitigate risks associated with the new ERP system and also as a result of the economic downturn in the fourth quarter.  In addition cash flow was positively impacted by $2.6 million from the net effect of non-cash charges totaling $20.6 million offset by the net loss of $18.0 million. These positive effects on cash flow were partially offset by an increase in accounts receivable of $4.5 million and a decrease in accounts payable of $5.3 million. Accounts receivable increased as a result of a change in customer mix to those with longer payment terms. Accounts payable reduced primarily as a result of the reduction in revenue.

Cash used in operating activities of $21.7 million for the nine months ended August 31, 2008 resulted primarily from the increases in inventory and accounts receivable of $64.9 million and $32.8 million respectively. The increase in inventory primarily related to a build up of inventory to mitigate the risks associated with the migration to our new “ERP” system. The increase in accounts receivable arose primarily from the increase of revenues in our third fiscal quarter. In addition a decrease in deferred revenues of $3.7 million, relating primarily to a decrease in orders on hand for automation equipment, contributed to the cash used in operating activities. These negative effects on cash flow were partially offset by the positive contribution of net income of $7.8 million after excluding net non-cash charges totaling $20.6 million and an increase in accounts payable of $49.1 million. The increase in accounts payable primarily related to the growth in revenues and the timing of revenues in our third quarter of 2008 being back end weighted. Deferred revenue primarily represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products.

Net cash used in investing activities was $12.4 million for the nine months ended August 31, 2009 compared to $17.3 million for the nine months ended August 31, 2008 all relating to capital expenditure.

Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment and also a building expansion in Malaysia. We would expect our capital expenditure to generally change in line with our revenues. We increased our capital expenditure in 2008 to support the expansion of activity in Malaysia. Following the change in the economic environment our capital expenditure has reduced significantly in our 2009 fiscal year. We have however completed the expansion of our facilities in Malaysia which required expenditure of approximately $4.0 million in our 2009 fiscal year. We currently have no material commitments for capital expenditures.

Net cash provided by our financing activities was $0.1 million in the nine months ended August 31, 2009 compared to net cash used in our financing activities of $4.5 million in the nine months ended August 31, 2008.

Net cash used in financing activities for the nine months ended August 31, 2008 comprised of $6.0 million for the repurchase of shares under our share buy-back program as described in the overview partially offset by $1.5 million proceeds from the exercise of employee share options.

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Liquidity and Capital Resources

We finance our operations primarily through cash balances and cash flow from operations. We also have available bank facilities from HSBC.

Cash flows

Net cash provided by operating activities was $9.2 million for the six months ended May 31, 2009 compared to net cash used in operating activities of $2.4 million for the six months ended May 31, 2008.

Cash provided by operating activities of $9.2 million for the six months ended May 31, 2009 resulted primarily from a reduction in working capital related to the reduction in revenues. This included a decrease in inventory and accounts receivable of $26.0 million and $37.8 million respectively offset by a decrease in accounts payable of $35.5 million and a decrease in deferred revenues of $3.5 million. These positive effects on cashflow were partially offset by the net loss of $25.8 million after excluding net non-cash charges totaling $13.6 million. Deferred revenue primarily represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products.

Cash used in operating activities of $2.4 million for the six months ended May 31, 2008 resulted primarily from the increases in inventory and accounts receivable of $48.7 million and $22.9 million respectively. The increase in inventory primarily related to a build up of inventory to mitigate the risks associated with the migration to our new “ERP” system. The increase in accounts receivable related primarily from the timing of revenues in our second fiscal quarter being weighted towards the end of the quarter. In addition a decrease in deferred revenues of $5.2 million, relating to a decrease in orders on hand for automation equipment, contributed to the cash used in operating activities. These negative effects on cashflow were partially offset by an increase in accounts payable of $60.8 million and the $13.8 million impact of net income after excluding non-cash charges. The increase in accounts payable primarily related to the timing of revenues and increase in inventories in our second quarter being weighted towards the end of the quarter.

