REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For July 15, 2005

Commission File Number: 333-116083

XYRATEX LTD

(Translation of registrant’s name into English)

Langstone Road,
Havant
PO9 1SA
United Kingdom

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):           .

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):          .

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-           .

NEWS RELEASE

For Immediate Release

Xyratex Ltd today released the following financial information for the second quarter, ending May 31, 2005:

•              Management’s Discussion and Analysis of Financial Condition and Results of Operations—page 3

•              Unaudited condensed consolidated financial statements—page 16

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This section contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in our Annual Report on Form 20-F as filed with the Securities and Exchange Commission. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Overview

We are a leading provider of modular enterprise-class data storage subsystems and storage process technology. We design, develop and manufacture enabling technology that provides our customers with data storage products to support high-performance storage and data communication networks. We operate in two business segments: Storage and Network Systems and Storage Infrastructure.

Our Storage and Network Systems products are primarily storage subsystems which we provide exclusively to OEMs and our Storage Infrastructure products consist of disk drive manufacturing process equipment which we sell directly to manufacturers of disk drives and disk drive components. We form long-term strategic relationships with our customers and we support them through our operations in the United States, Asia and Europe. In our 2004 fiscal year, sales to our top three customers, Network Appliance, Seagate Technology and Western Digital, accounted for 53%, 24% and 5% of our revenues, respectively. In the six months ended May 31, 2005, sales to these customers accounted for 87% of our revenues. We enter into joint development projects with our key customers and suppliers in order to research and introduce new technologies and products. As of May 31, 2005, we had over 100 customers.

On May 23, 2005, we acquired the business of Oliver Design, Inc., a company located in Scotts Valley, California, which develops and sells magnetic disk drive media cleaning technology for use in the disk drive production process, for a total cash consideration of $17.2 million, consisting of an initial payment of $14.2 million and deferred consideration of $3.0 million due fifteen months from closing and recorded as an acquisition note payable. We anticipate funding the remaining portion of this acquisition through cash on hand and cash generated from operations. The results of this business have been consolidated from the date of acquisition, but are not significant in our most recent fiscal quarter.

In February 2004, we acquired the business of ZT Automation LLC, a company located in Fremont, California, which develops and sells magnetic disk media handling automation technology for use in the disk drive production process, for a maximum total consideration of $29.0 million, which consists of $6.6 million of initial consideration and $22.4 million of deferred consideration. Of the deferred consideration, $2.0 million was recorded as an acquisition note payable and was paid in February 2005. The additional amounts of deferred consideration of up to $20.4 million are payable based principally on a percentage of revenue generated by this business in the three years ending on December 31, 2006, calculated as 21.5% of cumulative revenue in excess of $19.6 million. The amount paid or payable based on revenue was $2.5 million at May 31, 2005. We anticipate funding the remaining portion of this acquisition through cash on hand and cash generated from operations.

On June 29, 2004 we completed an initial public offering in which we issued 4,000,000 common shares at $14.00 per share. The total proceeds from the common shares issued by us were $56.0 million and the net proceeds received by us after deducting underwriting discounts and other offering expenses were $48.1 million. Immediately prior to the closing of the initial public offering and in order to facilitate the listing of our common shares on the NASDAQ National Market, Xyratex Ltd, a Bermuda company,

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became the parent company of our business through an exchange by Xyratex Group Limited shareholders of their shares in Xyratex Group Limited, our previous parent company, for common shares of Xyratex Ltd. Xyratex Ltd was formed in April 2002 and had no operations prior to the initial public offering. In our 2004 fiscal year, as a consequence of our initial public offering, we recorded a non-cash equity compensation expense of $181.1 million.

In September 2004, we acquired the intellectual property of Beyond3, a developer of advanced optical inspection systems based in San Jose, California. The structure of the transaction involves an initial cash consideration of $1.3 million plus additional future payments of up to $17.2 million, $1.2 million of which is dependent on the achievement of certain product delivery milestones and up to $16.0 million of which is dependent on operating profit generated from the acquired intellectual property over the four years ending November 30, 2008.

Revenues

We derive revenues primarily from the sale of our Storage and Network Systems products and our Storage Infrastructure products.

