As filed with the Securities and Exchange Commission on June 24, 2011

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

BLUEARC CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware	3572	77-0526726
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

50 Rio Robles

San Jose, California 95134

(408) 576-6600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Michael B. Gustafson

President and Chief Executive Officer

BlueArc Corporation

50 Rio Robles

San Jose, California 95134

(408) 576-6600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Copies to:

Michael J. Danaher, Esq.

Julia Reigel, Esq.

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

Martin A. Wellington, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

(650) 752-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee
Common Stock, par value $0.001 per share	$100,000,000	$11,610

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated June 24, 2011

shares

LOGO

Common stock

This is the initial public offering of our common stock of BlueArc Corporation. We are offering shares of common stock.

Prior to this offering, there has been no public market for our common stock. We expect the initial public offering price of our common stock will be between $ and $ per share. We expect to apply to list our common stock on either The NASDAQ Global Market or The New York Stock Exchange under the symbol “BLRC.”

Investing in our common stock involves risks. See “Risk Factors ” beginning on page 13.

Price to public

Underwriting

discounts and

commissions

Proceeds to

BlueArc

Corporation

Per Share

Total

The underwriters have an option to purchase up to additional shares of common stock from us to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on , 2011.



J.P. Morgan	BofA Merrill Lynch	Credit Suisse

William Blair & Company

Pacific Crest Securities		ThinkEquity LLC

The date of this prospectus is , 2011.

LOGO

Table of contents


	Page

Prospectus summary		1

The offering		8

Summary condensed consolidated financial data		10

Risk factors		13

Special note regarding forward-looking statements and industry data		41

Use of proceeds		42

Dividend policy		42

Capitalization		43

Dilution		45

Selected consolidated financial data		47

Management’s discussion and analysis of financial condition and results of operations		50

Business		77

Management		98

Executive compensation		107

Related party transactions		131

Principal stockholders		139

Description of capital stock		142

Shares eligible for future sale		147

Material United States federal income tax and estate tax consequences to non-U.S. holders		150

Underwriting		154

Experts		164

Legal matters		164

Where you can find more information		164

Index to consolidated financial statements		F-1

You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our consolidated financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk factors” beginning on page 13. Unless the context otherwise requires, we use the terms “BlueArc,” “we,” “us” and “our” in this prospectus to refer to BlueArc Corporation and its subsidiaries.

Overview

We are a leading provider of high performance, highly scalable networked storage systems for businesses of all sizes. Our storage systems deliver the levels of performance, scalability, versatility and simplicity required to cost effectively manage the rapid growth of unstructured data, making them particularly suited for data-intensive applications such as server and desktop virtualization and cloud-based computing. Reliance on email, business documents, web pages, digital images, audio and video, as well as the document retention and access requirements of regulatory compliance are driving the rapid growth of unstructured data. The proliferation of unstructured data and the need to manage and access it at scale has resulted in the demand for next-generation storage systems that minimize the complexities and overcome the performance limitations of existing storage systems. Our storage systems leverage our proprietary file system and flexible architecture to meet the needs of today’s most demanding applications and to manage unstructured data at scale. We enable our customers to more effectively explore, discover, research, create, process and innovate in performance sensitive and data intensive environments.

Our storage systems minimize the complexities and overcome the performance limitations of existing networked storage systems. We enable our customers to address storage bottlenecks and accelerate processes to achieve their critical business goals, such as enhanced revenue generation and improved service offerings. Our massively parallel architecture is highly scalable and delivers sustained performance under increased workloads, unlike competing storage systems. Our storage systems combine our servers with our advanced, proprietary software suite, and use standard interfaces and multiple tiers of efficient enterprise-class storage devices to provide a wide variety of system configurations to our customers. We also sell our servers independently as a gateway solution that can be deployed in storage environments to enable file services for easier data sharing, simplified management, server and desktop virtualization and improved functionality. As of April 30, 2011, over 750 customers worldwide have deployed over 2,000 of our storage systems.

We believe that our networked storage systems address multiple end markets in light of the proliferation of unstructured data, the growing need to manage it at scale and the continuing shift to Internet Protocol networking. According to IDC, an independent research firm, the network attached storage, or NAS, and Internet small computer system interface storage area network, or iSCSI SAN, markets are expected to grow from $8.1 billion in 2010 to $12.0 billion in 2014, representing a 10.2% compound annual growth rate, or CAGR. In addition, we believe that the Fibre Channel connectivity of our platform enables us to address the migration and transition

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away from Fibre Channel to next-generation storage systems that are optimized for unstructured data and file-based applications. Our storage systems are deployed throughout a wide range of organizations, from global businesses to small organizations with just one location. Our diverse customer base includes organizations in industries such as media and entertainment, electronic discovery for litigation, or e-Discovery, energy, the federal government, life sciences, Internet and cloud hosted service providers and other enterprises. We sell our storage systems through multiple channels; which include our direct sales force, our extensive network of channel partners and a global original equipment manufacturer, or OEM, agreement with Hitachi Data Systems Corporation, or HDS.

In fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, we had total revenue of $74.2 million, $65.9 million, $85.6 million and $24.7 million, respectively. In fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, we incurred net losses of $19.6 million, $15.8 million, $9.4 million and $4.3 million, respectively.

Industry background

The amount of data used by businesses of all sizes globally is growing rapidly. IDC predicts that between 2009 and 2020, the amount of digital data in customer sites will grow to 44 times what it was in 2010—growing to 35 billion terabytes. Businesses are increasingly focusing on leveraging highly scalable, high performance file systems and related storage infrastructure as they seek to intelligently organize, manage, access and analyze growing amounts of data. Given the rapid pace of change in today’s markets, businesses seek solutions that can seamlessly scale as their business requirements evolve. In recent years, unstructured data has become increasingly critical to businesses. Reliance on email, business documents, web pages, digital images, audio and video, as well as the document retention and access requirements of regulatory compliance are driving the rapid growth of unstructured data across businesses. For example, computer-generated imagery for film, games and television and e-Discovery all require massive amounts of unstructured data to carry out their primary functions. In addition, system capabilities such as high scalability and parallel processing, once required only for specific high performance computing, or HPC, applications such as genomics, have become increasingly common for a wide variety of businesses. The growth in unstructured data, combined with advanced networking capabilities, increased disk capacities, improved computer processing capabilities and server and desktop virtualization have resulted in the need for next-generation data center technologies uniquely architected to meet the needs of today’s most demanding applications.

Key trends affecting growing data center environments

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systems. The proliferation of unstructured data is driving a need for next-generation file systems and the related storage infrastructure to manage, move, protect and deliver growing amounts of unstructured data for businesses and consumers. These next-generation solutions must be high performance, flexible and scalable to address the rapid growth of unstructured data.

Growing performance demands. As data sets have grown and the performance requirements to both process and manage them have increased, mainstream businesses and organizations increasingly require high performance, highly scalable storage systems that were previously only needed for HPC environments. At the same time, the storage system requirements to support HPC applications continue to increase. Growing performance burdens on storage infrastructure also result from greater numbers of files, concurrent users, demands for faster response times, increased sharing of data and the proliferation of server and desktop virtualization. In addition, as businesses increasingly consolidate their data center footprint to achieve cost efficiencies, the performance and scalability requirements for storage intensify.

Focusing on reduced complexity and leveraging existing infrastructure. To scale their infrastructure and manage growth in unstructured data, many organizations have deployed multiple disparate storage systems over time as their data needs have grown. This has resulted in overly complex infrastructure that is difficult and expensive to manage. To address these difficulties, businesses increasingly demand solutions that provide open architectures, are highly scalable and are interoperable with their existing data center deployments, enabling them to leverage significant existing infrastructure investments.

Increasing use of virtualization technologies. Increased adoption of server and desktop virtualization technologies has resulted in data center environments with dynamic storage requirements. Server virtualization technologies enable an administrator to use a software application to divide one physical server into multiple virtual servers, enabling multiple operating systems to run simultaneously on the same computer. Desktop virtualization environments provide multiple users with desktop, processing and storage capabilities on a remote central server instead of on a local computer. As businesses increasingly adopt server virtualization technologies and consolidate their data center resources, independent storage resources become siloed, driving demand for solutions that enable the consolidation and centralization of these siloed storage pools. In addition, as businesses continue to adopt desktop virtualization technologies, their data centers are required to evolve to support simultaneous operations of a large number of virtual desktops, such as having multiple users log in at the same time. Increased use of server and desktop virtualization technologies within data centers has resulted in an exponential increase in requirements for high input output operations per second, or IOPs, to support highly unpredictable traffic patterns within data centers.

Accelerating adoption of cloud-based architectures. The proliferation of cloud-based architectures, or architectures that enable the delivery of hosted on-demand services over the Internet, and data has resulted in the rapid growth of large data centers that require highly scalable networked storage with centralized management. The requirements of on-demand storage in cloud-based architectures are driving the need for storage technologies that deliver high efficiency across the storage infrastructure. To increase cost efficiency, storage architectures are increasingly incorporating tiering, which automatically routes and stores data in different storage media based on administrator-defined policies. Using cloud-based storage as one tier of

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the architecture reduces the cost of storing data. Many existing data center deployments are not optimized for current volumes of data and traffic or for the interoperability to offload data to a cloud-based tier of storage, making them difficult to scale and operate cost effectively.

Increasing focus on minimizing total cost of ownership. To stay competitive, businesses have increasingly focused on lowering their operating costs, particularly information technology infrastructure costs. Managing information technology infrastructure costs has also become increasingly complex as the rapid adoption of applications has competed with the need to manage mixed workloads across a shared network infrastructure environment.

We believe that existing storage systems do not fully address key requirements of businesses in today’s environment because they were not originally architected to address the scale of and broad prevalence of unstructured data. Existing storage systems lack the performance and scalability to address the diversity of applications and the size of data sets that are now being generated across distributed storage resources. Dynamic requirements for next-generation technologies and limitations of currently available solutions make it difficult for many storage systems to cost effectively address continually evolving business requirements.

Our networked storage systems

We provide industry leading storage systems that leverage our proprietary file system, SiliconFS, and flexible architecture to deliver intelligent data management functionality for our customers. Our massively parallel architecture is designed to overcome the data network bottlenecks created by existing storage systems and deliver superior performance across diverse workloads without sacrificing scalability, storage bandwidth, functionality, or overall capacity. Through our intelligent file system architecture, we enable our customers to scale their infrastructure up, or enable higher performance out of a single storage system, and scale their infrastructure out, or enable multiple servers to be deployed seamlessly across data centers to meet continually changing business and application requirements. Our intelligent file system architecture enables our customers to scale-right, or scale each of these attributes independently to their specific needs, and to run intensive data management applications seamlessly without burdening the performance of overall storage infrastructure.

Our massively parallel architecture and highly scalable storage systems leverage a combination of standard field programmable gate arrays, or FPGAs, as an offload engine for high speed data transfer and multi-core processors for intensive data management functions. This architecture, combined with SiliconFS, allows us to deliver the following benefits to customers:

Management of unstructured data at scale. Our storage systems allow for the intelligent management of applications in data intensive environments and allow our customers to add storage systems, applications and data management features seamlessly without sacrificing performance or functionality. We believe our storage systems provide the most scalable solution in our product class, with the highest performance, as measured in IOPs, storage capacity up to 16 petabytes in a single system, throughput up to 1.5 gigabytes per second and the ability to configure clusters of up to eight servers. By scaling right, we also enable our customers to scale each of these attributes independently, significantly reducing the potential for underutilization of resources.

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Ability to reduce complexity. Our storage systems are often deployed as a consolidation platform for networked storage environments, reducing complexity and cost by eliminating excess storage systems. Due to their ability to handle diverse and unpredictable workloads, our storage systems serve as an ideal platform for the consolidation of applications, such as email, databases and home directories, as well as SAN and NAS on the same storage system. Our storage systems allow different users, applications, protocols and performance requirements to share storage resources and enable traditionally siloed pools of storage to be viewed and managed through our single cluster namespace, which enables a user to view clusters of multiple servers and file systems as if they are a single coherent unit. We architected our storage systems to be easily integrated into our customers’ data centers to simplify the integration and management of our storage systems.

Optimized for virtual environments. Our architecture is ideally suited for large scale virtualized server and desktop environments because it delivers high levels of predictable performance for unpredictable workloads. In addition, our proprietary technology provides the ability to instantly create space-efficient, writeable copies of files for use in a wide variety of environments and run multiple simulations with large-scale data sets. This allows administrators to quickly deploy many new virtual machines without consuming additional disk storage space. Our differentiated solutions enable virtualized environments to achieve maximum utilization of storage resources and avoid performance bottlenecks, reducing the management time required and making the data center less complex and cumbersome to manage.

Support for cloud-based environments. Our storage systems deliver high predictability, high performance and continuous availability across a variety of workloads. These characteristics allow our customers to easily scale their storage systems, applications and data management features without sacrificing performance, making our storage systems optimal for cloud-based environments. In addition, where most existing storage systems realize performance degradation as capacity begins to be utilized, our customers benefit from our predictable performance across a variety of complex workloads such as those associated with hosted security, storage and software models. Our open architecture provides and supports interoperability with cloud-based tiers of storage, allowing customers to seamlessly offload noncritical data to locations hosted offsite in public and private clouds. Our solutions enable businesses to easily manage the high growth of data in cloud-based environments without increasing complexity or unnecessary infrastructure costs.

Low total cost of ownership. We believe our storage systems enable our customers to achieve higher usable capacity per server and lower overall total cost of ownership. Our customers are able to realize cost savings and higher efficiencies from using fewer servers, smaller physical data center space and fewer administrators. Our storage systems also provide superior power efficiency, require less cooling and offer efficient space utilization. In addition, our platform is based on our open architecture, which supports interoperability within data center environments, enabling our customers to leverage their significant investments in existing infrastructure to achieve higher returns on investment and faster payback periods.

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Our strategy

Our objective is to be the leading networked storage system vendor providing solutions to solve the challenges businesses face in managing unstructured data at scale. Key elements of our strategy include:

•

Extending our technology leadership and product breadth by leveraging our massively parallel architecture and file system;

•

Continuing to deepen and expand our customer relationships and vertical market penetration through leveraging our proven high performance technology and our diverse routes to market;

•

Continuing to expand our routes to market, including direct and channel distribution, to maximize our reach to customers; and

•

Broadening our technology partnerships with infrastructure vendors, application vendors and storage suppliers by leveraging our existing platform.

Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in “Risk Factors” below together with all the other information contained in this prospectus, including the following:

•

We have a history of losses, and we may not be able to achieve or sustain consistent profitability in the future.

•

We must continue to expand our routes to market, increase our customer base and increase our revenue to become profitable. If we fail to do so, our business, results of operations and financial condition may suffer.

•

We have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively. If we fail to manage our growth effectively, we may be unable to execute our business plan, sell our storage systems and services successfully and adequately address competitive challenges. As a result, our financial performance may suffer.

•

We are dependent on our relationship with HDS for a substantial portion of our revenue, and any disruption in this relationship could adversely affect our revenue and significantly harm our business, operating results and financial condition.

•

If we are unable to maintain or extend our relationships with our current customers, establish new customer relationships or to increase the diversification of our current customer base, our growth may be limited and our operating results could be adversely affected.

•

The market for our storage systems is highly competitive and dominated by larger companies with significantly greater resources than us. If we are unable to compete effectively, we may experience decreased sales or pricing pressure, which would adversely impact our operating results.

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Corporate information

We were founded in 1998 in Bracknell, England. In 1999, we relocated our corporate headquarters to San Jose, California and incorporated as a Delaware corporation under the name Synaxia Networks Inc. We changed our name to BlueArc Corporation in January 2001. Our principal executive offices are located at 50 Rio Robles, San Jose, California 95134. Our telephone number is (408) 576-6600. Our website address is www.bluearc.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus.

“BlueArc,” “Titan,” “Mercury,” “SiliconFS,” “JetCenter,” “JetClone,” “Data Migrator,” our logo and other trademarks or service marks of BlueArc appearing in this prospectus are the property of BlueArc Corporation. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

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The offering

Common stock offered by BlueArc

Over-allotment option

Common stock to be outstanding after this offering

Use of proceeds

We intend to use the net proceeds from this offering for working capital and other general corporate purposes including research and development and the expansion of our storage systems to serve other high growth data intensive markets. We may also use part of the net proceeds to develop technology partnerships and to acquire other businesses, products or technologies. However, we do not have agreements or commitments for any specific partnerships or acquisitions at this time.

Proposed symbol

BLRC

The number of shares of our common stock to be outstanding following this offering is based on 43,330,741 shares of our common stock outstanding as of April 30, 2011, which excludes:

•

7,019,362 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $1.02 per share;

•

894,327 shares of common stock reserved as of April 30, 2011 for future grant under our 2000 Stock Plan, or our 2000 Plan;

•

shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, or our 2011 Plan, that will become effective on the effective date of the registration statement of which this prospectus is a part;

•

1,073,447 shares of common stock reserved for issuance upon the exercise of outstanding warrants as of April 30, 2011, at a weighted average exercise price of $2.68 per share; and

•

320,393 shares of common stock reserved for issuance upon the exercise of outstanding warrants as of April 30, 2011, at a weighted average exercise price of $2.53 per share that will be net exercised for shares of common stock, based on an assumed initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus.

Unless otherwise indicated, this prospectus reflects and assumes the following:

•

the automatic conversion of each outstanding share of our preferred stock into one share of common stock (excluding conversion of our Series CC and Series EE preferred stock) upon the closing of the offering;

•

the automatic conversion of each outstanding share of our Series CC preferred stock into 11.80684 shares of common stock upon the closing of the offering;

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•

the automatic conversion of each outstanding share of our Series EE preferred stock into 1.02268 shares of common stock upon the closing of the offering;

•

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and

•

no exercise of the underwriters’ over-allotment option.

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Summary condensed consolidated financial data

We derived the summary condensed consolidated statements of operations data for the fiscal years ended January 31, 2009, January 30, 2010 and January 29, 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The condensed consolidated statements of operations data for the three months ended May 1, 2010 and April 30, 2011 and the condensed consolidated balance sheet data as of April 30, 2011, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include, in our opinion, all adjustments, which include only normal recurring adjustments, that we consider necessary for the fair presentation of the financial information set forth in those financial statements. Historical results are not necessarily indicative of future results. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the accompanying notes to those statements, as well as “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations,” appearing elsewhere in this prospectus.


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(in thousands, except per share data)

Consolidated statements of operations data:
Product revenue	$	59,864		$	49,523		$	66,550		$	14,103		$	19,596
Support revenue		14,366			16,352			19,039			4,511			5,116

Total revenue		74,230			65,875			85,589			18,614			24,712
Cost of product revenue		32,179			29,709			34,627			7,546			9,938
Cost of support revenue		3,483			4,570			6,184			1,395			1,815

Total cost of revenue(1)		35,662			34,279			40,811			8,941			11,753

Gross profit		38,568			31,596			44,778			9,673			12,959

Sales and marketing(1)		33,759			28,540			32,068			7,868			9,327
Research and development(1)		18,274			13,783			16,410			3,775			4,966
General and administrative(1)		5,659			4,868			5,277			1,464			1,614

Total operating expenses		57,692			47,191			53,755			13,107			15,907

Loss from operations		(19,124	)		(15,595	)		(8,977	)		(3,434	)		(2,948	)
Interest income		260			24			15			—			2
Interest expense		(237	)		(1,065	)		(1,317	)		(339	)		(284	)
Other expense, net		(1,359	)		(389	)		(566	)		(136	)		(1,552	)

Loss before income taxes		(20,460	)		(17,025	)		(10,845	)		(3,909	)		(4,782	)
Benefit from income taxes		882			1,272			1,420			324			453

Net loss	$	(19,578	)	$	(15,753	)	$	(9,425	)	$	(3,585	)	$	(4,329	)

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	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(in thousands, except per share data)
Deemed dividend on exchange of preferred stock		—			—			(940	)		—			—
Net loss attributable to common stockholders	$	(19,578	)	$	(15,753	)	$	(10,365	)	$	(3,585	)	$	(4,329	)

Net loss per share attributable to common stockholders, basic and diluted	$	(8.74	)	$	(6.55	)	$	(3.54	)	$	(1.47	)	$	(1.25	)

Shares used in computing net loss per share attributable to common stockholders, basic and diluted		2,241			2,404			2,930			2,438			3,465

Pro forma net loss per share, basic and diluted (unaudited)(2)							$	(0.24	)				$	(0.06	)

Shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)								39,363						43,284


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

	(in thousands, unaudited)

Other financial data:
Adjusted EBITDA(3)	$	(14,875	)	$	(10,739	)	$	(5,146	)	$	(2,514	)	$	(1,546	)


	As of April 30, 2011
	Actual			Pro forma(4)		Pro forma as adjusted(5)(6)

	(in thousands, unaudited)

Consolidated balance sheet data:
Cash and cash equivalents	$	16,084		$	16,084	$
Working capital		12,187			12,187
Total assets		57,646			57,646
Total debt and capital lease obligations		7,481			7,481
Total liabilities		48,022			44,420
Convertible preferred stock		121,699			—
Common stock and additional paid-in-capital		117,094			242,395
Total stockholders’ equity (deficit)		(112,075	)		13,226

(1)

Includes stock-based compensation expense as follows:


	Year ended						Three months ended
	January 31, 2009		January 30, 2010		January 29, 2011		May 1, 2010		April 30, 2011

							(unaudited)
	(in thousands)
Cost of revenue	$	51	$	67	$	44	$	9	$	11
Sales and marketing		498		610		476		86		116
Research and development		282		366		254		69		62
General and administrative		387		366		343		115		132

Total stock-based compensation expense	$	1,218	$	1,409	$	1,117	$	279	$	321

(2)

Pro forma weighted average shares outstanding reflects the conversion of our convertible preferred stock (using the if-converted method) into common stock as though the conversion had occurred at the beginning of the period or original date of issuance, if later.