Net cash used in investing activities was $10.1 million for the six months ended May 31, 2009 compared to $11.6 million for the six months ended May 31, 2008 all relating to capital expenditure.

Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. We would expect our capital expenditure to generally change in line with our revenues. We increased our capital expenditure in 2008 to support the expansion of activity in Malaysia. Following the change in the economic environment we would expect our capital expenditure to be significantly lower in our 2009 fiscal year. We are however continuing to expand our facilities in Malaysia which required additional expenditure of approximately $3.4 million in our 2009 fiscal year to complete the building expansion. We currently have no material commitments for capital expenditures.

Net cash provided by our financing activities was $0.1 million in the six months ended May 31, 2009 compared to net cash used in our financing activities of $2.1 million in the six months ended May 31, 2008.

Net cash used in financing activities for the six months ended May 31, 2008 comprised of $3.1 million for the repurchase of shares under our share buy-back program as described in the overview partially offset by $1.0 million proceeds from the exercise of employee share options.

Liquidity

As of May 31, 2009, our principal sources of liquidity consisted of cash and cash equivalents of $27.2 million and our multi-currency credit facilities with HSBC. The facilities include a revolving line of credit which expires in October 2011, and a short-term overdraft facility. The revolving line of credit is for an aggregate principal amount of up to $30.0 million and bears interest at a rate of between 2.5% and 3.0% above LIBOR, depending on the level of debt relative to operating income. The overdraft facility is for an aggregate principal amount of $25.0 million and bears interest at a rate equal to 3% above LIBOR. As of May 31, 2009, we had no debt outstanding under our revolving line of credit or our overdraft facility. The HSBC credit facilities provide for a security interest on substantially all of our assets.

Our future financing requirements will depend on many factors, but are particularly affected by our ability to generate profits, changes in revenues and associated working capital requirements, changes in the payment terms with our major customers and suppliers of disk drives, and quarterly fluctuations in our revenues. Additionally, our cash flow could be significantly affected by any acquisitions we might choose to make or alliances we have entered or might enter

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Liquidity and Capital Resources

We finance our operations primarily through cash balances and cash flow from operations. We also have available bank facilities from HSBC.

Cash flows

Net cash provided by operating activities was $10.3 million for the three months ended February 28, 2009 compared to net cash used in operating activities of $6.8 million for the three months ended February 29, 2008.

Liquidity and Capital Resources

        We finance our operations primarily through cash balances and cash flow from operations. We also have available bank facilities from HSBC.

Cash flows

        Net cash used in operating activities was $12.8 million in our 2008 fiscal year, compared to net cash provided by operating activities of $41.3 million and $54.5 million for our fiscal years ended November 30, 2007 and 2006, respectively.

        Cash used in operating activities of $12.8 million for the 2008 fiscal year resulted primarily from increases in inventories and accounts receivable of $36.5 million and $18.6 million, respectively. The increase in inventories primarily relates to our NSS segment and results from purchases in anticipation of a significant increase in revenue in the latter part of the year which did not materialize, partly due to the change in economic circumstances. The increase in accounts receivable primarily related to higher revenues in the final quarter of our 2008 fiscal year. These negative effects on cash flows were partially offset by the positive contribution of the net loss of $47.9 million after excluding non cash charges totaling $62.7 million and the non cash decrease in deferred income taxes of $16.9 million. In addition an increase in accounts payable of $15.2 million offset the cash used. The decrease in deferred income taxes primarily related to the valuation allowance against the U.K. deferred tax asset as described in the overview above. The increase in accounts payable primarily related to the higher revenues in the final quarter of our 2008 fiscal year. Other changes in working capital resulted in a cash outflow of $1.7 million.