Our Storage and Network Systems products consist primarily of storage subsystems which address three market segments through our OEM customers, Network Attached Storage or NAS, Storage Area Networks or SAN and, more recently, Nearline storage.  Our customers typically operate across multiple market segments. Nearline storage is considered to be a new segment within the external storage systems market. It is primarily driven by magnetic tape technology being replaced by storage systems containing low cost disk drive technology in the back up and recovery processes within enterprises. The deployment of low cost disk drives is also taking place within the SAN and NAS market segments as IT departments begin to classify their data as part of an information life cycle or corporate data management strategy. Our customers in each market segment currently use the fibre channel protocol to access the storage subsystem which can incorporate either high performance fibre channel or lower cost ATA/SATA disk drives.

Our Storage Infrastructure revenues are derived from the sale of disk drive manufacturing process equipment directly to manufacturers of disk drives and disk drive components and we have seen growth in these revenues over recent fiscal years, primarily through sales to Seagate Technology. We supply four main product lines in this segment: production test systems, servo track writers and, following our acquisitions of the businesses of Oliver Design, Inc. and ZT Automation LLC, we now supply media cleaning and media handling automation technology. Revenues from these products are subject to significant fluctuations, particularly from quarter to quarter, as they are dependent on the capital investment decisions and installation schedules of our customers.

As described below, the unit prices we obtain from our major customers will typically vary with volumes. As products become more mature, prices will generally decline, partly reflecting reduced component costs. We also regularly introduce new products which are likely to incorporate additional features or new technology and these products will generally command a higher unit price. Average unit prices will also vary with the mix of customers and products. In the last three fiscal years we have not seen an overall trend in our unit prices.

Revenues from product sales are recognized once delivery has occurred, provided that there is persuasive evidence that a delivery arrangement exists, the price for the delivered product is fixed or determinable, and it is reasonably assured that the revenue will be collected. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer. For sales that include customer-specified acceptance criteria, revenues are recognized after the acceptance criteria have been met. Sales of the major portion of our Storage Infrastructure products include an installation element. Revenue for these products is recognized upon installation except that, where there is objective and reliable evidence to support the value of installation, the product is treated as a separate element of the arrangement and product revenue is recognized upon delivery. In addition, some of our sales contracts provide that a certain percentage of payments is to be made in advance of product delivery, in which case we record these payments as deferred revenue until the product is actually delivered.

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We typically enter into arrangements with our largest customers and provide them with products based on purchase orders executed under these arrangements. These arrangements often include estimates as to future product demand but do not typically specify minimum volume purchase requirements. Due to the complexity of our products, we provide almost all of our products on a build-to-order basis. The prices of our products are generally agreed to in advance and are based on a pre-negotiated pricing model. The pricing model may specify certain product components and component costs as well as anticipated profit margins. Some of these arrangements require non-refundable payments from our customers for research and development during the product development phase, which is known as non-recurring engineering. Revenue from non-recurring engineering under these contracts has been recognized upon the achievement of agreed project milestones and amounted to $1.5 million in our 2004 fiscal year and $0.2 million in the six months ended May 31, 2005. We do not anticipate any significant changes in the level of revenue from non-recurring engineering.

We believe that both of our business segments present the opportunity for growth in the near-term. We are seeing growth in demand from our customers which we believe relates to factors including increases in the amount of digitally stored information, increased information technology spending, growth in the specific markets which our customers address, the trend towards outsourcing and increased market share of our customers. Growth in our Storage Infrastructure revenues is also specifically affected by the growth in shipped volume of and increases in the individual storage capacity of disk drives.

Foreign Exchange Rate Fluctuations

The functional currency for all our operations is U.S. dollars and the majority of our revenues and cost of revenues are denominated in U.S. dollars. A significant proportion (approximately $50 million in our 2004 fiscal year) of our non-U.S. dollar operating expenses relate to payroll and other expenses of our U.K. operations. We manage our U.S. dollar to U.K. pound exchange rate exposure through the use of forward foreign currency exchange contracts and option agreements. By using these derivative instruments, increases or decreases in our U.K. pound operating expenses resulting from changes in the U.S. dollar to U.K. pound exchange rate are partially offset by realized gains and losses on the derivative instruments.