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(3)

We present Adjusted EBITDA, which we define as net loss excluding:

•

benefit from income taxes;

•

other income (expense), net;

•

interest expense;

•

interest income;

•

stock-based compensation; and

•

depreciation and amortization.

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles, or GAAP. We exclude other income (expense), net from Adjusted EBITDA as it largely consists of mark to market and other expenses related to our warrants and foreign currency gain or losses. Gains from nonrecurring engineering projects included in other income (expense), net are all excluded from other income (expense), net when calculating Adjusted EBITDA. We have provided a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or nonrecurring items.

We reconcile net loss to Adjusted EBITDA as follows:


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2010

	(in thousands, unaudited)
Net loss	$	(19,578	)	$	(15,753	)	$	(9,425	)	$	(3,585	)	$	(4,329	)
Benefit from income taxes		(882	)		(1,272	)		(1,420	)		(324	)		(453	)
Other expense, net		1,359			389			566			136			1,832
Interest expense		237			1,065			1,317			339			284
Interest income		(260	)		(24	)		(15	)		—			(2	)
Stock-based compensation		1,218			1,409			1,117			279			321
Depreciation and amortization		3,031			3,447			2,714			641			801

Adjusted EBITDA	$	(14,875	)	$	(10,739	)	$	(5,146	)	$	(2,514	)	$	(1,546	)

(4)

The pro forma consolidated balance sheet data in the table above gives effect to the automatic conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering, assuming that our Series CC preferred stock converts at a ratio of one for 11.80684 and our Series EE preferred stock converts at a ratio of one for 1.02268. In addition, it assumes the reclassification of the convertible preferred stock warrant liability to additional paid-in capital.

(5)

The pro forma as adjusted consolidated balance sheet data in the table above gives effect to our receipt of the estimated net proceeds from this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commission and estimated offering expenses payable by us.

(6)

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share of our common stock in this offering would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to invest.

Risks related to our business and industry

We have a history of losses, and we may not be able to achieve or sustain consistent profitability in the future.

Since our formation, we have recorded a net loss in every fiscal year and we expect to continue to record net losses. We had a net loss of $9.4 million in fiscal 2011 and $4.3 million in the three months ended April 30, 2011. As of April 30, 2011, our accumulated deficit was $230.3 million. We anticipate spending significantly to develop our storage systems and expand our business, including expenditures for additional personnel in sales and marketing and research and development. As a public company, we will also incur significant legal, accounting and other expenses as a result of regulatory requirements that did not apply to us as a private company. We may encounter unforeseen difficulties, complications and delays and other unknown factors that require additional expenditures. Due to these increased expenditures, we will have to generate and sustain substantially higher revenue in order to achieve and maintain profitability. Our revenue growth trend since the first quarter of fiscal 2010 may not be sustainable, and we may not generate revenue in excess of our anticipated expenditures to achieve or maintain profitability. Failure to achieve and sustain consistent profitability may require us to raise additional capital, which may not be available on terms acceptable to us, or at all. In addition, our expense levels are based in part on our expectations as to future sales and a significant percentage of our expenses are fixed. If sales are below expectations, our operating expenses would be disproportionately high relative to revenue, which would adversely impact our ability to become profitable. Although we achieved Adjusted EBITDA profitability during the three months ended January 29, 2011, we expect that our Adjusted EBITDA will continue to be negative on a quarterly basis.

We may not continue to experience revenue growth unless we gain market share by expanding our routes to market, including our relationships with OEMs, value added resellers, or VARs, and other distribution partners, as well as our internal sales force. Expanding our relationships with new OEMs, VARs and other distribution partners requires significant time and resources from many of our key personnel. Expanding our internal sales force is a lengthy process that involves substantial training of new sales personnel and competing with our competitors for qualified talent. If we are not successful in expanding our routes to market, our ability to generate future growth could be impaired. In addition, we may be unsuccessful in establishing these new relationships or hiring new sales personnel if our competitors offer incentives or other terms that we are unable to match or exceed. Consequently, our revenue could suffer, our relationships with our existing OEM partner, VARs and other distribution partners could be harmed and our ability to adequately grow or retain our internal sales force could be impaired.

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We must also continue to scale and improve our processes and procedures that support our partners and sales personnel, including investments in systems and training. These processes and procedures may become increasingly complex and difficult to manage. If we fail to adequately develop these processes and procedures, our partners and sales personnel may not adequately market and sell our storage systems or accurately educate our potential customers regarding the benefits of our storage systems.

We must timely develop and introduce new products and technologies that allow us to increase our business with our existing customers, broaden our customer base and expand our business both domestically and internationally. We must also deepen our relationships with our existing customers by penetrating their organizations more deeply with our existing products. Successful marketing and selling of our storage systems depends on us identifying appropriate customers, educating them about the benefits of our storage systems and overcoming any concerns they may have about working with a small, independent storage system vendor with whom they may not have a business relationship. If our storage systems do not continue to achieve market adoption, our ability to grow our business will be materially and adversely affected.

Another key strategy is to partner with major third party software and hardware vendors to integrate our storage systems into their products and also co-market our storage systems with the vendors. We have significant partner relationships with database, business application, backup management and server virtualization companies, including VMware, Inc. A number of these strategic partners are industry leaders that offer us expanded access to segments of the storage and data management market. There is intense competition for strategic partners, and even if we can establish relationships with these or other partners, these partnerships may not generate significant revenue or may not continue to be in effect for any specific period of time. If these relationships are not maintained or fail to materialize as expected, our revenue could be adversely affected and we could suffer delays in product development or experience other operational difficulties.

Our contracts with our partners do not prohibit them from offering products or services that compete with ours. These partners may choose to discontinue offering our storage systems and services or may not devote sufficient attention and resources to selling our storage systems and services. Our competitors may provide more favorable terms or more lucrative sales incentives to our existing and potential partners to use or purchase their products and services or to prevent or reduce sales of our storage systems and services. If our distribution and strategic partners do not effectively promote and sell our storage systems or if we lose the services of certain of our key distribution and strategic partners, we would have to develop additional relationships with other third parties or devote more resources to directly marketing and selling our storage systems, either of which could reduce our revenue or cause us to lose customers.

In recent periods we have significantly expanded the size and scope of our business, and our future operating results depend to a large extent on our ability to successfully manage any future expansion and growth. Continued growth in our business will place significant demands on our managerial, administrative, operational, financial and other resources. Successful

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management of any future growth will require substantial management attention with respect to, among other things:

•

recruiting, hiring, integrating and retaining highly skilled and motivated individuals, including research and development and sales personnel;

•

maintaining and expanding our indirect sales channels and educating and supporting the sales forces of those channel partners;

•

expanding and broadening product development processes;

•

accurately forecasting revenue and controlling costs;

•

enhancing and expanding our infrastructure;

•

managing inventory levels;

•

expanding our international operations and managing increasingly dispersed geographic locations and facilities; and

•

implementing and improving our company-wide processes and procedures to address human resource, financial reporting and financial management matters.

If we are unable to execute our growth strategy effectively or to manage any future growth we may experience, we may not be able to take advantage of market opportunities, execute our business plan or remain competitive. In addition, our failure to effectively sustain or manage any future growth we do experience could result in a reduction of revenue, an inability to maintain customer relationships or attract new customers and our business and financial results could be materially and adversely affected.

We sell our SiliconFS file system and license additional software applications to HDS, which resells them in combination with its storage arrays. HDS accounted for 22%, 30%, 41% and 45% of our revenue in fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, respectively. Although we have experienced high rates of growth from HDS in recent periods, we do not expect the rate of revenue growth to continue at the level we experienced in fiscal 2011 and the three months ended April 30, 2011. We expect that our relationship with HDS will continue to account for a substantial portion of our revenue for the foreseeable future. Although our OEM agreement with HDS has one-year automatic renewals of its term, either party can terminate the agreement for any reason by providing the other party with written notice at least 60 days prior to the end of the next renewal period, which for the current term is in July 2013. A termination of our agreement with HDS, decreased purchases by HDS, whether under the OEM agreement or otherwise, or any other disruption in our relationship with HDS, could adversely affect our revenue and significantly harm our business, operating results and financial condition.

After September 30, 2011, HDS will no longer have any minimum purchase commitments under the OEM agreement. Although HDS has agreed to provide us with rolling forecasts of potential orders under the agreement, the forecasts are nonbinding. The nonbinding nature of the forecasts and the elimination of HDS’ minimum purchase obligations may make it difficult for us

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to accurately predict HDS sales of our products during any given period. Our long lead time for manufacturing, coupled with this uncertainty in predicting the requirements of HDS, could result in an inventory shortage and force us to make difficult decisions regarding the allocation of our available inventory among HDS and our other customers. If we are unable to fully satisfy purchase orders of HDS on a timely basis, our relationship with HDS could be damaged. Alternatively, if we overestimate the number of units that HDS may purchase in any period, we could have an excess inventory of products that we may or may not be able to sell to other customers.

Our agreement with HDS does not prohibit us or HDS from competing in each other’s respective markets or from approaching the other party’s customer prospects for future business. If we and HDS engage with the same customers, there may be customer confusion and prices for our products may decline due to competition between us and HDS. Although we support HDS’ selling activities, we and HDS do not coordinate our sales and channel conflicts may arise. In addition, if HDS or another OEM partner required us to allow them to rebrand or sell our storage systems as white box storage systems, we may not build the brand recognition we need to grow our business because customers purchasing these storage systems may not realize they are storage systems we developed and sell independently.

Our agreement does not preclude HDS or its affiliates from developing competing products or technologies internally and focusing the activities of its sales force on selling and marketing those internal products and technologies. HDS currently has internally developed NAS storage systems in its product portfolio that do not address the same markets as our storage systems. In the future HDS or its affiliates may enhance these existing storage systems or develop new storage systems or technologies to directly compete with our storage systems. If HDS or its affiliates were to do so, HDS may opt to reduce or eliminate purchases from us in order to promote its internally developed solution, regardless of the relative quality or functionality of its solutions compared to ours, which would cause our revenue and operating results to suffer.

We rely upon HDS’ sales force to continue to aggressively sell the HDS products into which our SiliconFS file system is incorporated. HDS’ sales personnel may decide to focus on selling other HDS products due to changes in sales incentives, the lengthy sales cycle for our products or HDS internal directives to push other products into the market. If these sales personnel reduced their efforts to actively sell the storage systems containing our SiliconFS file system, our revenue would decline and our relationship with HDS and our operating results could be negatively affected.

As an OEM customer, HDS may from time to time require us to customize our SiliconFS file systems and related software to ensure that they interoperate with new products or product enhancements of HDS. This customization process could lengthen our normal sales cycle and make us vulnerable to the risk of delays if we encounter manufacturing or supplier capacity issues, either of which could harm our reputation and reduce our revenue.

We have historically derived a large percentage of our revenue from repeat sales to our existing customers. We may be unable to secure future orders from these customers as they build out their storage networks and, even if we do, our current customers may reach saturation once they complete their storage networks. We cannot provide any assurance that we will be able to

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sustain our revenue from our existing customers. Our customers typically buy storage systems on a purchase order basis and do not enter into long-term contracts or minimum purchase commitments that would obligate them to continue to buy additional storage systems or services from us in the future. Although we continuously seek to grow our customer base through the addition of new customers, there is no assurance that we will be successful in doing so. If we are unable to generate repeat business from our existing customers or to generate revenue from new customers or expand into broader enterprise markets, our operating results would be adversely affected.

Our operating results may fluctuate significantly as a result of factors that may be outside of our control, which may make it difficult to rely on our quarterly comparisons as an indicator of future performance.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Our sales cycles can be long and unpredictable and our sales efforts require substantial time and expense. Our revenue is difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly. We ship the vast majority of our storage systems in the same quarter in which they are ordered, and as a result do not enter new quarters with any significant backlog. Our revenue each quarter depends on our ability to receive purchase orders and ship our products in that quarter. In addition, a significant percentage of our sales typically occurs near the end of the quarter. Small delays in receipt of purchase orders and shipment of products could result in our failure to achieve our internal forecasts or stock market expectations. Our customers also often purchase our storage systems as part of larger storage installations and the timing of negotiations for those purchases may cause the timing of our orders with customers to fluctuate. In addition, some of the orders we receive may include conditions, such as customer acceptance criteria, in which case we cannot immediately recognize revenue for those orders, if at all. These conditions make it difficult to determine when orders will translate to revenue and to accurately predict future operating results. If our revenue or operating results fall below the expectations of investors or the securities analysts that follow us, the price of our common stock may decline.

In any quarter, our revenue may be largely attributable to the timing of our customers’ orders. We expect our gross margins to fluctuate over time depending on product configuration and channel mix shifts, as well as quarter to quarter volatility caused by large implementations of our storage systems. For these reasons, comparisons of our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

Factors that are difficult to predict and that may affect our operating results include:

•

the timing and magnitude of shipments of our storage systems in each quarter;

•

the gain or loss of one or more of our significant customers;

•

reductions in customers’ budgets for storage system purchases or delays in their purchasing cycles;

•

our ability to timely develop new technologies, products and enhancements that meet customer requirements;

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•

deferments of customer storage system purchases in anticipation of new products or updates from us or our competitors or products used in combination with ours;

•

production delays as a result of manufacturing or supplier capacity or quality issues;

•

the extent to which and the timing of when our customers renew their support contracts with us;

•

increases in the costs or lack of availability of the components we use in our storage systems;

•

the timing of product releases or upgrades or announcements by us or our competitors;

•

unanticipated warranty expenses or charges for excess or obsolete inventory;

•

fluctuations in demand and prices for our storage systems;

•

changes in industry standards in the storage industry;

•

any change in the competitive landscape of our industry, including further consolidation or the entrance of new competitors;

•

general economic conditions in the markets in which we operate; and

•

other factors outside our control.

Our sales cycles can be long and unpredictable, and our sales efforts often require a substantial amount of time and expenses. As a result, the timing of our sales is difficult to predict and could vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.

Our sales efforts involve educating our current and prospective customers about the use and benefits of our storage systems, including their technical merits and potential cost savings to the customers as compared to storage solutions currently used by them or other storage solutions that are available. Customers often undertake a significant evaluation and testing process that can result in a lengthy sales cycle that typically averages six months, but has, in some cases, exceeded 12 months. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases by our current and prospective customers are frequently subject to budget constraints, multiple approvals and a variety of unpredictable administrative, processing and other delays. Purchases of our storage systems may also occur in connection with a larger data center scale out. The effect of these factors tends to be magnified even greater in the case of large orders.

Our sales to HDS can also involve a substantial amount of time. HDS incorporates our solutions into its products, which can require a lengthy evaluation and testing process before our product is approved for inclusion in one of its storage systems. Sales cycles to customers of HDS may be longer than our normal sales cycle because our product may be a part of a larger storage solution. Our extended sales cycle with HDS’ customers makes us vulnerable to the risk of delays or termination of orders if the end customers decide to delay or withdraw their purchases, which could occur for various reasons, including global economic cycles and capital market fluctuations. These delays or termination of orders could negatively impact the revenue we realize from sales to HDS.

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Our lengthy and uncertain sales cycles make it difficult for us to predict when customers may purchase and accept products from us, may prevent us from recognizing revenue in a particular quarter and ultimately may not produce any sales. As a result, our operating results may vary significantly from quarter to quarter.

The market for our storage systems is highly competitive and we expect competition to intensify in the future. Currently, we face competition from a number of established companies, including EMC Corporation, or EMC, Hewlett Packard Company, or HP, International Business Machines Corporation, or IBM, and NetApp, Inc., or NetApp. We also face competition from smaller, privately held companies and could face competition from new market entrants, whether from new ventures or from established companies moving into our industry. We also compete against internally developed storage systems as well as combined third party software and hardware systems. A number of new, privately held companies are currently attempting to enter our market, some of which may become significant competitors in the future. All of our well established competitors, as well as some of our other current and potential competitors, have longer operating histories, greater brand awareness, more employees, a larger customer base, more established customer relationships and significantly greater financial, technical, sales, marketing and other resources than we have. As a result of their established presence in the industry, some of our competitors have substantial control and influence over future trends in the industry, including acceptance of a particular industry standard or competing technology. In addition, many of our competitors benefit from long-standing relationships with key decision makers at many of our current and prospective customers. Our competitors may be able to leverage these existing relationships to persuade our current and potential customers to purchase our competitors’ products, regardless of the performance or features of our storage systems. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, which could allow them to introduce new technologies and products to the market faster than we can.

Because many of our competitors have greater resources than we do and are able to offer a more diversified and comprehensive bundle of products and services, these competitors may be able to adopt more aggressive pricing policies than we can adopt, through which they could deliver competitive products or technologies at a lower price than our storage systems. If our competitors are able to undercut our prices, we may be unable to remain competitive in the industry or be forced to reduce our selling prices. This could result in reduced gross margins, increased sales and marketing expenses or our failure to increase, or our loss of, market share, any of which could seriously harm our business, operating results and financial condition.

Our ability to compete effectively depends on a number of factors, including:

•

our ability to effectively respond to aggressive business tactics by our competitors, including selling at a discount or asserting intellectual property rights irrespective of the validity of the claims;

•

our storage systems’ scalability, performance, quality, ease of use and cost effectiveness relative to that of our competitors’ products;

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•

our storage systems’ interoperability with various operating systems, software applications, data access protocols and other storage systems;

•

our success in developing and using new and proprietary technologies to offer products and features previously not available in the marketplace;

•

our ability to attract and retain other VARs and OEMs;

•

our success in identifying new markets, applications and technologies;

•

our ability to continue to establish greater name recognition and build upon our reputation in the industry;

•

our ability to recruit and retain development engineers and sales and marketing personnel; and

•

our ability to protect our intellectual property.

We may not be able to address one or more of the factors listed above, which could hurt our ability to effectively compete in our industry and adversely affect our operating results and financial condition.

Consolidation in the storage industry has increased the competitive pressures that we face and could materially and adversely affect our operating results.

The storage industry has consolidated over the past several years as the result of a series of acquisitions, including recent acquisitions by EMC, HP and IBM. For example, Isilon Systems, Inc. was acquired by EMC in December 2010, 3Par Inc. was acquired by HP in September 2010 and Data Domain, Inc. was acquired by EMC in July 2009. The consolidation in the storage industry has resulted in a few large companies controlling a substantial portion of the market share, which may make it difficult for us to compete effectively. These large competitors may seek to further consolidate the industry by acquiring components, technologies and resources of suppliers in the industry, which may make it difficult for us to obtain components for our storage systems at competitive prices or in sufficient quantities. For example, NetApp recently acquired Engenio, the external storage systems business of LSI Corporation, which is one of our component suppliers. Although we historically competed with targeted sales forces of independent competitors, we now compete with the larger sales forces of integrated storage providers. In addition, current and potential competitors have established, or may establish, strategic alliances among themselves or with third parties, including some of our partners. Through these alliances our competitors could acquire additional market share and further strengthen their positions in the industry. Continued consolidation of our industry or establishment of strategic alliances by our competitors could increase the competitive pressures that we face and materially and adversely affect our business and operating results.

If we are unsuccessful in developing and selling new storage systems, services and product enhancements that achieve market acceptance, our ability to attract and retain customers could be impaired, our competitive position could be harmed and our revenue could be reduced.

We compete in a market characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. Improvements in existing technologies and applications, including desktop and server virtualization, to accelerate storage performance or reduce storage costs may reduce the need for our storage systems.

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Improvements in other emerging technologies, other application protocols or network protocols such as the Transmission Control Protocol could have a similar effect. Our future growth depends on our ability to anticipate future market needs and to successfully design, develop, market and sell new file systems and software products that provide increasingly higher levels of performance, functionality, capacity and reliability and that meet the cost expectations of our customers. Developing our storage systems is expensive and the investment in product development may involve a long payback cycle. In fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, our research and development expenses were $18.3 million, $13.8 million, $16.4 million and $5.0 million, respectively. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain and extend our competitive position.

Due to the complexity of storage systems, the new storage systems that we develop are subject to significant technical risks that may impact our ability to introduce these storage systems successfully. Our new storage systems must address technological changes and evolving industry standards and may not achieve market acceptance. In addition, in the event that new storage systems require features for which we have not developed or otherwise acquired technology, we will be required to develop or obtain such technology through purchase, license or other arrangements. If the required technology is not available on commercially reasonable terms, or at all, we may incur additional expenses in an effort to internally develop the required technology.

Despite our efforts to develop new and successful storage systems and technologies, our competitors, many of whom have greater financial and engineering resources than we do, may be able to introduce new storage systems or develop new technologies more quickly than we can. If our investments in our research and development do not provide the desired returns in a timely manner or if the new storage systems and technologies we develop do not achieve market acceptance, our ability to attract and retain customers could be impaired, our competitive position could be harmed and our revenue could be reduced.

If we are unable to reduce or adequately control our total costs of revenue, our gross margins could decrease, we may not become profitable and our business and financial results could suffer.

If we are unable to reduce or maintain a sufficiently low level of costs for manufacturing and selling our storage systems relative to their selling prices, our operating results, gross margins and business could be materially and adversely impacted. The largest component of our cost of product revenue is disk drives and disk arrays that we integrate into and sell with our storage systems. We have made, and will be required to make, significant efforts to reduce the cost of products, including but not limited to disk drives and disk arrays. The consolidation that has occurred among suppliers of a variety of components, including but not limited to disk drives, makes it difficult for us to control the cost of the components we use in our storage systems. As compared to our larger competitors, we typically do not purchase a sufficiently high volume of components to obtain the discounts that our larger competitors are often able to obtain from their component suppliers. Some of our larger competitors, such as NetApp, have also acquired component suppliers, which provides them with advantages in obtaining lower cost components and may negatively affect our ability to reduce our cost of product revenue as we will be negotiating pricing with our competitors. We expect this consolidation of the component suppliers to continue in the future. Further consolidation would continue to make it difficult for

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us to reduce or control the costs of manufacturing our storage systems due to a lack of alternative suppliers.