        Cash provided by operating activities of $41.3 million for the 2007 fiscal year resulted primarily from the positive contribution of net income of $28.1 million after excluding net non-cash charges totaling $29.4 million together with an increase in accounts payable of $11.1 million. These positive effects on cash flows were partially offset by increases in accounts receivable of $17.0 million. The increase in accounts receivable and accounts payable primarily related to growth in our NSS revenues. Other changes in working capital resulted in a cash outflow of $10.3 million. These included the effects of a reduction in employee performance related bonuses of $3.4 million and an increase in sales related tax recoverable of $2.5 million.

        Cash provided by operating activities of $54.5 million for the 2006 fiscal year resulted primarily from the positive contribution of net income of $58.2 million after excluding net non-cash charges totaling $22.7 million together with increases in current liabilities of $9.3 million. The increase in current liabilities resulted primarily from the increase in revenues. A decrease in deferred income taxes of $5.8 million, related primarily to the usage of U.K. net operating loss carry-forwards, also contributed to operating cash flow. These positive effects on cash flows were partially offset by increases in accounts receivable and inventories of $21.1 million and $21.5 million, respectively. The increase in inventories resulted from an increase in the levels of revenue and changes to installation schedules by our disk drive manufacturer customers. The increase in accounts receivable resulted from an increase in revenues.

        Net cash used in investing activities was $25.8 million for our 2008 fiscal year, $23.5 million for our 2007 fiscal year and $35.4 million for our 2006 fiscal year.

        Net cash used in investing activities for the 2008 fiscal year related to capital expenditure.

        Net cash used in investing activities for the 2007 fiscal year included a $1.7 million final payment of deferred consideration related to our acquisition of ZT Automation in 2004, $17.0 million related to capital expenditure and $4.8 million related to the purchase of intellectual property from IBM and Ario Data Networks Inc.

        Net cash used in investing activities for the 2006 fiscal year included $9.8 million deferred consideration related to our acquisition of ZT Automation, $1.7 million consideration relating to our

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Table of Contents

acquisition of Jastam Trading Co. Limited in September 2006, $19.9 million related to capital expenditure and $4.0 million related to the acquisition of a portfolio of patents from IBM.

        Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. In addition, in July 2005 we commenced a new project to replace our ERP system. This has resulted in additional capital expenditure of $10.4 million in our last four fiscal years, of which $3.0 million, $2.1 million and $1.5 million, respectively is included in capital expenditure in our 2006, 2007 and 2008 fiscal years. We would expect our capital expenditure to generally change in line with our revenues. We increased our capital expenditure in 2008 partly in anticipation of growth in NSS revenues and also to support the expansion of activity in Malaysia. Following the change in the economic environment we would expect our capital expenditure to be significantly lower in our 2009 fiscal year. We are continuing to expand our operations in Malaysia which will require additional expenditure of approximately $3.4 million in our 2009 fiscal year to complete the building expansion. With this exception we currently have no material commitments for capital expenditures.

        Net cash used in our financing activities was $4.1 million in our 2008 fiscal year, $4.1 million in our 2007 fiscal year and $3.4 million in our 2006 fiscal year.

        Net cash used in financing activities for the 2008 fiscal year comprises $6.1 million for the repurchase of shares under our share buy-back program as described in the overview partially offset by $2.0 million proceeds from the exercise of employee share options.

        Net cash used in financing activities for the 2007 fiscal year comprises a final repayment of $7.0 million of our HSBC term loan offset by $2.9 million proceeds from the exercise of employee share options.

        Net cash used in financing activities for the 2006 fiscal year comprises quarterly repayments totaling $4.0 million under a previously existing HSBC term loan and payments of $3.0 million deferred consideration for the 2005 acquisition of Oliver Design offset by $3.6 million proceeds from the exercise of employee share options.