From August 2003 until November 2004, the U.S. dollar fell by approximately 16% relative to the U.K. pound. The effect on net income in our 2004 fiscal year was significantly reduced because we hedged the majority of our exposure to this exchange rate movement until November 30, 2004. This historical exchange rate movement will result in an increase in operating expenses in our 2005 fiscal year of approximately $6.0 million. This amount will rise or fall with future movement in the U.S. dollar relative to the U.K. pound offset by additional forward contracts and option agreements we have entered into in respect of our 2005 fiscal year.

Costs of Revenues and Gross Profit

Our costs of revenues consist primarily of the costs of the materials and components used in the assembly and manufacture of our products, including disk drives, electronic cards, enclosures and power supplies. Other items included in costs of revenues include salaries, bonuses and other labor costs for employees engaged in the component procurement, assembly and testing of our products, warranty expenses, shipping costs, depreciation of manufacturing equipment and certain overhead costs. Our gross margins change primarily as a result of fluctuations in our product mix. Our gross margins also change as a result of changes to product pricing, manufacturing volumes and costs of components. Our gross margins for our Storage and Network Systems products tend to be lower than the margins of our other products. To the extent our revenues from our Storage and Network Systems products grow relative to our other products and services our gross profit may decrease as a percentage of revenues. We will seek to continue to improve our gross margins by delivering higher value-added products to our customers.

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Research and Development

Our research and development expenses include expenses related to product development, engineering, materials costs and salaries, bonuses and other labor costs for our employees engaged in research and development. Research and development expenses include the costs incurred in designing products for our OEM customers, which often occurs prior to their commitment to purchase these products. These expenses have increased over the last three years, reflecting our continuing commitment to developing products based on advanced technologies and designs. We expense research and development costs as they are incurred. As of May 31, 2005 approximately one third of our employees were engaged in our research and development activities. We anticipate that this level of research and development commitment will continue.

Due to the level of competition in the markets in which we operate and the rapid changes in technology, our future revenues are heavily dependent on the improvements we make to our products and the introduction of new products. During our 2004 fiscal year our research and development expenses were spread over approximately 44 separate projects relating to improving existing products, meeting customer specific requirements and entering new markets, such as an investment in silicon-based switch architecture. We are planning to increase our expenditure in each of these areas in our 2005 fiscal year.

Selling, General and Administrative

Selling, general, and administrative expenses include expenses related to salaries, bonuses and other labor costs for senior management and sales, marketing, and administrative employees, market research and consulting fees, commissions to sales representatives, information technology costs, other marketing and sales activities and exchange gains and losses arising on the retranslation of U.K. pound denominated assets and liabilities. Our selling, general and administrative expenses have increased over recent fiscal years as we have grown our business. To the extent our business continues to grow we would expect this trend to continue and in addition, following our initial public offering, we have and will incur additional expenses in connection with operating as a public company, particularly an increase in directors and officers’ insurance expense of approximately $1.7 million per annum. Excluding equity compensation expenses, in recent years, our expenses for sales, general and administrative functions have declined as a percentage of our revenues. As our business continues to grow we expect this trend to continue although, as discussed above, this can be affected in any fiscal year by the effect of significant changes in exchange rates.

Provision for Income Taxes

We are subject to taxation primarily in the United Kingdom, the United States and Malaysia. Substantially all of our Malaysian operations benefit from “high-tech pioneer” status which provides us with a zero tax rate provided that we meet certain requirements. This status is due to expire in March 2007 and to the extent we repatriate profits from Malaysia to the United Kingdom they may be subjected to U.K. taxation upon the expiry of certain beneficial elements of an international tax treaty between Malaysia and the United Kingdom in December 2005.

As of November 30, 2004, we recorded a deferred tax asset of $21.5 million. Of this amount, $10.9 million relates to a loss carryforward of $23.2 million and other tax and accounting timing differences in the United Kingdom. The remaining $10.6 million results from the recording of a non-cash equity compensation expense in our 2004 fiscal year and relates to a U.K. tax deduction which is permitted once share options granted to U.K.  employees are exercised, calculated as the excess of the market price on date of exercise over the exercise price.