If the average selling prices of our storage systems decrease, our revenue and gross margins could decline.

We anticipate that we will be forced to make price reductions in the future. Because of the resources available to many of our large, established competitors, reductions in average selling prices throughout our industry could have a more adverse effect on our business than on the business of these large competitors. In addition, if we decide to target the lower end of our market, we may sell our storage systems at prices that are lower than those of our storage systems that address the mid-range and high-end of the market. If we are unsuccessful in offsetting price reductions in our storage systems by increasing our sales volumes or reducing our cost of goods, our revenue and operating results could suffer. If the average selling prices of our existing products decline and if we are unable to introduce and generate significant demand for higher margin storage systems or additional software applications, we may be unable to maintain our current gross margins.

We and our contract manufacturer rely on a limited number of suppliers, and in some cases single sources, and any disruption or termination of these supply arrangements could delay shipments of our storage systems and reduce our revenue.

We and Sanmina-SCI Corporation, or Sanmina-SCI, our contract manufacturer, rely on a limited number of suppliers for several key components used in the assembly of our storage systems, including our FPGAs, which are manufactured by Altera Corporation, and our disk drives, which are manufactured by Seagate Technology plc., or Seagate, and Hitachi Global Storage Technologies, Inc., or Hitachi GST. This reliance on a limited number of suppliers involves several risks, including:

•

supplier capacity constraints;

•

price increases;

•

timely delivery; and

•

component quality.

If any of these suppliers were to cancel or materially change their commitments to us or Sanmina-SCI or fail to meet the quality or delivery requirements needed to allow Sanmina-SCI to timely manufacture our storage systems, we could lose time-sensitive customer orders, be unable to develop or sell certain storage systems cost effectively or on a timely basis, if at all, and have significantly reduced revenue. In addition, in the event that it became necessary to find other suppliers of certain of the key components used in the manufacturing and assembly of our storage systems, transition to the new supplier could take three to six months, due to the lengthy qualification and technology development process that is required to qualify suppliers of these key components. Inadequate supplies of critical components may impair our ability to fulfill orders in a given quarter and/or result in a decrease in our gross margins.

Component quality is particularly significant for suppliers of our disk drives. Disruption or termination of the supply of these components and problems with manufacturing quality could delay shipments of our storage systems and materially and adversely affect our operating results. For example, we recently experienced a supply chain disruption for the disk drives used in certain

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of our storage systems as a result of the Japanese earthquake and tsunami in March 2011. In the past we have also experienced quality problems with disk drives and we were forced to seek out and engage a new supplier of disk drives. These delays and quality defects are outside of our control and are difficult to predict. Any delay of storage system shipments or the existence of defects in our storage systems could damage relationships with current and prospective customers, increase our costs due to the time and money spent remedying the defects and reduce our revenue.

Our future financial performance depends on growth in the market for the storage and management of unstructured data at scale and our ability to adapt to customer demands in the market. If this market does not grow as we expect or if we are unable to adequately address market demands, our business and results of operations could be materially adversely affected.

Our storage systems are designed to address the market for the storage and management of unstructured data at scale. This is a rapidly growing, evolving and challenging market. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to emerging market demands. Unlike many of our large competitors that have a broad offering of storage systems for various markets and industries, our business is predominantly focused on the NAS segment of the storage industry that addresses the storage and management of unstructured data at scale. Consequently, we are vulnerable to fluctuations in the growth in this market and the demand for storage systems that address this market. A number of factors could adversely affect the growth in this market or the demand for our storage systems, including the following:

•

introduction of new products and technologies that serve as replacements or substitutes to our storage systems or that reduce the demand for high performance network systems, such as advances in file compression technology that result in smaller file sizes;

•

lack of customer acceptance of new storage systems or technologies that we may develop or our inability to timely develop product enhancements that satisfy customer requirements;

•

decreased reliance by businesses on data that their businesses generate; and

•

customer budgetary constraints or reduced corporate spending on data storage solutions.

Any of the factors listed above could result in decreased revenue to us or a lower growth rate in our revenue, which would materially adversely affect our business and results of operations.

We are dependent on our customers’ information technology budgets for storage systems and any economic constraints on their capital spending they experience could negatively impact our business.

Our business is subject to our customers’ information technology budgets for building and maintaining storage solutions within their organizations. If the demand for storage solutions declines as a result of our customers’ budgetary constraints, reduced corporate spending on storage solutions or any other factors, demand for our storage systems will be similarly affected. The recent global economic downturn caused a significant reduction in information technology budgets for storage solutions across a wide range of industries, which resulted in a decline in our revenue. Limitations on significant build out of storage infrastructure due to economic factors, lack of access to funding for capital expenditures or other conditions could result in reduced demand for our storage systems. If there is another downturn or customers experience

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substantial reductions in their information technology budgets, our business, operating results and financial condition may be materially harmed.

As we introduce subsequent generations of our storage systems, we may experience difficulties transitioning customers to these newer offerings. Customer acceptance of the newer generations of storage systems is critical because if we are unable to sell customers these newer offerings, we may experience a decline in revenue that could materially impact our financial results.

As we develop and introduce new storage systems to the market, we face the risk that potential and existing customers may be unwilling to replace their current storage systems with our newer storage systems. Transitioning customers to newer generations of storage systems involves a substantial amount of time educating our customers on the benefits provided by the new storage systems. However, regardless of the enhanced features or superior performance of the newer generation of storage systems as compared to older storage systems that the customers may currently have installed, they may be unwilling to adopt the new storage systems as a result of familiarity with the existing storage system, reluctance to use a new storage system that has an unproven record in the industry or internal budget restraints that prevent them from purchasing the new storage systems. We must also successfully manage product transition in order to minimize disruption in our customers’ ordering and purchasing patterns, ensure that sufficient supplies of new storage systems are available to meet customer demand and avoid reductions in the demand for our prior generation storage systems and resulting excessive inventory levels of those storage systems. Due to the extensive time and resources that we invest in developing new storage systems, if we are unable to sell customers subsequent generations of our storage systems, our revenue could decline and our financial results could be materially impacted.

Our storage systems must interoperate with our customers’ existing infrastructure, including hardware and software applications that are developed by others, as well as various data access protocols. If our storage systems fail to interoperate, we may be unable to increase, or we may lose, market share and we may experience weakening demand for our storage systems.

Our storage systems must interoperate with our customers’ existing infrastructure, specifically their networks, operating systems, software applications and other storage devices and hardware that are developed by others, each of which may have different specifications. When new or updated versions of these operating systems or software applications are introduced, or if we find, as we have in the past, defects in the existing software or hardware used in our customers’ infrastructure or an incompatibility or deficiency in our software, we must sometimes develop updated versions of our software so that they interoperate properly with these operating systems, software applications and hardware. We may not accomplish these development efforts quickly, cost effectively or at all. These development efforts may require substantial capital investment and the devotion of substantial employee resources. If we fail to maintain compatibility with these operating systems, software applications or other storage devices and hardware, our storage systems may not be able to fulfill our customers’ requirements, or we may experience longer sales and implementation cycles for our storage systems or order cancellations. As a result, there may be weakening demand for our storage systems and we may fail to increase, or we may lose, market share.

In addition, our storage systems interoperate with servers and software applications predominantly through the use of protocols, many of which are created and maintained by independent standards organizations. Some of these protocols that exist today or that may be

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created in the future are, or could be, proprietary technology and therefore require licensing a proprietary protocol’s specifications from a third party or implementing the protocol without specifications, which could entail significant effort on our part. If we fail to obtain a license to necessary specifications on reasonable terms from third party vendors, we could be liable for infringing certain intellectual property rights of such vendors, and if we are not able to implement a necessary protocol in the absence of these specifications, our storage systems might become less competitive, which would harm our business. For example, Microsoft maintains and enhances the Common Internet File System, or CIFS, a proprietary protocol that our storage systems use to communicate with the Windows operating system. Although our storage systems are currently compatible with CIFS, at present we do not license the specifications to this proprietary protocol. If we are not able to continue to maintain adequate compatibility with CIFS or if we are not able to license adequate specifications to this protocol on reasonable terms, our storage systems would likely be less competitive in the marketplace, which could reduce our revenue.

If we lose key personnel, key personnel are distracted or we are unable to attract and retain highly qualified personnel, our business and our results of operations would be harmed.

Our future success also depends on our continued ability to attract and retain highly qualified technical, sales, support and management personnel. In particular, our ability to enhance and maintain our technology requires talented software and hardware development engineers with specialized skills in areas such as very large scale integration, or VLSI, FPGA design, distributed computing, file systems, network and storage protocols and operating systems. If we are unable to recruit and retain these engineers, the quality and speed with which our storage systems are developed would likely be seriously compromised, and our reputation and business would suffer as a result. In addition, our sales positions require candidates with specific sales and engineering backgrounds in the storage industry, and we may be unable to locate and hire individuals with these credentials as quickly as needed, if at all. Once new sales personnel are hired, we need a reasonable amount of time to train the new sales personnel before they are able to effectively and efficiently perform their responsibilities. Failure to hire and retain qualified sales personnel could adversely impact our storage system sales. Competition for these and the other personnel we require, particularly in the Silicon Valley area, is intense, and we may fail to attract or retain highly qualified technical, sales, support and management personnel necessary for our business. In addition, we compete for these personnel with large, established publicly traded companies and we may be unsuccessful at attracting and retaining employees because of our history of losses and concerns about the impact on employees if we are acquired. If we are unable to attract and retain the necessary key personnel, our business and our results of operations could be harmed.

Our ability to sell our storage systems is partially dependent on ease of use and the quality of our support offerings, and any failure to offer high-quality technical support services could negatively impact our business, operating results and financial condition.

After our storage systems are deployed within our customers’ storage networks, our customers depend on our support services organization to resolve issues relating to our storage systems and how they perform within our customers’ environments. Our storage systems serve mission critical functions for our customers and high-quality support services are therefore imperative for the successful marketing and sale of our storage systems. If we do not succeed in helping our customers to quickly resolve post-deployment issues, it would damage our reputation, harm our

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customer relationships and adversely affect our ability to sell our storage systems to potential and existing customers. Our ability to provide effective support and service offerings is largely dependent on our ability to attract, train and retain qualified service personnel. As we expand our operations internationally, our support services organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. If our customers do not receive high-quality post-sale support services from us, they may be unwilling to recommend our storage systems to other potential customers or we may gain a reputation in the industry of providing poor support services. As a result, our failure to maintain high quality support services could reduce our sales and revenue and negatively impact our business, operating results and financial condition.

Our storage systems are highly technical and complex and may contain undetected software or hardware defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our customers, harm to our reputation, a loss of customers and a reduction in our revenue.

Our storage systems are highly technical and complex and are often used to store information critical to our customers’ business operations. Our storage systems have contained and may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to our customers. Some errors in our storage systems may only be discovered after they have been installed and used by customers. Resolving these errors and defects sometimes requires a significant amount of time and prevents our technical personnel from working on other tasks that may be more important to the future growth of our business.

In addition, if flaws in the design, production or assembly of our storage systems or our suppliers’ components were to occur, we could experience a rate of failure in our storage systems that could result in substantial repair, replacement or service costs and harm to our reputation. The availability of quality components from our suppliers and quality services from our manufacturers are key factors to our continued growth and success. We have in the past, and may in the future, experience quality problems with the components provided by our suppliers. Although we have procedures in place to monitor the quality of our suppliers’ components and our manufacturers’ processes, we cannot assure you that our efforts will be sufficient to avoid a rate of failure in our storage systems that results in substantial delays in shipment or significant repair or replacement costs, any of which could result in lost sales, harm to our reputation and an increase in our operating costs.

Any errors, defects or security vulnerabilities discovered in our storage systems after commercial release, as well as any computer virus or human error on the part of our customer support or other personnel resulting in a customer’s data unavailability, loss or corruption could result in a loss of customers, product return or increased support and warranty costs, any of which may adversely affect our business, operating results and financial condition. Our OEM partner and resellers may also terminate their relationships with us or reduce their efforts to sell our storage systems if we experience significant product failures and they do not believe we respond quickly and effectively. We may also face claims for product liability, tort or breach of warranty, including claims relating to changes to our storage systems made by our partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, could be costly and might divert management’s attention and adversely affect the market’s perception of us and our

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storage systems. In addition, if the amount and scope of our business liability insurance coverage proves inadequate for a claim, or future coverage is unavailable on acceptable terms or at all, our revenue could be reduced.

We currently rely on a single contract manufacturer to manufacture and assemble our storage systems, and our failure to manage this relationship effectively could negatively impact our revenue and operating results.

We currently rely on a single contract manufacturer, Sanmina-SCI, to manufacture our storage systems, assemble our storage systems and, alone or together with us, negotiate certain component costs. Our reliance on Sanmina-SCI reduces our control over the manufacturing and assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with Sanmina-SCI effectively, or if Sanmina-SCI experiences delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship storage systems to our customers could be impaired and our competitive position and reputation could be harmed. If Sanmina-SCI cannot negotiate with certain suppliers for reduced component costs, our operating results could suffer. Additionally, if Sanmina-SCI terminates its agreement with us, which is terminable by Sanmina-SCI for any reason upon 60 days’ notice, we would be required to engage a new manufacturer. Qualifying a new contract manufacturer and commencing volume production would be expensive and time consuming. If we are required to change contract manufacturers, move from the current production site or assume internal manufacturing operations for any reason including any negative developments in Sanmina-SCI’s business that are unrelated to our relationship, we may lose revenue, incur increased costs and damage our customer relationships.

We are subject to business uncertainties that make it difficult to forecast demand and production levels accurately and to secure components and products on a timely basis, which could interfere with our ability to deliver our storage systems and generate product sales.

Our sales are generally based on purchase orders with our customers rather than long-term purchase commitments. As a result, it is difficult to accurately forecast customer demand for future periods. We are required under our agreement with Sanmina-SCI to provide forecasts regarding product demand and production levels. In order to secure components required for the production of our storage systems on a timely basis and to ensure that we have sufficient inventory to meet our customers’ demands, it is imperative that our forecasts are accurate. If we inaccurately forecast demand for our storage systems, we may have excess or inadequate inventory or incur cancellation charges or penalties. Excess inventory levels could result in unexpected expenses or increases in our reserves that could adversely impact our operating results. Conversely, inadequate inventory levels could cause us to forego revenue opportunities, potentially lose market share and harm our customer relationships. We also intend to introduce new storage systems and product enhancements, which could require us to achieve volume production rapidly or manage transitions from our old storage systems to our new storage systems by coordinating with Sanmina-SCI and our suppliers. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions, if we experience increased demand. The inability of Sanmina-SCI to provide us with adequate supplies of high quality products on a timely basis, or an inability to obtain adequate quantities of components, could cause a delay in our order fulfillment and could interfere with our ability to deliver our storage systems and generate revenue.

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Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

We derived 30%, 24%, 30% and 30% of our revenue from customers outside the United States in fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, respectively. We have sales and technical support personnel in countries other than the United States, as well as a significant number of research and development personnel in England. We outsource certain quality assurance related to research and development as well as product development to third parties in India. We may continue to add personnel in additional countries. Our international operations subject us to a variety of risks, including:

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the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

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the challenge of managing a development team in geographically disparate locations;

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tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our storage systems in various foreign markets;

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restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts involving the U.S. government;

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increased exposure to foreign currency exchange rate risk;

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reduced protection for intellectual property rights in some countries;

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geopolitical turmoil, including terrorism, war or political or military coups; and

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political and economic instability.

As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could adversely affect our business, financial condition and results of operations.

If we need additional capital in the future, it may not be available to us on favorable terms, or at all.

There can be no assurance that we will be successful in executing our business plan, maintaining and growing our existing customer base or achieving profitability and realizing our working capital. Failure to generate sufficient revenue, achieve planned gross margins or control operating costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on acceptable terms, or at all, and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs, which could have a material adverse effect on our business, operating results, financial condition and ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Our accounts

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receivable based credit facility, which expires in December 2012, includes a material adverse change clause as a condition precedent to funding, which allows the lender to withdraw any unutilized portion of the facility at the time it is notified of the occurrence of certain triggering events. In addition, our long-term capital growth facility is subject to interest-only payments through December 2011. However, if we do not meet certain performance criteria tied to a measure of our quarterly earnings for quarters through October 29, 2011, repayment of principal via monthly installments will be accelerated and will commence in the month following the determination that the performance criteria have not been achieved.

We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.

Because a portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Historically, our primary exposures have related to nondollar denominated operating expenses in the British pound sterling. An increase in the value of the dollar could increase the real cost to our customers of our storage systems in those markets outside the United States where we sell in dollars and other currencies, and a weakened dollar could increase the cost of local operating expenses.

If we or our third party contractors fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

We are subject to various environmental laws and regulations, including laws governing the hazardous material content of our products and laws relating to the collection and recycling of electrical and electronic equipment. We face increasing complexity in our research and development and procurement operations as a result of requirements relating to the materials composition of many of our storage systems, including the European Union’s, or EU, Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, directive, which restricts the content of lead and certain other substances in specified electronic products put on the market in the EU after July 2006 and similar legislation relating to marking of electronic products which became effective in March 2007 in China. In addition, we could be required to recall and replace any non-compliant storage systems already shipped, resulting in reduced revenue, increased costs and harm to our business, customer relationships and reputation. If there are changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our storage systems to comply with such laws, which could result in additional costs to us or disrupt or delay our operations and adversely affect our business.

There are also significant costs and liabilities associated with product take back legislation. The EU has enacted the Waste Electrical and Electronic Equipment, or WEEE, directive, which makes producers of electronic equipment responsible for specified collection, recycling, treatment and disposal of past and future covered products. We rely on third party contractors to manufacture and take back products on our behalf in compliance with environmental requirements. If such third party contractors do not comply with these laws and regulations, we could be subject to fines, civil or criminal sanctions and contract damage claims.

Some of our operations, such as our research and development facilities, are also regulated under various other federal, state, local, foreign and international environmental laws and

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requirements, including those governing, among other matters, the discharge of pollutants into the air and water, the management, disposal, handling, use, labeling of and exposure to, hazardous substances and wastes and the cleanup of contaminated sites. Liability under certain environmental laws can be joint and several and without regard to comparative fault. Our failure to comply with these and other environmental laws could result in civil or criminal fines and penalties or other sanctions and decreased revenue, which could adversely affect our operating results.

As a result of our efforts to comply with these or other future environmental laws and regulations, we could incur substantial costs, including those relating to excess component inventory, and be subject to disruptions to our operations and logistics, which could harm our business and financial condition. We expect that our operations and products will be affected by new environmental laws and regulations on an ongoing basis, and although we cannot predict the ultimate impact of any such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, any of which could have a material adverse effect on our business.

We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.

Because we incorporate encryption technology into our storage systems, our storage systems are subject to United States export controls and may be exported outside the United States only with the required level of export license or through an export license exception. If a transaction involves countries, individuals or entities that are the target of U.S. or other economic sanctions, licenses or other approvals from the United States Department of the Treasury’s Office of Foreign Assets Control or other sanctions authorities may be required and may not be granted. In addition, various countries regulate the importation of certain encryption technology and have enacted laws that could limit our ability to distribute our storage systems or could limit our customers’ ability to implement our storage systems in those countries. Changes in our storage systems or changes in export or import or economic sanctions regulations may create delays in the introduction of our storage systems in international markets, prevent our customers with international operations from deploying our storage systems throughout their global information technology infrastructure or, in some cases, prevent the export or import of our storage systems to certain countries altogether. Any change in export, import or economic sanctions regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our storage systems by, or in our decreased ability to export or sell our storage systems to, existing or potential customers with international operations. In addition, failure to obtain required import or export approval for our storage systems or failure to comply with these regulations could result in penalties and restrictions on export privileges and could impair our ability to compete in international markets.

Failure to comply with the United States Foreign Corrupt Practices Act, or the FCPA, and similar laws associated with our activities outside the United States could subject us to penalties and other adverse consequences.

As a growing percentage of our revenue is and will be from jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other applicable

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anticorruption laws that prohibit improper payments or offers of payment to foreign government officials and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, which represent our principal markets, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. We are in the early stages of implementing our FCPA compliance program. There can be no assurance that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anticorruption laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have a material and adverse effect on our reputation, business, operating results and financial condition.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our business.

In the future, we may acquire other businesses, products or technologies. We have not made any acquisitions to date and are not engaged in any at this time. Accordingly, our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not strengthen our competitive position or achieve our goals, or these acquisitions may be viewed negatively by customers, financial markets or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business, operating results and financial condition. Future acquisitions may reduce our cash available for operations and other uses, and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.

Our ability to benefit from certain tax credits or net operating losses, or NOLs, may be impaired as a result of our growth or changes in tax laws or regulations.

To date, we have not paid material income taxes as a result of our losses. In the United Kingdom, we receive tax benefits primarily due to the surrendering of our NOL carryforwards, in exchange for a current cash refund for research and development activities in the United Kingdom. Beginning after fiscal 2014, we no longer expect to be eligible to surrender these NOLs and receive a cash tax refund as we expect to exceed certain specified statutory thresholds. In the past, these tax credits have resulted in positive cash flows. We also have significant NOL carryforwards in the United States and other jurisdictions. Some of these NOLs will expire at various times in the future or may be rescinded with changes in tax laws or regulations. Any changes that may affect our NOLs would affect our ability to estimate our provision for income tax in the future.

Our ability to use NOLs to offset future taxable income may be subject to significant limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on

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its ability to utilize its prechange NOLs to offset future taxable income. We experienced an ownership change as defined by Section 382 in July 2003. This change resulted in an annual limitation of $1.4 million on all NOLs incurred prior to this date. If we undergo an ownership change in connection with or after this public offering, our ability to utilize NOL carryforwards could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. In addition, the State of California has currently suspended the use of NOL carryforwards to offset taxable income. For these reasons, it is likely that we may not be able to utilize a significant portion of our NOL carryforwards if we attain profitability.