Liquidity

        As of November 30, 2008, our principal sources of liquidity consisted of cash and cash equivalents of $28.0 million and our multi-currency credit facilities with HSBC. The facilities include a revolving line of credit which expires in October 2011, and a short-term overdraft facility. The revolving line of credit is for an aggregate principal amount of up to $30.0 million and bears interest at a rate of between 1.25% and 1.75% above LIBOR, depending on the level of debt relative to operating income. The overdraft facility is for an aggregate principal amount of $25.0 million and bears interest at a rate equal to 1% above LIBOR. As of November 30, 2008, we had no debt outstanding under our revolving line of credit or our overdraft facility. The HSBC credit facilities provide for a security interest on substantially all of our assets.

        Our future financing requirements will depend on many factors, but are particularly affected by our ability to generate profits, changes in revenues and associated working capital requirements, changes in the payment terms with our major customers and suppliers of disk drives, and quarterly fluctuations in our revenues. Additionally, our cash flow could be significantly affected by any acquisitions we might choose to make or alliances we have entered or might enter into. Our operating cash outflow in our 2008 fiscal year included $36.5 million related to an increase in inventories, primarily in our NSS segment. Based on current forecasts we expect to reduce NSS inventories in our 2009 fiscal year. The current economic environment has increased the risk that we will not be able to generate profits in the short term. We believe that our cash and cash equivalents together with our credit facilities with HSBC will be sufficient to meet our cash requirements at least through the next 12 months. However, we cannot assure you that additional equity or debt financing will be available to us on acceptable terms or at all and in particular if we are unable to generate profits our ability to utilize the HSBC facilities may be limited.

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Liquidity and Capital Resources

Cash flows

Net cash used in operating activities was $21.7 million for the nine months ended August 31, 2008 compared to net cash provided by operating activities of $29.8 million for the nine months ended August 31, 2007.

Cash used in operating activities of $21.7 million for the nine months ended August 31, 2008 resulted primarily from the increases in inventory and accounts receivable of $64.9 million and $32.8 million respectively. The increase in inventory primarily related to a build up of inventory to mitigate the risks associated with the migration to our new “ERP” system. The increase in accounts receivable arose primarily from the increase of revenues in our third fiscal quarter. In addition a decrease in deferred revenues of $3.7 million, relating primarily to a decrease in orders on hand for automation equipment, contributed to the cash used in operating activities. These negative effects on cashflow were partially offset by the positive contribution of net income of $7.8 million after excluding net non-cash charges totaling $20.6 million and an increase in accounts payable of $49.1 million. The increase in accounts payable primarily related to the growth in revenues and the timing of revenues in our third quarter of 2008 being back end weighted. Deferred revenue primarily represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products.

Cash provided by operating activities of $29.8 million for the nine months ended August 31, 2007 resulted primarily from the positive contribution of net income of $16.4 million after excluding net non-cash charges totaling $20.8 million together with a decrease in inventory of $4.0 million and an increase in accounts payable of $23.7 million. The decrease in inventory primarily related to the lower revenues in the period. The increase in accounts payable primarily related to the timing of Storage Infrastructure revenues in our third quarter being concentrated at the end of the quarter. These positive effects on cashflow were partially offset by increases in accounts receivable and other current assets of $19.8 million and $3.6 million, and decreases in employee compensation and benefits payable and deferred revenue of $4.9 million and $5.8 million respectively. The increase in accounts receivable resulted from the timing of Storage Infrastructure revenues as explained above. The increase in other current assets related primarily to the timing of payments of U.K. sales taxes. The decrease in employee compensation and benefits payable related to the payment of 2006 fiscal year bonuses. The decrease in deferred revenue relates to a reduction in orders on hand in our Storage Infrastructure segment.

Net cash used in investing activities was $17.3 million for the nine months ended August 31, 2008 compared to $17.8 million for the nine months ended August 31, 2007.

Net cash used in investing activities for the nine months ended August 31, 2008 related to capital expenditure. Net cash used in investing activities for the nine months ended August 31, 2007 included $4.9 million related to the purchase of intellectual property from IBM and Ario Data Networks Inc., $1.7 million deferred consideration related to our acquisition of ZT Automation in 2004 and $11.3 million related to capital expenditure.