Tax payments in our 2004 fiscal year amounted to $1.3 million and, due to the beneficial Malaysian tax status and U.K. loss carryforwards, these tax payments related primarily to our U.S. operations and to U.K. interest income. We do not anticipate a significant change in the level of our tax payments in our 2005 fiscal year. The tax expense we recorded in the six months ended May 31, 2005 and expect to record in our 2005 fiscal year primarily relates to the usage of U.K. operating loss carryforwards. This expense may increase in our 2006 fiscal year as a result of the expiry of certain beneficial elements of the international tax treaty between Malaysia and the United Kingdom.

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Equity Compensation Expense

In our 2004 fiscal year, as a consequence of our initial public offering, we recorded a non-cash equity compensation expense of $181.1 million, of which $1.0 million related to the vesting of share and option awards subsequent to the offering. Of this amount $168.1 million was included in continuing operations and $12.9 million was included in discontinued operations. The equity compensation expense of $181.1 million is associated with the historical grants of Xyratex Group Limited class A preferred ordinary and class C ordinary shares totaling 10.6 million shares, and 3.8 million unexercised share options and other equity incentives awarded to our employees. U.S. GAAP requires that compensation expense for awards of shares, share options and other equity-based awards be measured on the first date that the number of shares that an employee is entitled to receive and the option or purchase price is known, referred to as the final measurement date. The final measurement date for grants of Xyratex Group Limited’s class A preferred ordinary shares, as well as some of the share options, was the completion date of the initial public offering since the transferability restrictions associated with the shares lapsed on that date.

Under our existing accounting policy we record equity compensation expense using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion 25 – “Accounting for Stock Issued to Employees”. We recorded an expense of $0.4 million in the six months ended May 31, 2005 related to 0.3 million share awards based on the prorated vesting of those shares during the quarter. We expect to record similar equity compensation expense amounts in our next two fiscal quarters. In our 2006 fiscal year we will be required to record equity compensation expense using the fair value method required by Financial Accounting Standard (FAS) 123R – “Share Based Payment”. Included in Note 2 to the unaudited condensed consolidated financial statements is a calculation of the expense using a fair-value-based method required by FAS 123. We do not expect the calculation of equity expense under FAS 123R to differ materially from the pro forma calculations included in Note 2.

Results from Operations

The following table sets forth, for the periods indicated, selected operating data as a percentage of revenues.

Three Months Ended May 31, 2005 Compared to Three Months Ended May 31, 2004

The following is a tabular presentation of our results of operations for the three months ended May

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31, 2005 compared to the three months ended May 31, 2004. Following the table is a discussion and analysis of our business and results of operations for such periods. A discussion of the non-cash equity compensation expense is set out above.

Revenues

The 56.9% increase in our revenues in the three months ended May 31, 2005 compared to the three months ended May 31, 2004 was attributable to increased sales of both our Storage and Network Systems and Storage Infrastructure products.

Of the $18.0 million increase in revenues from sales of our Storage and Network Systems products, management estimates that $5.0 million was contributed by a 55% growth in revenues from products incorporating low-cost disk drives. The remaining increase related primarily to growth of approximately 17% in sales of our storage subsystem products incorporating fibre channel disk drives. Both of these increases were driven largely by a continued growth in our sales to Network Appliance and we believe this reflects the increasing requirements for storage of digital information, particularly networked storage.

The $43.5 million increase in revenues from sales of Storage Infrastructure products included increases of $41.7 million and $4.8 million in revenues from the sale of production test systems and servo track writers, respectively, and a $3.1 million decrease in sales of automation technology. The changes in sales of these products relate to the requirements of our major disk drive customers for these products which has been affected by the growth in demand for disk drives those customers are experiencing, both in terms of volume and storage capacity. As described above, our revenues from our Storage Infrastructure products are subject to significant quarterly fluctuations resulting from our major customers’ capital expenditure decisions and installation schedules.

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Cost of Revenues and Gross Profit

The increase in cost of revenues and gross profit in the three months ended May 31, 2005 compared to the three months ended May 31, 2004 was primarily related to our growth in revenues. As a percentage of revenues, excluding the non-cash equity compensation expense, our gross profit was 22.0% in the three months ended May 31, 2005 compared to 21.5% for the three months ended May 31, 2004. This reflects an increase of 2.7% resulting from an increased proportion of higher margin Storage Infrastructure revenues partially offset by decreases in the gross margin for both our Storage and Network Systems and our Storage Infrastructure products.