Our business is vulnerable to interruption by events beyond our control, including earthquakes, fire, floods and other natural catastrophic events.

Our corporate headquarters and the operations of our key suppliers, manufacturers and spare parts logistics provider are located in the San Francisco Bay area, Wisconsin, England, Singapore, Mexico, China, Japan and Taiwan. A significant natural disaster, such as an earthquake, tsunami, fire or flood, could have a material adverse impact on our business, operating results and financial condition. In the event that any of our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of these events, shipments could be delayed, resulting in our missing key financial targets, including revenue and earnings estimates, for a particular quarter. For example, in June 2011, our spare parts logistics provider suffered a fire at one of their locations and we lost approximately $350,000 of spare parts inventory. See Note 16 in the notes to our consolidated financial statements. Although we believe the losses we incurred as a result of the fire will be covered by insurance, we cannot determine when, if and to what extent we will be reimbursed for our losses.

Risks related to our intellectual property

We operate in an industry with extensive intellectual property litigation. Claims of infringement against us or our suppliers could increase our expenses, disrupt our ability to sell our storage systems and reduce our revenue.

Third parties may claim that our storage systems or technologies infringe or misappropriate their intellectual property rights. The data storage industry is characterized by the existence of a large number of patents, trademarks, trade secrets and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. From 2003 to 2006, we defended an intellectual property infringement claim that was brought by NetApp against us. Although we ultimately prevailed, it was costly to defend and required a substantial amount of our senior management’s time and attention. We expect that infringement claims and misappropriation claims may further increase as the number of products and competitors in our market increases. In addition, if we gain greater visibility and market exposure as a public company, we face a higher risk of being the subject of intellectual property infringement claims and misappropriation claims. We cannot assure you that we do not currently infringe or misappropriate, or that we will not in the future infringe or misappropriate, any third party patents or other proprietary rights. For instance, because patent applications in the United States and foreign jurisdictions are typically maintained in confidence for up to 18 months after their filing or, in some cases, for the entire time prior to issuance as a U.S. patent, third parties may have earlier filed applications covering methods or other inventions that we consider our trade secrets. In addition, the limited size of our patent portfolio may not provide meaningful deterrence against third parties alleging that we infringe their patents, particularly against

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patent holding companies or other adverse patent owners who have no relevant product revenues. Any claims of infringement or misappropriation by a third party, even those without merit, could cause us to incur substantial costs defending against the claims, and could distract our management from our business. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our storage systems. In addition, we might be required to seek a license for the use of the infringed intellectual property, which might not be available on commercially reasonable terms or at all. Alternatively, we might be required to develop noninfringing technology, which could require significant effort and expense and might ultimately be unsuccessful. Any of these events could seriously harm our business, operating results and financial condition.

Third parties may also assert infringement claims against our customers and partners. Claims against our customers and partners may require us to initiate or defend potentially protracted and costly litigation on a customer’s or partner’s behalf, regardless of the merits of these claims, because we generally defend and indemnify our customers and partners from claims of infringement and misappropriation of proprietary rights of third parties based on the use or resale of our storage systems. Because some of our customers and partners, including HDS, are much larger than us and have much greater resources than we do, they may be more likely to be the target of an infringement claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit. If any of these claims succeeds, we might be forced to pay damages on behalf of our customers or partners which could increase our expenses, disrupt our ability to sell our storage systems and reduce our revenue.

It is also not uncommon for suppliers of certain components in our storage systems to be involved in infringement lawsuits by or against third parties. Although some of our suppliers are obligated to indemnify us in connection with infringement claims related to their intellectual property rights, these suppliers may contest their obligations to indemnify us, or their available assets or indemnity obligation may not be sufficient to cover our losses. We cannot determine with certainty whether any existing or future third party intellectual property infringement claims that involved us or our suppliers would require us to alter our technologies, obtain licenses or cease certain activities.

We may not be able to protect and enforce our intellectual property rights, which could harm our competitive position and reduce the value of our proprietary technology.

Our success is dependent in part on obtaining, maintaining and enforcing our patent and other proprietary rights. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. We do not know whether any of our pending patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. As of April 30, 2011, we had five issued U.S. patents, four issued foreign patents, 14 U.S. pending patent applications and 16 pending foreign patent applications. Our patents may be contested, circumvented, found unenforceable or invalidated and we may not be able to prevent third parties from infringing them. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive

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advantages, and, as a result, our competitors may be able to develop technologies similar or superior to ours. In some countries where our storage systems are sold or may be sold, we do not have foreign patents or pending applications corresponding to some of our U.S. patents and patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

Protecting against the unauthorized use of our technology, trademarks and other proprietary rights is expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. For instance, our objection to an Australian web design firm’s use of the BLUEARC name has prompted that firm to challenge our Australian trademark registration, and we will be forced to defend against their claims in a hearing scheduled for July 2011. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we have. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Patent protection outside the United States is generally not as comprehensive as in the United States and may not protect our intellectual property in some countries where our storage systems are sold or may be sold in the future. Even if patents are granted outside the United States, effective enforcement in those countries may not be available. For example, the legal regime protecting intellectual property rights in China is relatively weak and it is often difficult to create and enforce such rights. Accordingly, we may not be able to effectively protect our intellectual property rights in China or elsewhere. Many companies have encountered substantial intellectual property infringement in countries where we sell or intend to sell storage systems. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our storage systems at competitive prices and to be the sole provider of leading edge products may be adversely affected and our financial condition and results of operations could be materially and adversely affected.

Our use of open source and third party software could impose limitations on our ability to commercialize our storage systems.

We incorporate open source software into certain of our storage systems. Although we monitor our use of open source software to avoid subjecting our storage systems to conditions we do not intend, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our storage systems. For example, we may be required to seek licenses from third parties to continue offering our storage systems, to make generally available, in source code form, our proprietary code that is used in connection with certain open source modules, to license or redistribute our proprietary software at no charge, to reengineer our storage systems, or to discontinue the sale of our storage systems if reengineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

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We may also find that we need to incorporate certain proprietary, third party technologies, including software programs, into our storage systems in the future. However, licenses to relevant third party technology may not be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our current storage systems. These delays, if they occur, could result in lost sales and a reduction in our revenue.

Security breaches could expose us to liability and our reputation and business may suffer.

Our storage systems retain sensitive data, including intellectual property, accounting books and records and personally identifiable information of our customers. It is critical to our business strategy that our storage systems remain secure and are perceived by customers and partners to be secure. Despite our security measures, our storage systems may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information stored on our storage systems. While we do not believe that any attack to date has successfully penetrated our network defenses, we have not commissioned a formal security audit by any third party. Any such breach could negatively affect our reputation by adversely affecting the market’s perception of the security or reliability of our storage systems.

Risks related to this offering and ownership of our common stock

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on any research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts start coverage of us, the trading price for our stock would be negatively impacted. If securities or industry analysts cover us and one or more of these analysts downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts stops coverage of us or fails to publish reports on us regularly, demand for our stock could decrease which could cause our stock price and trading volume to decline.

If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

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We are in the very early stages of the costly and challenging process of hiring personnel and compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. We cannot assure you that there will not be material weaknesses and significant deficiencies in our internal controls in the future. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm were to issue an adverse opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

We have not completed a testing cycle under Section 404 of the Sarbanes-Oxley Act and cannot assure you that we will be able to implement and maintain an effective internal control over financial reporting in the future. Any failure to maintain such controls could severely inhibit our ability to accurately report our financial condition or results of operations.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act and the Dodd-Frank Act of 2010, as well as rules implemented by the Securities and Exchange Commission, or SEC, and the stock exchange on which our common stock is traded. We expect these rules and regulations to increase our legal and financial compliance costs substantially and to make some activities more time consuming and costly. We are currently unable to estimate these costs with any degree of certainty. We also expect that, as a public company, it will be more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

Our common stock has no prior public trading market and could trade at prices below the initial public offering price.

Our common stock has no prior public trading market. Historically, the trading prices of the securities of technology companies have been highly volatile. Our common stock could trade at prices below the initial public offering price. Factors that could affect the trading price of our common stock, some of which are outside our control, include the following:

•

price and volume fluctuations in the overall stock market from time to time;

•

significant volatility in the market price and trading volume of technology companies in general, and of companies in our industry;

•

variations in our operating results or those of our competitors;

•

actual or anticipated announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;

•

the gain or loss of significant customers;

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•

recruitment or departure of key personnel;

•

level of sales in a particular quarter;

•

changes in the estimates of our operating results;

•

lawsuits threatened or filed against us;

•

sales of large blocks of our stock;

•

actual or anticipated changes in recommendations by any securities analysts who elect to follow our common stock;

•

whether our operating results meet the expectations of investors or securities analysts;

•

major catastrophic events; and

•

adoption or modification of regulations, policies, procedures or programs applicable to our business.

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could have a material adverse effect on your investment in our common stock. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material adverse effect on our business, operating results and financial condition.

A market may not develop for our securities and our stock price may decline after the offering.

Before this offering, there has been no public market for shares of our common stock and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of our common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. As a result of these and other factors, the price of our common stock may decline, possibly materially.

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence corporate matters.

Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders, if acting together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions such as a merger or other sale of our company or our assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see the section titled “Principal stockholders.”

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Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or show an intention to sell, substantial amounts of our common stock in the public market after the contractual lock-up agreements and other restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of April 30, 2011, upon completion of this offering, we will have outstanding shares of common stock. Of these shares, only the shares of common stock sold in this offering or shares of common stock sold in this offering if the underwriters’ over-allotment option were exercised in full, would be freely tradable, without restriction, in the public market. Our underwriters may, in their sole discretion, permit our directors, officers, employees and current stockholders who are subject to the 180-day contractual lock-up to sell shares before the lock-up agreements expire. The lock-up may be extended under some circumstances.

At various times after the lock-up agreements pertaining to this offering expire, up to an additional 43,330,741 shares will be eligible for sale in the public market of which 26,177,168 shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or Securities Act, and in certain cases, various vesting agreements.

In addition, the shares that are either subject to outstanding options under our 2000 Plan or reserved for future issuance under any post-initial public offering stock plans, 1,073,447 shares of common stock reserved for issuance upon the exercise of outstanding warrants and 320,393 shares of common stock reserved for issuance of certain outstanding warrants that will be net exercised for shares of common stock upon completion of this offering will become eligible for sale in the public market to the extent permitted by the provisions of various vesting arrangements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

Some of our existing stockholders have demand and piggyback rights to require us to register with the SEC up to 40,732,348 shares of our common stock (including 592,718 shares of our common stock reserved for issuance upon the exercise of certain outstanding warrants and 320,393 shares of our common stock reserved for issuance upon the exercise of outstanding warrants that will be net exercised for shares of common stock upon completion of this offering). If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market. Most of these shares are subject to lock-up agreements restricting their sale for 180 days after the date of this prospectus, subject to extension or reduction.

After this offering, we intend to register approximately shares of our common stock that we have issued or may issue under our equity plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the applicable lock-up agreements described above.

As a new investor, you will experience substantial dilution as a result of this offering.

The assumed initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding before this offering. As a result, investors purchasing common stock in this offering will experience immediate dilution of

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$ per share in the pro forma net tangible book value per share from the price paid, based on an assumed initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus). Investors who purchase shares in this offering will contribute approximately % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately % of the outstanding capital stock. In addition, we have issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent outstanding options and warrants are ultimately exercised, there will be further dilution to investors in this offering. This dilution occurs because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, if the underwriters exercise their option to purchase additional shares from us or if we issue additional equity securities, you will experience additional dilution.

Provisions in our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of us or changes in our management and therefore depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may consider advantageous. These provisions:

•

establish a classified board of directors so that not all members of our board are elected at one time;

•

provide that directors may only be removed for cause;

•

authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

•

eliminate the ability of our stockholders to call special meetings of stockholders;

•

prohibit stockholder action by written consent, which has the effect of requiring all stockholder actions to be taken at a meeting of stockholders;

•

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

•

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of us by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.

Our management will have broad discretion as to the use of the net proceeds from this offering and might invest or spend the proceeds in ways with which you might not agree or in ways that may not yield a return.

Our management will have broad discretion to use the net proceeds from this offering and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways with which you

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agree or that increase the value of your investment. We expect to use the net proceeds from this offering for working capital and general corporate purposes, which may include acquisitions of complementary businesses, products or technologies. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You may not have the opportunity to influence our decisions on how to use the net proceeds from this offering. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

We do not expect to pay dividends in the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We expect to retain all of our future earnings for use in the development of business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, investors must rely on sales of their common stock after price appreciation which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

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Special note regarding forward-looking statements and industry data

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in the sections entitled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” “Business,” “Compensation discussion and analysis” and “Executive compensation.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates, that we obtained from industry publications, surveys and forecasts, including those generated by IDC. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we believe the information in these industry publications, surveys and forecasts is reliable, we have not independently verified the accuracy or completeness of the information. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section entitled “Risk factors.”

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Use of proceeds

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus and after deducting an assumed underwriting discount and estimated offering expenses that we must pay. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $ . A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our expected net proceeds by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting an assumed underwriting discount and estimated offering expenses that we must pay.

Pending use of net proceeds from this offering, we intend to invest the net proceeds in investment grade, interest-bearing securities.

Dividend policy

We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Our long-term capital growth facility agreement with Gold Hill Capital also limits our ability to pay dividends. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may consider relevant.

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization:

•

on an actual basis as of April 30, 2011;

•

on a pro forma basis after giving effect to the automatic conversion of all outstanding shares of preferred stock, assuming our Series CC preferred stock converts on a one for 11.80684 basis and our Series EE preferred stock converts on a one for 1.02268 basis, into common stock upon the closing of this offering and the reclassification of a portion of the warrants liability to additional paid-in capital; and

•

on a pro forma as adjusted basis reflecting (i) the pro forma presentation described above; (ii) the receipt of the estimated net proceeds from the sale of shares of common stock offered by us in this offering at an assumed initial public offering price of $ , which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, after deducting an assumed underwriting discount and estimated offering expenses that we must pay; and (iii) the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering.

You should read this table in conjunction with the sections of this prospectus entitled “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” and with our consolidated financial statements and related notes.


	As of April 30, 2011
	Actual			Pro forma			Pro forma as adjusted(1)

	(in thousands, except share numbers, unaudited)
Cash and cash equivalents	$	16,084		$	16,084		$

Total debt and capital lease obligations		7,481			7,481
Warrants liability		3,935			333
Convertible preferred stock, $0.001 par value: 52,566,195 authorized, 36,451,015 shares issued and outstanding actual; no shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted		121,699			—

Stockholders’ equity (deficit):
Preferred stock, $0.001 par value: no shares authorized, issued or outstanding actual or pro forma; 50,000,000 shares authorized, no shares issued or outstanding pro forma as adjusted		—			—			—
Common stock and additional paid-in capital, $0.001 par value: 50,540,389 shares authorized, 3,511,504 shares issued and outstanding actual; 75,950,000 shares authorized, 43,330,741 shares issued and outstanding pro forma; 500,000,000 shares authorized, shares issued and outstanding pro forma as adjusted		117,094			242,395
Accumulated other comprehensive income		1,093			1,093
Accumulated deficit		(230,262	)		(230,262	)

Total stockholders’ equity (deficit)		(112,075	)		13,226

Total capitalization	$	21,040		$	21,040		$

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share of our common stock in this offering would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriter discounts and commissions and estimated offering expense payable by us.

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If the underwriters’ option to purchase additional shares in the offering were exercised in full, pro forma as adjusted cash and cash equivalents, common stock and additional paid-in capital, total stockholders’ equity (deficit) and total capitalization as of April 30, 2011 would be $ , $ , $ , $ and $ respectively.

This table excludes the following shares:

•

7,019,362 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $1.02 per share;

•

894,327 shares of common stock reserved as of April 30, 2011 for future issuance under our 2000 Plan;

•

shares of common stock reserved for future issuance under our 2011 Plan that will become effective on the effective date of the registration statement of which this prospectus is a part;

•

1,073,447 shares of common stock reserved for issuance upon the exercise of outstanding warrants as of April 30, 2011, at a weighted average exercise price of $2.68 per share; and

•

320,393 shares of common stock reserved for issuance upon the exercise of outstanding warrants as of April 30, 2011, at a weighted average exercise price of $2.53 per share, that will be net exercised for shares of common stock, based on an assumed initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus.

See the section titled “Executive compensation—Employee benefit plans” for a description of our equity plans.

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Dilution

Our pro forma net tangible book value as of April 30, 2011 was $ , or $ per share. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by shares of common stock outstanding after giving effect to the automatic conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering, assuming that our Series CC preferred stock converts on a one for 11.80684 basis and our Series EE preferred stock converts on a one for 1.02268 basis.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, and after deducting an assumed underwriting discount and estimated offering expenses, our pro forma net tangible book value as of April 30, 2011 would have been $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share attributable to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to purchasers of common stock in this offering, as illustrated in the following table:


Assumed initial public offering price per share						$
Pro forma net tangible book value per share as of April 30, 2011						$
Increase in pro forma net tangible book value per share attributable to new investors

Pro forma net tangible book value per share after the offering

Dilution of pro forma net tangible book value per share to new investors						$

If the underwriters exercise in full their option to purchase additional shares of our common stock in this offering, the pro forma net tangible book value per share after the offering would be $ per share, the increase in pro forma net tangible book value per share to existing stockholders would be $ per share and the dilution to new investors purchasing shares in this offering would be $ per share.

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our pro forma net tangible book value by $ million, or $ per share, the increase in pro forma net tangible book value attributable to existing stockholders by $ per share and the dilution in pro forma net tangible book value per share to purchasers of common stock in this offering by $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting an assumed underwriting discount and estimated offering expenses we must pay.

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The following table presents on a pro forma basis as of April 30, 2011, after giving effect to the automatic conversion of all outstanding shares of preferred stock, assuming the conversion of our Series CC preferred stock on a one for 11.80684 basis and the conversion of our Series EE preferred stock on a one for 1.02268 basis, into common stock upon completion of this offering, the differences between the existing stockholders and the purchasers of shares in the offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:

Shares purchased

Total consideration

Average price

per share

Number

Percent

Amount

Percent

(in thousands, except per share data and percentage)

Existing stockholders

New stockholders

Total

If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to shares, or % of the total number of shares of our common stock outstanding after this offering.

These tables exclude the following shares:

•

7,019,362 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $1.02 per share;

•

894,327 shares of common stock reserved as of April 30, 2011 for future issuance under our 2000 Plan;

•

shares of common stock reserved for future issuance under our 2011 Plan that will become effective on the effective date of the registration statement of which this prospectus is a part;

•

1,073,447 shares of common stock reserved for issuance upon the exercise of outstanding warrants as of April 30, 2011, at a weighted average exercise price of $2.68 per share; and

•

See the section titled “Executive compensation—Employee benefit plans” for a description of our equity plans.

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Selected consolidated financial data

We derived the selected consolidated statements of operations data for the years ended January 31, 2009, January 30, 2010 and January 29, 2011 and consolidated balance sheet data as of January 30, 2010 and January 29, 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the years ended January 31, 2007 and January 31, 2008 and consolidated balance sheet data as of January 31, 2007, January 31, 2008 and January 31, 2009 from our audited consolidated financial statements and related notes not included in this prospectus. We derived the consolidated statements of operations data for the three months ended May 1, 2010 and April 30, 2011 and the consolidated balance sheet data as of April 30, 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, which include only normal recurring adjustments, that we consider necessary for the fair presentation of the financial information set forth in those financial statements. Historical results are not necessarily indicative of future results.