Capital expenditure increased in comparison to the prior period to support actual and planned growth in Networked Storage Solutions revenues. Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. We do not anticipate any significant changes in the nature or level of our capital expenditures and we would expect these to generally change in line with our revenues. We currently have no material commitments for capital expenditures.

Net cash used in our financing activities was $4.5 million in the nine months ended August 31, 2008 compared to $4.7 million in the nine months ended August 31, 2007.

Net cash used in financing activities for the nine months ended August 31, 2008 comprised of $6.0 million for the repurchase of shares under our share buy-back program as described in the overview partially offset by $1.5 million proceeds from the exercise of employee share options.

Net cash used in financing activities for the nine months ended August 31, 2007 comprised repayments of the $7.0 million remaining under our HSBC term loan partially offset by $2.3 million proceeds from the exercise of employee share options.

Liquidity

As of August 31, 2008, our principal sources of liquidity consisted of cash and cash equivalents of $27.2 million and our multi-currency credit facilities with HSBC. The HSBC credit facilities include a revolving line of credit which expires in December 2008, and a short-term overdraft facility. The revolving line of credit is for an aggregate principal amount of up to $30.0 million and bears interest at a rate of between 0.6% and 1.25% above LIBOR, depending on the level of debt relative to operating income. The overdraft facility is for an aggregate principal amount of $15.0 million and bears interest at a rate equal to 0.75% above LIBOR. As of August 31, 2008 we had no debt outstanding under our revolving line of credit or our overdraft facility. The HSBC credit facilities

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Liquidity and Capital Resources

Cash flows

Net cash used in operating activities was $2.4 million for the six months ended May 31, 2008 compared to net cash provided by operating activities of $24.3 million for the six months ended May 31, 2007.

Cash used in operating activities of $2.4 million for the six months ended May 31, 2008 resulted primarily from the increases in inventory and accounts receivable of $48.7 million and $22.9 million respectively. The increase in inventory primarily related to a build up of inventory to mitigate the risks associated with the migration to our new “ERP” system.

Liquidity and Capital Resources

Cash flows

Net cash used by operating activities was $6.8 million for the three months ended February 29, 2008 compared to net cash provided by operating activities of $8.3 million for the three months ended February 28, 2007.

Cash used by operating activities of $6.8 million for the three months ended February 29, 2008 resulted primarily from an increase in inventory of $21.5 million, offset by a reduction in working capital requirements of our Storage Infrastructure business. The increase in inventory primarily related to a build up of inventory to mitigate the risks associated with the migration to our new “ERP” system and lower than expected shipments at the end of the quarter. The reduction in working capital requirements for our Storage Infrastructure business primarily resulted from the reduction in revenues in that division and was the primary cause of a decrease in accounts receivable of $20.8 million and a decrease in accounts payable of $3.3 million. In addition a decrease in deferred revenue of $7.0 million also contributed to the net cash used.  This relates to a reduction in orders on hand in our Storage Infrastructure segment. Deferred revenue represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products. These negative effects on cashflow were partially offset by a $4.9 million positive effect of the operating results being the net loss adjusted for non-cash charges.

Cash provided by operating activities of $8.3 million for three months ended February 28, 2007 resulted primarily from the positive contribution of net income of $10.1 million after excluding net non-cash charges totaling $6.3 million together with a decrease in inventory of $6.4 million, and increases in accounts payable of $3.5 million.  The decrease in inventory was primarily related to the expectation of lower revenues in our second fiscal quarter. The increase in accounts payable resulted primarily from the timing of purchases in the quarter. These positive effects on cashflow were partially offset by increases in accounts receivable and other current assets of $7.0 million and $3.0 million respectively and decreases in employee compensation and benefits and deferred revenue of $5.3 million and $3.5 million respectively. The increase in accounts receivable resulted from changes in the timing of shipments in the quarter. The increase in other currents assets related to a reduction in value of forward foreign currency exchange contracts. The decrease in employee compensation and benefits payable related to the payment of 2006 fiscal year bonuses. The decrease in deferred revenue relates to a reduction in orders on hand in our Storage Infrastructure segment. Deferred revenue represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products.