The gross margin for our Storage and Network Systems products decreased to 16.0% in the three months ended May 31, 2005 from 17.8% in the three months ended May 31, 2004, primarily as a result of changes in product mix, particularly the increasing proportion of lower margin products incorporating low cost disk drive technology. The timing of increases in manufacturing expenses associated with new manufacturing capacity also contributed to the decrease in gross margin.

The gross margin for Storage Infrastructure products decreased to 30.7% in the three months ended May 31, 2005 from 33.3% in the three months ended May 31, 2004, primarily as a result of the reduced proportion of higher margin automation products, partially offset by operating efficiencies associated with the higher volumes.

Research and Development - other

The $3.6 million increase in other research and development expense in the three months ended May 31, 2005 compared to the three months ended May 31, 2004 includes increased investment of approximately $1.5 million in a number of projects to enhance the technology content and broaden the range of our storage subsystems including $0.5 million in connection with a new Storage Appliance product line related to the in process research and development expense described below. Of the remaining increase, $0.7 million related to investment in new Storage Infrastructure products, including optical inspection technology following the Beyond3 acquisition, $0.6 million related to higher annual staff performance bonuses and $0.6 million related to changes in exchange rates.

Selling, General and Administrative - other

The $2.7 million increase in our selling, general and administrative expense in the three months ended May 31, 2005 compared to the three months ended May 31, 2004 includes $0.6 million related to changes in exchange rates, $0.5 million related to higher annual staff performance bonuses and a $0.9 million increase in insurance and other costs following our IPO. Additionally we have increased the number of employees engaged in sales activities in support of the increase in the level of business.

Amortization of Intangible Assets

The amortization of intangible assets relates primarily to the intangible assets purchased as part of the acquisition of the business of ZT Automation LLC in February 2004.

In process research and development

In April 2005 we purchased intellectual property for $2.2 million consisting of a software suite which we intend to incorporate into a new Storage Appliance product line within our Storage and Network Systems segment. The purchase price was recorded as an operating expense because the acquired software had not reached technological feasibility and had no alternative uses.

Other Costs

In the three months ended May 31, 2004 we incurred costs of $0.4 million in preparation for our initial public offering consisting of professional fees.

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Interest Income, Net

We recorded net interest income of $0.3 million in the three months ended May 31, 2005 compared to interest expense of $20 thousand in the three months ended May 31, 2004. The recording of interest income in the three months ended May 31, 2005 resulted from an increase in cash and cash equivalents, primarily related to the net proceeds from the issuance of common shares in connection with our IPO.

Provision for Income Taxes

During the three months ended May 31, 2005, the provision for income taxes increased by approximately $1.2 million compared with the three months ended May 31, 2004 primarily as a result of the increase in income before income taxes. This was partially offset by the increase in income related to our Malaysian operation which is substantially exempt from income taxes. The increase in income of our Malaysian operation results from the increased level of Storage Infrastructure revenue.

Net Income

The increase in net income for the three months ended May 31, 2005 compared to the three months ended May 31, 2004 resulted primarily from the factors set out above, including, in particular, the increase in our revenues and the increase in gross margins. The effects of these were offset by factors set out above, including, in particular, increases in operating expenses.

Six Months Ended May 31, 2005 Compared to Six Months Ended May 31, 2004

The following is a tabular presentation of our results of operations for the six months ended May 31, 2005 compared to the six months ended May 31, 2004. Following the table is a discussion and analysis of our business and results of operations for such periods. A discussion of the non-cash equity compensation expense is set out above.

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Revenues

The 37.3% increase in our revenues in the six months ended May 31, 2005 compared to the six months ended May 31, 2004 was attributable to increased sales of both our Storage and Network Systems and Storage Infrastructure products.