	Year ended															Three months ended
	Jan. 31, 2007			Jan. 31, 2008			Jan. 31, 2009			Jan. 30, 2010			Jan. 29, 2011			May 1, 2010			Apr. 30, 2011

																(unaudited)
	(in thousands, except per share data)

Consolidated statements of operations data:
Product revenue	$	35,555		$	56,490		$	59,864		$	49,523		$	66,550		$	14,103		$	19,596
Support revenue		6,509			10,730			14,366			16,352			19,039			4,511			5,116

Total revenue		42,064			67,220			74,230			65,875			85,589			18,614			24,712
Cost of product revenue		19,752			29,174			32,179			29,709			34,627			7,546			9,938
Cost of support revenue		2,947			3,920			3,483			4,570			6,184			1,395			1,815

Total cost of revenue(1)		22,699			33,094			35,662			34,279			40,811			8,941			11,753

Gross profit		19,365			34,126			38,568			31,596			44,778			9,673			12,959

Sales and marketing(1)		17,625			28,413			33,759			28,540			32,068			7,868			9,327
Research and development(1)		11,149			16,800			18,274			13,783			16,410			3,775			4,966
General and administrative(1)		4,846			9,062			5,659			4,868			5,277			1,464			1,614

Total operating expenses		33,620			54,275			57,692			47,191			53,755			13,107			15,907

Loss from operations		(14,255	)		(20,149	)		(19,124	)		(15,595	)		(8,977	)		(3,434	)		(2,948	)
Interest income		746			744			260			24			15			—			2
Interest expense		(605	)		(76	)		(237	)		(1,065	)		(1,317	)		(339	)		(284	)
Other income (expense), net		373			33			(1,359	)		(389	)		(566	)		(136	)		(1,552	)

Loss before income taxes		(13,741	)		(19,448	)		(20,460	)		(17,025	)		(10,845	)		(3,909	)		(4,782	)
Benefit from income taxes		983			1,390			882			1,272			1,420			324			453

Net loss	$	(12,758	)	$	(18,058	)	$	(19,578	)	$	(15,753	)	$	(9,425	)	$	(3,585	)	$	(4,329	)

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	Year ended															Three months ended
	Jan. 31, 2007			Jan. 31, 2008			Jan. 31, 2009			Jan. 30, 2010			Jan. 29, 2011			May 1, 2010			Apr. 30, 2011

																(unaudited)
	(in thousands, except per share data)
Deemed dividend on exchange of preferred stock		—			—			—			—			(940	)		—			—
Net loss attributable to common stockholders	$	(12,758	)	$	(18,058	)	$	(19,578	)	$	(15,753	)	$	(10,365	)	$	(3,585	)	$	(4,329	)

Net loss per share attributable to common stockholders, basic and diluted	$	(17.93	)	$	(10.85	)	$	(8.74	)	$	(6.55	)	$	(3.54	)	$	(1.47	)	$	(1.25	)

Shares used in computing net loss per share attributable to common stockholders, basic and diluted (unaudited)		711			1,665			2,241			2,404			2,930			2,438			3,465

Pro forma net loss per common share, basic and diluted (unaudited)													$	(0.24	)				$	(0.06	)

Pro forma shares used in calculation of basic and diluted net loss per share attributable to common stockholders, basic and diluted (unaudited)														39,363						43,284


	Year ended															Three months ended
	Jan. 31, 2007			Jan. 31, 2008			Jan. 31, 2009			Jan. 30, 2010			Jan. 29, 2011			May 1, 2010			Apr. 30, 2011

	(in thousands, unaudited)

Other financial data:
Adjusted EBITDA(2)	$	(12,441	)	$	(17,044	)	$	(14,875	)	$	(10,739	)	$	(5,146	)	$	(2,514	)	$	(1,546	)


	As of
	Jan. 31, 2007			Jan. 31, 2008			Jan. 31, 2009			Jan. 30, 2010			Jan. 29, 2011			Apr. 30, 2011

																(unaudited)
	(in thousands)

Consolidated balance sheet data:
Cash and cash equivalents	$	20,140		$	8,978		$	13,805		$	10,711		$	15,971		$	16,084
Working capital		22,013			8,442			14,286			4,126			17,716			12,187
Total assets		48,037			45,190			46,669			38,223			55,082			57,646
Total debt and capital lease obligations		—			7,393			6,020			7,501			7,197			7,481
Total liabilities		21,174			34,834			32,197			37,943			41,681			48,022
Convertible preferred stock		79,510			79,510			102,617			102,617			121,699			121,699
Common stock and additional paid-in-capital		109,065			110,524			111,821			113,265			116,727			117,094
Total stockholders’ equity (deficit)		(52,647	)		(69,154	)		(88,145	)		(102,337	)		(108,298	)		(112,075	)

(1)

Includes stock-based compensation expense as follows:


	Year ended										Three months ended
	Jan. 31, 2007		Jan. 31, 2008		Jan. 31, 2009		Jan. 30, 2010		Jan. 29, 2011		May 1, 2010		Apr. 30, 2011

											(unaudited)
	(in thousands)
Cost of revenue	$	—	$	—	$	51	$	67	$	44	$	9	$	11
Sales and marketing		61		370		498		610		476		86		116
Research and development		26		155		282		366		254		69		62
General and administrative		110		235		387		366		343		115		132

Total stock-based compensation expense	$	197	$	760	$	1,218	$	1,409	$	1,117	$	279	$	321

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(2)

We present Adjusted EBITDA, which we define as net loss excluding:

•

benefit from income taxes;

•

other income (expense), net;

•

interest expense;

•

interest income;

•

stock-based compensation; and

•

depreciation and amortization.

Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. We exclude other income (expense), net from Adjusted EBITDA as it largely consists of mark to market and other expenses related to our warrants and foreign currency gain or losses. Gains from nonrecurring engineering projects included in other income (expense), net are all excluded from other income (expense), net when calculating Adjusted EBITDA. We have provided a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or nonrecurring items.

We reconcile net loss to Adjusted EBITDA as follows:


	Year ended															Three months ended
	Jan. 31, 2007			Jan. 31, 2008			Jan. 31, 2009			Jan. 30, 2010			Jan. 29, 2011			May 1, 2010			Apr. 30, 2011

	(in thousands, unaudited)
Net loss	$	(12,758	)	$	(18,058	)	$	(19,578	)	$	(15,753	)	$	(9,425	)	$	(3,585	)	$	(4,329	)
Benefit from income taxes		(983	)		(1,390	)		(882	)		(1,272	)		(1,420	)		(324	)		(453	)
Other income (expense), net		(373	)		(33	)		1,359			389			566			136			1,832
Interest expense		605			76			237			1,065			1,317			339			284
Interest income		(746	)		(744	)		(260	)		(24	)		(15	)		—			(2	)
Stock-based compensation		197			760			1,218			1,409			1,117			279			321
Depreciation and amortization		1,617			2,345			3,031			3,447			2,714			641			801

Adjusted EBITDA	$	(12,441	)	$	(17,044	)	$	(14,875	)	$	(10,739	)	$	(5,146	)	$	(2,514	)	$	(1,546	)

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Management’s discussion and analysis of

financial condition and results of operations

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-looking Statements and Industry Data” included elsewhere in this prospectus.

Overview

We were founded in 1998 and began commercial shipments of our storage systems in 2001. In January 2004, we introduced our first generation storage systems aimed at customers seeking high performance computing solutions in industries such as genomics, oil and gas and media and entertainment. We have continued to innovate and advance our storage systems for HPC. We also leveraged the architecture of our HPC systems to expand our storage system offerings and address the mid-range market. The introduction of our mid-range storage systems in July 2009 resulted in us achieving significant revenue growth beginning in late fiscal 2010. Our solutions include an advanced suite of software features and data management software, such as our software that addresses desktop and server virtualization and cloud environments.

Historically, the substantial majority of our sales were made through our direct sales force. Today we sell our storage systems through multiple channels, which include our direct sales force, our extensive network of channel partners and our OEM, HDS. HDS accounted for 22%, 30%, 41% and 45% of revenue in fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, respectively. HDS has sold our product to over 300 customers worldwide.

We outsource our manufacturing, repair and supply chain operations and also our spare parts logistics to increase our operational efficiency and flexibility. We also outsource some quality assurance related to research and development as well as product development activities.

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We experienced a decrease in revenue in the last quarter of fiscal 2009 and in the first half of fiscal 2010 as a consequence of decreased information technology infrastructure spending caused by global economic conditions. In response, we implemented a variety of cost saving measures, which included a reduction in our direct sales force, and focused on the development of our mid-range storage systems. With the introduction of our mid-range storage systems and improving economic conditions, we achieved 30% growth in revenue from fiscal 2010 to fiscal 2011.

We have a history of net losses in each fiscal year since our inception as we have invested significantly in our product development, customer services and sales and marketing organizations to support the growth of our business. We financed our operations through the issue of preferred stock and debt securities. We plan to continue to invest in our sales channels, customer service and research and development organizations and infrastructure, which we expect will result in future net losses. We believe this strategy will better position us in the market to achieve substantial, long-term growth and market share in our business. We intend to use the proceeds from this offering and other potential sources of funding, if and when available, to fund our growth.

Key financial data


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(in thousands)
Revenue	$	74,230		$	65,875		$	85,589		$	18,614		$	24,712
Gross profit		38,568			31,596			44,778			9,673			12,959
Net loss		(19,578	)		(15,753	)		(9,425	)		(3,585	)		(4,329	)

Other financial data:
Adjusted EBITDA (unaudited)	$	(14,875	)	$	(10,739	)	$	(5,146	)	$	(2,514	)	$	(1,546	)

We present Adjusted EBITDA, which we define as net loss excluding:

•

benefit from income taxes;

•

other income (expense), net;

•

interest expense;

•

interest income;

•

stock-based compensation; and

•

depreciation and amortization.

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Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. We have included Adjusted EBITDA in this prospectus because it is a basis upon which our management assesses financial performance and it eliminates the impact of items that we do not consider indicative of our core operating performance. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or nonrecurring items.

Hitachi Data Systems arrangements

We have a Master Distribution Agreement, or MDA, with HDS. The MDA commits HDS to purchase specified dollar amounts of our product offerings through September 2011. Under the MDA, during fiscal 2010 and fiscal 2011, HDS prepaid $10.0 million and $5.0 million, respectively, for future purchases of our products. As partial consideration for these prepayments, during fiscal 2011 we issued to HDS vested warrants to purchase 206,184 shares of our common stock with a per share exercise price of $1.94 and expiration in 2017. We determined the fair value at issuance was $222,000 and recognized as a reduction in revenue upon HDS’ purchase of products using the prepayment.

During fiscal 2011, HDS paid us $1.5 million for certain research and development projects. We recognized these amounts as a reduction in research and development expense as the associated projects were conducted. As of April 30, 2011, $537,000 remained included in customer deposits in our balance sheet. We have also received fees from HDS for an inventory supply agreement, whereby we set aside certain inventory quantities to be available for them as needed. The amount of support fees recognized for this service was $112,000, $682,000 and $321,000 in fiscal 2009, fiscal 2010 and fiscal 2011, respectively. This inventory arrangement expired at the end of fiscal 2011.

During fiscal 2009, we issued HDS vested warrants to purchase 151,418 shares of our common stock with a per share exercise price of $4.13 and a fair value at issuance of $194,000. The warrants were issued upon HDS’ achievement of specified revenue milestones for the sale of our products. These warrants expired unexercised in fiscal 2011. We recognized fair value of these warrants as a reduction in revenue.

Components of our results of operations

Revenue. We generate product revenue from sales of our storage systems in configurations tailored to meet our customers’ requirements. Our storage systems combine our file servers with an advanced software suite critical to the functionality of our SiliconFS file system, standard interfaces and multiple tiers of enterprise-class storage devices. We also license certain of our software separately to add functionality for our storage solution. We sell our SiliconFS file system and license additional software applications to HDS, which resells them in combination with its storage arrays. We generate our support revenue by providing hardware and software support and maintenance under contracts, which are generally one to three years, as well as installation, training and professional services. We generally ship our products and recognize the related revenue in the period in which the products are ordered and do not carry a significant backlog

from period to period. As such, our revenue in a given period is substantially dependent on sales in that period.

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We market and sell our storage systems, support and professional services primarily through our direct sales force or through resellers and other channel partners. We maintain sales operations, which include our direct sales force and our channel management personnel, in the United States, England, Germany, Canada, Norway and Australia. The following table summarizes by geographic region our total revenue in fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended May 1, 2010 and April 30, 2011:


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			Apr. 30, 2011

										(unaudited)
	(in thousands)

Revenue:
United States	$	51,645		$	50,295		$	59,492		$	12,549		$	17,218
Canada		8,830			1,932			3,943			1,915			806
EMEA		9,002			7,372			15,937			3,700			4,442
Other		4,753			6,276			6,217			450			2,246

Total	$	74,230		$	65,875		$	85,589		$	18,614		$	24,712


Percent of revenue by geography:
United States		70	%		76	%		70	%		67	%		70	%
Canada		12			3			5			10			3
EMEA		12			11			19			20			18
Other		6			10			6			3			9

Total		100	%		100	%		100	%		100	%		100	%

We expect that sales in the United States will continue to contribute a substantial majority of our revenue for the foreseeable future. We plan to continue to add direct sales personnel in the United States, as well as elsewhere, and to expand our network of channel partners and resellers.

Cost of revenue

Cost of product revenue. Cost of product revenue consists primarily of the cost of components used to manufacture our SiliconFS file system and storage hardware, as well as manufacturing and assembly costs charged by our contract manufacturer. We make provisions for excess and obsolete inventory, if any, product warranty obligations, shipping charges, overhead allocations and personnel-related costs. Because our storage systems combine our proprietary SiliconFS file system and software with third party storage arrays, gross margins on these storage systems are lower than when we sell our file system and software on a standalone basis. We intend to continue to optimize our cost of product revenue through cost improvements and achievements of economies of scale. We expect our product gross margins to fluctuate over time depending on product configuration and channel mix shifts, as well as quarter to quarter volatility caused by large implementations of our storage systems.

Cost of support revenue. Cost of support revenue consists of customer service and technical support personnel and third party costs we incur in order to provide hardware repair and replacement services, installation, training and other professional services. We expect cost of support revenue to increase on an absolute basis as we continue to invest in our support infrastructure.

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Operating expenses. Personnel-related costs, which include stock-based compensation, are the most significant component of each of our operating expense categories. We expect to hire significant numbers of additional employees in order to support our anticipated growth. In any particular period, the timing of additional hires could materially affect our operating expenses. We recently began outsourcing certain research and development, quality assurance related to research and development and product development activities and expect to continue to do so in the future to reduce costs.

Sales and marketing. Sales and marketing expenses represent the largest component of our operating expenses and include personnel-related costs, sales commissions, travel and marketing programs. We intend to continue to invest heavily in sales and marketing by increasing the number of sales and support personnel worldwide. New sales personnel do not immediately generate revenue and therefore we may not experience the full benefits of these additional sales personnel until they gain experience selling our storage systems. We expect sales and marketing costs to continue to increase in absolute dollars.

Research and development. Research and development expenses primarily include personnel-related costs, depreciation on lab equipment, prototype equipment, outsourced quality assurance and product development. In addition, we periodically perform nonrecurring research and development services for HDS, payment for which we offset against personnel and equipment costs. We expense research and development costs as incurred. Our research and development employees are based in England and the United States. A substantial majority of our research and development employees focus on software development. We expect our research and development expense to increase in absolute dollars.

General and administrative. General and administrative expenses consist primarily of personnel-related costs and facilities costs related to our executives, finance, human resource and information technology functions and fees for professional services. Professional services consist of outside legal, tax and audit. We expect our general and administrative expenses to increase in absolute dollars as we invest in additional infrastructure to support our growth and incur expenses as a result of operating as a public company, including increased audit and legal fees, compliance costs, investor relations expenses and higher insurance premiums.

Interest income. Interest income consists of interest income on our cash and cash equivalents balances. We have historically primarily invested our funds in deposits and money market accounts.

Interest expense. Interest expense primarily consists of interest accrued or paid and loan fees on our outstanding long-term capital growth facility agreement and/or our accounts receivable revolving line of credit.

Other income (expense), net. We classify our outstanding preferred stock warrants and certain common stock warrants as liabilities on our balance sheets and record changes in their fair value from period to period in other income (expense), net. In addition, we record fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar in other income (expense), net.

Benefit from income taxes. To date, we have not paid material income taxes as a result of our losses. We receive tax benefits primarily due to the surrendering of our NOL carryforwards in the United Kingdom, in exchange for a cash refund for research and development activities in the

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United Kingdom. After fiscal 2014, we no longer expect to be eligible to surrender these NOLs and receive a cash tax refund as we expect to exceed certain specified statutory thresholds.

Critical accounting policies and estimates

We prepare our consolidated financial statements in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. In other cases, our judgment is required in selecting among available alternative accounting policies that allow different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.

Revenue recognition. We recognize revenue, net of sales tax, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. These criteria are usually met for hardware and software license elements when the storage system is shipped to the customer. For evaluation units, we do not recognize revenue until receipt and acceptance of the customer’s purchase order requesting conversion of the unit into a sale. We defer support revenue and recognize it ratably over the period during which the support is to be performed, which is typically from one to three years.

For channel partner sales, we evaluate whether fees are fixed or determinable by considering a number of factors, including payment terms, the channel partner’s credit standing and financial position and our contractual relationship and past history with the particular channel partner. If the fees are not deemed to be fixed or determinable, we delay the shipment or, if product is shipped, defer recognition of revenue until there is persuasive evidence that fees are fixed or determinable and that collection is probable. Persuasive evidence may include copies of end customer purchase orders, cash payments or letters of credit guaranteeing cash payments, reports from channel partners documenting sell-through activity, data indicating an order has shipped to an end customer or other similar information. We do not offer channel partners return rights, rebate, price protection or other similar rights.

Deferred revenue balances consist of deferred support revenue and deferred product revenue.

Our storage systems are typically sold with multiple elements: hardware and perpetual software licenses for the embedded software and support services that entitle customers during the support services term to telephone support and unspecified software upgrades, bug fixes and patch releases, which are offered on a when-and-if-available basis. The hardware in our storage systems is integrated with software that is essential to the functionality of the equipment, except

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for certain optional software features, and more than incidental to the storage system as a whole. Accordingly, we applied the accounting standards for software revenue recognition for all transactions involving the sales of software and related services for all periods prior to January 30, 2011. For these fiscal years, we allocated revenue between delivered hardware and software elements and undelivered support services using the residual value method. Under the residual method the amount equal to the fair value of the undelivered support services, also known as vendor specific objective evidence, or VSOE, is deferred and amortized over the period when such services are provided and any remaining amounts are attributed to the delivered hardware and software elements and are recognized when those items are delivered. VSOE represents the price charged for a deliverable when it is sold separately.

We established VSOE of fair value for our support services. For arrangements where support renewal rates are not contractually stated, fair value is established based on the pricing analysis of our actual support renewals. For arrangements with contractually stated support renewal rates, fair value of one year of support services is established by reference to the contractually stated renewal rates.

In October 2009, the Financial Accounting Standards Board, or FASB, issued an accounting standards update, which removes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue guidance. At the same time, FASB amended the accounting standard for multiple element revenue arrangements, which are not in the scope of industry specific software revenue recognition guidance, to provide updated guidance to separate the deliverables and to measure and allocate arrangement consideration to one or more units of accounting. The new guidance eliminates the use of the residual method and requires an entity to allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. In contrast to the residual method, this has the effect of allocating any inherent discount in a multiple element arrangement to each of the deliverables on a proportionate basis. The guidance also expands the disclosure requirements to require an entity to provide both qualitative and quantitative information about the significant judgments made in applying the revised guidance and subsequent changes in those judgments that may significantly affect the timing or amount of revenue recognition. The revised revenue recognition accounting standards are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.

We adopted the new revenue recognition guidance for arrangements with multiple deliverables on a prospective basis for new or modified arrangements entered on or after January 30, 2011. We now allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method unless the amount allocated to delivered hardware and software elements exceeds the arrangement consideration that is not contingent upon delivery of support services. This method requires us to determine the selling price at which each deliverable could be sold if it were sold regularly on a standalone basis. Under this approach, the selling price of a deliverable is determined by using a selling price hierarchy which requires the use of VSOE of fair value if available, third party evidence, or TPE, if VSOE is not available, or estimated selling price, or ESP, if neither VSOE nor TPE is available. Since we generally do not have standalone sales of our hardware and software products, the use of VSOE is limited to support services. TPE of selling price is established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. However, since our competitors do not generally sell tangible products and perpetual

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licenses on a standalone basis except for limited cases, no consistent pricing information is available. Therefore, we concluded that no reliable TPE is available for our products and services. We determine ESP by considering factors such as market conditions, sales channels, internal costs and product margin objectives, and pricing practices. We regularly review and update our VSOE, TPE and ESP information and obtain formal approval by appropriate levels of management.

We continue to account for optional software applications and related support services included in a multiple element arrangement under industry specific software revenue recognition guidance using the residual method. Revenue is first allocated to the nonsoftware deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy described above. Next, under the residual method, we defer revenue from the sale equivalent to the VSOE of the fair value of support services and apply any inherent discounts to the delivered software element.

The adoption of the new revenue recognition guidance did not result in changes of the individual deliverables to which we allocate revenue, or the timing of recognition of revenue for the individual deliverables. The change in the allocation method from residual to relative selling price did not have a material impact on our financial statements during the three months ended April 30, 2011.

Income taxes. We use the asset and liability method of accounting for income taxes. We recognize deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances when necessary to reduce deferred tax assets where management concludes that it is more likely than not that the deferred tax assets will not be realized based upon the available evidence.

We record a liability for the uncertain tax positions taken or expected to be taken on our tax return when it is more likely than not that the tax position might be challenged and additional taxes may be due as a result, despite our belief that the tax return positions are fully supportable. To the extent that our assessment of our tax positions change, the change in estimate is recorded in the period in which the determination is made. The provision for income taxes includes the impact of provisions for uncertain tax positions.

Warranty reserve. We provide three year and 90 day warranties for our hardware and software, respectively. These warranty periods are extended for customers who purchase additional hardware support after the warranty period has expired. We estimate the costs that we may incur under our warranty obligations and record a liability concurrent with the revenue recognition, which is included in other accrued liabilities and other long-term liabilities. The warranty accrual is based on our historical experience of product replacements, repair costs and ongoing product failure rates and for specific failure issues, if necessary. Each period, we assess the adequacy of our recorded warranty reserve and make adjustments we deem necessary. We record warranty cost as part of our cost of product revenue.

Inventory. Inventories include the cost of materials, labor and related manufacturing overhead and are adjusted to approximate the lower of cost or market value. Raw materials consist principally of storage system components and finished goods are comprised of assembled storage

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systems. We write down inventory to market value if lower than cost, based on current inventory levels, projected realizable values and demand, expected lives and technological obsolescence of the products or component parts.

Service spares inventory consists of components used to support the field services organization. In addition, in order to fulfill our hardware warranty obligations, we hold storage system components at our logistics provider’s depots that are used to repair and replace broken hardware. We establish an inventory valuation reserve for spares inventory to reduce the carrying amounts of the inventories to their net estimated realizable values. We estimate these net estimated realizable values by analyzing historical failure rates and past usage of service components, expected lives and support terms, technological obsolescence and economic factors.

Evaluation storage systems are finished goods located at customer sites, as some of our customers test our storage systems prior to purchase primarily for a period of up to 90 days. At the end of the evaluation period, a customer may decide to either purchase the system or return the system to us at no further cost or obligation. We disassemble returned evaluation storage systems and we hold the related components as raw materials. We adjust the inventory value of evaluation storage systems for expected wear and tear based upon factors that include past experience of diminution in value of returned evaluation storage systems and the length of time the storage systems are at our customers’ sites.

We include the reserve provision for all inventories in cost of product revenue. Once the lower cost basis is established, subsequent changes in facts or circumstances do not result in the restoration or increase in that newly established cost basis. Historically, we have written off excess and obsolete inventory during product transitions.