Net cash used in investing activities was $4.0 million for the three months ended February 29, 2008 compared to $10.1 million for the three months ended February 28, 2007.

Net cash used in investing activities for the three months ended February 29, 2008 related to capital expenditure. Net cash used in investing activities for the three months ended February 28, 2007 comprised $4.8 million related to the purchase of intellectual property from IBM and Ario Data Networks Inc., $1.7 million deferred consideration related to our acquisition of ZT Automation in 2004 and $3.6 million related to capital expenditure.

Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. We do not anticipate any significant changes in the nature or level of our capital expenditures and we would expect these to generally change in line with our revenues. We currently have no material commitments for capital expenditures.

Net cash used in our financing activities was $2.0 million in the three months ended February 29, 2008 and $0.5 million in the three months ended February 28, 2007.

Net cash used in financing activities for the three months ended February 29, 2008 comprised the repurchase of shares under our share buy-back program as described in the overview of the value $2.6 million partially offset by $0.6 million proceeds from the exercise of employee share options.

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Liquidity and Capital Resources

        We have financed our operations since our management buy-out in 1994 primarily through cash flow from operations, sales of non-core businesses, bank borrowings and the net proceeds from our initial public offering.

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Cash flows

        Net cash provided by operating activities was $41.3 million, $54.5 million and $38.6 million for our fiscal years ended November 30, 2007, 2006 and 2005 respectively.

        Cash provided by operating activities of $41.3 million for the 2007 fiscal year resulted primarily from the positive contribution of net income of $28.1 million after excluding net non-cash charges totaling $29.4 million together with an increase in accounts payable of $11.1 million. These positive effects on cash flows were partially offset by increases in accounts receivable of $17.0 million. The increase in accounts receivable and accounts payable primarily related to growth in our Networked Storage Solutions revenues. Other changes in working capital resulted in a cash out flow of $10.3 million. These included the effects of a reduction in employee performance related bonuses of $3.4 million and an increase in sales related tax recoverable of $2.5 million.

        Cash provided by operating activities of $54.5 million for the 2006 fiscal year resulted primarily from the positive contribution of net income of $58.2 million after excluding net non-cash charges totaling $22.7 million together with increases in current liabilities of $9.3 million. The increase in current liabilities resulted primarily from the increase in revenues. A decrease in deferred income taxes of $5.8 million, related primarily to the usage of U.K. net operating loss carry-forwards, also contributed to operating cash flow. These positive effects on cash flows were partially offset by increases in accounts receivable and inventories of $21.1 million and $21.5 million, respectively. The increase in inventories resulted from an increase in the levels of revenue and changes to installation schedules by our disk drive manufacturer customers. The increase in accounts receivable resulted from an increase in revenues.

        Cash provided by operating activities of $38.6 million for our 2005 fiscal year resulted primarily from the positive contribution of net income of $41.9 million after excluding non-cash charges totaling $14.2 million together with an increase in accounts payable of $25.7 million. A decrease in deferred income taxes of $4.4 million and an increase in employee compensation and benefits payable of $2.5 million also contributed to the cash provided by operating activities. The increases in accounts payable and employee compensation and benefits payable result primarily from underlying revenue growth. The decrease in deferred income tax assets related primarily to the usage of U.K. net operating loss carryforwards. These positive effects on cash flows were partially offset by increases in accounts receivable and inventories of $29.3 million and $16.3 million, respectively, resulting primarily from revenue growth. In addition a $2.6 million decrease in deferred revenue also offset the increase in cash provided by operating activities. The increase in deferred revenue resulted primarily from a decrease in orders on hand for Storage Infrastructure products where payments are made in advance of shipment.