Of the $37.2 million increase in revenues from sales of our Storage and Network Systems products, management estimates that $18.1 million was contributed by a 75% increase in revenues from products incorporating low-cost disk drives. The remaining increase related primarily to growth of approximately 17% in sales of our storage subsystem products incorporating fibre channel disk drives. Both of these increases were driven largely by a continued growth in our sales to Network Appliance and we believe this reflects the increasing requirements for storage of digital information, particularly networked storage.

The $47.5 million increase in revenues from sales of Storage Infrastructure products primarily resulted from an increase of $44.2 million in revenues from the sale of production test systems. Also in comparing these periods, revenues from the sale of servo track writers increased by $2.6 million and revenue from the sale of automation technology increased by $0.6 million.  The changes in sales of these products relate to the requirements of our major disk drive customers for these products which has been affected by the growth in demand for disk drives those 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 significant quarterly fluctuations resulting from our major customers’ capital expenditure decisions and installation schedules.

Cost of Revenues and Gross Profit

The increase in cost of revenues and gross profit in the six months ended May 31, 2005 compared to the six months ended May 31, 2004 was primarily related to our growth in revenues. As a percentage of revenues, excluding the non-cash equity compensation expense, our gross profit was 21.4% in the six months ended May 31, 2005 compared to 22.9% for the six months ended May 31, 2004. This reflects decreases in the gross margin for both our Storage and Network Systems and our Storage Infrastructure products, partially offset by an increase of 0.9% resulting from an increased proportion of higher margin Storage Infrastructure revenues.

The gross margin for our Storage and Network Systems products decreased to 16.0% in the six months ended May 31, 2005 from 18.1% in the six months ended May 31, 2004, primarily as a result of changes in product mix, in particular the increasing proportion of lower margin products incorporating low cost disk drive technology and the inclusion in the six months ended May 31, 2004 of sales of a discontinued higher margin networking product. The timing of increases in manufacturing expenses associated with new capacity also contributed to the decrease in gross margin.

The gross margin for Storage Infrastructure products decreased to 29.9% in the six months ended May 31, 2005 from 32.6% in the six months ended May 31, 2004. This was the result of the inclusion in the comparative period of the one-time benefit of component cost reductions together with the reduced proportion of higher margin automation products, partially offset by operating efficiencies associated with the higher volumes.

Research and Development—development arrangement

In our 2002 fiscal year, as part of a development arrangement with a supplier, Chaparral Network Storage Inc, or Chaparral, we loaned $6.0 million to Chaparral in connection with the development of RAID controller components to be included in certain of our products. Because we believed that the repayment of these amounts was dependent on the successful efforts of the related research and development, the amounts were recorded as expense in 2002.

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In February 2004, Dot Hill Systems Corp. acquired Chaparral and, based on the financial position of Dot Hill, we determined that the $6.0 million loan plus $0.9 million of accrued interest was collectible. Accordingly, we recorded a reduction in research and development expenses and additional interest income for these amounts in the three months ended February 29, 2004. In August 2004, Dot Hill repaid the loan and accrued interest in full.

Research and Development - other

The $6.2 million increase in other research and development expense in the six months ended May 31, 2005 compared to the six months ended May 31, 2004 includes increased investment of approximately $2.7 million in a number of projects to enhance the technology content and broaden the range of our storage subsystems, including $0.5 million in connection with a new Storage Appliance product line related to the in process research and development expense described below. Of the remaining increase  $1.2 million related to investment in new Storage Infrastructure products including automation and optical inspection technologies following the ZT Auomation and Beyond3 acquisitions, $0.8 million related to higher annual staff performance bonuses and $1.2 million related to changes in exchange rates.

Selling, General and Administrative - other

The $4.7 million increase in our selling, general and administrative expense in the six months ended May 31, 2005 compared to the six months ended May 31, 2004 includes $0.5 million related to the ZT Automation acquisition, $1.2 million related to changes in exchange rates, $0.7 million related to higher annual staff performance bonuses and a $1.8 million increase in insurance and other costs following our IPO. Additionally, we have increased the number of employees engaged in sales activities in support of the increase in the level of business.

In process research and development

As described above in our discussion of the quarterly operating results, we recorded in process research and development expense of $2.2 million resulting from a purchase of intellectual property in April 2005.