Stock-based compensation. We grant our employees options to purchase our common stock. Effective February 1, 2006, we utilize the fair value recognition method of accounting for stock-based employee compensation arrangements, which requires us to measure the stock-based compensation costs of stock-based compensation arrangements based on the grant date fair value, and recognize the costs in the financial statements over the employees’ requisite service period. We adopted the above guidance using the modified prospective transition method. Under this transition method, the new fair value recognition provisions are applied to option grants on and after July 1, 2005. We expense all options granted or modified after July 1, 2005 on a straight-line basis. We measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award. We recognize the fair value of the employee awards that vest based only on employees’ continuing service on a straight-line basis over the requisite service period, which is generally the vesting period. For employee awards with performance conditions, we recognize expense separately for each vesting event of the award to the extent we determine it is probable that the performance goals will be achieved. We continue to recognize this expense until such time as the vesting event is achieved or becomes unachievable. The fair value of the options granted to nonemployees is revalued as they vest, and the resulting change in value, if any, is recognized as expense during the period the related services are rendered. We estimate the fair value of stock-based awards on the grant date using an option pricing model.

In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation still to be recognized combined with the issuance of additional stock-based awards in order to attract and retain employees and nonemployee consultants.

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Significant factors, assumptions and methodologies used in determining fair value. The fair value of options on the grant date is estimated using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions including expected term, volatility, risk-free interest rate and the fair value of our common stock. Compensation expense is recognized on awards ultimately expected to vest and reduced for forfeitures that are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. These assumptions generally require significant judgment.

The fair value of each new employee option awarded was estimated on the grant date for the periods below using the Black-Scholes option-pricing model with the following assumptions:


	For the year ended January 29, 2011		Three months ended May 1, 2010		Three months ended April 30, 2011

Risk-free interest rate		1.4% - 2.7%		2.4% - 2.7%		2%
Expected term (in years)		4.5		4.5		4.9
Expected dividend		0%		0%		0%
Expected volatility		50% - 51%		50%		53%

Our assumptions used in the Black-Scholes model are discussed below:

Expected volatility. As we have no active trading history for our common stock, we have derived our expected volatility from historical volatilities of several peer public companies deemed to be comparable to our business.

Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding and was estimated based on patterns of historical exercises and post-vesting cancellations and the options’ contractual term.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

Expected dividend. The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

We estimate our forfeiture rate based on an analysis of our actual forfeitures, employee turnover and other factors.

The absence of an active market for our common stock also required our board of directors, the members of which we believe have extensive business, finance and venture capital experience, to estimate the fair value of our common stock for purposes of granting options and for determining stock-based compensation expense for the periods presented. In response to these requirements, our board of directors’ practice has been to estimate the fair market value of common stock at each meeting at which options were granted. We have obtained contemporaneous third party valuations to assist our board of directors in determining fair market value. We have historically granted stock options at not less than the fair market value of our common stock as determined at the time of grant. These contemporaneous third party valuations used the methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Guide.

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The following table summarizes the options granted or existing grants we modified during fiscal 2011 and the three months ended April 30, 2011:


Date of grants	Number of shares granted		Exercise price per share

April 2010		240,767	$	1.94
September 2010		841,108		1.42
October 2010		306,261		1.42
December 2010		42,000		1.71
March 2011		347,500		1.78

		1,777,636

Our board of directors determined the fair value of our common stock based on an evaluation of numerous objective and subjective factors as of the date of each grant including the following:

•

contemporaneous valuations by an unrelated third party valuation firm;

•

the prices of the recent preferred stock sales to investors in arms-length transactions;

•

our capital resources and financial condition;

•

the preferences held by our preferred stock classes in favor of our common stock;

•

the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of our company given prevailing market conditions;

•

our historical operating and financial performance as well as management’s estimates of future financial performance;

•

recent acquisitions and valuations of comparable companies;

•

the hiring of key personnel;

•

the status of our development, product introduction and sales efforts;

•

revenue growth;

•

industry information such as market growth and volume and macro-economic events; and

•

additional objective and subjective factors relating to our business.

The valuations that our board of directors considered in making its determination of the fair value of our common stock utilized a probability-weighted expected return method, or PWERM. This valuation method was considered to be most appropriate given the status of our business and the anticipated liquidity events. Under PWERM, the valuations assigned probabilities and timing estimates to potential liquidity events for us based on a variety of factors, including primarily our recent operating history, the amount of cash held by us and the preferences held by the preferred stock relative to our common stock. Three principal scenarios were examined: a merger or acquisition, or M&A, scenario; an initial public offering, or IPO, scenario; and a scenario in which we continue to operate as a private entity. For each valuation date, we prepared a financial forecast to be used in the computation of the enterprise value. The financial forecasts took into account our past experience and future expectations.

To arrive at a value for common shares under the M&A scenario and the IPO scenario, the market approach and specifically, the guideline public company method, was used to estimate our total

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stockholder value at the time of the respective anticipated liquidity event. The guideline public company method estimates the fair value of a company by applying to that company market revenue multiples of publicly traded firms in similar lines of business. When choosing the comparable companies to be used for the guideline public company method, the valuations focused on companies in the computer storage industry. Some of the specific criteria used to select and analyze comparable companies within our industry included the business description, business size, projected growth, financial condition and historical operating results. The valuations analyzed the business and financial profiles of the selected companies for relative similarity to us, and once such differences and similarities were determined and proper adjustments were made, determined an appropriate total stockholder value revenue multiple for us. This revenue multiple was applied to the trailing 12 months’ revenue to arrive at our anticipated total stockholder value at the time of the anticipated future liquidity event. The total stockholder value was then allocated amongst share classes based on the amount of liquidation preferences, and the resulting values were discounted to the present value using a discount rate which accounted for the market cost of capital and risk.

To estimate the value of the common shares under the continuing to operate as a private company scenario, the valuations used two approaches: a guideline public company method (market approach), and a discounted cash flow approach (income approach). The guideline public company method, as discussed previously, was applied at the valuation date to estimate the total stockholder value of the company at the present. Under the discounted cash flow approach, the valuations analyzed the forecast of our expected future financial performance, and discounted those amounts to present value using an appropriate discount rate which reflected the then-current company’s cost of capital. The total stockholder values determined by the guideline public company method and the discounted cash flow approach were weighed to arrive at a single enterprise value for the continuing to operate as a private company scenario. Subsequently, this total stockholder value was apportioned to the various classes of our stock, based on their respective liquidation preferences, to arrive at a value for the common shares under the continuing to operate as a private company scenario. Finally, the valuations applied a marketability discount to reflect the fact that our common stockholders were unable to liquidate their holdings at will, or possibly at all.

The common stockholder values under each of the scenarios were probability weighed to arrive at an indication of value for our common equity.

The following table provides some key assumptions utilized in the contemporaneous third party valuations at each respective grant or modification date:


Grant date	Derived common stock value		Expected liquidity timing		Probability % weighting of potential outcomes (IPO, M&A, Private)		Discount rate		Remain private discount for lack of marketability

April 2010 grants	$	1.94		June 2011		25%, 40%, 35%		31%		35%
September & October 2010 grants	$	1.42		June 2011		25%, 35%, 40%		31%		37%
December 2010 grants	$	1.71		June 2011		25%, 45%, 30%		32%		39%
March 2011 grants	$	1.78		March 2012		25%, 45%, 30%		33%		38%

Determining the fair value of the enterprise using PWERM requires us to estimate the probability and timing of IPO and non-IPO scenarios. Changes to the timing and probability estimates can significantly affect the fair value of the enterprise. In addition, our calculations are sensitive to highly subjective assumptions relating to an appropriate present value discount rate that we

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were required to make at each valuation date. Our present value discount rate was determined using a Capital Asset Pricing Model, or CAPM. The discount rate was based on an analysis of comparable companies in the computer storage industry. We also compared the results of the CAPM discount rate analysis to discount rates published in various studies of venture capital required rate of return for investments in companies of an equivalent stage of development.

April to September 2010. The lower common stock value for the September and October 2010 grants as compared to the common stock value for the April 2010 grants was primarily due to the issuance of our Series GG convertible preferred stock in July 2010. During the first half of 2010, we lowered our financial forecasts from the one in existence at the beginning of 2010 and used for the valuation of the April 2010 grants as we continued to develop and elaborate on our business plan and multi-year financial model. Finally, a slightly lower estimated probability assigned to an M&A scenario occurring by the middle of 2011 and a slightly higher estimated probability assigned to a remain private scenario (which had a lower derived value for our company compared to the M&A scenario) lowered the common stock value.

October to December 2010. The higher common stock value for the December 2010 grants compared to the September and October 2010 value is primarily due to our higher estimated probability of an M&A scenario at those dates; progress towards achieving the projected financial forecast; the passage of time toward the expected liquidity event date; and slightly higher peer company comparable valuations. We estimated a higher probability of the M&A scenario primarily as a result of the increased number of public company acquisitions of comparable companies in our industry.

December 2010 to March 2011. The higher common stock value for the March 2011 grants compared to the December 2010 grants is primarily due to the incorporation of a higher financial forecast due to an improved outlook for our business, partially offset by the extension of time anticipated for the liquidity events. The improved outlook was a result of the ongoing acceptance of our mid-range storage systems into the enterprise market, the anticipation of new product features expanding on the capabilities of our high-end storage system offerings and the overall anticipated growth of our industry as well as expected improvements in the overall macro-economic environment. The extension of time anticipated for the liquidity events was primarily due to management’s assessment of a potential liquidity event date and the length of time it would take to complete an IPO process.

Convertible preferred stock warrants and common stock warrants.

Convertible preferred stock warrants. We classify freestanding warrants to purchase shares of our convertible preferred stock as liabilities on our consolidated balance sheets carry them at fair value, because the warrants may obligate us to transfer assets to the holders under certain circumstances (e.g., upon a change in control) at some point in the future. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense), net in the consolidated statements of operations. We estimated the fair value of these warrants at issuance and at the respective balance sheet dates using the Black-Scholes option pricing model or a binomial model, to the extent the warrants had antidilutive features. The various estimates and assumptions inputted into these models are highly judgmental and could differ significantly in the future.

As of January 30, 2010, we had outstanding warrants to purchase an aggregate of 397,847 shares of our Series CC and Series FF convertible preferred stock. As of January 29, 2011 and April 30,

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2011, we had outstanding warrants to purchase an aggregate of 913,111 shares of our Series FF, Series FF-1 and Series GG convertible preferred stock. The aggregate fair value of our warrants was $1.3 million, $1.8 million and $3.6 million as of January 30, 2010, January 29, 2011 and April 30, 2011, respectively, and these amounts were recorded on our consolidated balance sheets as a warrant liability within current liabilities. The change in fair value of these warrants resulted in a gain to other income (expense), net in the amount of $134,000, a loss of $372,000, a loss of $5,000 and a loss of $1.8 million during fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, respectively.

We will continue to record adjustments to the fair value of the warrants until they are exercised, converted into warrants to purchase common stock or expire, at which time the warrants will no longer be remeasured at each balance sheet date. Upon the closing of this offering, for example, all outstanding warrants to purchase shares of our convertible preferred stock will become warrants to purchase shares of our common stock and, as a result, will no longer be remeasured. The then-current aggregate fair value of these warrants at the time of the offering will be reclassified from liabilities to additional paid-in capital, a component of stockholders’ (equity) deficit.

Common stock warrants. We have issued warrants to purchase our common stock that have certain exercise features not indexed to our common stock. These features require such warrants to be classified as liabilities and remeasured to fair value at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net. These common stock warrants were issued to our growth facility lender as part of the renegotiated terms of the loan. We issued warrants to purchase 174,371 and 100,170 shares of our common stock in April 2010 and January 2011, respectively. The number of shares subject to the warrant issued in April 2010 was subject to a one-time reduction if we did not achieve certain levels of earnings during quarters within fiscal 2011. The number of shares subject to the warrant issued in January 2011 is subject to a one-time reduction if we do not achieve certain levels of earnings during quarters within fiscal 2012. The number of shares subject to the reduction varies depending on the quarter in which we do not achieve the requisite level of earnings, and the principal on the loan will begin to amortize. We achieved the contractual levels of earnings during fiscal 2011 and expect to achieve all contractual levels of earnings during fiscal 2012, such that there has been, and we expect, no reduction in the number of shares underlying these warrants.

We will continue to record adjustments to the fair value of these warrants until the number of shares of common stock underlying the warrants is no longer subject to change. At that time, the then-current fair value of these warrants will be reclassified from liabilities to additional paid-in capital.

We estimated the fair value of these warrants at issuance and at the respective balance sheet dates using the Black-Scholes option pricing model under various probability-weighted outcomes and estimates and assumptions, including the probabilities of achieving the quarterly earnings levels, fair value and volatility of our stock, the remaining contractual term of the warrants, risk-free interest rates and expected dividend yield.

As of January 29, 2011, we had an outstanding warrant to purchase an aggregate of 174,371 shares of our common stock with a fair value of $208,000 for which the number of shares was no longer subject to change and that were reclassified to equity. The change in the fair value of this warrant throughout the remeasurement period during fiscal 2011 resulted in a gain to other income (expense), net in the amount of $64,000.

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As of January 29, 2011, we also had an outstanding warrant to purchase an aggregate of 100,170 shares of our common stock with a fair value of $135,000. The change in the fair value of this warrant during the three months ended April 30, 2011 resulted in a loss to other income (expense), net in the amount of $198,000.

We have also issued warrants to purchase common stock to HDS in connection with HDS’s achievement of certain revenue milestones as well as for prepayments for our products. We estimated the fair value of these warrants at the respective issuance dates using the Black-Scholes option pricing model and various estimates and assumptions, including fair value and volatility of our common stock, the remaining contractual term of the warrants, risk-free interest rates and expected dividend yield. The fair value of these common stock warrants at issuance was recorded on our consolidated balance sheets in stockholders’ deficit and was not subject to remeasurement. Warrants to purchase a total of 151,418 shares of our common stock at a fair value at issuance of $194,000 were issued to HDS in fiscal 2009. These warrants expired unexercised in fiscal 2011. The fair value of these warrants was recognized as a reduction in revenue. We issued HDS warrants to purchase a total of 206,184 shares of our common stock with a fair value at issuance of $222,000 in fiscal 2011. The fair value of these warrants was also recorded as a reduction in revenue.

Results of operations

The following table sets forth our historical operating results for fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended May 1, 2010 and April 30, 2011, respectively. The period to period comparison of financial results is not necessarily indicative of the financial results we may achieve in future periods and the results for the three months ended April 30, 2011 are not necessarily indicative of financial results to be expected for the full fiscal year or any other period.


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(in thousands)
Consolidated statements of operations data:
Product revenue	$	59,864		$	49,523		$	66,550		$	14,103		$	19,596
Support revenue		14,366			16,352			19,039			4,511			5,116

Total revenue		74,230			65,875			85,589			18,614			24,712
Cost of product revenue		32,179			29,709			34,627			7,546			9,938
Cost of support revenue		3,483			4,570			6,184			1,395			1,815

Total cost of revenue		35,662			34,279			40,811			8,941			11,753

Gross profit		38,568			31,596			44,778			9,673			12,959

Sales and marketing		33,759			28,540			32,068			7,868			9,327
Research and development		18,274			13,783			16,410			3,775			4,966
General and administrative		5,659			4,868			5,277			1,464			1,614

Total operating expenses		57,692			47,191			53,755			13,107			15,907

Loss from operations		(19,124	)		(15,595	)		(8,977	)		(3,434	)		(2,948	)
Interest income		260			24			15			—			2
Interest expense		(237	)		(1,065	)		(1,317	)		(339	)		(284	)
Other expense, net		(1,359	)		(389	)		(566	)		(136	)		(1,552	)

Loss before income taxes		(20,460	)		(17,025	)		(10,845	)		(3,909	)		(4,782	)
Benefit from income taxes		882			1,272			1,420			324			453

Net loss	$	(19,578	)	$	(15,753	)	$	(9,425	)	$	(3,585	)	$	(4,329	)

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	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(as a percentage of revenue)
Consolidated statements of operations data:
Product revenue		81	%		75	%		78	%		76	%		79	%
Support revenue		19			25			22			24			21

Total revenue		100			100			100			100			100
Cost of product revenue		43			45			41			41			40
Cost of support revenue		5			7			7			7			8

Total cost of revenue		48			52			48			48			48

Gross profit		52			48			52			52			52
Sales and marketing		45			43			38			42			38
Research and development		25			21			19			20			20
General and administrative		8			8			6			8			6

Total operating expenses		78			72			63			70			64

Loss from operations		(26	)		(24	)		(11	)		(18	)		(12	)
Interest income		—			—			—			—			—
Interest expense		—			(2	)		(2	)		(2	)		(1	)
Other expense, net		(2	)		(1	)		(1	)		(1	)		(6	)

Loss before income taxes		(28	)		(27	)		(14	)		(21	)		(19	)
Benefit from income taxes		1			2			2			2			2

Net loss		(27	)%		(25	)%		(12	)%		(19	)%		(17	)%

Comparison of the three months ended May 1, 2010 and April 30, 2011

Revenue. Revenue and the related changes for the three months ended May 1, 2010 and April 30, 2011 were as follows (in thousands):


	Three months ended										Change
	May 1, 2010					April 30, 2011					Change
	$		% of total revenue			$		% of total revenue			$		%
	(unaudited)

Revenue
Product	$	14,103		76	%	$	19,596		79	%	$	5,493		39	%
Support		4,511		24			5,116		21			605		13

Total	$	18,614		100	%	$	24,712		100	%	$	6,098		33	%

Product revenue. The increase in product revenue resulted from growth across our high-end and mid-range storage systems. In particular, we experienced strong adoption of our lower-priced, mid-range storage systems across all channels.

Support revenue. The increase in support revenue was primarily due to an increase in the number of hardware and software maintenance contracts resulting from the increase in our installed base, in addition to revenue from existing maintenance contracts and customer support renewals.

Of our revenue, indirect sales, including HDS, VARs and other channel partners, accounted for 51% and 57% in the three months ended May 1, 2010 and April 30, 2011, respectively. HDS contributed 38% and 45% of our revenue in the three months ended May 1, 2010 and April 30, 2011, respectively. No other customer accounted for 10% or more of our revenue in either period.

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Cost of revenue and gross margin. Cost of revenue, gross margin and the related changes for the three months ended May 1, 2010 and April 30, 2011 were as follows (in thousands):


	Three months ended										Change
	May 1, 2010					April 30, 2011					Change
	$		Gross margin			$		Gross margin			$		%
	(unaudited)

Cost of revenue
Product	$	7,546		47	%	$	9,938		49	%	$	2,392		32	%
Support		1,395		69			1,815		65			420		30

Total	$	8,941		52	%	$	11,753		52	%	$	2,812		32	%

Cost of product revenue increased as a result of higher volumes of our storage systems sold, as well as incremental inventory write downs of $640,000 in the three months ended April 30, 2011, as compared to the three months ended May 1, 2010 for excess materials and spare parts inventory amortization. Product gross margin increased as a result of faster growth in our OEM channel and less pricing pressure as economic conditions improved.

Cost of support revenue increased as a result of continued investment in our customer support infrastructure, which resulted in an increase of $385,000 in headcount and third party vendor costs associated with providing support and training to customers. These infrastructure expenses were incurred in connection with the incremental needs of our customers. The impact of additional headcount and infrastructure expenses adversely affected support gross margin for the period.

Operating expenses. Operating expenses and the related changes for the three months ended May 1, 2010 and April 30, 2011 were as follows (in thousands):


	Three months ended										Change
	May 1, 2010					April 30, 2011					Change
	$		% of total revenue			$		% of total revenue			$		%
	(unaudited)

Operating expenses
Sales and marketing	$	7,868		42	%	$	9,327		38	%	$	1,459		19	%
Research and development		3,775		20			4,966		20			1,191		32
General and administrative		1,464		8			1,614		6			150		10

Total	$	13,107		70	%	$	15,907		64	%	$	2,800		21	%

Sales and marketing. Sales and marketing expense increased primarily due to an increase in headcount, resulting in an $838,000 increase in salaries, employee benefits and stock-based compensation expense, a $320,000 increase in third party vendors for marketing and outsourced sales activities and a $253,000 increase in sales and marketing related travel.

Research and development. Research and development expense increased primarily due to an increase in headcount, resulting in an $884,000 increase in salaries, employee benefits and stock-based compensation expense and a $218,000 increase in outside services, including offshore providers of quality assurance services and product development.

General and administrative. General and administrative expense remained relatively flat compared to the three months ended May 1, 2010. An increase in recruiting costs of $217,000 was offset by lower costs in various other areas.

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Other income (expense), net. Other income (expense), net was $1.6 million in the three months ended April 30, 2011 and was higher than the three months ended May 1, 2010, primarily due to higher outstanding preferred and common stock warrants and mark to market adjustments of the outstanding warrants. We realized nonrecurring income of $280,000 by obtaining acceptance of one of our research and development arrangements from HDS.

Benefit from income taxes. Our benefit from income taxes increased by $129,000 to $453,000. This was primarily due to the increased expenses eligible for the United Kingdom research and development tax credit.

Fiscal 2010 compared to fiscal 2011

Revenue. Revenue and the related changes for fiscal 2010 and fiscal 2011 were as follows (in thousands):


	Year ended										Change
	January 30, 2010					January 29, 2011					Change
	$		% of total revenue			$		% of total revenue			$		%


Revenue
Product	$	49,523		75	%	$	66,550		78	%	$	17,027		34	%
Support		16,352		25			19,039		22			2,687		16

Total	$	65,875		100	%	$	85,589		100	%	$	19,714		30	%

Product revenue. The increase in product revenue resulted from growth across our high-end and mid-range storage systems as well as continued improvements in economic conditions. In particular, our fiscal 2011 product revenue benefited from the strong adoption and full year of sales of our lower-priced, mid-range storage systems, which we introduced during the third quarter of fiscal 2010.