        Net cash used in investing activities was $23.5 million for our 2007 fiscal year, $35.4 million for our 2006 fiscal year and $51.9 million for our 2005 fiscal year.

        Net cash used in investing activities for the 2007 fiscal year included a $1.7 million final payment of deferred consideration related to our acquisition of ZT Automation in 2004, $17.0 million related to capital expenditure and $4.8 million related to the purchase of intellectual property from IBM and Ario Data Networks Inc as described in the overview above.

        Net cash used in investing activities for the 2006 fiscal year included $9.8 million deferred consideration related to our acquisition of ZT Automation, $1.7 million consideration relating to our acquisition of Jastam Trading Co. Limited in September 2006, $19.9 million related to capital expenditure and $4.0 million related to the acquisition of a portfolio of patents from IBM.

        Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. In addition, in July 2005 we commenced a new project to replace our Enterprise and Resource Planning ("ERP") system. This has resulted in additional capital expenditure of $8.9 million in our 2005, 2006 and 2007 fiscal years, of which $3.8 million, $3.0 million and

49

$2.1 million respectively is included in capital expenditure in our 2005, 2006 and 2007 fiscal years. With this exception, we do not anticipate any significant changes in the nature or level of our capital expenditures and we would expect these to generally change in line with our revenues. We currently have no material commitments for capital expenditures.

        Net cash used in investing activities for our 2005 fiscal year comprised $24.5 million consideration for our acquisition of nStor, $14.2 million initial consideration for our acquisition of Oliver Design less cash acquired of $10.3 million, $4.3 million deferred consideration related to our acquisition of ZT Automation, $2.2 million for our purchase of partially developed intellectual property from Cap Epsilon and $17.1 million related to capital expenditure.

        Net cash used in our financing activities was $4.1 million in our 2007 fiscal year, $3.4 million in our 2006 fiscal year and $9.0 million in our 2005 fiscal year.

        Net cash used in financing activities for the 2007 fiscal year comprises a final repayment of $7.0 million of our HSBC term loan offset by $2.9 million proceeds from the exercise of employee share options.

        Net cash used in financing activities for the 2006 fiscal year comprises quarterly repayments totaling $4.0 million under our HSBC term loan and payments of $3.0 million deferred consideration for the acquisition of Oliver Design offset by $3.6 million proceeds from the exercise of employee share options.

        Net cash used in financing activities for our 2005 fiscal year includes repayments totaling $5.1 million of short-term borrowings assumed as part of our acquisition of nStor, the payment of a $2.0 million acquisition note payable related to our acquisition of ZT Automation and quarterly repayments totaling $4.0 million under our HSBC term loan. These were partially offset by proceeds of $2.2 million from the exercise of employee share options.

Liquidity

        As of November 30, 2007, our principal sources of liquidity consisted of cash and cash equivalents of $70.7 million and our multi-currency credit facilities with HSBC. The facilities include a revolving line of credit which expires in December 2008, and a short-term overdraft facility. The revolving line of credit is for an aggregate principal amount of up to $30.0 million and bears interest at a rate of between 0.6% and 1.25% above LIBOR, depending on the level of debt relative to operating income. The overdraft facility is for an aggregate principal amount of $15.0 million and bears interest at a rate equal to 0.75% above LIBOR. As of November 30, 2007, we had no debt outstanding under our revolving line of credit or our overdraft facility. The HSBC credit facilities provide for a security interest on substantially all of our assets.

        On January 14, 2008 we commenced a share buy-back program. We have announced that we will purchase our common shares up to a value of $30 million and it is anticipated that the repurchase will take place over a period of up to one year.