Amortization of Intangible Assets

The increase in amortization of intangible assets in the six months ended May 31, 2005 relates to the acquisition of the business of ZT Automation LLC in February 2004 and the resulting inclusion in the comparative period of approximately only one quarter of amortization expense. This expense will increase further in future periods as a result of the inclusion of amortization of assets associated with the Oliver Design acquisition.

Other Costs

In the six months ended May 31, 2004 we incurred costs of $1.9 million in preparation for our initial public offering consisting of professional fees.

Interest Income, Net

We recorded net interest income of $0.7 million in the six months ended May 31, 2005 compared to $0.8 million in the six months ended May 31, 2004. The interest income in the prior period includes the recognition of $0.9 million interest received on the loan made to Chaparral as part of the development arrangement described above. Excluding this amount, the recording of interest income in the six months ended May 31, 2005 resulted from an increase in cash and cash equivalents, primarily related to the net proceeds from the issuance of common shares in connection with our IPO.

Provision for Income Taxes

During the six months ended May 31, 2005, the provision for income taxes decreased compared with

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the six months ended May 31, 2004 by $1.0 million, primarily as a result of the decrease in income from before income taxes. In addition the decrease resulted from the increase in income related to our Malaysian operation which is substantially exempt from income taxes. The increase in income of our Malaysian operation results from the increased level of Storage Infrastructure revenue.

Net Income

The reduction in net income for the six months ended May 31, 2005 compared to the six months ended May 31, 2004 resulted primarily from the factors set out above, including, in particular, increases in operating expenses, the reduction in gross margins and the inclusion in the prior quarter of the release of the bad debt allowance against the supplier loan. The effects of these were offset by factors set out above, including, in particular, the increase in our revenues.

Liquidity and Capital Resources

Cash flows

Net cash provided by operating activities was $14.9 million for the six months ended May 31, 2005 compared to $1.7 million in the six months ended May 31, 2004.

Operating cash flows in the six months ended May 31, 2005 have been affected by underlying revenue growth. This together with the related increases in cost of sales and operating expenses has resulted in an increased requirement for working capital. In particular, as described in the discussion below, this has resulted in operating cash out flows related to increases in accounts receivable and inventories partly offset by increases in accounts payable.

Cash provided by operating activities of $14.9 million for the six months ended May 31, 2005 resulted primarily from the positive contribution of net income after excluding non-cash charges for depreciation and amortization of $3.9 million together with increases in accounts payable of $21.7 million and a decrease in deferred income taxes of $4.1 million. The increase in accounts payable results primarily from underlying sales growth. The decrease in deferred income taxes 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 $15.3 million and $18.7 million, respectively, resulting primarily from growth in the business.

Cash provided by operating activities of $1.7 million for the six months ended May 31, 2004 resulted primarily from net income after excluding non-cash charges of $2.9 million for depreciation and amortization and a gain of $6.0 million related to the recognition of a supplier note receivable. The supplier note receivable related to amounts we expected to collect in connection with a loan which had been written off in our 2002 fiscal year and which was repaid in August 2004. Increases in accounts payable and other accrued liabilities of $2.4 million and $1.6 million, respectively, together with a decrease in deferred income taxes of $3.4 million also contributed to cash provided by operating activities. The increases in accounts payable and other accrued liabilities resulted primarily from growth in the business and the accrual of the costs of our IPO, respectively. The decrease in deferred income taxes resulted primarily from the usage of U.K. net operating loss carryforwards. These positive effects on cash flows were partially offset by increases in accounts receivable, inventories and prepaid expenses and other current assets of $4.7 million,  $4.1 million and $2.5 million, respectively, and decreases in employee compensation and benefits payable and deferred revenue of $4.1 million and $9.4 million, respectively. The increases in accounts receivable and inventories resulted primarily from underlying sales growth. The increase in prepaid expenses related to the prepaid expenses of our IPO. The decrease in employee compensation and benefits payable resulted primarily from the payment of 2003 fiscal year bonuses. The decrease in deferred revenue resulted from a reduction in orders on hand from a major customer where payments are made in advance of shipment.