Of our revenue, indirect sales, including OEMs, VARs and other channel partners, accounted for 47% and 57% in fiscal 2010 and 2011, respectively. HDS contributed 30% and 41% of our revenue in fiscal 2010 and fiscal 2011, respectively. No other customer accounted for 10% or more of our revenue in either period.

Cost of revenue and gross margin. Cost of revenue, gross margin and the related changes for fiscal 2010 and fiscal 2011 were as follows (in thousands):


	Year ended										Change
	January 30, 2010					January 29, 2011					Change
	$		Gross margin			$		Gross margin			$		%


Cost of revenue
Cost of product revenue	$	29,709		40	%	$	34,627		48	%	$	4,918		17	%
Cost of support revenue		4,570		72			6,184		68			1,614		35

Total	$	34,279		48	%	$	40,811		52	%	$	6,532		19	%

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Cost of product revenue increased as a result of higher volumes of storage systems sales. In fiscal 2011, we recorded an increase of $1.5 million in warranty-related expense driven by increased volumes in our mid-range storage systems as well as higher reserves for certain components. In fiscal 2010, cost of product revenue included a $1.0 million charge for excess and obsolete inventory in connection with the transition to our new mid-range storage systems. Product gross margin in fiscal 2011 increased as a result of faster growth in our OEM channel, continued adoption of our mid-range storage systems and more favorable pricing due to improving economic conditions.

Cost of support revenue increased primarily as a result of continued investment in our customer support infrastructure, which resulted in an increase of $1.4 million in headcount and third party vendor costs associated with providing support and training to customers. As a result, support gross margin decreased.

Operating expenses. Operating expenses and the related changes for fiscal 2010 and fiscal 2011 were as follows (in thousands):


	Year ended										Change
	January 30, 2010					January 29, 2011					Change
	$		% of total revenue			$		% of total revenue			$		%


Operating expenses
Sales and marketing	$	28,540		43	%	$	32,068		38	%	$	3,528		12	%
Research and development		13,783		21			16,410		19			2,627		19
General and administrative		4,868		8			5,277		6			409		8

Total	$	47,191		72	%	$	53,755		63	%	$	6,564		14	%

Sales and marketing. Sales and marketing expense increased primarily due to an increase in headcount, as well as restoration of salaries following cost reduction actions taken in fiscal 2010, resulting in a $2.9 million increase in salaries, employee benefits and stock-based compensation expense, a $780,000 increase in sales and marketing related travel and a $473,000 increase in marketing programs and trade shows. These increases were partially offset by a $403,000 decrease in depreciation expense.

Research and development. Research and development expense increased primarily due to an increase in headcount, as well as restoration of salaries following cost reduction actions taken in fiscal 2010, resulting in a $2.0 million increase in salaries, employee benefits and stock-based compensation expense, and a $631,000 increase in outside services including an offshore provider of quality assurance and product development services.

General and administrative. General and administrative expense increased primarily due to an increase in headcount, as well as restoration of salaries following cost reduction actions taken in fiscal 2010, resulting in a $575,000 increase in salaries, employee benefits and stock-based compensation expense, and an increase in recruiting fees of $273,000. These increases were partially offset by a decrease in bad debt expense of $335,000.

Interest expense. Interest expense increased by $252,000 to $1.3 million in fiscal 2011, primarily due to interest payable on our long-term capital growth facility agreement that we entered into during fiscal 2010.

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Other income (expense), net. Other income (expense), net increased by $177,000 to $566,000 in fiscal 2011. The increase in expense was primarily due to the issuances of preferred and common stock warrants and the mark to market adjustments of the outstanding warrants.

Benefit from income taxes. Our benefit from income taxes increased by $148,000 to $1.4 million in fiscal 2011. This was primarily due to the increased expenses eligible for the United Kingdom research and development tax credit.

Fiscal 2009 compared to fiscal 2010

Revenue. Revenue and the related changes for fiscal 2009 and fiscal 2010 were as follows (in thousands):


	Year ended										Change
	January 31, 2009					January 30, 2010					Change
	$		% of total revenue			$		% of total revenue			$			%


Revenue
Product	$	59,864		81	%	$	49,523		75	%	$	(10,341	)		(17	)%
Support		14,366		19			16,352		25			1,986			14

Total	$	74,230		100	%	$	65,875		100	%	$	(8,355	)		(11	)%

Product revenue. The decrease in product revenue was primarily due to reduced spending by customers across our industry in response to the challenging economic conditions that existed during fiscal 2010. In the second half of fiscal 2010, we introduced and experienced strong adoption of our mid-range storage systems, which partially offset the negative impact of economic conditions.

Support revenue. The increase in support revenue was primarily due to an increase in the number of hardware and software maintenance contracts resulting from the cumulative growth in our installed base. An inventory supply arrangement with HDS also accounted for a $570,000 increase in support revenue.

Of our revenue, indirect sales, including HDS, VARs and other channel partners, accounted for 40% and 47% in fiscal 2009 and fiscal 2010, respectively. HDS contributed 22% and 30% of our revenue in fiscal 2009 and fiscal 2010. No other customer accounted for 10% or more of our revenue in either period.

Cost of revenue and gross margin. Cost of revenue and gross margin and the related changes for fiscal 2009 and fiscal 2010 were as follows (in thousands):


	Year ended										Change
	January 31, 2009					January 30, 2010					Change
	$		Gross margin			$		Gross margin			$			%


Cost of revenue
Cost of product revenue	$	32,179		46	%	$	29,709		40	%	$	(2,470	)		(8	)%
Cost of support revenue		3,483		76			4,570		72			1,087			31

Total	$	35,662		52	%	$	34,279		48	%	$	(1,383	)		(4	)%

Cost of product revenue decreased as a result of lower volumes. Product gross margin decreased primarily due to pricing pressure caused by the challenging economic conditions that existed during fiscal 2010.

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Cost of support revenue increased primarily as a result of investment in our customer support infrastructure, which resulted in an increase of $1.1 million in headcount and third party vendor costs associated with providing support and training to customers.

Operating expenses. Operating expenses and the related changes for fiscal 2009 and fiscal 2010 were as follows (in thousands):


	Year ended
	January 31, 2009					January 30, 2010					Change
	$		% of total revenue			$		% of total revenue			$			%


Operating expenses
Sales and marketing	$	33,759		45	%	$	28,540		43	%	$	(5,219	)		(16)	%
Research and development		18,274		25			13,783		21			(4,491	)		(25)
General and administrative		5,659		8			4,868		8			(791	)		(14)

Total	$	57,692		78	%	$	47,191		72	%	$	(10,501	)		(18)	%

In the fourth quarter of fiscal 2009 and early fiscal 2010, we implemented a variety of cost saving measures due to the challenging economic conditions. These cost saving measures included a reduction in personnel costs through a variety of measures, renegotiation of costs for third party services such as legal, insurance and audit, and reduced travel costs.

Sales and marketing. Sales and marketing expense decreased as a result of a reduction in force and salary reductions for the remaining employees. These actions resulted in a $1.2 million decrease in salaries, employee benefits and stock-based compensation expense. We also experienced a $2.1 million decrease in commissions, an $848,000 reduction in travel costs and a $734,000 decrease in marketing programs.

Research and development. Research and development expense decreased primarily as a result of salary reductions. We experienced a $1.6 million decrease in salaries, employee benefits and stock-based compensation expense, a $1.0 million decrease in temporary contractors and outside services and an $881,000 decrease in engineering consumables for prototypes and development of new products.

General and administrative. General and administrative expense decreased primarily as a result of cost saving measures and salary reductions. We experienced a $628,000 decrease in third party services and a $552,000 decrease in salaries, employee benefits and stock-based compensation. These decreases were partially offset by an increase in bad debt expense of $305,000.

Interest income. Interest income decreased by $236,000 from $260,000 in fiscal 2009 due to lower interest rates payable on available cash balances.

Interest expense. Interest expense increased by $828,000 to $1.1 million in fiscal 2010 primarily due to interest payable on our long-term capital growth facility agreement entered into in April 2009.

Other income (expense), net. Other income (expense), net decreased by $970,000 to $389,000 in fiscal 2010 primarily due to lower foreign currency exchange rate losses.

Benefit from income taxes. Our benefit from income taxes increased by $390,000 to $1.3 million in fiscal 2010. This was primarily due to the increased expenses eligible for the United Kingdom research and development tax credit.

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Unaudited quarterly results of operations

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period to period basis may not be meaningful. A significant portion of our quarterly sales typically occurs during the last month of the quarter, which we believe reflects customer buying patterns of products similar to ours and other products in the technology industry, generally. You should not rely on our past results as an indication of our future performance. The unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, which include only normal recurring adjustments, that we consider necessary for the fair presentation of the financial information set forth in those financial statements. As a result, our quarterly operating results are difficult to predict even in the near term.


	Three months ended
	May 1, 2010			July 31, 2010			October 30, 2010			January 29, 2011			April 30, 2011

	(in thousands, unaudited)

Consolidated statements of operations data:
Product revenue	$	14,103		$	15,473		$	17,319		$	19,655		$	19,596
Support revenue		4,511			4,588			4,778			5,162			5,116

Total revenue		18,614			20,061			22,097			24,817			24,712
Cost of product revenue		7,546			8,057			8,680			10,344			9,938
Cost of support revenue		1,395			1,528			1,579			1,682			1,815

Total cost of revenue		8,941			9,585			10,259			12,026			11,753

Gross profit		9,673			10,476			11,838			12,791			12,959
Sales and marketing		7,868			7,690			8,504			8,006			9,327
Research and development		3,775			3,875			4,260			4,500			4,966
General and administrative		1,464			1,226			1,447			1,140			1,614

Total operating expenses		13,107			12,791			14,211			13,646			15,907

Loss from operations		(3,434	)		(2,315	)		(2,373	)		(855	)		(2,948	)
Interest income		—			1			4			10			2
Interest expense		(339	)		(346	)		(337	)		(295	)		(284	)
Other income (expense), net		(136	)		(409	)		(208	)		187			(1,552	)

Loss before income taxes		(3,909	)		(3,069	)		(2,914	)		(953	)		(4,782	)
Benefit from income taxes		324			370			293			433			453

Net loss	$	(3,585	)	$	(2,699	)	$	(2,621	)	$	(520	)	$	(4,329	)


	Three months ended
	May 1, 2010			July 31, 2010			October 30, 2010			January 29, 2011		April 30, 2011

	(in thousands, unaudited)

Other financial data:
Adjusted EBITDA (1)	$	(2,514	)	$	(1,369	)	$	(1,361	)	$	98	$	(1,546	)

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(1)

We define Adjusted EBITDA as net loss excluding benefit from income taxes, other income (expense), net, interest expense, interest income, stock-based compensation and depreciation and amortization. Please see footnote 2 in the section titled “Selected consolidated financial data” for more information. We reconcile net loss to Adjusted EBITDA as follows:


	Three months ended
	May 1, 2010			July 31, 2010			October 30, 2010			January 29, 2011			April 30, 2011

	(in thousands, unaudited)
Net loss	$	(3,585	)	$	(2,699	)	$	(2,621	)	$	(520	)	$	(4,329	)
Benefit from income taxes		(324	)		(370	)		(293	)		(433	)		(453	)
Other income (expense), net		136			409			208			(187	)		1,832
Interest expense		339			346			337			295			284
Interest income		—			(1	)		(4	)		(10	)		(2	)
Stock-based compensation		279			314			297			227			321
Depreciation and amortization		641			632			715			726			801

Adjusted EBITDA	$	(2,514	)	$	(1,369	)	$	(1,361	)	$	98		$	(1,546	)

The following table sets forth our unaudited quarterly consolidated statements of operations data as a percentage of revenue:


	Three months ended
	May 1, 2010			July 31, 2010			October 30, 2010			January 29, 2011			April 30, 2011

	(unaudited)
Consolidated statements of operations data:
Product revenue		76	%		77	%		78	%		79	%		79	%
Support revenue		24			23			22			21			21

Total revenue		100			100			100			100			100
Cost of product revenue		41			40			39			42			40
Cost of support revenue		7			8			7			7			8

Total cost of revenue		48			48			46			49			48

Gross profit		52			52			54			51			52
Sales and marketing		42			38			38			32			38
Research and development		20			19			19			18			20
General and administrative		8			6			7			5			6

Total operating expenses		70			63			64			55			64

Loss from operations		(18	)		(11	)		(10	)		(4	)		(12)
Interest income		—			—			—			—			—
Interest expense		(2	)		(2	)		(2	)		(1	)		(1)
Other income (expense), net		(1	)		(2	)		(1	)		1			(6)

Loss before income taxes		(21	)		(15	)		(13	)		(4	)		(19)
Benefit from income taxes		2			2			1			1			2

Net loss		(19	)%		(13	)%		(12	)%		(3	)%		(17	)%

Revenue was flat in the three months ended April 30, 2011 due to seasonally reduced activity. In the three months ended January 29, 2011, our warranty-related expense increased by $449,000 due to higher reserves for certain components. In the three months ended January 29, 2011 and the three months ended April 30, 2011, our inventory reserve expense increased by $259,000 and $258,000, respectively, compared to the three months ended October 30, 2010. These expenses were for excess materials in the three months ended January 29, 2011 and excess materials and spare parts inventory amortization in the three months ended April 30, 2011. Sales and marketing expenses have generally increased sequentially in each of the quarters presented as we continue to add personnel and incur related costs to accommodate our growing business, with the exception of the three months ended January 29, 2011, during which we recognized a benefit of $508,000 for a change in estimate regarding commissions expense. We usually experience increased costs in the first quarter of each fiscal year due to some annual events and year end activities, such as audit.

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Liquidity and capital resources

Since our inception, we have incurred significant losses and, as of April 30, 2011, we had an accumulated deficit of $230.3 million. We have funded our operations primarily with customer payments for our storage systems and services, proceeds from issuances of convertible preferred stock, borrowings under our long-term capital growth facility, the utilization of our accounts receivable credit line and the issuance of convertible promissory notes. From inception, we have sold an aggregate of $247 million of our convertible preferred stock, including the conversion or our convertible promissory notes. At April 30, 2011, we had cash and cash equivalents of $16.1 million, an unutilized accounts receivable credit line of $12.5 million, $7.5 million of debt outstanding on our long-term capital growth facility, and $686,000 of capital and $4.1 million of operating lease obligations. We had positive working capital of $17.7 million and $12.2 million as of January 29, 2011 and April 30, 2011, respectively.

We believe that our existing sources of liquidity and the proceeds of this offering will satisfy our working capital and capital requirements for at least the next 12 months. There can be no assurance, however, that we will be successful in executing our business plan, maintaining and growing our existing customer base or achieving profitability and realizing our working capital. Failure to generate sufficient revenue, achieve planned gross margins or control operating costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on terms acceptable to us, or at all, and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs, which could have a material adverse effect on our business, operating results, financial condition and ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Our accounts receivable based credit facility, which expires in December 2012, includes a material adverse change clause as a condition precedent to funding which allows the lender to withdraw any unutilized portion of the facility at the time we are notified of the occurrence of certain triggering events. In addition, our long-term capital growth facility is subject to interest-only payments through December 2011. However, if we do not meet certain performance criteria tied to a measure of our quarterly earnings for quarters through October 29, 2011, repayment of principal via monthly installments will be accelerated and will commence in the month following the determination that the performance criteria have not been achieved.

In summary, our cash flows were as follows:


	Year ended									Three months ended
	January 31, 2009			January 30, 2010			January 29, 2011			May 1, 2010			April 30, 2011

										(unaudited)
	(in thousands)

Net cash provided by (used in):
Operating activities	$	(14,059	)	$	(2,464	)	$	(11,529	)	$	(479	)	$	1,247
Investing activities		(2,833	)		(2,013	)		(3,920	)		(1,007	)		(1,118	)
Financing activities		21,719			1,383			20,682			2,653			(22	)
Net increase/(decrease) in cash and cash equivalents	$	4,827		$	(3,094	)	$	5,233		$	1,167		$	107

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Cash flows from operating activities. We have historically experienced negative cash flows from operating activities as we continued to expand our business and built our infrastructure. Our operating cash flow primarily depends on the timing and amount of cash receipts from our customers, inventory purchases and payments for operating expenses. Net cash used in operating activities for the periods presented consisted of net losses adjusted for certain noncash items and changes in assets and liabilities.

Three months ended May 1, 2010 compared to three months ended April 30, 2011. For the three months ended April 30, 2011, revenue increased by 33% compared to the three months ended May 1, 2010. However, our net loss was higher due to a significant increase in noncash expenses related to fair value adjustments of warrant liabilities in the three months ended April 30, 2011. Increases in product sales, and a higher level of evaluation units led to an increase in the inventory balance during the period. The increase in use of cash was more than offset by higher accounts payables and accrued liabilities balances, primarily due to the timing of inventory purchases at the end of the quarter.

Fiscal 2010 compared to fiscal 2011. For fiscal 2011, revenue increased 30%, resulting in a smaller net loss. Noncash expenses such as stock-based compensation and depreciation were lower while changes in the fair value of issued preferred and common stock warrants were higher in fiscal 2011. Substantial revenue growth in fiscal 2011 resulted in an increase in outstanding accounts receivable balances. The change in inventory in fiscal 2011 was not significant. However, in fiscal 2010 the change in inventory was a source of cash of $2.1 million. In addition, we applied the prepayments from HDS against the sales of our products to them. These increases in uses of cash were partially offset by higher accounts payable and accrued liability balances in fiscal 2011 as we increased our headcount and spending to support our growth.

Fiscal 2009 compared to fiscal 2010. For fiscal 2010, revenue decreased 11%. However, we reduced our net loss by reducing our headcount and operating expenses to a greater extent. Noncash expenses such as stock-based compensation, depreciation and changes in the fair value of issued preferred stock warrants were higher in fiscal 2010. The lower sales and spending levels contributed to an overall decrease in cash used in operating activities as we had lower outstanding receivable and inventory balances. Deferred revenue increased because of a larger installed base purchasing our support services. A source of cash was prepayments from HDS in fiscal 2010 to be applied toward future sales. Declines in cash usage during fiscal 2010 were partially offset by a higher research and development tax credit receivable balance.

Cash flows from investing activities. Cash flows from investing activities primarily relate to capital expenditures incurred to support our growth. In the three months ended April 30, 2011, our cash used for capital expenditures increased by 11% compared to three months ended May 1, 2010. During fiscal 2011, fiscal 2010 and fiscal 2009, our net cash used in investing activities was $3.9 million, $2.0 million and $2.8 million, respectively. The increase in capital expenditures in fiscal 2011 and the three months ended April 1, 2011 was due to increased investment in our engineering and lab equipment, and leasehold improvements at our offices in the United States and England.

Cash flows from financing activities. Cash flows from financing activities primarily include net proceeds from issuances of convertible preferred stock and convertible promissory notes; proceeds and payments related to our accounts receivable credit line; proceeds from our long-term capital growth facility and payments on our capital lease obligations.

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In the three months ended April 30, 2011, cash used in financing activities primarily consisted of payments related to our capital lease obligations, partially offset by proceeds from issuance of common stock resulting from exercise of stock options.

We generated $20.7 million of net cash from financing activities during fiscal 2011. In July 2010, we issued Series GG convertible preferred stock for net proceeds of $18.1 million and the conversion of promissory notes amounting to $2.7 million that were issued in connection with the Series GG financing.

We generated $1.4 million in net cash from financing activities in fiscal 2010, including $7.5 million borrowed from our long-term growth facility, offset by payment of $6.0 million on our accounts receivables credit line.

During fiscal 2009, we generated $21.7 million in cash from financing activities, primarily due to the net proceeds of $16.4 million received from the sale and issuance of our Series FF convertible preferred stock, and proceeds of $6.7 million from the issuance of convertible promissory notes and related warrants, offset by payment of $1.4 million on our accounts receivables credit line.

Off balance sheet arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

Contractual obligations and commitments

The following table summarizes our contractual obligations and commitments for principal and interest payments due on the long-term capital growth facility and lease payments as of January 29, 2011:


	Payments due by period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years

	(in thousands)
Debt payments	$	9,236	$	1,048	$	6,776	$	1,412
Operating lease obligations		4,193		992		1,997		1,204
Capital lease obligations		436		287		149		—
Component purchase obligations		10,809		10,809		—		—

Total	$	24,674	$	13,136	$	8,922	$	2,616

At January 29, 2011 we had a liability for unrecognized tax benefits of $202,000. Due to uncertainties with respect to the timing to future cash flow associated with our unrecognized tax benefits at January 29, 2011 we are unable to make reasonably reliable estimates of the period of cash settlement with the applicable taxing authority. Therefore, $202,000 of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 12 in the notes to our consolidated financial statements for a discussion of income taxes.

Our operating lease commitments primarily relate to the lease of our corporate headquarters in San Jose, California and our England office, and to a lesser extent, our leases for our sales offices in Germany, Australia and New Zealand.

Our capital lease consists of equipment financing arrangements with vendors.

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To ensure uninterrupted supply, our contract manufacturer makes advance purchases of components based on the system unit forecasts we provide. To the extent these components are purchased by the contract manufacturer and cannot be used by their other customers, we are obligated to purchase these components. The amounts in the table above represent the maximum amount of purchase commitment that we may be obligated to pay within one year. The amount as of April 30, 2011 was $7.5 million. Actual amounts paid may be lower to the extent that the contract manufacturer can avoid purchasing components that are ultimately not needed. Additionally, we have an obligation to purchase components procured by our contract manufacturer if these components become obsolete. Accruals related to obsolete components purchased by the contract manufacturer were immaterial as of January 29, 2011 and April 30, 2011.

Quantitative and qualitative disclosures about market risk

Foreign currency risk. A substantial portion of our sales are currently denominated in U.S. dollars. Our international research and development and sales operations incur expenses that are denominated in foreign currencies. Our international sales and operating expenses could be materially affected by currency fluctuations. Our exposures are to fluctuations in exchange rates primarily for the U.S. dollar versus the euro, the British pound, and to a lesser extent, the Australian, Canadian and New Zealand dollar. Any foreign currency transaction, defined as a transaction denominated in a currency other than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. Additionally, our research and development operations maintain cash balances denominated in the British pound. In order to decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we have not maintained significant cash balances in foreign currencies. As of April 30, 2011, we had $420,000 of cash in foreign accounts. To date, we have occasionally used foreign currency forward contracts to manage our currency exposure to the British pound.

Interest rate sensitivity. We had cash and cash equivalents of $16.1 million as of April 30, 2011. Our cash and cash equivalents are held primarily in cash deposits and money market funds. We hold our cash and cash equivalents for working capital purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income. During fiscal 2011, a 10% appreciation or depreciation in overall interest rates would not have had a material impact on our interest income.

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Business

Overview

Our storage systems minimize the complexities and overcome the performance limitations of existing networked storage systems. We enable our customers to address storage bottlenecks and accelerate processes to achieve their critical business goals, including enhanced revenue generation and improved service offerings. Our massively parallel architecture is highly scalable and delivers sustained performance without feature degradation under increased workloads, unlike competing storage systems, which typically suffer from performance or feature degradation as the workload increases. Our storage systems combine our servers with our advanced, proprietary software suite, and use standard interfaces and multiple tiers of efficient enterprise-class storage devices to provide a wide variety of system configurations to our customers. We also sell our servers independently as a gateway solution that can be deployed in storage environments to enable file services for easier data sharing, simplified management, server and desktop virtualization and improved functionality. As of April 30, 2011, over 750 customers worldwide have deployed over 2,000 of our storage systems.

We believe that our networked storage systems address multiple end markets in light of the proliferation of unstructured data, the growing need to manage it at scale and the continuing shift to Internet Protocol networking. According to IDC, the NAS and iSCSI SAN markets are expected to grow from $8.1 billion in 2010 to $12.0 billion in 2014, representing a 10.2% CAGR. In addition, we believe that the Fibre Channel connectivity of our platform enables us to address the migration and transition away from Fibre Channel to next-generation storage systems that are optimized for unstructured data and file-based applications. Our storage systems are deployed throughout a wide range of organizations, from global businesses to small organizations with just one location. Our diverse customer base includes organizations in industries such as media and entertainment, e-Discovery, energy, the federal government, life sciences, Internet and cloud hosted service providers and other enterprises. We sell our storage systems through multiple channels which include our direct sales force, our extensive network of channel partners and an OEM agreement with HDS.

In fiscal 2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, we had total revenue of $74.2 million, $65.9 million, $85.6 million and $24.7 million, respectively. In fiscal

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2009, fiscal 2010, fiscal 2011 and the three months ended April 30, 2011, we incurred net losses of $19.6 million, $15.8 million, $9.4 million and $4.3 million, respectively.

Industry background

The amount of data used by businesses of all sizes globally is growing rapidly. IDC predicts that between 2009 and 2020, the amount of digital data in customer sites will grow to 44 times what it was in 2010—growing to 35 billion terabytes. Businesses are increasingly focusing on leveraging highly scalable, high performance file systems and related storage infrastructure as they seek to intelligently organize, manage, access and analyze growing amounts of data. Given the rapid pace of change in today’s markets, businesses seek solutions that can seamlessly scale as their business requirements evolve. In recent years, unstructured data has become increasingly critical to businesses. Reliance on email, business documents, web pages, digital images, audio and video, as well as the document retention and access requirements of regulatory compliance are driving the rapid growth of unstructured data across businesses. For example, computer-generated imagery for film, games and television and e-Discovery all require massive amounts of unstructured data to carry out their primary functions. In addition, system capabilities such as high scalability and parallel processing, once required only for specific HPC applications such as genomics, have become increasingly common for a wide variety of businesses. The growth in unstructured data, combined with advanced networking capabilities, increased disk capacities, improved computer processing capabilities and server and desktop virtualization have resulted in the need for next-generation data center technologies uniquely architected to meet the needs of today’s most demanding applications.

Key trends affecting growing data center environments

Proliferation of unstructured data. As modern applications continue to grow in sophistication, they produce and require increasing amounts of unstructured data. The long-term storage and management of this unstructured data poses a significant challenge for businesses as the amount of unstructured data has grown exponentially, the commercial value of that data has increased and the need to store and access it for long periods continues. IDC estimates that worldwide enterprise storage capacity shipped for traditional unstructured data is expected to grow from 3,924 petabytes in 2010 to 22,930 petabytes in 2014, representing a CAGR of 55.5%. Unlike structured data, which is typically stored in databases, unstructured data is stored in file systems. The proliferation of unstructured data is driving a need for next-generation file systems and the related storage infrastructure to manage, move, protect and deliver growing amounts of unstructured data for businesses and consumers. These next-generation solutions must be high performance, flexible and scalable to address the rapid growth of unstructured data.

Growing performance demands. As data sets have grown and the performance requirements to both process and manage them have increased, mainstream businesses and organizations increasingly require high performance, highly scalable storage systems that were previously only needed for HPC environments. At the same time, the storage system requirements to support HPC applications continue to increase. HPC applications, such as oil and gas exploration, animation rendering services and genomics, and emerging data-intensive applications, such as cloud-based services, e-Discovery and web analytics, are driving new performance and scalability requirements for networked storage. Growing performance burdens on storage infrastructure also result from greater numbers of files, concurrent users, demands for faster response times, increased sharing of data and the proliferation of server and desktop

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virtualization. In addition, as businesses increasingly consolidate their data center footprint to achieve cost efficiencies, the performance and scalability requirements for storage intensify.

Focusing on reduced complexity and leveraging existing infrastructure. To scale their infrastructure and manage growth in unstructured data, many organizations have deployed multiple disparate storage systems over time as their data needs have grown. This has resulted in overly complex infrastructure that is difficult and expensive to manage. To address these difficulties, businesses increasingly demand solutions that provide open architectures, are highly scalable and are interoperable with their existing data center deployments, enabling them to leverage significant existing infrastructure investments. Most businesses have traditionally selected either a SAN, which is optimized for structured, or block-level, data, or a NAS, which is optimized for unstructured, or file-level data. As businesses increasingly need to manage both types of data efficiently and cost effectively, they are looking for solutions that support interoperability and convergence of their SAN and NAS storage infrastructures.

Increasing use of virtualization technologies. Increased adoption of server and desktop virtualization technologies has resulted in data center environments with dynamic storage requirements. Server virtualization technologies enable an administrator to use a software application to divide one physical server into multiple virtual servers, enabling multiple operating systems to run simultaneously on the same computer. Desktop virtualization environments provide multiple users with desktop processing and storage capabilities on a remote central server instead of on a local computer. As businesses increasingly adopt server virtualization technologies and consolidate their data center resources, independent storage resources become siloed, driving demand for solutions that enable the consolidation and centralization of these siloed storage pools. In addition, as businesses continue to adopt desktop virtualization technologies, their data centers are required to evolve to support simultaneous operations of a large number of virtual desktops, such as having multiple users log in at the same time. Increased use of server and desktop virtualization technologies within data centers has resulted in an exponential increase in requirements for high IOPs to support highly unpredictable traffic patterns within data centers. Storage infrastructure is frequently cited as the bottleneck in these highly virtualized environments.

Accelerating adoption of cloud-based architectures. Cloud-based architectures, or architectures that enable the delivery of hosted on-demand services over the Internet, have gained prominence given their ability to provide cost effective support to multiple users while maintaining the security, agility and reliability of existing computing platforms. The proliferation of cloud-based architectures and data has resulted in the rapid growth of large data centers that require highly scalable networked storage with centralized management. The requirements of on-demand storage in cloud-based architectures are driving the need for storage technologies that deliver high efficiency across the storage infrastructure. To increase cost efficiency, storage architectures are increasingly incorporating tiering, which automatically routes and stores data in different storage media based on administrator-defined policies. Using cloud-based storage as one tier of the architecture reduces the cost of storing data. Many existing data center deployments were not optimized for current volumes of data and traffic or for the interoperability to offload data to a cloud-based tier of storage, making them difficult to scale and operate cost effectively.

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there has been increased focus from businesses on managing operating costs and efficiently scaling capacity, or doing more with less. With increasing focus on budgets, businesses seek the flexibility to add only the capacity or additional IOPs needed on an incremental basis. Managing information technology infrastructure costs has also become increasingly complex as the rapid adoption of applications has competed with the need to manage mixed workloads across a shared network infrastructure environment.

Limitations of existing storage networking systems

Inability to manage unstructured data at scale. Existing storage systems lack the performance and scalability to address the diversity of applications and the size and diversity of data sets that are now being generated across distributed storage resources. Most NAS systems are based on general purpose server technology running a proprietary operating system that has been optimized for file serving, creating a dedicated storage server appliance that is easy to deploy. Many existing NAS storage systems only support a small file system size, small storage capacity and a limited number of concurrent users. These network protocol, file system and storage management functions all contend for the same internal system resources. As the burden of the workload and the number of users increases, businesses are required to deploy additional devices, resulting in sprawling systems with very unpredictable performance that can drop off dramatically. Many alternative remedial solutions have been designed to scale capacity, bandwidth and processing power in unison, which results in over-provisioning of one of those areas, creating complexity and underutilization of resources.

Inability to manage complexities within data centers. Businesses have often responded to data growth by using multiple storage systems with multiple file systems that, when combined together within a data center, result in an overly complex environment that is difficult to manage and results in excess capacity that cannot be used to address other needs. Many existing storage systems were based on proprietary platforms and are not interoperable with other components of the data center infrastructure. While both NAS and SAN have particular strengths, there remain challenges for the vast majority of businesses due to the lack of heterogeneous block and file support from the same system. SAN environments are not optimized to readily access file-based, unstructured data. In addition, most existing NAS deployments have been ineffective at achieving the performance and scalability of SAN deployments. Businesses increasingly need a storage solution that delivers the performance benefits of a SAN with the ability to work with large volumes of unstructured data.

Not optimized for virtualization. Most existing networked storage systems were not architected to support data center environments that use server and desktop virtualization technologies. The use of server and desktop virtualization results in highly unpredictable traffic patterns and higher performance demands on storage systems, which combine to create significant performance degradation. Existing storage systems lack the performance and scalability necessary to satisfy the exponential increase in demand for IOPs within these environments, resulting in significant bottlenecks from storage systems.

Lack of support for cloud-based environments. The proliferation of cloud-based environments has placed significant strains on data centers as unstructured data continues to

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grow rapidly. The mix of unpredictable workloads pervasive in cloud environments causes existing network storage systems to experience performance degradation during periods of high demand. In addition, most existing storage systems do not provide support for the interoperability, information movement and management necessary for the deployment of cloud-based tiers of storage.

Total cost of ownership. Limitations on performance, scalability and manageability have a direct impact on total cost of ownership. The use of multiple single-application storage systems and the proliferation of devices within data centers results in lower storage utilization and increased storage administration time. Siloed storage resources have resulted in higher energy use and physical footprint, increasing capital and operating costs for businesses that are looking to drive more utilization out of their infrastructure investments.

These dynamic requirements and challenges within data centers make it difficult for many storage systems to cost effectively address continually evolving business requirements. Market trends, such as the management of unstructured data and data center complexity at scale, virtualization and cloud computing and an increased focus on total cost of ownership make existing storage systems inadequate to address businesses’ storage systems problems today.

Our networked storage systems

We provide industry-leading storage systems that leverage our proprietary file system, SiliconFS, and flexible architecture to deliver intelligent data management functionality for our customers. Our massively parallel architecture is designed to overcome the data network bottlenecks created by existing storage systems and deliver superior performance across diverse workloads without sacrificing scalability, storage bandwidth, functionality or overall capacity. Through our intelligent file system architecture, we enable our customers to scale their infrastructure up, or enable higher performance out of a single storage system, and scale their infrastructure out, or enable multiple servers to be deployed seamlessly across data centers, to meet continually changing business and application requirements. Our intelligent file system architecture enables our customers to scale-right, or scale each of these attributes independently to their specific needs, and to run intensive data management applications seamlessly without burdening the performance of overall storage infrastructure.

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BlueArc “Scale-Right” storage architecture

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Our massively parallel architecture and highly scalable storage systems leverage a combination of standard FPGAs, as an offload engine for high speed data transfer and multi-core processors for intensive data management functions. This architecture, combined with SiliconFS, allows us to deliver the following benefits to customers:

Ability to reduce complexity. Our storage systems are often deployed as a consolidation platform for networked storage environments, reducing complexity and cost by eliminating excess storage systems. Due to their ability to handle diverse and unpredictable workloads, our storage systems serve as an ideal platform for the consolidation of applications, such as email, databases and home directories, on the same storage system. Our storage systems allow different users, applications, protocols and performance requirements to share storage resources and enable traditionally siloed pools of storage to be viewed and managed through our single cluster namespace, which enables a user to view clusters of multiple servers and file systems as if they are a single coherent unit. We architected our storage systems to be easily integrated into our customers’ data centers to simplify the integration and management of our storage systems. Our solution is a unified storage platform supporting both SAN and NAS file and management protocols.

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Optimized for virtual environments. Our architecture is ideally suited for large scale virtualized server and desktop environments because it delivers high levels of predictable performance for unpredictable workloads. In addition, our proprietary technology provides the ability to instantly create space-efficient, writeable copies of files for use in a wide variety of environments and run multiple simulations with large-scale data sets. This allows administrators to quickly deploy many new virtual machines without consuming additional disk storage space. Our differentiated solutions enable virtualized environments to achieve maximum utilization of storage resources and avoid performance bottlenecks, reducing the management time required and making the data center less complex and cumbersome to manage.

Support for cloud-based environments. Our storage systems deliver high predictability, high performance and continuous availability across a variety of workloads. These characteristics allow our customers to easily scale their storage systems, applications and data management features without sacrificing performance, making our storage systems optimal for cloud-based environments. In addition, where most existing storage systems realize performance degradation as capacity begins to be utilized, our customers benefit from our predictable performance across a variety of complex workloads such as those associated with hosted security, storage and software models. Our open architecture provides and supports interoperability with cloud-based tiers of storage, allowing customers to seamlessly offload noncritical data to locations hosted offsite in public and private clouds. Our solutions enable businesses to easily manage the high growth of data in cloud-based environments without increasing complexity or unnecessary infrastructure costs.

Lower total cost of ownership. We believe our storage systems enable our customers to achieve higher usable capacity per server and lower overall total cost of ownership. Given the high capacity, performance and scalability of our networked storage systems, our customers are able to realize cost savings and higher efficiencies from using fewer servers, smaller physical data center space and fewer administrators. Our storage systems also provide superior power efficiency, require less cooling and offer efficient space utilization. We enable our customers to scale performance, capacity and throughput independently when they need it, increasing efficiency and reducing upfront capital requirements. In addition, our platform is based on our open architecture, which supports interoperability within data center environments, enabling our customers to leverage their significant investments in existing infrastructure to achieve higher returns on investment and faster payback periods.

Our strategy

Extending our technology leadership and product breadth. We intend to continue to innovate and to maintain our leadership position by leveraging our massively parallel architecture and file system. We believe that our innovative system architecture and design provide us with significant competitive advantages over existing storage systems for managing unstructured data at scale, including virtualized and cloud-based environments. We intend to continue to make investments to extend the performance leadership of our platform through both software and hardware improvements. We will continue to make significant investment in our SiliconFS file system that

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enables customers to run more intensive applications on our systems, such as primary deduplication, while preserving the performance of the file system.

Continuing to deepen and expand our customer relationships and vertical market penetration. We intend to expand our enterprise customer base by continuing to leverage our proven high performance technology and our diverse routes to market. We will continue to target customers who are increasingly dependent on storage performance and management of unstructured data at scale. We believe our deep customer relationships, service offerings and customer feedback programs enable us to better understand their challenges and determine the solutions that we can provide to better serve their needs as well as to identify areas of focus for our ongoing research and development activities. This positions us to sell additional products and services such as storage capacity and additional software functionality to address their growing demand for storage.

Continuing to expand our routes to market including direct and channel distribution. We utilize a multi-channel go-to-market strategy through our direct sales effort, our extensive network of partners and our OEM relationship with HDS. We plan to continue optimizing our multi-dimensional go-to-market strategy to maximize our reach to customers. We plan to further invest in growing our direct, VAR and solution partners channels across various geographies. We will continue to evaluate additional OEM and strategic reseller partnerships to leverage their global reach and continue to drive our penetration into the enterprise.

Broadening our technology partnerships. We intend to continue to leverage our existing platform by expanding our technology partnerships with infrastructure vendors, application vendors and storage suppliers. Broadening our partnerships with infrastructure vendors in particular vertical markets will provide us with additional competitive insights into those markets so we can continue tailoring our products to specific applications. We plan to enhance our partnerships with application vendors that benefit from running their applications in close proximity to the data set, as this will serve as a fundamental component of our software initiatives as we leverage the ability to run applications on the storage server itself. We continuously seek to expand our storage supplier relationships to offer customers a choice of storage arrays, to improve our supply chain and to encourage competitive pricing from our suppliers.

Case studies

Major Internet company using cloud computing. Over the past year, a large worldwide Internet company made a strategic decision to move part of its business away from its existing storage vendor and implemented our SiliconFS file system due to its ability to meet the Internet company’s requirements. The Internet company consolidated data that was previously spread across many systems and moved its business data to our storage systems. The Internet company is now able to use our streamlined storage system environment to deliver the performance required to serve data, such as photos, video and email, at scale from the cloud.

Large airline. In 2010, a large airline was looking for an optimal storage solution to deploy a large scale virtual desktop environment. The airline adopted our storage systems after evaluating competing solutions. Although it had adopted another company’s NAS solution for general file management, the airline selected our storage system because of our SiliconFS file system’s virtual desktop capabilities.

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Major media and entertainment company. In early 2010, one of the world’s largest movie, music and entertainment companies needed a more powerful solution for transcoding, which is the process of converting original content into an increasing variety of format outputs. Transcoding enables original content providers to stream full length motion pictures over the Internet for viewing on a laptop, game player or other device, each of which requires a separate file conversion. We collaborated with a transcoding software vendor to offer the entertainment company a unified solution. The entertainment company selected our storage solution based in part on our storage systems’ ability to handle the dynamic workloads involved in this data-intensive process, as well as our other high performance features that enable quick conversion of original source files. The high performance and quick conversion of our storage systems enabled the entertainment company to realize a faster time to revenue for its product.

Large oil exploration company. One of the world’s largest publicly traded oil companies was interested in decreasing costs while increasing the performance of the primary applications used in the exploration for oil resources. The key application was a third party seismic data processing suite that was known for its high IOPs requirements. Our technology enabled the oil exploration company to complete a large consolidation of the oil exploration company’s legacy storage environment while significantly improving application performance. Subsequently, the oil exploration company’s Australian subsidiary decided to move all of its geophysical and commercial office applications to our platform. The oil exploration company now has our storage solutions in its four largest global exploration and production data centers that host high performance computing applications. Implementation of our storage systems reduced the time to complete its seismic processing work flows, reduced its information technology expense and enabled it to locate and exploit oil resources faster.

Products

We offer a range of storage systems to meet different performance, scalability and price points. Our storage systems share a common underlying architecture, with most software and file system features available across our product offerings. In addition, we offer a rich suite of software features organized into a comprehensive operating environment that includes the base operating system, licensed options for file services, data protection services, integration with system virtualization products and an extensive system management framework. To facilitate the sale of our platform and software products when sold as complete systems, we also offer a range of ancillary products that we purchase and resell, including storage arrays, Fibre Channel switches, equipment racks and other items.

With common software across all of our storage systems, customers have a choice of different price and performance points to meet their individual application requirements. All of our software features are available on our storage systems, including unique features that take advantage of our hybrid core design. Software updates with new features can be added as they become available.

High-end and mid-range storage systems. Currently we designate our products as Mercury and Titan.

Our Titan storage systems offer competitive pricing with high-end performance, scalability and functionality for HPC environments. Our Titan product family consists of our 3200 series storage systems that are designed to meet the needs of customers seeking HPC solutions. Our Titan storage systems have been our performance flagship systems over three product generations for

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the past seven years. Titan’s performance and scalability have doubled with each succeeding generation and offers a suitable storage solution for large-scale installations.

We leveraged the architecture of our HPC systems to expand our storage system offerings and address the mid-range market and tailor solutions for a broader array of customer needs. Our Mercury storage systems offer mid-range pricing with high-end performance, scalability and functionality. Our Mercury product family consists of our 55 and 110 series storage systems that are designed to meet the needs of mid-range storage customers.

The following table provides certain technical and performance statistics regarding our products:


	Mid-range			High-end
	Mercury 55	Mercury 110		Titan 3200

SPECsfs IOPs(1)	Up to 40,000		Up to 73,000	Up to 200,000
Data throughput per server(2)	up to 700 MB/sec		Up to 1,100 MB/sec	Up to 1,500 MB/sec
Maximum capacity(3)	4 PB		8 PB	16 PB
Ethernet network data ports(4)	Two 10 GbE + Six GbE		Two 10 GbE + Six GbE	Two 10 GbE
Fibre Channel storage ports(5)	Four 4 Gb		Four 4 Gb	Eight 4 Gb
Clustering interconnect ports(6)	Two 10 GbE		Two 10 GbE	Two 10 GbE

(1)

Input/output operations per second are measured using the SPECsfs 2008 benchmark for Mercury 55 and Mercury 110 and SPECsfs 97_r1.v3 benchmark for Titan 3210. SPECsfs benchmarks are developed and published by Standard Performance Evaluation Corporation.

(2)

Maximum data throughput capability in megabytes/second, or MB/sec for mixed read/write operations as measured using the IOzone benchmark.

(3)

Maximum capacity is defined as maximum usable storage capacity in petabytes, or PBs.

(4)

Ethernet LAN ports are used for LAN connectivity to enable client access to our platforms and operate at either 1 gigabit/second, or Gb/sec, or 10 Gb/sec each.

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