        In addition to the share buy-back our future financing requirements will depend on many factors, but are particularly affected by the rate at which our revenues and associated working capital requirements grow, changes in the payment terms with our major customers and suppliers of disk drives, and quarterly fluctuations in our revenues. Additionally, our cash flow could be significantly affected by any acquisitions we might choose to make or alliances we have entered or might enter into. We believe that our cash and cash equivalents together with our credit facilities with HSBC will be sufficient to meet our cash requirements at least through the next 12 months. We cannot assure you that additional equity or debt financing will be available to us on acceptable terms or at all.

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Liquidity and Capital Resources

Cash flows

Net cash provided by operating activities was $29.8 million for the nine months ended August 31, 2007 compared to $33.2 million for the nine months ended August 31, 2006.

Cash provided by operating activities of $29.8 million for the nine months ended August 31, 2007 resulted primarily from the positive contribution of net income of $16.4 million after excluding net non-cash charges totaling $20.8 million together with a decrease in inventory of $4.0 million and an increase in accounts payable of $23.7 million. The decrease in inventory primarily related to the lower revenues in the period. The increase in accounts payable primarily related to the timing of Storage Infrastructure revenues in our third quarter being concentrated at the end of the quarter. These positive effects on cashflow were partially offset by increases in accounts receivable and other current assets of $19.8 million and $3.6 million, and decreases in employee compensation and benefits payable and deferred revenue of $4.9 million and $5.8 million respectively. The increase in accounts receivable resulted from the timing of Storage Infrastructure revenues as explained above. The increase in other currents assets related primarily to the timing of payments of U.K. sales taxes. The decrease in employee compensation and benefits payable related to the payment of 2006 fiscal year bonuses. The decrease in deferred revenue relates to a reduction in orders on hand in our Storage Infrastructure segment. Deferred revenue represents advance payments from customers for Storage Infrastructure products and varies with the level of orders on hand for these products.

Cash provided by operating activities of $33.2 million for the nine months ended August 31, 2006 resulted primarily from the positive contribution of net income of $48.8 million after excluding net non-cash charges totaling $16.4 million together with increases in accounts payable and deferred revenue of $40.1 million and $3.6 million respectively. The increase in accounts payable resulted primarily from the increase in revenues. A decrease in deferred income taxes of $7.1 million and an increase in other accrued liabilities of $3.8 million also contributed to operating cash flow. The decrease in deferred income taxes related primarily to the usage of U.K. net operating loss carry-forwards. The increase in other accrued liabilities resulted primarily from an increase in liabilities to suppliers for an order cancellation. These positive effects on cash flows were partially offset by increases in accounts receivable and inventories of $32.1 million and $56.2 million, respectively. The increase in inventories resulted from an increase in the levels of revenue and changes to installation schedules by our disk drive manufacturer customers. The increase in accounts receivable resulted from an increase in revenues.

Net cash used in investing activities for the nine months ended August 31, 2007 included $4.9 million related to the purchase of intellectual property from IBM and Ario Data Networks Inc as described in the overview above, $1.7 million deferred consideration related to our acquisition of ZT Automation in 2004 and $11.3 million related to capital expenditure.

Net cash used in investing activities for the nine months ended August 31, 2006 included $8.0 million deferred consideration related to our acquisition of ZT Automation in 2004, $15.6 million related to capital expenditure and $4.0 million related to the acquisition of a portfolio of patents from IBM on June 30, 2006.

Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines and test equipment. In addition, in July 2005 we commenced a new project to replace our Enterprise and Resource Planning (“ERP”) system. This will result in additional capital expenditure of approximately $9.0 million in our 2005, 2006 and 2007 fiscal years, of which $6.8 million was included in capital expenditure in our 2005 and 2006 fiscal years. With this exception, we do not anticipate any significant changes in the nature or level of our capital expenditures and we would expect these to generally change in line with our revenues. We currently have no material commitments for capital expenditures.

Net cash used in our financing activities was $4.7 million in the nine months ended August 31, 2007 and $2.9 million in the nine months ended August 31, 2006.

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