Net cash used in investing activities was $9.7 million for the six months ended May 31, 2005

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compared to $9.7 million for the six months ended May 31, 2004. Net cash used in the six months ended May 31, 2005 comprised $14.1 million initial consideration for the Oliver Design acquisition less cash acquired of $10.1 million, $1.2 million deferred consideration related to the ZT Automation acquisition and $4.5 million related to capital expenditure. The cash used in the six months ended May 31, 2004 comprised $6.0 million in respect of the initial consideration for the acquisition of the business of ZT Automation LLC and $3.7 million related to capital expenditure.

Our capital expenditures relate primarily to purchases of equipment such as tooling, production lines, test equipment and computers. 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 a total of approximately $4.0 million 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 increase in line with our revenues. With the exception of the new ERP system, we currently have no material commitments for capital expenditures.

Net cash used in financing activities was $2.2 million in the six months ended May 31, 2005 compared to cash provided by financing activities of $6.1 million in the six months ended May 31, 2004. Net cash used in financing activities in the six months ended May 31, 2005 includes the payment of a $2.0 million acquisition note payable related to the ZT Automation acquisition and quarterly repayments totaling $2.0 million under our HSBC term loan. These were partially offset by proceeds of $1.8 million from the exercise of employee share options. Net cash provided by financing activities in the six months ended May 31, 2004 comprised issuances of ordinary shares of $4.3 million primarily related to the exercise of employee share options, borrowings of $3.8 million under our HSBC overdraft facility to fund working capital offset by quarterly repayments totaling $2.0 million under our HSBC term loan.

Liquidity

As of May 31, 2005, our principal sources of liquidity consisted of cash and cash equivalents of $66.6 million and our multi-currency credit facilities with HSBC. The HSBC credit facilities include the remaining $13.0 million of a $19.0 million term loan. This loan is repayable in equal quarterly installments over five years. The facilities also include a revolving line of credit which expires in September 2008, and a short-term overdraft facility. The revolving line of credit is for an aggregate principal amount of up to $10.0 million and bears interest at a rate of 0.75% above LIBOR. The overdraft facility is for an aggregate principal amount of up to approximately $15.0 million and bears interest at a rate of 0.75% above LIBOR. As of May 31, 2005, 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 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. As part of the Oliver Design acquisition we assumed advance payments from customers totaling $17.1 million and recorded as deferred revenue. In addition we acquired inventory valued at $10.0 million and assumed $4.8 million accounts payable. These were the significant contributors to the cash assumed in the acquisition of $10.3 million. These balances were based on an historically high level of orders on hand. We would anticipate that the level of orders on hand will reduce during the remainder our 2005 fiscal year and therefore increase our requirement for working capital.

Additionally, our cash flow could be significantly affected by certain acquisitions we have made or might choose to make or alliances we have entered or might enter into. As described above, in connection with the acquisition of the business of ZT Automation LLC we will be required to make payments of deferred consideration of up to $20.4 million, payable over approximately three years based on the revenue generated by this business. We paid $1.2 million under this arrangement in the six months ended May 31, 2005. We may also be required to make additional payments of up to $17.2 million related to the purchase of intellectual property from Beyond3. In August 2006 we expect to repay the $3.0 million acquisition note payable related to the Oliver Design acquisition.

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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 24 months. We cannot assure you that additional equity or debt financing will be available to us on acceptable terms or at all.

Foreign Exchange Rate Fluctuations

Since November 30, 2004, there has not been a material change to our market exposure related to foreign exchange rates.

Interest Rates

We had cash and cash equivalents at May 31, 2005 totaling $66.6 million. These are primarily held in variable interest liquidity funds, overnight deposits and short-term fixed interest deposits. In addition, at May 31, 2005 we had short and long-term bank borrowings with variable interest rates amounting to $13.0 million. We do not hedge our exposure to interest rate fluctuations through the use of derivative instruments.

Since November 30, 2004, there has not been a material change to our market exposure related to interest rates.

Recent Accounting Pronouncement

In May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections” (“FAS 154”), which replaced APB No. 20, “Accounting Changes” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. FAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle by requiring voluntary changes in accounting principles to be reported using retrospective application, unless impracticable to do so. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

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XYRATEX LTD

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

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XYRATEX LTD

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.

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XYRATEX LTD

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(US dollars and amounts in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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XYRATEX LTD

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS