10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to

Commission file number 1-13317

DOT HILL SYSTEMS CORP.

(Exact name of registrant as specified in its charter)

Delaware	13-3460176
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)
2200 Faraday Avenue, Suite 100, Carlsbad, CA	92008
(Address of principal executive offices)	(Zip Code)

(760) 931-5500
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

      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 o               Accelerated filer þ                         Non-accelerated filer o                         Smaller reporting company o

                                        (Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 46,054,529 shares of common stock, $0.001 par value, outstanding as of May 6, 2008.

DOT HILL SYSTEMS CORP.

FORM 10-Q
For the Quarter Ended March 31, 2008
INDEX

 EXHIBIT 10.1

 EXHIBIT 10.2

 EXHIBIT 31.1

 EXHIBIT 31.2

 EXHIBIT 32.1

Part I. Financial Information

Item 1. Financial Statements

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)

	December 31,			March 31,
	2007			2008
ASSETS
Current Assets:
Cash and cash equivalents	$	82,358		$	77,406
Accounts receivable, net of allowance of $302 and $195		32,445			36,569
Inventories		9,013			14,430
Prepaid expenses and other		3,968			4,626
Total current assets		127,784			133,031
Property and equipment, net		9,599			8,819
Intangible assets, net		2,280			1,873
Other assets		264			236
Total assets	$	139,927		$	143,959
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	28,472		$	35,738
Accrued compensation		3,115			3,612
Accrued expenses		6,227			5,588
Deferred revenue		1,409			1,284
Income taxes payable		143			270
Total current liabilities		39,366			46,492
Other long-term liabilities		4,132			3,769
Total liabilities		43,498			50,261
Commitments and Contingencies (Note 11)
Stockholders’ Equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.001 par value, 100,000 shares authorized, 45,781 and 46,055 shares issued and outstanding at December 31, 2007 and March 31, 2008, respectively		46			46
Additional paid-in capital		294,193			297,803
Accumulated other comprehensive loss		(3,100	)		(3,331	)
Accumulated deficit		(194,710	)		(200,820	)
Total stockholders’ equity		96,429			93,698
Total liabilities and stockholders’ equity	$	139,927		$	143,959

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Amounts)

	Three Months Ended
	March 31,
	2007			2008
NET REVENUE	$	53,441		$	52,826
COST OF GOODS SOLD		46,767			48,660
GROSS PROFIT		6,674			4,166
OPERATING EXPENSES:
Sales and marketing		3,908			4,272
Research and development		6,074			7,424
General and administrative		3,670			3,043
Legal settlement		—			(3,836	)
Total operating expenses		13,652			10,903
OPERATING LOSS		(6,978	)		(6,737	)
OTHER INCOME:
Interest income		1,308			708
Other income, net		—			79
Total other income, net		1,308			787
LOSS BEFORE INCOME TAXES		(5,670	)		(5,950	)
INCOME TAX EXPENSE		292			160
NET LOSS	$	(5,962	)	$	(6,110	)
NET LOSS PER SHARE:
Basic and diluted	$	(0.13	)	$	(0.13	)
WEIGHTED AVERAGE SHARES USED TO CALCULATE NET LOSS PER SHARE:
Basic and diluted		45,157			45,956
COMPREHENSIVE LOSS:
Net loss	$	(5,962	)	$	(6,110	)
Foreign currency translation adjustments		(604	)		(231	)
Comprehensive loss	$	(6,566	)	$	(6,341	)

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

	Three Months Ended
	March 31,
	2007			2008
Cash Flows From Operating Activities:
Net loss	$	(5,962	)	$	(6,110	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,775			1,465
Gain on disposal of property and equipment		—			(5	)
Provision for doubtful accounts		—			(171	)
Issue of warrant to customer		—			2,282
Share-based compensation expense		225			665
Changes in operating assets and liabilities:
Accounts receivable		2,109			(4,032	)
Inventories		(195	)		(5,390	)
Prepaid expenses and other assets		1,042			(626	)
Accounts payable		(417	)		6,987
Accrued compensation and other expenses		(2,250	)		(121	)
Deferred revenue		28			(151	)
Income taxes payable		158			126
Other long-term liabilities		16			(363	)
Net cash used in operating activities		(3,471	)		(5,444	)
Cash Flows From Investing Activities:
Purchases of property and equipment		(945	)		(268	)
Net cash used in investing activities		(945	)		(268	)
Cash Flows From Financing Activities:
Proceeds from sale of stock to employees		508			465
Proceeds from exercise of stock options and warrants		94			198
Net cash provided by financing activities		602			663
Effect of Exchange Rate Changes on Cash		64			97
Net Decrease in Cash and Cash Equivalents		(3,750	)		(4,952	)
Cash and Cash Equivalents, beginning of period		99,663			82,358
Cash and Cash Equivalents, end of period	$	95,913		$	77,406
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes	$	125		$	35
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Construction in progress costs incurred but not paid	$	481		$	142

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The Company

     Dot Hill Systems Corp (referred to herein as Dot Hill, we, our or us) is a provider of entry level and midrange storage systems for organizations requiring high reliability, high performance networked storage and data management solutions in an open systems architecture. Our storage solutions consist of integrated hardware, firmware and software products employing a modular system that allows end-users to add capacity as needed. Our broad range of products, from medium capacity stand-alone storage units to complete very high capacity storage area networks provide end-users with a cost-effective means of addressing increasing storage demands without sacrificing performance. Our new product family based on our R/Evolution(TM) architecture provides high performance and large capacities for a broad variety of environments, employing Fibre Channel, or Internet Small Computer Systems Interface, or Serial Attached SCSI, or SAS, interconnects to switches and/or hosts. Our SANnet products have been distinguished by certification as Network Equipment Building System, Level 3 (a telecommunications standard for equipment used in central offices) and are MIL-STD-810F (a military standard created by the U.S. government) compliant based on their ruggedness and reliability.

Basis of Presentation

     The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles, or GAAP, for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2008.

Use of Estimates

     The preparation of our financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, litigation and other contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Revenue Recognition

     In accordance with SEC Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, and SAB No. 104, Revenue Recognition, we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to our customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. Revenue is recognized for product sales upon transfer of title to the customer. We record reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data, and other factors known at the time. If actual future returns and allowances differ from past experience, additional allowances may be required. Revenue from product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. We recognize revenue on upfront nonrefundable payments from our customers by deferring the payment and recognizing it ratably over the term of the agreement. In accordance with Emerging Issues Task Force, or EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, when we provide consideration to our customers we recognize the value of that consideration as a reduction in revenue. We maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products.

     A majority of our net revenue is derived from a limited number of customers. For the three months ended March 31, 2008 sales to our largest OEM customer accounted for approximately 44% of total sales as compared to 76% for the three months ended March 31, 2007, and sales to our second largest OEM customer accounted for approximately 24% for the three months ended March 31, 2008 as compared to less than 1% for the three months ended March 31, 2007. No other customers had net revenue in the quarter that represented 10% or more of our total net revenue.

Foreign Currency Transaction and Translation

     A portion of our international business is presently conducted in currencies other than the United States dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the United States dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure and we currently do not intend to engage in hedging activities in the near future.

     During the first quarter of 2008, we closed our operations in the Netherlands and transitioned all functions previously performed in that location to our Carlsbad location. During this process, we performed a review of the functional currency for this operation in accordance with FASB Statement No. 52 Foreign Currency Transactions and based on the changes in operating conditions and economic facts and circumstances we changed the functional currency for our operation in the Netherlands from the Euro to the United States dollar effective January 1, 2008. For foreign subsidiaries whose functional currency is the local currency, assets and liabilities are translated into United States dollars at period-end exchange rates. Revenues and expenses, and gains and losses are translated at rates of exchange that approximate the rates in effect on the transaction date. Resulting translation gains and losses are recognized as a component of other comprehensive income.

Adoption of New Accounting Pronouncements

     In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires enhanced disclosures about fair value measurements. FASB Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008 the FASB issued FASB staff position, or FSP, No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of FASB Statement No. 157 for non-financial assets and liabilities, other than those that are recognized or disclosed at fair value on a recurring basis, to fiscal years beginning after November 15, 2008. The adoption of FASB Statement No. 157 related to financial assets and liabilities had no impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact, if any, that FASB Statement No. 157 may have on its future consolidated financial statements related to non-financial assets and liabilities.

2. Share-Based Compensation

     We account for share-based compensation in accordance with the Financial Accounting Standards Board, or FASB, Statement No. 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors and consultants, including stock option grants and purchases of stock made pursuant to our 2000 Amended and Restated Equity Incentive Plan, or the 2000 EIP, our 2000 Amended and Restated Non-Employee Directors’ Stock Option Plan, or the 2000 NEDSOP, and our 2000 Amended and Restated Employee Stock Purchase Plan, or the 2000 ESPP, based on estimated fair values.

     FASB Statement No. 123(R) requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2007 and 2008.

     As of March 31, 2008, total unrecognized share-based compensation cost related to unvested stock options was $6.9 million, which is expected to be recognized over a weighted average period of approximately 2.9 years. We have included the following amounts for share-based compensation cost, including the cost related to the 2000 EIP, 2000 NEDSOP and 2000 ESPP, in the accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2007 and 2008 (amounts in thousands):

	Three Months Ended
	March 31,
	2007			2008
Cost of goods sold	$	103		$	96
Sales and marketing		105			139
Research and development		193			197
General and administrative		(176	)		233
Share-based compensation expense before taxes		225			665
Related deferred income tax benefits		—			—
Share-based compensation expense, net of income taxes	$	225		$	665
Net share-based compensation expense per basic and diluted common share	$	—		$	0.01

	Three Months Ended
	March 31,
	2007		2008
Share-based compensation expense is derived from:
Stock options	$	132	$	568
2000 ESPP		93		97
Share-based compensation expense before taxes	$	225	$	665

     Share-based compensation expense recognized during the three months ended March 31, 2008 included (1) compensation expense for awards granted prior to, but not fully vested as of, January 1, 2006 and (2) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant date fair values estimated in accordance with the provisions of FASB Statement No. 123(R). FASB Statement No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In our pro forma disclosures required under FASB Statement No. 123, Accounting for Stock-based Compensation, for the periods prior to 2006, we accounted for forfeitures as they occurred. We have historically and continue to estimate the fair value of share-based awards using the Black-Scholes option-pricing model. Total unrecognized share-based compensation cost related to unvested stock options as of March 31, 2008 has been adjusted for changes in estimated forfeitures.

     To estimate compensation expense under FASB Statement No. 123(R) for the three months ended March 31, 2007 and 2008, we used the Black-Scholes option-pricing model with the following weighted-average assumptions for equity awards granted:

	2000 EIP and 2000 NEDSOP						2000 ESPP
	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2007			2008			2007			2008
Risk-free interest rate		4.46	%		2.42	%		5.16	%		2.07	%
Expected dividend yield		—	%		—	%		—	%		—	%
Volatility		68	%		68	%		68	%		84	%
Expected life	5.4 years			5.6 years			0.5 years			0.5 years

     The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent remaining term. We have not paid dividends in the past and do not plan to pay any dividends in the future. The expected volatility is based on implied volatility of our stock for the related vesting period. The expected life of the equity award is based on historical experience.

Stock Incentive Plans

     2000 EIP. During 2007 and 2008, we primarily granted options to purchase common stock to our employees under the 2000 EIP. These options expire 10 years from the date of grant and typically vest over four years, with 25% of the shares subject to the option vesting one year from the date of grant and the remaining shares subject to the option vesting ratably thereafter on a monthly basis. The number of shares of common stock reserved for issuance under the 2000 EIP is increased annually on the date of our meeting of stockholders by an amount equal to the lesser of (A) two percent of our outstanding shares as of the date of our annual meeting of stockholders, (B) 1,000,000 shares or (C) an amount determined by our board of directors. If an option is surrendered or for any other reason ceases to be exercisable in whole or in part, the shares with respect to which the option was not exercised shall continue to be available under the 2000 EIP. As of March 31, 2008, options to purchase 6,720,284 shares of common stock were outstanding under the 2000 EIP and the options to purchase 356,628 shares of common stock remained available for grant under the 2000 EIP.

     2000 NEDSOP. Under the 2000 NEDSOP, nonqualified stock options to purchase common stock are automatically granted to our non-employee directors upon appointment to our board of directors (initial grants) and upon each of our annual meetings of stockholders (annual grants). Options granted under the 2000 NEDSOP expire 10 years from the date of the grant. Initial grants vest over four years, with 25% of the shares subject to the option vesting one year from the date of grant and the remaining shares subject to the option vesting ratably thereafter on a monthly basis. Annual grants are fully vested on the date of grant. 1,000,000 shares of common stock are reserved for issuance under the 2000 NEDSOP. As of March 31, 2008, options to purchase 500,000 shares of common stock were outstanding under the 2000 NEDSOP and options to purchase 413,124 shares of common stock remained available for grant under the 2000 NEDSOP.

     2000 ESPP. The 2000 ESPP qualifies under the provisions of Section 423 of the Internal Revenue Code, or IRC, and provides our eligible employees, as defined in the 2000 ESPP, with an opportunity to purchase shares of our common stock at 85% of fair market value, as defined in the 2000 ESPP. The number of shares of common stock reserved for issuance under the 2000 ESPP is increased annually on the date of our meeting of stockholders by an amount equal to the lesser of (A) 100,000 shares or (B) an amount determined by our board of directors. There were 191,594 and 168,971 shares issued for the 2000 ESPP during the three months ended March 31, 2007 and 2008, respectively.

     Activity and pricing information regarding all options to purchase shares of common stock are summarized as follows:

				Weighted		Weighted average
				average		remaining		Aggregate
	Number of			exercise		contractual term		intrinsic value
	shares			price		(in years)		(in thousands)
Outstanding at December 31, 2007		6,672,095		$	5.36
Granted		1,022,500			2.40
Exercised		(73,715	)		2.69
Forfeited		(246,070	)		3.58
Expired		(154,526	)		7.72
Outstanding at March 31, 2008		7,220,284		$	4.98		6.94	$	1,126,632
Vested and expected to vest at March 31, 2008		6,535,159		$	5.15		6.72	$	966,830
Exercisable at March 31, 2008		4,033,968		$	6.15		5.79	$	466,902

     As of March 31, 2007, approximately 3,417,881 options were exercisable at a weighted average exercise price of $6.79.

     The weighted average grant-date fair values of options granted during the three months ended March 31, 2007 and 2008 were $2.21 per share and $1.58 per share, respectively.

     During the three months ended March 31, 2008, cash generated from share-based compensation arrangements amounted to $0.2 million from the exercise of options and $0.5 million from the purchase of shares through the 2000 ESPP. We issue new shares from the respective plan share reserves upon exercise of options to purchase common stock and for purchases through the 2000 ESPP.

     The total fair value of options to purchase common stock that vested during the three months ended March 31, 2007 and 2008 was $0.8 million and $0.9 million, respectively.

3. Net Loss Per Share

     Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period.

     Diluted net loss per share reflects the potential dilution by including common stock equivalents, such as stock options and stock warrants in the weighted average number of common shares outstanding for a period, if dilutive.

     The following table sets forth a reconciliation of the basic and diluted number of weighted average shares outstanding used in the calculation of net loss per share (in thousands):

	Three Months Ended
	March 31,
	2007		2008
Shares used in computing basic net loss per share		45,157		45,956
Dilutive effect of warrants and common stock equivalents		—		—
Shares used in computing diluted net loss per share		45,157		45,956

     For the three months ended March 31, 2007, outstanding options to purchase 6,240,873 shares of common stock with exercise prices ranging from $1.34 to $17.14 per share and outstanding warrants to purchase 1,714,679 shares of common stock at prices ranging from $2.97 to $4.50 were not included in the calculation of diluted loss per share because their effect was antidilutive.

     For the three months ended March 31, 2008, outstanding options to purchase 7,220,284 shares of common stock with exercise prices ranging from $1.34 to $17.14 per share and outstanding warrants to purchase 1,602,489 shares of common stock at a price of $2.40 were not included in the calculation of diluted loss per share because their effect was antidilutive.

4. Cash and Cash Equivalents

     At March 31, 2008, we had $77.4 million in cash and cash equivalents. Pursuant to FASB Statement No. 157, Fair Value Measurements , the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets. We place our cash investments in instruments that meet credit quality standards and maturity guidelines, as specified in our investment policy. These guidelines limit the type, maturity and exposure to any one issue. The policy requires all investments to have a minimum rating of AAA or Aaa, AA, A-1 or P-1 as report by two rating agencies.

A summary of our cash and cash equivalents by major security type is as follows:

	March 31,
	2008
Cash	$	9,806
Time Deposits		22,618
Commercial paper		11,755
U.S. Treasury and agency obligations		2,996
Institutional money market funds		30,231
Cash and cash equivalents	$	77,406

5. Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market value. The following is a summary of inventories (in thousands):

	December 31,		March 31,
	2007		2008
Purchased parts and materials	$	1,187	$	1,117
Finished goods		7,826		13,313
Total inventory	$	9,013	$	14,430

6. Intangible Assets

     All of our identified intangible assets are considered to have finite lives and are being amortized in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, and consist of the following as of December 31, 2007 and March 31, 2008 (in thousands):

	December 31, 2007
			Accumulated
	Gross		Amortization			Net
Core technology	$	5,000	$	(4,260	)	$	740
Customer relationships		2,500		(2,500	)		—
Licensed patent portfolio		2,570		(1,030	)		1,540
Total intangible assets	$	10,070	$	(7,790	)	$	2,280

	March 31, 2008
			Accumulated
	Gross		Amortization			Net
Core technology	$	5,000	$	(4,538	)	$	462
Licensed Patent Portfolio		2,570		(1,159	)		1,411
Total intangible assets	$	7,570	$	(5,697	)	$	1,873

     Amortization expense related to intangible assets totaled $0.6 million and $0.4 million for the three months ended March 31, 2007 and 2008, respectively.

     Estimated future amortization expense related to intangible assets as of March 31, 2008 is as follows (in thousands):

Years ending December 31,
2008 (remaining 9 months)	$	848
2009		514
2010		511
Total	$	1,873

     7. Product Warranties Activity

     We generally extend to our customers the warranties provided to us by our suppliers and, accordingly, the majority of our warranty obligations to customers are covered by supplier warranties. For warranty costs not covered by our suppliers, we provide for estimated warranty costs in the period the revenue is recognized. There can be no assurance that our suppliers will continue to provide such warranties to us in the future, which could have a material adverse effect on our operating results and financial condition if these warranties are eliminated. Estimated liabilities for product warranties are included in accrued expenses. The changes in our aggregate product warranty liability are as follows for the three months ended March 31, 2008 (in thousands):

	Three Months Ended
	March 31,
	2007			2008
Balance, beginning of period	$	663		$	1,381
Charged to operations		1,044			621
Deductions for costs incurred		(674	)		(793	)
Balance, end of period	$	1,033		$	1,209

8. Income Taxes

     We recorded income tax expense of $0.2 million for the three months ended March 31, 2008 compared to $0.3 million for the three months ended March 31, 2007. Our effective income tax rate of( 2.69)% for the three months ended March 31, 2008 differs from the U.S. federal statutory rate due to our U.S. and foreign deferred tax asset valuation allowance position, foreign taxes and state taxes.

     On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

     The cumulative effects of adopting FIN 48 resulted in an increase of $0.5 million to accumulated deficit and an increase in other long term liabilities of $0.5 million of tax benefits that, if recognized, would affect the effective tax rate. At December 31, 2007 we had cumulative unrecognized tax benefits of approximately $4.5 million, of which approximately $0.2 million are included in other long term liabilities that, if recognized, would affect the effective tax rate. The remaining $4.3 million of unrecognized tax benefits will have no impact on the effective tax rate due to the existence of net operating loss carryforwards and a full valuation allowance. Consistent with previous periods, penalties and tax related interest expense are reported as a component of income tax expense. As of December 31, 2007, the total amount of accrued income tax related interest and penalties included in the consolidated balance sheet was less than $0.1 million. We do not expect that our unrecognized tax benefit will change significantly within the next 12 months. There have been no material changes to the unrecognized tax benefit during the three month period ended March 31, 2008.

          Due to net operating losses and other tax attributes carried forward, we are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending March 31, 1994 through December 31, 2007. With few exceptions, our state income tax returns are open to audit for the years ended December 31, 1999 through 2007.

          We periodically evaluate the likelihood of the realization of deferred tax assets, and adjust the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carryforward periods available to us for tax reporting purposes, and other relevant factors.

          At March 31, 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was not more likely than not that our United States deferred tax assets would be realized and have a $67.3 million valuation allowance associated with our United States deferred tax assets compared to $65.9 million at December 31, 2007.

          As of December 31, 2007, we had federal and state net operating losses of approximately $144.0 million and $77.0 million, which begin to expire in the tax years ending 2013 and 2008, respectively. In addition, we had federal tax credit carryforwards of $3.9 million, of which approximately $0.5 million can be carried forward indefinitely to offset future taxable income, and the remaining $3.4 million will begin to

expire in the tax year ending 2008. We also had state tax credit carryforwards of $4.1 million, of which $3.8 million can be carried forward indefinitely to offset future taxable income, and the remaining $0.3 million began to expire in the tax year ending 2008.

          As a result of our equity transactions, an ownership change, within the meaning of IRC Section 382, occurred on September 18, 2003. As a result, annual use of our federal net operating loss and credit carry forwards is limited to (i) the aggregate fair market value of Dot Hill immediately before the ownership change multiplied by (ii) the long-term tax-exempt rate (within the meaning of Section 382 (f) of the IRC) in effect at that time. The annual limitation is cumulative and, therefore, if not fully utilized in a year, can be utilized in future years in addition to the Section 382 limitation for those years.

          As a result of our acquisition of Chaparral Network Storage, Inc., or Chaparral, a second ownership change, within the meaning of IRC Section 382, occurred on February 23, 2004. As a result, annual use of Chaparral’s federal net operating loss and credit carry forwards may be limited. The annual limitation is cumulative and, therefore, if not fully utilized in a year, can be utilized in future years in addition to the Section 382 limitation for those years.

          We have not provided for any residual U.S. income taxes on the earnings from our foreign subsidiaries because such earnings are intended to be indefinitely reinvested. Such residual U.S. income taxes, if any, would be insignificant.

9. Accumulated Other Comprehensive Loss

     The components of accumulated other comprehensive loss are as follows (in thousands):

	Foreign
	Currency
	Items
Balance, December 31, 2007	$	(3,100	)
Quarterly change		(231	)
Balance, March 31, 2008	$	(3,331	)

10. Credit Facilities

     Effective July 1, 2007, we amended our credit agreement to extend our term for two years with Wells Fargo Bank, National Association, or Wells Fargo, which allows us to borrow up to $30.0 million under a revolving line of credit that expires July 1, 2009. Amounts loaned under the credit agreement bear interest at our option at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or at a fixed rate per annum determined by Wells Fargo to be 0.65% above LIBOR in effect on the first day of the applicable fixed rate term. In connection with the credit agreement, to the extent we have outstanding borrowings, we have granted Wells Fargo a security interest in our investment management account maintained with Wells Capital Management Incorporated. As of December 31, 2007 and March 31, 2008, there were no balances outstanding under this line of credit. The credit agreement limits any new borrowings, loans or advances outside of the credit agreement to an amount less than $1.0 million and annual capital expenditures to an amount less than $10.0 million.

11. Commitments and Contingencies

   Contingencies

   Crossroads Systems Litigation

     On October 17, 2003, Crossroads Systems, Inc., or Crossroads, filed a lawsuit against us in the United States District Court in Austin, Texas, alleging that our products infringe two United States patents assigned to Crossroads, Patent Numbers 5,941,972 and 6,425,035. The patents involve storage routers and methods for providing virtual local storage. Patent Number 5,941,972 involves the interface of Small Computer Systems Interface, or SCSI, storage devices and the Fibre Channel protocol and Patent Number 6,425,035 involves the interface of any one-transport medium and a second transport medium. We were served with the lawsuit on October 27, 2003. Chaparral was added as a party to the lawsuit in March 2004.

     On June 28, 2006 we entered into a Settlement and License Agreement with Crossroads that settles the lawsuit and licenses to us the family of patents from which it stemmed. We concurrently entered into an Agreement between Dot Hill Systems and Infortrend Re Settlement of Crossroads Lawsuit with Infortrend Technology, Inc. In accordance with the Crossroads and Infortrend agreements, July 14, 2006, we paid $3.35 million to Crossroads for alleged past damages and Crossroads agreed to dismiss, with prejudice, all patent claims against us. In addition, Infortrend paid Crossroads an additional $7.15 million on our behalf, from which $1.43 million was withheld for Taiwan taxes and is included in income tax expense on our statement of operations. Going forward, Crossroads will receive a running royalty of 2.5% based on a percentage of net sales of RAID products sold by us, but only those with functionality that is covered by United States Patents No. 5,941,972 and No. 6,425,035 and other patents in the patent family. For RAID products that use a controller sourced by Infortrend, we will pay 0.8125% of the 2.5% royalty, and Infortrend will be responsible for the remainder. For RAID products that use our proprietary controller, we alone will be paying the 2.5% running royalty. No royalty payments will be required with respect to the sale of storage systems that do not contain RAID controllers, known as JBOD systems, or systems that use only the SCSI protocol end-to-end, even those that perform RAID. Further, royalty

payments with respect to the sale of any products that are made, used and sold outside of the United States will only be required if and when Crossroads is issued patents that cover the products and that are issued by countries in which the products are manufactured, used or sold.

     On July 24 and 25th, 2006, respectively, Crossroads filed another lawsuit against us in the United States District Court for the Western District of Texas as well as a Motion to Enforce in the aforementioned lawsuit. Both the new lawsuit and motion alleged that Dot Hill had breached the June 28, 2006 Settlement and License Agreement by deducting $1.43 million of the lump sum payment of $10.50 million as withholding against any potential Taiwan tax liability arising out of Dot Hill’s indemnification by Infortrend, a Taiwan company. On September 28, 2006 the Court indicated that it would grant Crossroads’ Motion to Enforce. Therefore, on October 5, 2006, Crossroads and Dot Hill amended the original Settlement and License Agreement to state that Dot Hill would pay to Crossroads the $1.43 million, plus $45,000 in late fees, and would not make deductions based on taxes on royalty payments in the future. The payment of the $1.475 million was made on October 5, 2006. As required by the amended settlement, Crossroads has dismissed with prejudice the original patent action as well as the second lawsuit based on the enforcement of the original settlement.

     Thereafter, we gave notice to Infortrend of our intent to bring a claim alleging breach of the settlement agreement seeking reimbursement of the $1.475 million from Infortrend. On November 13, 2006, Infortrend filed a lawsuit in the Superior Court of California, County of Orange for declaratory relief. The complaint seeks a court determination that Infortrend is not obligated to reimburse Dot Hill for the $1.475 million. On December 12, 2006, we answered the complaint and filed a cross complaint alleging breach of contract, fraud, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and declaratory relief. Infortrend demurred to the cross complaint. The Court denied the demurrer as to the fraud cause of action and sustained the demurrer as to the claims for breach of the covenant of good faith and fair dealing and breach of fiduciary duty. The Court granted Dot Hill leave to amend the cross complaint as to those two causes of action. No trial date has been scheduled. The outcome of this action is uncertain, and no amounts have been accrued as of March 31, 2008.

Dot Hill Securities Class Actions, Derivative Suits and Direct State Securities Action

     In late January and early February 2006, numerous purported class action complaints were filed against us in the United States District Court for the Southern District of California. The complaints allege violations of federal securities laws related to alleged inflation in our stock price in connection with various statements and alleged omissions to the public and to the securities markets and declines in our stock price in connection with the restatement of certain of our quarterly financial statements for fiscal year 2004, and seeking damages therefore. The complaints were consolidated into a single action, and the Court appointed as lead plaintiff a group comprised of the Detroit Police and Fire Retirement System and the General Retirement System of the City of Detroit. The consolidated complaint was filed on August 25, 2006, and we filed a motion to dismiss on October 5, 2006. The Court granted our motion to dismiss on March 15, 2007. Plaintiffs filed their Second Amended Consolidated Complaint on April 20, 2007. We filed a motion to dismiss the Second Amended Consolidated Complaint on May 1, 2008 and a hearing is set for August 14, 2008. The outcome of these actions is uncertain, and no amounts have been accrued as of March 31, 2008.

     In addition, three complaints purporting to be derivative actions have been filed in California state court against certain of our directors and executive officers. These complaints are based on the same facts and circumstances described in the federal class action complaints and generally allege that the named directors and officers breached their fiduciary duties by failing to oversee adequately our financial reporting. Each of the complaints generally seeks an unspecified amount of damages. Our demurrer to two of those cases, in which we sought dismissal, was overruled (i.e., denied). We formed a Special Litigation Committee, or SLC, of disinterested directors to investigate the alleged wrongdoing. On January 12, 2007, another derivative action similar to the previous derivative actions with the addition of allegations regarding purported stock option backdating was served on us. On April 16, 2007, the SLC concluded its investigation and based on its findings directed us to file a motion to dismiss the derivative matters. On June 27, 2007, the parties stipulated to consolidate all of the derivative matters for pre-trial proceedings. We expect to file a motion to dismiss the consolidated matters pursuant to the SLC’s directive in the next few months. The outcome of these actions is uncertain, and no amounts have been accrued as of March 31, 2008.

     In August 2007, a securities lawsuit was filed in California state court by a single former stockholder against certain of our directors and executive officers. This complaint is based on the same facts and circumstances described in the federal class action and state derivative complaints, and generally alleges that Dot Hill and the named officers and directors committed fraud and violated state securities laws. The complaint seeks $500,000 in damages, as well as attorneys’ fees and costs. On November 1, 2007, we filed a motion to dismiss the complaint, which was granted on February 15, 2008. On February 25, 2008, the plaintiff filed his First Amended Complaint. We filed a motion to dismiss the First Amended Complaint on March 6, 2008. A hearing is scheduled on our motion to dismiss for mid-May 2008. The outcome of these actions is uncertain, and no amounts have been accrued as of March 31, 2008.

     The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The result of legal proceedings are inherently uncertain and material adverse outcomes are possible. From time to time the Company may enter into confidential discussions regarding the potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. The settlement of any pending litigation or other proceedings could require Dot Hill to incur substantial settlement payments and costs.

    Chaparral Network Storage Shareholders Escrow Fund

     In February 2007, we filed a claim for arbitration in Denver, Colorado alleging that the representative of the Chaparral shareholders was wrongfully withholding escrow funds due to us as a result of damages incurred by us relating to a completed patent infringement lawsuit filed by Crossroads. A settlement was reached and a payment in the amount of $3.8 million was received in March 2008. This legal settlement amount was recorded as a reduction in operating expenses for the three months ended March 31, 2008.

    Other Litigation

     We are involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that the outcome of such other litigation and claims will likely not have a material adverse effect on our financial condition or results of operations.

12. Warrant

     In January 2008, we amended our Product Purchase Agreement, or the Agreement, originally entered into with Hewlett Packard, or HP, in September 2007 to allow for sales to additional divisions within HP. The Agreement does not contain any minimum purchase commitments and the term of the Agreement was extended from one to five years. In connection with the Agreement, we issued a warrant to HP to purchase 1,602,489 shares of our common stock (approximately 3.5% of our outstanding shares prior to the issuance of the warrant) at an exercise price of $2.40 per share. The warrant was fully vested and exercisable at signing. The fair value of the warrant, determined using the Black-Scholes option-pricing model, was approximately $2.3 million. The Black-Scholes option-pricing model utilized the following assumptions; a risk-free interest rate of 3.18%, expected volatility of 59.5% and a contractual life of five years. The warrant was issued to induce the customer to enter into the Agreement with us. The fair value of the warrant was recorded as a reduction in revenue for the three months ended March 31, 2008, the period the Agreement was signed.

13. Segment Information

     Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our Chief Executive Officer. Our operating segments are managed separately because each segment represents a strategic business unit that offers different products or services.

     Our operating segments are organized on the basis of products and services. We have identified operating segments that consist of our SANnet ® family of systems, legacy and other systems, and services. We currently evaluate performance based on stand-alone segment revenue and gross margin. Because we do not currently maintain information regarding operating income at the operating segment level, such information is not presented.

     Information concerning net revenue and gross profit by product and service is as follows (in thousands):

	SANnet		Legacy and
	Family		Other		Services		Total
Three months ended:
March 31, 2007:
Net revenue	$	51,948	$	177	$	1,316	$	53,441
Gross profit	$	6,195	$	42	$	437	$	6,674
March 31, 2008:
Net revenue	$	50,384	$	148	$	2,294	$	52,826
Gross profit	$	2,598	$	13	$	1,555	$	4,166

     Information concerning operating assets by product and service, derived by specific identification for assets related to specific segments and an allocation based on segment volume for assets related to multiple segments, is as follows (in thousands):

	SANnet		Legacy and
	Family		Other		Services		Total
As of:
December 31, 2007	$	132,599	$	1,022	$	6,306	$	139,927
March 31, 2008	$	140,412	$	896	$	2,651	$	143,959

14. Recent Accounting Pronouncements

     In December 2007 the FASB issued FASB Statement No. 141R, Business Combinations, (“FASB Statement No 141R”). FASB Statement No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FASB Statement No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We are in the process of assessing the impact of the adoption of this standard on our future consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement for Forward-Looking Information

     Certain statements contained in this quarterly report on Form 10-Q, including, statements regarding the development, growth and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance and the products we expect to offer, and other statements regarding matters that are not historical facts, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the “safe harbor” created by these sections. Because such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found in Part II, Item 1A, “Risk Factors” and in our reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2007. Readers are cautioned not to place undue reliance on forward-looking statements. The forward- looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

     The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q and our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2007.

Overview

     We are a provider of entry level and midrange storage systems for organizations requiring high reliability, high performance networked storage and data management solutions in an open systems architecture. Our storage solutions consist of integrated hardware, firmware and software products employing a modular system that allows end-users to add capacity as needed. Our broad range of products, from medium capacity stand-alone storage units to complete very high capacity storage area networks, or SANs, provide end-users with a cost-effective means of addressing increasing storage demands without sacrificing performance. Our new product family based on our R/Evolution architecture provides high performance and large capacities for a broad variety of environments, employing Fibre Channel, or FC, or Internet Small Computer Systems Interface, or iSCSI, or Serial Attached SCSI, or SAS, interconnects to switches and/or hosts. Our SANnet products have been distinguished by certification as Network Equipment Building System, or NEBS, Level 3 (a telecommunications standard for equipment used in central offices) and are MIL-STD-810F (a military standard created by the U.S. government) compliant based on their ruggedness and reliability.

     Our products and services are sold worldwide to end-users through our channel partners, which consist primarily of original equipment manufacturers, or OEMs, supplemented by system integrators, or SIs, and distribution and value added resellers, or VARs. Our OEM channel partners currently include, among others, Sun Microsystems, or Sun, Network Appliance, Inc., or NetApp, Fujitsu Siemens Computers, or Fujitsu Siemens, Hewlett Packard, or HP, Motorola, NEC, Sepaton and Stratus Technologies.

     We have been shipping our products to Sun for resale to Sun’s customers since October 2002 and continue to do so, having shipped over 153,000 units to date. Over the past year we have experienced a decline in net revenues from Sun. Pursuant to our Development and OEM Supply Agreement with NetApp, we are designing and developing general purpose disk arrays for a variety of products to be sold under private label by NetApp. We began shipping products to NetApp under the agreement for general availability in the third quarter of 2007 and expect revenues from NetApp to increase in 2008. Pursuant to our Master Purchase Agreement with Fujitsu Siemens, we are jointly developing with Fujitsu Siemens storage solutions utilizing key components and patented technologies from Dot Hill. We began shipping products to Fujitsu Siemens under the agreement in July 2006.

     In January 2008, we amended our Product Purchase Agreement, or the Agreement, originally entered into with HP in September 2007 to allow for sales to additional divisions within HP. The Agreement does not contain any minimum purchase commitments and the term of the Agreement was extended from one to five years. In connection with the Agreement, we issued a warrant to HP to purchase 1,602,489 shares of our common stock (approximately 3.5% of our outstanding shares prior to the issuance of the warrant) at an exercise price of $2.40 per share. The warrant was fully vested and exercisable at signing. The fair value of the warrant, determined using the Black-Scholes option-pricing model, was approximately $2.3 million. The Black-Scholes option-pricing model utilized the following assumptions; a risk-free interest rate of 3.18%, expected volatility of 59.5% and a contractual life of five years. The warrant was issued to induce the customer to enter into the Agreement with us. The fair value of the warrant was recorded as a reduction in revenue for the three months ended March 31, 2008, the period the Agreement was signed.

     Our agreements with our channel partners do not contain any minimum purchase commitments and may be terminated at any time upon notice from the applicable partner. Our ability to achieve a return to profitability will depend on the level and mix of orders we actually receive from our channel partners, the actual amounts we spend for inventory support and incremental internal investment, our ability to reduce product cost, our product lead time and our ability to meet delivery schedules required by our channel partners.

     Our strategy includes outsourcing substantially all of our manufacturing to third-party manufacturers in order to reduce sales cycle times and manufacturing infrastructure, enhance working capital and improve margins by taking advantage of the third party’s manufacturing and

procurement economies of scale. Since 2002, we have outsourced substantially all of our manufacturing operations to Solectron Corporation, or Solectron, which was subsequently purchased by Flextronics International Limited, or Flextronics. In February 2007, we entered into a manufacturing agreement with MiTAC International Corporation, or MiTAC, a leading provider of contract manufacturing and original design manufacturing services, and SYNNEX Corporation, or SYNNEX, a leading global information technology, or IT, supply chain services company. Under the terms of the agreement, MiTAC will supply Dot Hill with manufacturing, assembly and test services from its facilities in China and SYNNEX will provide Dot Hill with final assembly, testing and configure-to-order services through its facilities in Fremont, California and Telford, United Kingdom. We believe that the agreement with MiTAC and SYNNEX will facilitate our strategic product initiatives, help to expand our global capabilities and further reduce our manufacturing costs. We began shipping products for general availability under the MiTAC and SYNNEX agreement in 2007. All of our Series 2000 and Series 5000 R/Evolution products are now manufactured by these partners.

     We derive net revenues primarily from sales of our SANnet II and Series 2000 family of products and we are in the process of transitioning SANnet II customers to our Series 2000 family of products.

     We derive a portion of our net revenues from services associated with the maintenance service we provide for our installed products. In May 2003, we entered into a services agreement with Anacomp, Inc. to provide all maintenance, warranty and non-warranty services for our SANnet I and certain legacy products. We recently entered into an agreement with GAVS to provide warranty and non-warranty services for customers who purchase new maintenance agreements for our prior generation SANnet product family as well as our new R/Evolution platform. Anacomp, our current service provider, will manage our SANnet I support for our non-warranty customers.

     Cost of goods sold includes costs of materials, subcontractor costs, salary and related benefits for the production and service departments, depreciation and amortization of equipment used in the production and service departments, production facility rent and allocation of overhead.

     Sales and marketing expenses consist primarily of salaries and commissions, advertising and promotional costs and travel expenses. Research and development expenses consist primarily of project-related expenses and salaries for employees directly engaged in research and development. General and administrative expenses consist primarily of compensation to officers and employees performing administrative functions, expenditures for administrative facilities as well as expenditures for legal and accounting services and fluctuations in currency valuations.

     Other income is comprised primarily of interest income earned on our cash, cash equivalents, and other miscellaneous income and expense items.

     On February 23, 2004, we completed the acquisition of Chaparral, a privately held developer of specialized storage appliances as well as high-performance, mid-range RAID controllers and data routers. We believe the acquisition of Chaparral has enabled us to increase the amount of proprietary technology within our storage systems, broaden our product line and diversify our customer base. We began to introduce the Series 2000 family of products during the third quarter of 2006. The 2730 is the first product in the Series 2000 family developed and launched based on the technology acquired from Chaparral and is also the first in a family of offerings focused on the incorporation of SAS and SATA drive technology in the same infrastructure with a variety of front-end host interfaces. We are now shipping the product to nearly 40 customers, including Fujitsu Siemens and HP, and shipped over 5,750 units in 2007.

     In August 1999, we merged with Artecon, Inc. and we changed our name from Box Hill Systems Corp. to Dot Hill Systems Corp. We reincorporated in Delaware in 2001. Our headquarters are located in Carlsbad, California, and we maintain international offices in Germany, Japan, China and the United Kingdom.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, share-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, litigation and other contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

     We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements.

   Revenue Recognition

     We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is

reasonably assured. We recognize revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Revenue from product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. We record reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data, and other factors known at the time. Historically these amounts have not been material. In accordance with Emerging Issues Task Force, or EITF, Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, when we provide consideration to our customers we recognize the value of that consideration as a reduction in revenue.

     A majority of our net revenue is derived from a limited number of customers. For the three months ending March 31, 2008 sales to our largest OEM customer accounts for approximately 44% of total sales as compared to 76% for the three months ending March 31, 2007, sales t our second largest OEM customer accounts for approximately 24% for the three months ending March 31, 2008 as compared to less that 1% for the three months ending March 31, 2007. No other customers had net revenue in the quarter that represented 10% or more of our total net revenue.

     We maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. If a customer does not take our product under a hubbing arrangement in accordance with the schedule it originally provided to us, our future revenue stream could vary substantially from our forecasts and our results of operations could be materially affected.

     In July 2007, we received an upfront nonrefundable payment from one of our customers in the amount of $2.5 million. This amount represented a reimbursement for production test equipment and tooling that will be utilized over the term of the agreement to manufacture product for this customer. The upfront nonrefundable payment has been deferred is being recognized ratably over the term of the agreement.

Valuation of Inventories

     Inventories are comprised of purchased parts and assemblies, which include direct labor and overhead. We record inventories at the lower of cost or market value, with cost generally determined on a first-in, first-out basis. We establish inventory reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory reserves could be required. Under the hubbing arrangements that we maintain with certain customers, we own inventory that is physically located in a third party’s warehouse. As a result, our ability to effectively manage inventory levels may be impaired, which would cause our total inventory turns to decrease. In that event, our expenses associated with excess and obsolete inventory could increase and our cash flow could be negatively impacted.

Foreign Currency Transaction and Translation

     A portion of our international business is presently conducted in currencies other than the United States dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the United States dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure and we currently do not intend to engage in hedging activities in the near future.

     During the first quarter of 2008, we closed our operations in the Netherlands and transitioned all functions previous performed in that location to our Carlsbad location. During this process, we performed a review of the functional currency for this operation in accordance with FASB Statement No. 52 Foreign Currency Transactions and based on the changes in operating conditions and economic facts and circumstances we changed the functional currency for our operation in the Netherlands from the Euro to the United States dollar effective January 1, 2008. For foreign subsidiaries whose functional currency is the local currency assets and liabilities are translated into United States dollars at period-end exchange rates. Revenues and expenses, and gains and losses are translated at rates of exchange that approximate the rates in effect on the transaction date. Resulting translation gains and losses are recognized as a component of other comprehensive income.

Deferred Taxes

     We utilize the liability method of accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. As a result of our cumulative losses in the U.S. and certain foreign jurisdictions, we have concluded that a full valuation allowance against our net deferred tax assets is appropriate in such jurisdictions. In certain other foreign jurisdictions where we do not have cumulative losses, we record valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than

not to be realized. In the future, if we realize a deferred tax asset that currently carries a valuation allowance, we may record a reduction to income tax expense in the period of such realization. In July 2006 the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 , or FIN 48, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under FIN 48, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Prior to 2007 we recorded estimated income tax liabilities to the extent they were probable and could be reasonably estimated. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the requirement to recognize the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. In assessing the need for a valuation allowance, we consider all positive and negative evidence.

     The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.

Share-Based Compensation

     We account for share-based compensation in accordance with FASB Statement No. 123(R), Share-Based Payment, which requires us to record stock compensation expense for equity based awards granted, including stock options, for which expense will be recognized over the service period of the equity based award based on the fair value of the award, at the date of grant. The estimation of stock option fair value requires management to make complex estimates and judgments about, among other things, employee exercise behavior, forfeiture rates, and the volatility of our common stock. These judgments directly affect the amount of compensation expense that will ultimately be recognized. We currently use the Black-Scholes option pricing model to estimate the fair value of our stock options. The Black-Scholes model meets the requirements of FASB Statement No. 123R but the fair values generated by the model may not be indicative of the actual fair values of our stock options as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We use the implied volatility for traded options on our stock as the expected volatility assumption required in the Black-Scholes model. Our selection of the implied volatility approach is based on the availability of data regarding actively traded options on our stock as well as we believe that implied volatility is more representative than historical volatility. The expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our stock options. The dividend yield assumption is based on our history and expectation of dividend payouts. We will evaluate the assumptions used to value stock options on a quarterly basis. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. To the extent that we grant additional stock options to employees our share-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.

     As of March 31, 2008, total unrecognized share-based compensation cost related to unvested stock options was $6.9 million, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Contingencies

     From time to time we are involved in disputes, litigation and other legal proceedings. We prosecute and defend these matters aggressively. However, there are many uncertainties associated with any litigation, and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation and/or substantial settlement charges. In addition, the resolution of intellectual property litigation may require us to pay damages for past infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or running royalties, which could adversely impact gross profit and gross margins in future periods, or could prevent us from manufacturing or selling some of our products. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. However, the actual liability in any such disputes or litigation may be materially different from our estimates, which could result in the need to record additional costs.

     Results of Operations

     The following table sets forth certain items from our statements of operations as a percentage of net revenues for the periods indicated:

	Three Months Ended
	March 31,
	2007			2008
Net revenues		100.0	%		100.0	%
Cost of goods sold		87.5			92.1
Gross profit		12.5			7.9
Operating expenses:
Sales and marketing		7.3			8.1
Research and development		11.4			14.1
General and administrative		6.9			5.8
Legal settlement		—			(7.3	)
Total operating expenses		25.6			20.7
Operating loss		(13.1	)		(12.8	)
Other income, net		2.4			1.5
Income tax expense		0.5			0.0
Net loss		(11.2	)%		(11.3	)%

(percentages may not aggregate due to rounding)

Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2008

Net Revenue

			Three Months Ended
			March 31,					%
	2007		2008		(Decrease)			Change
	(in thousands, except percentages)
Net Revenue	$	53,441	$	52,826	$	(615	)		(1.2	)%

Units Shipped

	Three Months Ended
	March 31,
	2007		2008
	(in units)
Fiber Channel		2,217		1,043
Small Computer Systems Interface (SCSI)		2,848		1,690
Blade		2,743		2,058
SATA		133		12
Series 2000		1,040		2,755

     Although there is only a slight overall decrease in net revenues there has been a significant change in net revenues by customer and product. Our net revenues from Sun, our largest OEM customer who sells our SANnet II family of products under the ST-3000 brand product line, decreased $17.4 million, or 42.8%, from the three months ended March 31, 2007 as compared to the three months ended March 31, 2008. For the three months ended March 31, 2008, net revenue from Sun totaled $23.3 million, or 44.2%, of our net revenues, compared to $40.7 million, or 76.1%, of our net revenues for the three months ended March 31, 2007. The decline in Sun net revenues is primarily due to the products nearing the end of their lifecycle and the lack of follow-on products for the ST-3000 line having been developed to date. We expect net revenues from Sun to continue to decline over future periods. The decrease in net revenues from Sun were partially offset by increased net revenues of $12.1 million, from another large OEM customer, NetApp, who sells our Series 2000 family of products introduced during the third quarter of 2006. For the three months ended March 31, 2008, net revenues from NetApp totaled $12.5 million, or 23.6%, of our net revenues, as compared to $0.4 million, or 0.1%, for the three months ended March 31, 2007. The rapid growth in net revenues from NetApp was driven by NetApp’s product launch during the third quarter of 2007. Additionally, we amended our OEM agreement with HP in January 2008. Net revenues from HP totaled $2.2 million for the three months ended March 31, 2008. There were no net revenues from HP for the three months ended March 31, 2007. The $2.2 million in net revenues from HP for the three months ended March 31, 2008 is net of a $2.3 million reduction in net revenues, representing the fair value of the warrant issued to HP to induce them to enter into the agreement with us. HP also sells a version of our Series 2000 family of products.

Cost of Goods Sold

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net					%
	Amount		Revenues			Amount		Revenues			Increase		Change
	(in thousands, except percentages)
Cost of Goods Sold	$	46,767		87.5	%	$	48,660		92.1	%	$	1,893		4.0	%

     The increase in cost of goods sold in absolute dollars and as a percentage of net revenues was primarily attributable to a change in product sales mix. Net revenues on our highest margin product sales to Sun and other SANnet II customers declined as a percentage of total net revenues. Sun net revenues declined from 76.1% of net revenues for the three months ended March 31, 2007 to 44.2% for the three months ended March 31, 2008. This was replaced by lower margin net revenues of our Series 2000 products and sales to NetApp. Net revenues from our Series 2000 products and sales to NetApp represented 0.1% of net revenues for the three months ended March 31, 2007 as compared to 23.6% of net revenues for the three months ended March 31, 2008. Cost of goods sold associated with our Series 2000 products improved significantly from the three months ended March 31, 2007 as compared to the three months ended March 31, 2008 as the Series 2000 product first started shipping in the third quarter of 2006 and was initially manufactured in a mostly soft tooled environment resulting in higher costs of goods sold. Also, we completed the transition of the manufacturing of our Series 2000 products from Flextronics to MiTAC and SYNNEX and have been able to take advantage of their lower manufacturing costs. This transition was largely completed during the fourth quarter of 2007. Additionally, the Series 2000 product cost of goods sold have improved due to component cost reductions and value engineering of the products. Our historical experience indicates that gross margins on new products sold to new customers start out low initially and increase over the first several quarters. Thereafter the margin improvements are generally more modest. The cost of goods sold on our business with NetApp improved from the three months ended March 31, 2007 as compared to the three months ended March 31, 2008 primarily due to the same reasons as the Series 2000 products. The product we sell to NetApp does not include higher margin value added features such as RAID controllers. As we continue to transition our net revenues from our largest OEM customer with higher margins to our second largest OEM customer and other customers with lower margins, we anticipate cost of goods sold will continue to be a higher percentage of net revenues throughout 2008 in comparison to corresponding periods in the prior year. Lastly, cost of goods sold as a percentage of revenue increased as a result of a $2.3 million reduction in net revenues, representing the fair value of the warrant issued to HP to induce them to enter into the agreement with us.

Gross Profit

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net						%
	Amount		Revenues			Amount		Revenues			(Decrease)			Change
	(in thousands, except percentages)
Gross Profit	$	6,674		12.5	%	$	4,166		7.9	%	$	(2,508	)		(37.6	)%

     The decrease in gross profit in both absolute dollars and as a percentage of net revenues for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was primarily attributable to the $2.3 million reduction in net revenues, representing the fair value of the warrant issued to HP to induce them to enter into the agreement with us and secondarily due to a change in product sales mix. Net revenues on our highest margin product sales to Sun declined as a percentage of total net revenues from 76.1% of net revenues for the three months ended March 31, 2007 to 44.2% of net revenues for the three months ended March 31, 2008. This was replaced by lower margin net revenues from our Series 2000 products and sales to NetApp. Net revenues from our Series 2000 products and sales to NetApp represented 0.1% of our net revenues for the three months ended March 31, 2007 compared to 23.6% of net revenues for the three months ended March 31, 2008.

Sales and Marketing Expenses

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net					%
	Amount		Revenues			Amount		Revenues			Increase		Change
	(in thousands, except percentages)
Sales and Marketing Expenses	$	3,908		7.3	%	$	4,272		8.1	%	$	364		9.3	%

     The slight increase in sales and marketing expenses in both absolute dollars and as a percentage of net revenues was primarily attributable to an increase in recruiting fees, consulting fees, payroll related expenses, customer evaluation units and severance costs related to employees in our Netherlands office, offset by decreases in intangible asset amortization, advertising and travel related expenses.

Research and Development Expenses

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net					%
	Amount		Revenues			Amount		Revenues			Increase		Change
	(in thousands, except percentages)
Research and Development Expenses	$	6,074		11.4	%	$	7,424		14.1	%	$	1,350		22.2	%

     The increase in research and development expenses both in absolute dollars and as a percentage of net revenues was primarily due to a $0.7 million increase in project materials to support development projects for our OEM customer HP, and $0.3 million increase due to consulting fees for the development of an application-specific integrated circuit, or ASIC, chip. In addition we had an increase in recruiting and payroll related costs of $0.2 million.

General and Administrative Expenses

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net						%
	Amount		Revenues			Amount		Revenues			(Decrease)			Change
	(in thousands, except percentages)
General and Administrative Expenses	$	3,670		6.9	%	$	3,043		5.8	%	$	(627	)		(17.1	)%

     The decrease in general and administrative expenses both in absolute dollars and as a percentage of net revenues was primarily attributable to a $1.0 million decrease in legal expense, which included a reimbursement for legal fees from our insurance carrier of $0.3 million. The decrease was also due to a $0.1 million recovery of bad debt expense due to improved collections from our European customers. These decreases were offset by an increase in recruiting and consulting fees of $0.3 million, and share-based compensation expense of $0.4 million. The decrease in legal fees was due to the Special Litigation Committee completing the majority of its work in early 2007 and therefore minimal expenses are expected to be incurred in 2008. The reimbursement of legal fees from our insurance carrier was due to the settlement of the Crossroads litigation. The increase in consulting expense is primarily due to expenses associated with IT consultants for our Oracle production environment, finance consultants and an executive consultant.

Legal Settlement

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net						% of Net						%
	Amount		Revenues			Amount			Revenues			(Decrease)			Change
	(in thousands, except percentages)
Legal settlement	$	—		0.0	%	$	(3,836	)		(7.3	)%	$	(3,836	)		(100.0	)%

     The proceeds from the legal settlement of $3.8 million in March 2008 is from a February 2007 claim we filed for arbitration in Denver, Colorado alleging that the representative of the Chaparral shareholders was wrongfully withholding escrow funds due to us as a result of damages incurred by us relating to a completed patent infringement lawsuit filed by Crossroads. Such amount is reported as a reduction in operating expenses.

Other Income, net

	Three Months Ended					Three Months Ended
	March 31, 2007					March 31, 2008
			% of Net					% of Net						%
	Amount		Revenues			Amount		Revenues			(Decrease)			Change
	(in thousands, except percentages)
Other Income, net	$	1,308		2.4	%	$	787		1.5	%	$	(521	)		(39.8	)%

     The decrease in other income, net is primarily attributable to a decrease in interest income of $0.6 million. The decrease in interest income is primarily attributable to a lower overall cash balance and declining interest rates. Cash and cash equivalents decreased from $95.9 million as of March 31, 2007 to $77.4 million as of March 31, 2008.

Income Taxes

          We recorded an income tax expense of $0.2 million for the three months ended March 31, 2008 compared to an income tax expense of $0.3 million for the three months ended March 31, 2007. Our effective income tax rate of (2.69)% for the three months ended March 31, 2008 differs from the U.S. federal statutory rate due to our U.S. and foreign deferred tax asset valuation allowance position, foreign taxes and state taxes.

     On January 1, 2007, we adopted FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

     The cumulative effects of adopting FIN 48 resulted in an increase of $0.5 million to accumulated deficit and an increase in other long term liabilities of $0.5 million of tax benefits that, if recognized, would affect the effective tax rate. At December 31, 2007 we had cumulative unrecognized tax benefits of approximately $4.5 million, of which approximately $0.2 million are included in other long term liabilities that, if recognized, would affect the effective tax rate. The remaining $4.3 million of unrecognized tax benefits will have no impact on the effective tax rate due to the existence of net operating loss carryforwards and a full valuation allowance. Consistent with previous periods, penalties and tax related interest expense are reported as a component of income tax expense. As of December 31, 2007, the total amount of accrued income tax related interest and penalties included in the consolidated balance sheet was less than $0.1 million. We do not expect that our unrecognized tax benefit will change significantly within the next 12 months. There have been no material changes to the unrecognized tax benefit during the three month period ending March 31, 2008.

          Due to net operating losses and other tax attributes carried forward, we are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending March 31, 1994 through December 31, 2007. With few exceptions, our state income tax returns are open to audit for the years ended December 31, 1999 through 2007.

          We periodically evaluate the likelihood of the realization of deferred tax assets, and adjust the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carryforward periods available to us for tax reporting purposes, and other relevant factors.

          At March 31, 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was not more likely than not that our United States deferred tax assets would be realized and have a $67.3 million valuation allowance associated with our United States deferred tax assets compared to $65.9 million at December 31, 2007.

          As of December 31, 2007, we had federal and state net operating losses of approximately $144.0 million and $77.0 million, which begin to expire in the tax years ending 2013 and 2008, respectively. In addition, we had federal tax credit carryforwards of $3.9 million, of which approximately $0.5 million can be carried forward indefinitely to offset future taxable income, and the remaining $3.4 million will begin to expire in the tax year ending 2008. We also had state tax credit carryforwards of $4.1 million, of which $3.8 million can be carried forward indefinitely to offset future taxable income, and the remaining $0.3 million began to expire in the tax year ending 2008.

          As a result of our equity transactions, an ownership change, within the meaning of IRC Section 382, occurred on September 18, 2003. As a result, annual use of our federal net operating loss and credit carry forwards is limited to (i) the aggregate fair market value of Dot Hill immediately before the ownership change multiplied by (ii) the long-term tax-exempt rate (within the meaning of Section 382 (f) of the IRC) in effect at that time. The annual limitation is cumulative and, therefore, if not fully utilized in a year, can be utilized in future years in addition to the Section 382 limitation for those years.

          As a result of our acquisition of Chaparral Network Storage, Inc., or Chaparral, a second ownership change, within the meaning of IRC Section 382, occurred on February 23, 2004. As a result, annual use of Chaparral’s federal net operating loss and credit carry forwards may be limited. The annual limitation is cumulative and, therefore, if not fully utilized in a year, can be utilized in future years in addition to the Section 382 limitation for those years.

          We have not provided for any residual U.S. income taxes on the earnings from our foreign subsidiaries because such earnings are intended to be indefinitely reinvested. Such residual U.S. income taxes, if any, would be insignificant.

Liquidity and Capital Resources

     The two primary drivers affecting liquidity and cash are working capital requirements and net profits or losses. Historically, the payment terms we have had to offer our customers have been relatively similar to the terms received from our creditors and suppliers. We typically bill customers on an open account basis subject to our standard net thirty day payment terms. If in the longer term our net revenues increase, it is likely that our accounts receivable balance will also increase. Our accounts receivable could further increase if customers delay their payments or if we grant extended payment terms to customers. Furthermore, we have had to maintain only a small amount of inventory, as our customers for the most part took delivery of products directly from our contract manufacturer’s facility. Beginning in the latter half of 2007, however, we started to hub inventory for some of our larger customers and consequently the growth in inventory has started to become a use of cash. In the future, our inventory levels will continue to be determined based upon the level of purchase orders we receive, our ability, and the ability of our customers (specifically NetApp, HP and Fujitsu Siemens), to manage inventory under hubbing arrangements, as well as competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

     As of March 31, 2008, we had $77.4 million of cash and cash equivalents and $86.5 million of working capital. Cash equivalents include highly liquid investments purchased with an original maturity of three months or less and consist principally of money market funds and commercial paper.

     For the three months ended March 31, 2008, net cash used in operating activities was $5.4 million compared to cash used in operating activities of $3.5 million for the three months ended March 31, 2007. Net cash used in operating activities for the three months ended March 31, 2008 was attributable to the net loss of $6.1 million consisting of cash and non cash activities. The operating activities that affected cash consisted primarily of lower gross profit, lower interest income and increased research and development expense offset by lower general and administrative expenses. The non cash operating activities included in the net loss that did not affect cash consisted of the following; depreciation and amortization of $1.5 million; share-based compensation expense of $0.7 million, issuance of warrants to a customer of $2.3 million offset by the provision for doubtful accounts of $0.2 million. Cash flows from operations reflects the positive impact of $7.0 million related to an overall increase in accounts payable due to increased inventory and the timing of payments to our vendors, $3.8 million in proceeds from our Chaparral escrow legal settlement and income taxes of $0.1 million. Cash flows from operations was negatively impacted by a $4.0 million increase in accounts receivable due to higher net revenues in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 when including the $2.3 million reduction in net revenues as a result of the issuance of a warrant to a customer, a $5.4 million increase in inventory primarily due to the creation of new hub inventory locations and the build up of inventory at our existing hub locations for certain of our customers, a $0.6 million increase in prepaid and other assets primarily due to an increase in raw material component sales to our contract manufacturers to support our HP build plan, a $0.4 million decrease in other long term liabilities primarily consisting of deferred rent for our Carlsbad, California and Longmont, Colorado facilities, deferred revenue of $0.2 million and other expenses of $0.1 million.

     Cash used in investing activities for the three months ended March 31, 2008 was $0.3 million compared to $0.9 million of cash used in investing activities for the three months ended March 31, 2007. Cash used during the three months ended March 31, 2008 was for the addition of computer hardware assets.

     Cash provided by financing activities for the three months ended March 31, 2008 was $0.7 million compared to cash provided by financing activities of $0.6 million for the three months ended March 31, 2007. The cash provided by financing activities is attributable to the proceeds received from the exercises of stock options under our equity incentive plans and warrants of $0.5 million, and the proceeds received from the sale of common stock to employees under our employee stock purchase plan of $0.2 million.

     We presently expect cash, cash equivalents and cash generated from operations to be sufficient to meet our operating and capital requirements for at least the next 12 months and for operating periods in excess of 12 months. In addition, this will enable us to pursue acquisitions or capital improvements. The actual amount and timing of working capital and capital expenditures that we may incur in future periods may vary significantly and will depend upon numerous factors, including the amount and timing of the receipt of net revenues from continued operations, the overall level of net profits or losses, our ability to manage our relationships with our contract manufacturers, the potential growth in inventory to support NetApp, HP and Fujitsu Siemens, the status of our relationships with key customers, partners and suppliers, the timing and extent of the introduction of new products and services and growth in personnel and operations.

     Effective July 1, 2007, we amended our credit agreement with Wells Fargo Bank, National Association, or Wells Fargo, which allows us to borrow up to $30.0 million under a revolving line of credit that expires July 1, 2009. Amounts loaned under the credit agreement bear interest at our option at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or at a fixed rate per annum determined by Wells Fargo to be 0.65% above LIBOR in effect on the first day of the applicable fixed rate term. In connection with the credit agreement, to the extent we have outstanding borrowings, we have granted Wells Fargo a security interest in our investment management account maintained with Wells Capital Management Incorporated. As of December 31, 2007 and March 31, 2008, there were no balances outstanding under this line of credit. The credit agreement limits any new borrowings, loans, or advances outside of the credit agreement to an amount less than $1.0 million and annual capital expenditures to an amount less than $10.0 million.

     The following table summarizes our contractual obligations as of March 31, 2008 (in thousands).

Contractual Obligations	Total		2008		2009		2010		2011		2012		2013
Operating Lease Obligations	$	7,413	$	1,202	$	1,439	$	1,429	$	1,469	$	1,504	$	370

     For purposes of the table above, the operating lease obligations exclude common area maintenance, real estate taxes and insurance expenses.

     We maintain indemnification agreements with certain of our OEM customers related to intellectual property and product liability.

     In addition to the amounts shown in the table above, $0.2 million of unrecognized tax benefits have been recorded as liabilities in accordance with FIN 48, and we are uncertain as to if or when such amounts may be settled.

     At March 31, 2008, we did not have any relationship with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance variable interest, or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships and transactions with persons and entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed herein.

Recent Accounting Pronouncements

     In December 2007 the FASB issued FASB Statement No. 141R, Business Combinations, (“FASB Statement No 141R”). FASB Statement No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FASB Statement No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We are in the process of assessing the impact of the adoption of this standard on our future consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Credit Risk

     Our exposure to market rate risk for changes in interest rates relates to our investment portfolio. Our primary investment strategy is to preserve the principal amounts invested, maximize investment yields subject to other investment objectives and maintain liquidity to meet projected cash requirements. Accordingly, we invest in instruments such as money market funds, certificates of deposit, United States government/agencies bonds, notes, bills and municipal bonds that meet high credit quality standards, as specified in our investment policy guidelines. Our investment policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. We do not currently use derivative financial instruments in our investment portfolio and we do not enter into market risk sensitive instruments for trading purposes. We do not expect to incur any material losses with respect to our investment portfolio.

     The following table provides information about our investment portfolio at December 31, 2007 and March 31, 2008. For investment securities, the table presents carrying values at December 31, 2007 and March 31, 2008 and, as applicable, related weighted average interest rates by expected maturity dates.

	December 31, 2007			March 31, 2008
	(amounts in thousands)
Cash equivalents	$	78,157		$	67,599
Average interest rate		4.8	%		2.6	%

     We have a line of credit agreement, which accrues interest on any outstanding balances at a variable rate. As of March 31, 2008, we had no balance under this line. Were we to incur a balance under this line of credit, we would be exposed to interest rate risk on such debt.

Foreign Currency Exchange Rate Risk

     A portion of our international business is presently conducted in currencies other than the United States dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the United States dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure and we currently do not intend to engage in hedging activities in the near future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     We conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of March 31, 2008. Based upon that evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q.

Changes in Internal Controls

     There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Crossroads Systems Litigation

     On October 17, 2003, Crossroads filed a lawsuit against us in the United States District Court in Austin, Texas, alleging that our products infringe two United States patents assigned to Crossroads, Patent Numbers 5,941,972 and 6,425,035. The patents involve storage routers and methods for providing virtual local storage. Patent Number 5,941,972 involves the interface of SCSI storage devices and the Fibre Channel protocol and Patent Number 6,425,035 involves the interface of any one-transport medium and a second transport medium. We were served with the lawsuit on October 27, 2003. Chaparral was added as a party to the lawsuit in March 2004.

     On June 28, 2006, we entered into a Settlement and License Agreement with Crossroads Systems, Inc. that settles the lawsuit and licenses to us the family of patents from which it stemmed. We concurrently entered into an Agreement between Dot Hill Systems and Infortrend Re Settlement of Crossroads Lawsuit with Infortrend Technology, Inc. In accordance with the Crossroads and Infortrend agreements, on July 14, 2006, we paid $3.35 million to Crossroads for alleged past damages and Crossroads agreed to dismiss, with prejudice, all patent claims against us. In addition, Infortrend paid Crossroads an additional $7.15 million on our behalf, from which $1.43 million was withheld for Taiwan taxes and is included in income tax expense on our statement of operations. Going forward, Crossroads will receive a running royalty of 2.5% based on a percentage of net sales of RAID products sold by us, but only those with functionality that is covered by US Patents No. 5,941,972 and No. 6,425,035 and other patents in the patent family. For RAID products that use a controller sourced by Infortrend, we will pay 0.8125% of the 2.5% royalty, and Infortrend will be responsible for the remainder. For RAID products that use our proprietary controller, we alone will be paying the 2.5% running royalty. No royalty payments will be required with respect to the sale of storage systems that do not contain RAID controllers, known as JBOD systems, or systems that use only the SCSI protocol end-to-end, even those that perform RAID. Further, royalty payments with respect to the sale of any products that are made, used and sold outside of the United States will only be required if and when Crossroads is issued patents that cover the products and that are issued by countries in which the products are manufactured, used or sold.

     On July 24 and 25th, 2006, respectively, Crossroads filed another lawsuit against us in the United States District Court for the Western District of Texas as well as a Motion to Enforce in the aforementioned lawsuit. Both the new lawsuit and motion alleged that Dot Hill had breached the June 28, 2006 Settlement and License Agreement by deducting $1.43 million of the lump sum payment of $10.50 million as withholding against any potential Taiwan tax liability arising out of our indemnification by Infortrend, a Taiwan company. On September 28, 2006 the Court indicated that it would grant Crossroads’ Motion to Enforce. Therefore, on October 5, 2006, Crossroads and Dot Hill amended the original Settlement and License Agreement to state that we would pay to Crossroads the $1.43 million, plus $45,000 in late fees, and would not make deductions based on taxes on royalty payments in the future. The payment of the $1.475 million was made on October 5, 2006. As required by the amended settlement, Crossroads has dismissed with prejudice the original patent action as well as the second lawsuit based on the enforcement of the original settlement.

     Thereafter, we gave notice to Infortrend of our intent to bring a claim alleging breach of the settlement agreement seeking reimbursement of the $1.475 million from Infortrend. On November 13, 2006, Infortrend filed a lawsuit in the Superior Court of California, County of Orange for declaratory relief. The complaint seeks a court determination that Infortrend is not obligated to reimburse Dot Hill for the $1.475 million. On December 12, 2006, we answered the complaint and filed a cross complaint alleging breach of contract, fraud, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and declaratory relief. Infortrend demurred to the cross complaint. The Court denied the demurrer as to the fraud cause of action and sustained the demurrer as to the claims for breach of the covenant of good faith and fair dealing and breach of fiduciary duty. The Court granted Dot Hill leave to amend the cross complaint as to those two causes of action. No trial date has been scheduled.

Dot Hill Securities Class Actions, Derivative Suits and Direct State Securities Action

     In late January and early February 2006, numerous purported class action complaints were filed against us in the United States District Court for the Southern District of California. The complaints allege violations of federal securities laws related to alleged inflation in our stock price in connection with various statements and alleged omissions to the public and to the securities markets and declines in our stock price in connection with the restatement of certain of our quarterly financial statements for fiscal year 2004, and seeking damages therefore. The complaints were consolidated into a single action, and the Court appointed as lead plaintiff a group comprised of the Detroit Police and Fire Retirement System and the General Retirement System of the City of Detroit. The consolidated complaint was filed on August 25, 2006, and we filed a motion to dismiss on October 5, 2006. The Court granted our motion to dismiss on March 15, 2007. Plaintiffs filed their Second Amended Consolidated Complaint on April 20, 2007. We filed a motion to dismiss the Second Amended Consolidated Complaint on May 1, 2008 and a hearing is set for August 14, 2008. The outcome of these actions is uncertain, and no amounts have been accrued as of March 31, 2008.

     In addition, three complaints purporting to be derivative actions have been filed in California state court against certain of our directors and executive officers. These complaints are based on the same facts and circumstances described in the federal class action complaints and generally allege that the named directors and officers breached their fiduciary duties by failing to oversee adequately our financial reporting. Each of the complaints generally seeks an unspecified amount of damages. Our demurrer to two of those cases, in which we sought dismissal, was overruled (i.e., denied). We formed a Special Litigation Committee, or SLC, of disinterested directors to investigate the alleged wrongdoing. On January 12, 2007, another derivative action similar to the previous derivative actions with the addition of allegations regarding

purported stock option backdating was served on us. On April 16, 2007, the SLC concluded its investigation and based on its findings directed us to file a motion to dismiss the derivative matters. On June 27, 2007, the parties stipulated to consolidate all of the derivative matters for pre-trial proceedings. We expect to file a motion to dismiss the consolidated matters pursuant to the SLC’s directive in the next few months. The outcome of these actions is uncertain, and no amounts have been accrued as of March 31, 2008.

     In August 2007, a securities lawsuit was filed in California state court by a single former stockholder against certain of our directors and executive officers. This complaint is based on the same facts and circumstances described in the federal class action and state derivative complaints, and generally alleges that Dot Hill and the named officers and directors committed fraud and violated state securities laws. The complaint seeks $500,000 in damages, as well as attorneys’ fees and costs. On November 1, 2007, we filed a motion to dismiss the complaint, which was granted on February 15, 2008. On February 25, 2008, the plaintiff filed his First Amended Complaint. We filed a motion to dismiss the First Amended Complaint on March 6, 2008. A hearing is scheduled on our motion to dismiss for mid-May 2008. The outcome of this action is uncertain, and no amounts have been accrued as of March 31, 2008.

     The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The result of legal proceedings are inherently uncertain and material adverse outcomes are possible. From time to time the Company may enter into confidential discussions regarding the potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. The settlement of any pending litigation or other proceedings could require Dot Hill to incur substantial settlement payments and costs.

Chaparral Network Storage Shareholders Escrow Fund

     In February 2007, we filed a claim for arbitration in Denver, Colorado alleging that the representative of the Chaparral shareholders was wrongfully withholding escrow funds due to us as a result of damages incurred by us relating to a completed patent infringement lawsuit filed by Crossroads. A settlement was reached and a payment in the amount of $3.8 million was received in March 2008. The amount was recorded as proceeds from a legal settlement in operating expenses for the three months ended March 31, 2008.

Other Litigation

     We are involved in certain other legal actions and claims arising in the ordinary course of business. Management believes that the outcome of such other litigation and claims will not likely have a material adverse effect on our financial condition or operating results.

Item 1A. Risk Factors

     The following sets forth risk factors that may affect our future results, including certain revisions to the risk factors included in our annual report on Form 10-K for the fiscal year ending December 21, 2007. Our business, results of operations and financial condition may be materially and adversely affected due to any of the following risks. We face risks described but not limited to those detailed below. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-Q, including our financial statements and related notes.

We are dependent on sales to a relatively small number of customers and a disruption in sales to any one of these customers could materially harm our financial results.

     Our business is highly dependent on a limited number of OEM customers. For example, sales to Sun accounted for 63.2% of our net revenues for the year ended December 31, 2007 and 44.2% of our net revenues for the three months ended March 31, 2008. In addition, sales to NetApp accounted for 12.5% of our net revenues for the year ended December 31, 2007 and 23.6% of our net revenues for the three months ended March 31, 2008. We expect Sun, NetApp and HP will each represent greater than 10% of our overall revenues for the year ending December 31, 2008. If our relationships with Sun, NetApp, HP, Fujitsu Siemens, or certain of our other OEM customers were disrupted, we would lose a significant portion of our anticipated net revenue and our business could be materially harmed. We cannot guarantee that our relationship with Sun, NetApp, HP, Fujitsu Siemens or our other OEM customers will expand or not otherwise be disrupted. Factors that could influence our relationship with our significant OEM customers, including Sun, NetApp, HP and Fujitsu Siemens include:

• our ability to maintain our products at prices that are competitive with those of other storage system suppliers;

• our ability to maintain quality levels for our products sufficient to meet the expectations of our OEM customers;

• our ability to produce, ship and deliver a sufficient quantity of our products in a timely manner to meet the needs of our OEM customers;

• our ability to continue to develop and launch new products that our OEM customers feel meet their needs and requirements, with respect to cost, timeliness, features, performance and other factors;

• our ability to provide timely, responsive and accurate customer support to our OEM customers; and

• the ability of Sun, NetApp, HP, Fujitsu Siemens or our other OEM customers to effectively launch, ramp, ship, sell and market their own solutions based on our products.

The market for our products is subject to substantial pricing pressure that may harm our net revenues, gross margins and operating results.

     Pricing pressures exist in the data storage market and have affected and may, in the future, continue to affect our net revenues, gross margins and operating results. These pricing pressures are due, in part, to continuing decreases in component prices, such as those of disks, memory, semiconductors and RAID controllers. Decreases in component prices are typically passed on to customers by storage companies through a continuing decrease in the price of storage hardware systems.

     Pricing pressures are also due, in part, to the highly competitive nature of our industry, the narrowing of functional differences among competitors, which forces companies to compete more on price rather than product features, and the introduction of new technologies, which leaves older technology more vulnerable to pricing pressures. To the extent we are forced to reduce the prices of our products sold as a result of these pressures, our net revenues, gross margins and operating results could decline.

     Pricing pressures also exist from our significant OEM customers that may attempt to change the terms, including pricing and payment terms of their agreements with us. As our OEM customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually, or otherwise, commit to price reductions for our products prior to determining if we can implement corresponding cost reductions. If we are unable to achieve such cost reductions, or have to reduce the pricing of our products, our gross margins may be negatively impacted which could have a material adverse effect on our business, financial condition or results of operations.

Our OEM customers may have very aggressive product launch and ramp schedules and our efforts to accommodate these schedules may divert our management’s attention, cause component shortages and force us to allocate products across many customers, all of which could harm our customer relations.

     In January 2008, we entered into an expanded partnership with HP to provide private-label RAID storage arrays. In February 2008, HP indicated that they were planning to launch products based upon our technology and that they would start to ship these products in March 2008. Our efforts to accommodate similar to the HP launch and ramp schedules can divert management’s attention from the rest of our business and force us to allocate product volumes across many customers due to component shortages, all of which could harm our relations with customers. In addition, we could overtime, expedite charges and other charges such as shipping products by air as opposed to by ocean as a result of efforts to meet such schedules. Any of these factors could result in lower revenue and margin as well as increased operating expenses which could have an impact on our business, financial condition or results of operations.

Our contracts with our OEM customers do not include minimum purchase requirements and are not exclusive, and we cannot assure you that our relationship with these major customers will not be terminated or will generate significant sales.

     None of our contracts with our existing customers, including Sun, NetApp, HP and Fujitsu Siemens, contain any minimum purchasing commitments and our customers may cancel purchase orders at any time. Consequently, our customers generally order only through written purchase orders. Further, we do not expect that future contracts with customers, if any, will include any minimum purchasing commitments. Changes in the timing, or volume of purchases by our major customers, could result in lower revenue. For example, we cannot be certain that our sales to Sun will continue at historical levels or sales to NetApp, HP, or any of our OEM customers, will ramp to expected levels. In fact, sales to Sun have continued to decrease compared to earlier levels. In addition, our existing contracts do not require our OEM customers to purchase our products exclusively or on a preferential basis over the products of any of our competitors. Consequently, our OEM customers may sell the products of our competitors. For example, in April 2006, we were informed by Sun of its decision to move potential future supply of a new, low-end, entry-level storage product to another party. The project had previously been directed solely to Dot Hill. We cannot be certain if, when or to what extent any customer might cancel purchase orders, cease making purchases or elect not to renew the applicable contract upon the expiration of the current term. The decision by any of our OEM customers to cancel purchase orders, cease making purchases or terminate their respective contracts could cause our revenues to decline substantially, and our business and results of operations could be significantly harmed.

The requirement of a few of our larger OEM customers to locate finished goods inventory in vendor managed “hubs” could result in a reduction in working capital and cash.

     A few of our larger OEM customers including NetApp, HP and Fujitsu Siemens deploy vendor managed inventory, or VMI hubs, whereby vendors, including us, are required to provide for up to several weeks of finished goods inventory. This inventory is typically located at hubs close to our OEM customer’s final assembly facilities. Net inventory increased from $9.0 million as of December 31, 2007 to $14.4 million as of March 31, 2008, primarily resulting from inventory hubbing requirements with NetApp, Fujitsu Siemens and HP. If our business with these customers increases, we expect inventory levels at these hubs to grow, which could result in a reduction of cash and increasing inventory loss and obsolescence risk, all of which could harm our business and results of operations.

Our revenues may be affected by changes in IT spending levels.

     In the past, unfavorable or uncertain macroeconomic conditions and reduced global IT spending rates have adversely affected the markets in which we operate. The risk of a pending recession could reduce the demand for our products and negatively impact revenues and operating profit. We are unable to predict changes in general macroeconomic conditions and when global IT spending rates will be affected. Furthermore, even if IT spending rates increase, we cannot be certain that the market for external storage solutions will be positively impacted. If there are future reductions in either domestic or international IT spending rates, or if IT spending rates do not increase, our revenues, operating results and financial condition may be adversely affected.

We may continue to experience losses in the future, and may require additional capital.

     For the three months ended March 31, 2008, we incurred a net loss of $6.1 million. For the remainder of 2008, we expect our business to remain volatile as we are unable to reliably predict revenues from Sun, NetApp, HP, Fujitsu Siemens and our other OEM customers. In addition, we will have to make investments in people, inventory and capital equipment to support our amended agreement with HP. Revenue levels achieved from HP and our other customers, our ability to introduce new products as planned, and our ability to reduce product costs and manage our operating expenses and manufacturing variances, will affect our financial results for 2008. Consequently, we cannot assure you that we will be profitable in any future period, or that these attempts at mitigation will be successful.

     Our available cash, cash equivalents and short term investments as of March 31, 2008 totaled $77.4 million. We presently expect cash, cash equivalents, short term investments and cash generated from operations to be sufficient to meet our operating and capital requirements through at least the next 12 months. However, unanticipated events may require us to raise additional funds. Our future capital requirements will depend on, and could increase substantially as a result of many factors, including:

• the increased inventory requirements due to contractual requirements with NetApp, HP and Fujitsu Siemens;

• we expect to utilize a significant amount of cash to support additional finished goods inventory for our customers and to make incremental investments in organizational capabilities and test infrastructure to support their product launches;

• our ability to continue to maintain adequate lines of credit and favorable payment terms from our contract manufacturers,

• our ability to meet product delivery schedules for HP and other customers which could result in increased air freight, expedite and overtime charges;

• our plans to maintain and enhance our engineering, research, development and product testing programs;

• our need for additional tooling to support increased volumes or in support of disaster recovery plans;

• our ability to achieve targeted gross profit margins and cost reduction objectives;

• our ability to contain operating expenses and manufacturing variances;

• our ability to reach break-even or profitability;

• the extent to which we rationalize our facilities or organization;

• the success of our manufacturing strategy;

• the success of our sales and marketing efforts;

• the amount of field failures resulting in product replacements or recalls;

• the extent and terms of any development, marketing or other arrangements;

• changes in economic, regulatory or competitive conditions;

• costs of filing, prosecuting, defending and enforcing intellectual property rights; and

• costs of litigating and defending law suits.

     We may not be able to raise additional funds on commercially reasonable terms or at all. Any sales of convertible debt or equity securities in the future may have a substantial dilutive effect on our existing stockholders. If we are able to borrow funds, we may be required to grant liens on our assets to the provider of any source of financing or enter into operating debt service or working capital covenants with any provider of financing that could hinder our ability to operate our business in accordance with our plans. As a result, our ability to further borrow money on a secured basis may be impaired, and we may not be able to issue secured debt on commercially reasonable terms or at all.

A significant percentage of our expenses are fixed, and if we fail to generate targeted revenues or margins in associated periods, our operating results will be harmed.

     We may have to take further measures to reduce expenses if revenue declines and we experience greater operating losses or do not achieve a stable net income. A number of factors could preclude us from successfully bringing costs and expenses in line with our net revenue, such as the fact that our expense levels are based in part on our expectations as to future sales, and that a significant percentage of our expenses are fixed, which limits our ability to reduce expenses quickly in response to any shortfalls in net revenue or margin. As a result, if net revenue, product margin, or gross margin, do not meet our projections, operating results may be negatively affected. We may experience shortfalls in net revenue or margins for various reasons, including:

• significant pricing pressures that occur because of declines in selling prices over the life of a product or because of increased competition;

• sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers and manufacturers to allocate available supplies or capacity to others, which, in turn, may harm our ability to meet our sales obligations or we may have to incur additional charges to expedite product shipments to customers;

• product supply shortages due to increased demands of our OEM customers, which could also harm our relationships with our customers;

• the reduction, rescheduling or cancellation of customer orders;

• our inability to drive down component costs or adequately manage price variances on components;

• our inability to market products with competitive features, or the inability to market certain products in any form, due to the patents or other intellectual property rights of third parties; and

• product defects or quality issues that may result in higher product return rates and failure rates.

     In addition, we typically plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. Our customer’s forecasts have not historically demonstrated a high degree of accuracy. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers, we may order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs due to expected orders that fail to materialize.

The transition of manufacturing of our products and potentially other products to MiTAC and SYNNEX could impact our operating results.

     Our decision to enter into a manufacturing agreement with MiTAC and SYNNEX in February 2007 was partly based upon our belief that we could achieve lower manufacturing and product transformation costs. While much of this transition is now completed for our Series 2000 and successor products we need to refine and expand processes, tooling and manufacturing infrastructure. Consequently, there could be additional costs or capacity constraints that could negatively impact expected gross margins and revenues. We are currently evaluating migrating the manufacturing of products for NetApp to MiTAC and SYNNEX from Flextronics. During this transition, we could also have surplus raw materials and finished goods, at Flextronics, which could result in write-downs and/or lower margins. In addition, if we experience any product quality or manufacturing capacity issues, we could impact revenues from customers as well as their satisfaction with our products.

     The pricing we received from contract manufacturers was predicated on volume expectations. If however, we are unable to give any of our contract manufacturers sufficient volumes of products to manufacture on our behalf, our contract manufacturers are likely to become less responsive to us and seek to increase prices, which could potentially negatively impact margins and profits.

     In addition, our new relationship with MiTAC and SYNNEX may negatively impact our relationship with Flextronics, and thus we cannot be assured that there will not be any strains on the relationship between the two companies that could impact product cost, quality or our ability to meet product delivery schedules.

Our inability to lower product costs or changes in the mix of products we sell may significantly impact our gross margins and operating results.

     Our gross margins are determined in large part based on our manufacturing costs, our component costs and our ability to include RAID controllers, and low cost value added features into our products, as well as the prices at which we sell our products. If we are unable to lower production costs to be consistent with our projections or any decline in selling prices, our gross margins and operating results will suffer. Several of the new products we are currently shipping or expect to begin shipping are in the early stages of their lifecycle. Our historical experience indicates that gross margins on new products are low initially and increase over time as a result of maturing manufacturing processes, component cost reductions and engineering the products to reduce costs. If we fail to achieve these margin improvements, our gross

margins will be negatively impacted and our business, financial condition and results of operations could be significantly harmed. Additional factors which could adversely impact gross margin dollars and gross margin percentage include:

•	changes in the mix of products we sell to our customers;
•	increased price competition;
•	introduction of new products by us or our competitors, including products with price performance advantages;
•	our inability to reduce production or component costs;
•	entry into new markets or the acquisition of new customers;
•	sales discounts and marketing development funds;
•	ongoing revaluation of the Chinese RMB compared to the US dollar;
•	increases in material or labor costs;
•	excess inventory, inventory shrinkages and losses and inventory holding charges;
•	price purchase variances resulting from reductions in component costs purchased on our behalf by our contract manufacturers or owned by us in inventory versus the original cost of those components;
•	increased warranty costs and costs associated with any potential future product quality and product defect issues;
•	our inability to sell our higher performance Series 5000 and Series 2000 products and our data management services software;
•	component shortages which can result in expedite fees, overtime or increased use of air freight;
•	increased freight costs resulting from the need to expedite shipments of components to our contract manufacturer or finished goods to some of our customers and their hub locations; and
•	increases in headcount and expenses required to support our new customers.
Some of our strategies to offset gross margin erosion include:
•	shifting our manufacturing to lower cost suppliers, such as MiTAC and SYNNEX, as we did with our Series 2000 and 5000 products and transitioning the manufacturing of other products to MiTAC and SYNNEX;
•	leveraging our volumes created by our new design wins to secure additional component cost and manufacturing transformation cost reductions;
•	bundling our data management services software into our products; and
•	increasing adoption of our higher performance Series 5000 and Series 2000 Turbo products.

     We cannot assure you that we will be successful in executing these strategies to mitigate gross margin erosion. All of these factors, together with increasing pricing pressures, could further adversely affect our gross margins and operating results.

Our financial condition will be materially harmed if we do not maintain competitiveness and gain acceptance of our products.

     The markets in which we compete involve rapidly changing technology, evolving industry standards and continuing improvements in products and services. Our future success depends, in part, on our ability to:

• enhance our current products and develop and introduce in a timely manner new products that keep pace with technological developments and industry standards;

• compete effectively on the basis of price and performance; and

• adequately address OEM and end-user customer requirements and achieve market acceptance.

     We believe that to remain competitive, we will need to continue to develop new products, which will require a significant investment in new product development. Our competitors are developing alternative technologies, which may adversely affect the market acceptance of our products. If alternative technologies and interface protocols are adopted by the industry that we have not incorporated into our products, we may become uncompetitive and not have product offerings for select market segments. Even if our new products are developed on time, we may not be able to manufacture them at competitive prices or in sufficient volumes.

Liquidity problems or bankruptcy of some our small OEM customers could increase exposure to losses from bad debts, increase accounts receivable and could have a material adverse effect on our business, financial condition and results of operations.

     The revenue from our smaller OEM customers is increasing and they may not be as well capitalized nor do they have the financial resources of our historical customer base. In addition, our sales to all our customers are typically made on credit without collateral. There is a risk that customers will not pay, or that payment may be delayed, because of their liquidity constraints, or because they are awaiting payment from their customers, or other factors beyond our control, which could increase our exposure to losses from bad debts, or increase accounts receivable, and thus reduce cash.

Product recalls, epidemic failures, post-manufacture repairs of our products liability claims, absence or cost of insurance, and associated costs could harm our reputation, divert resources, reduce sales and increase costs and could have a material adverse effect on our financial condition.

     Our new integrated storage systems, as well as our legacy products, may contain undetected errors, or failures, that become epidemic failure, which may be discovered after shipment, resulting in a loss of revenue, or a loss or delay in market acceptance, which could harm our business. The product failure or recall could be the result of components purchased from our suppliers not meeting the required specifications, manufacturing defects or from our own design deficiencies. During the first half of 2007, we experienced several product quality issues associated with our then recently introduced Series 2000 products. The cost of rectifying these issues had a negative impact on margins during the first half of 2007.

     Even if the errors are detected before shipment, such errors could result in the halting of production, the delay of shipments, recovery costs, loss of goodwill, tarnishment of reputation and/or a substantial decrease in revenue. Our standard warranty provides that if our systems do not function to published specifications, we will repair or replace the defective component or system without charge generally for a period of about three years. Significant warranty costs, particularly those that exceed reserves, could decrease our margin and negatively impact our business, results of operations and financial condition. In addition, defects in our products could result in our customers claiming property damages, consequential damages, or bodily injury, which could also result in our loss of customers and goodwill. None of our customers have thus far asserted claims, but may in the future assert claims, that our products have failed to meet agreed-to specifications or that they have sustained injuries from our products, and we may be subject to lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of our insurance coverage. Any such claim could distract management’s attention from operating our business and, if successful, result in damage claims against us that might not be covered by our insurance.

Our operating results are subject to substantial quarterly and annual fluctuations, and our period-to-period comparisons are not necessarily meaningful and we may not meet the expectations of public market analysts and investors.

     Our revenues in any quarter are substantially dependent upon customer orders in that quarter. We attempt to project future orders based in part on estimates from our OEM customers. For this purpose, arrangements with OEM customers will usually include the estimated future volume requirements of that customer. Our OEM customers’ estimated requirements are not often accurate and we therefore cannot predict our quarterly revenues with any degree of certainty. Moreover, we cannot predict or control our customers’ product launch dates, volume ramps and other factors than may result in substantial fluctuations on a quarterly or annual basis. In addition, Sun’s quarterly operating results typically fluctuate downward in the first quarter of their fiscal year when compared with the immediately preceding fourth quarter. It is likely that NetApp’s and HP’s sales as well as sales of our other new OEM customers of storage products supplied by us will fluctuate on a quarterly basis, and these fluctuations will affect our financial results. Due to the infancy of the NetApp and HP relationships, we cannot be certain of what affect these fluctuations will have on our quarterly results.

     Our quarterly operating results have fluctuated significantly in the past as shown in the following table and are not a good indicator of future performance (in millions).

	Net		Net Income
Quarter	Revenues		(Loss)
First Quarter 2004	$	47.9	$	(2.6	)
Second Quarter 2004		69.0		6.7
Third Quarter 2004		57.0		3.5
Fourth Quarter 2004		65.5		4.0
First Quarter 2005		58.0		2.1
Second Quarter 2005		65.9		3.3
Third Quarter 2005		53.6		(1.3	)
Fourth Quarter 2005*		56.3		22.5
First Quarter 2006		58.7		(5.0	)
Second Quarter 2006		66.3		(6.6	)
Third Quarter 2006**		54.8		(60.1	)
Fourth Quarter 2006		59.4		(9.1	)
First Quarter 2007		53.4		(6.0	)
Second Quarter 2007		56.2		(3.7	)
Third Quarter 2007		45.7		(4.1	)
Fourth Quarter 2007***		51.8		(46.4	)
First Quarter 2008		52.8		(6.1	)

*	Includes deferred tax benefit from reversal of valuation allowance of $25.3 million.
**	Includes income tax expense related to reestablishing valuation allowance of $47.1 million.
***	Includes write off of $40.7 in goodwill

     Accordingly, comparisons of our quarterly results of operations or other period to period comparisons are not necessarily meaningful and should not be relied on as an indication of our future performance. In addition, the announcement of financial results that fall short of the results anticipated by public market analysts and investors could have an immediate and significant negative effect on the trading price of our common stock in any given period.

We may have difficulty predicting future operating results due to both internal and external factors affecting our business and operations, which could cause our stock price to decline.

     Our operating results may vary significantly in the future depending on a number of factors, many of which are out of our control, including:

• the size, timing, cancellation or rescheduling of significant customer orders;

• our ability to reduce fixed expenses;

• our customer policies pertaining to desired inventory levels of our products and the levels of inventory our customers require us to maintain in their designated inventory hub locations;

• changes in the mix or average selling prices of our products;

• market acceptance of our new products and product enhancements and new product announcements or introductions by our competitors;

• product configuration, mix and quality issues;

• changes in pricing by us or our competitors;

• the cost of litigation and settlements involving intellectual property and other issues;

• deferrals of customer orders in anticipation of new products or product enhancements;

• our ability to ramp our manufacturing to keep up with demand from our customers;

• our ability to develop, introduce and market new products and product enhancements on a timely basis;

• hardware component costs and availability, particularly with respect to hardware components obtained from sole-source providers and major component suppliers such as disk drives, memory, sole source semiconductors and legacy RAID controllers;

• our success in creating brand awareness and in expanding our sales and marketing programs;

• the level of competition;

• gain or loss of customers;

• potential increases or reductions in inventories held by OEM customers;

• slowing sales of the products of our OEM customers;

• technological changes in the open systems storage market, some of which could potentially be breakthrough technologies that may provide competitors cost or performance advantages;

• levels of expenditures on research, engineering and product development;

• levels of expenditures in our manufacturing and support organization and our ability to manage variances in component costs and inventory levels of components held by our manufacturing partners;

• longer than anticipated product integration cycles for our products;

• the quality and timeliness of products being manufactured by Flextronics, MiTAC and SYNNEX and compliance with environmental regulations or related requirements of our OEM customers;

• changes in our business strategies;

• actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances and valuation of goodwill), liabilities and other items reflected in our consolidated financial statements;

• changes in accounting rules or changes in our accounting policies;

• changes in effective income tax rates, including those resulting from changes in tax laws;

• personnel changes; and

• general economic and other conditions affecting the timing of customer orders and capital spending or conditions in the global economy that impact IT spending.

     Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter, or quarters, our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease.

Our sales cycle varies substantially and future net revenue in any period may be lower than our historical revenues or forecasts.

     Our sales are difficult to forecast because the open systems storage market is rapidly evolving and our sales cycle varies substantially from customer to customer. Customer orders for our products can range in value from a few thousand dollars to over a million dollars. The length of time between initial contact with a potential customer and the sale of our product may last from six to 36 months. This is particularly true during times of economic slowdown, for sales to OEM customers and for the sale and installation of complex solutions. We have shifted our business strategy to focus primarily on OEM customers, with whom sales cycles are generally longer, more costly and less certain than direct sales to end-users, or sales through VARs.

     Additional factors that may extend our sales cycle, particularly orders for new products, include:

• the amount of time needed for technical evaluations by customers;

• customers’ budget constraints and changes to customers’ budgets during the course of the sales cycle;

• customers’ internal review and testing procedures;

• our engineering work necessary to integrate a storage solution with a customer’s system;

• the complexity of technical challenges that need to be overcome during the development, testing and/or qualification process for new products and/or new customers;

• meeting unique customer specifications and requirements; and

• difficulties by our customers in integrating our products and technologies into their own products.

     Our net revenue is difficult for us to predict since it is directly affected by the timing of large orders. Due to the unpredictable timing of customer orders, we may ship products representing a significant portion of our net sales for a quarter during the last month of that quarter. In addition, our expense levels are based, in part, on our expectations as to future sales. As a result, if sales levels are below expectations, our operating results may be disproportionately affected. We cannot assure you that our sales will not decline in future periods.

Manufacturing and supplier disruptions could harm our business.

     We rely on third parties to manufacture all of our products. If our agreements with Flextronics, MiTAC or SYNNEX are terminated, or if they do not perform their obligations under our agreement, or if we otherwise determine to transition manufacturing of our products to another third party manufacturer, it could take several months to establish and qualify alternative manufacturing for our products and we may not be able to fulfill our customers’ orders in a timely manner. In addition, Flextronics recently acquired Solectron and there is no assurance that the combined company will not terminate, or otherwise seek to modify the terms of our agreement with Flextronics, and any such termination or modification may also require us to establish and qualify alternative manufacturing for our products. Any such transition would also require a significant amount of our management’s attention. Under our OEM agreements with Sun and NetApp, they have the right to require that we use a third party to manufacture our products. Such an external manufacturer must meet the engineering, qualification and logistics requirements of both Sun and NetApp. If our agreements with Flextronics, MiTAC or SYNNEX terminate, we cannot be certain that we will be able to identify a suitable alternative manufacturing partner that meets the requirements of our OEM customers and one that is cost competitive. Failure to identify a suitable alternative manufacturing partner could impact our customer relationships and our financial condition.

     Due to our use of third-party manufacturers, our ability to control the timing of shipments could decrease. Delayed shipment could result in the deferral or cancellation of purchases of our products. Any significant deferral or cancellation of these sales would harm our results of operations in any particular quarter. Net revenue for a period may be lower than predicted if large orders forecasted for that period are delayed or are not realized, which could impact cash flow or result in a decline in our stock price. To the extent we establish a relationship with an alternative manufacturer for our products, we may be able to partially mitigate potential disruptions to our business. We may also suffer manufacturing disruptions as we ramp up manufacturing processes for our new integrated storage systems, which could result in delays in delivery of these products to our OEM customers and adversely affect our results of operations. Additionally, production of our products could be disrupted as a result of geo-political events in Asia and other manufacturing locations.

     We also generally extend to our customers the warranties provided to us by our suppliers and, accordingly, the majority of our warranty obligations to customers are covered by supplier warranties. For warranty costs not covered by our suppliers, we reserve for estimated warranty costs in the period the revenue is recognized. There can be no assurance that our suppliers will continue to provide such warranties to us in the future, or that we have estimated these costs correctly, which could have a material adverse effect on our operating results and financial condition.

The loss of one or more suppliers could slow or interrupt the production and sales of our products.

     Our third party manufacturers rely on other third parties to supply key components of our storage products. Many of these components are available only from limited sources in the quantities and quality we require. From time to time there is significant market demand for disk drives, semiconductors, RAID controllers, memory and other components, and we may experience component shortages, selective supply allocations and increased prices of such components. In such event, we may be required to purchase our components from alternative suppliers, and we cannot be certain that alternative sources of supplies will be available at competitive terms. Even if alternative sources of supply for critical components such as disk drives and controllers become available, incorporating substitute components into our products could delay our ability to deliver our products in a timely manner. For example, we estimate that replacing key components we currently use in our products with those of another supplier, could involve several months of hardware and software modification, which could significantly harm our ability to meet our customers’ orders for our products, damage our customer relationships and result in a loss of sales.

Any shortage of disk drives, memory or other components could increase our costs or harm our ability to manufacture and deliver our storage products to our customers in a timely manner.

     Demand for disk drives and memory has at times surpassed supply, forcing drive, memory and component suppliers, including those who supply the components that are integrated into many of our storage products, to manage allocation of their inventory. If such a shortage were prolonged, we may be forced to pay higher prices for disk drives, memory or components or may be unable to purchase sufficient quantities of these components to meet our customers’ demand for our storage products in a timely manner or at all. Similar circumstances could occur with respect to other necessary components.

The market for storage systems is intensely competitive and our results of operations, pricing and business could be harmed if we fail to maintain or expand our market position.

     The storage market is intensely competitive and is characterized by rapidly changing technology. We compete primarily against independent storage system suppliers, including EMC, NetApp, Hitachi, LSI, Infortrend and Xyratex, but also against server companies such as HP, IBM, Sun and Dell as well as smaller storage companies. The server companies and independent storage systems suppliers are also potential customers as well and as indicated we have established a relationship with Sun, NetApp and HP. Future competitors could include original design manufacturers and contract manufacturers, some of whom we partner with today.

     Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources than us. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer service and access to more customers than we do. Other large companies with significant resources could become direct competitors, either through acquiring a competitor or through internal efforts. Additionally, a number of new, privately held companies are currently attempting to enter the storage market, some of which may become significant competitors in the future. Any of these existing or potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion and sale of products or deliver competitive products at lower prices than us.

     We could also lose current or future business to any of our suppliers or manufacturers, some of which directly and indirectly compete with us. Currently, we leverage our supply and manufacturing relationships to provide a significant share of our products. Our suppliers and manufacturers are very familiar with the specific attributes of our products and may be able to provide our customers with similar products.

     We also expect that competition will increase as a result of industry consolidation and the creation of companies with new, innovative product offerings. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers.

     Accordingly, it is possible that new competitors, or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, and may reduce operating margins and create a potential loss of market share, any of which could harm our business. We believe that the principal competitive factors affecting the storage systems market include:

• performance, features, scalability and reliability;

• price;

• product breadth;

• product availability and quality;

• timeliness of new product introductions; and

• interoperability and ease of management.

     We cannot assure you that we will be able to successfully incorporate these factors into our products and compete against current or future competitors or that competitive pressures we face will not harm our business. If we are unable to develop and market products to compete with the products of competitors, our business will be materially and adversely affected. In addition, if major OEM customers who are also competitors cease purchasing our products in order to concentrate on sales of their own products, our business will be harmed.

The open systems storage market is rapidly changing and we may be unable to keep pace with or properly prepare for the effects of those changes.

     The open systems data storage market in which we operate is characterized by rapid technological change, frequent new product introductions, new interface protocol, evolving industry standards and consolidation among our competitors, suppliers and customers. Customer preferences in this market are difficult to predict and changes in those preferences and the introduction of new products by our competitors or us could render our existing products obsolete or uncompetitive. Our success will depend upon our ability to address the increasingly sophisticated needs of customers, to enhance existing products, and to develop and introduce on a timely basis, new competitive products, including new software and hardware, and enhancements to existing software and hardware that keep pace with technological developments and emerging industry standards. If we cannot successfully identify, manage, develop, manufacture or market product enhancements or new products, our business will be harmed. In addition, consolidation among our competitors, suppliers and customers may harm our business by increasing the resources of our competitors, reducing the number of suppliers available to us for our product components and increasing competition for customers by reducing the number of customer-purchasing decisions.

Our success depends significantly upon our ability to protect our intellectual property and to avoid infringing the intellectual property of third parties, which has already resulted in costly, time-consuming litigation and could result in the inability to offer certain products.

     We rely primarily on patents, copyrights, trademarks, trade secrets, nondisclosure agreements and common law to protect our intellectual property. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of foreign countries may not adequately protect our intellectual property rights. Our efforts to protect our intellectual property from third party discovery and infringement may be insufficient and third parties may independently develop technologies similar to ours, duplicate our products or design around our patents.

     In addition, third parties may assert infringement claims against us, which would require us to incur substantial license fees, legal fees and other expenses, and distract management from the operations of our business. For example, in 2003, Crossroads Systems filed a lawsuit against us alleging that our products infringe two United States patents assigned to Crossroads. In 2006, we entered into a Settlement and License Agreement with Crossroads that settles the lawsuit and licenses to us the family of patents from which it stemmed. We incurred significant legal expenses in connection with these matters. Other third parties may assert additional infringement claims against us in the future, which would similarly require us to incur substantial license fees, legal fees and other expenses, and distract management from the operations of our business.

     We expect that providers of storage products will increasingly be subject to infringement claims as the number of products and competitors increases. In addition to the formal claims brought against us by Crossroads, we receive, from time to time, letters from third parties suggesting that we may require a license from such third parties to manufacture or sell our products. We evaluate all such communications to assess whether to seek a license from the patent owner. We may be required to purchase licenses that could have a material impact on our business, or, we may not be able to obtain the necessary license from a third party on commercially reasonable terms, or at all. Consequently, we could be prohibited from marketing products that incorporate the protected technology or incur substantial costs to redesign our products in a manner to avoid infringement of third party intellectual property rights.

Environmental compliance costs could adversely affect our net income.

     Many of our products are subject to various laws governing chemical substances in products, including those regulating the manufacture and distribution of chemical substances and those restricting the presence of certain substances in electronic products. We could incur substantial costs, or our products could be restricted from entering certain countries, if our products become non-compliant with environmental laws.

     We face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances that apply to specified electronic products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances Directive, or RoHS). We design our products to ensure that they comply with these requirements as well as related requirements imposed by our OEM customers. We are also working with our suppliers to provide us with compliant materials, parts and components. If our products do not comply with the European substance restrictions, we could become subject to fines, civil or criminal sanctions, and contract damage claims. In addition, we could be prohibited from shipping non-compliant products into the European Union, and required to recall and replace any products already shipped, if such products were found to be non-compliant, which would disrupt our ability to ship products and result in reduced revenue, increased obsolete or excess inventories and harm to our business and customer relationships. We also must successfully manage the transition to RoHS-compliant products in order to minimize the effects of product inventories that may become excess or obsolete, as well as ensure that sufficient supplies of RoHS-compliant products can be delivered to meet customer demand. Failure to manage this transition may adversely impact our revenues and operating results. Various other countries and states in the United States have issued, or are in the process of issuing, other environmental

regulations that may impose additional restrictions or obligations and require further changes to our products. These regulations could impose a significant cost of doing business in those countries and states.

     The European Union has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the European Union to enact the directive in their respective countries was August 13, 2004. Producers participating in the market became financially responsible for implementing these responsibilities beginning in August 2005. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant.

Our success depends on our ability to attract and retain key personnel.

     Our performance depends in significant part on our ability to attract and retain talented senior management and other key personnel. Our key personnel include Dana Kammersgard, our Chief Executive Officer and President, Hanif Jamal, our Chief Financial Officer, Phil Davis, our Executive Vice President of Worldwide Field Operations and James Kuenzel, our Senior Vice President of Engineering. If any of these individuals were to terminate his employment with us, we would be required to locate and hire a suitable replacement. Competition for attracting talented employees in the technology industry is intense. We may be unable to identify suitable replacements for any employees that we lose. In addition, even if we are successful in locating suitable replacements, the time and cost involved in recruiting, hiring, training and integrating new employees, particularly key employees responsible for significant portions of our operations, could harm our business by delaying our production schedule, our research and development efforts, our ability to execute on our business strategy and our client development and marketing efforts.

     Many of our customer relationships are based on personal relationships between the customer and our executives or sales representatives. If these representatives terminate their employment with us, we may be forced to expend substantial resources to attempt to retain the customers that the sales representatives serviced. Ultimately, if we were unsuccessful in retaining these customers, our net revenue would decline.

Our executive officers and directors and their affiliates own a significant percentage of our outstanding shares, which could prevent us from being acquired and adversely affect our stock price.

     As of March 31, 2008, our executive officers, directors and their affiliates beneficially owned approximately 10.3% of our outstanding shares of common stock. These individuals may be able to influence matters requiring approval by our stockholders, including the election of a majority of our directors. The voting power of these stockholders under certain circumstances could have the effect of delaying or preventing a change in control of us. This concentration of ownership may also make it more difficult or expensive for us to obtain financing. Further, any substantial sale of shares by these individuals could depress the market price of our common stock and impair our ability to raise capital in the future through the sale of our equity securities.

Protective provisions in our charter and bylaws and the existence of our stockholder rights plan could prevent a takeover which could harm our stockholders.

     Our certificate of incorporation and bylaws contain a number of provisions that could impede a takeover or prevent us from being acquired, including, but not limited to, a classified board of directors, the elimination of our stockholders’ ability to take action by written consent and limitations on the ability of our stockholders to remove a director from office without cause. Our board of directors may issue additional shares of common stock or establish one or more classes or series of preferred stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations as determined by our board of directors without stockholder approval. In addition, we adopted a stockholder rights plan in May 2003 that is designed to impede takeover transactions that are not supported by our board of directors. Each of these charter and bylaw provisions and the stockholder rights plan gives our board of directors, acting without stockholder approval, the ability to prevent, or render more difficult or costly, the completion of a takeover transaction that our stockholders might view as being in their best interests.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

     We are subject to income taxes in the United States and various foreign jurisdictions. Our effective income tax rates have recently been and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, by discovery of new information in the course of our tax return preparation process, or by changes in the valuation of our deferred tax assets and liabilities. Our effective income tax rates are also affected by intercompany transactions for licenses, services, funding and other items. Additionally, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities which may result in the assessment of additional income taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. However, there can be no assurance that the outcomes from these continuous examinations will not have a material adverse effect on our financial condition or results of operations.

     In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. We recognize potential accrued interest and penalties related to unrecognized tax benefits within income tax expense. The cumulative effect of applying the provision of FIN 48 has been reported as an adjustment to the opening balance of our accumulated deficit as of January 1, 2007.

The exercise of outstanding warrants may result in dilution to our stockholders.

     Dilution of the per share value of our common stock could result from the exercise of outstanding warrants. As of March 31, 2008 there was an outstanding warrant to purchase 1,602,489 shares of our common stock. The warrant has an exercise prices of $2.40 per share. The warrant is exercisable for a period of five years from the date of issuance. When the exercise price of the warrant is less than the trading price of our common stock, exercise of the warrant would have a dilutive effect on our stockholders. The possibility of the issuance of shares of our common stock upon exercise of the warrant could cause the trading price of our common stock to decline.

     Furthermore, it is also possible that future large customers or suppliers, make our relationship with them contingent on receiving warrants to purchase Dot Hill’s common stock. The impact of potentially issuing additional warrants can have a dilutive effect on our stockholders.

Our stock price may be highly volatile and could decline substantially and unexpectedly, which has resulted in litigation.

     The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Several factors could impact our stock price including, but not limited to:

• differences between our actual operating results and the published expectations of analysts;

• quarterly fluctuations in our operating results;

• introduction of new products or changes in product pricing policies by our competitors or us;

• conditions in the markets in which we operate;

• changes in market projections by industry forecasters;

• changes in estimates of our earnings by industry analysts;

• overall market conditions for high technology equities;

• rumors or dissemination of false information; and

• general economic and geopolitical conditions.

     It is often the case that securities class action litigation is brought against a company following periods of volatility in the market price of its securities. For example, in late January and early February 2006, numerous purported class action complaints were filed against us in the United States District Court for the Southern District of California. The complaints seek damages based on alleged violations of federal securities laws related to alleged inflation in our stock price in connection with various statements and alleged omissions to the public and to the securities markets and declines in our stock price in connection with the restatement of certain of our quarterly financial statements for fiscal year 2004. In addition, four complaints purporting to be derivative actions have been filed in California state court against certain of our directors and executive officers. These complaints are based on the same facts and circumstances described in the federal class action complaints and generally allege that the named directors and officers breached their fiduciary duties by failing to oversee adequately our financial reporting. Each of the complaints generally seeks an unspecified amount of damages. Securities litigation could result in the expenditure of substantial funds, divert management’s attention and resources, harm our reputation in the industry and the securities markets and reduce our profitability.

Future sales of our common stock may hurt our market price.

     As of March 31, 2008, 41% of our common stock was owned by six institutional stockholders. As a result a substantial number of shares of our common stock may become available for resale. If these or other of our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decline. These sales might also make it more difficult for us to sell equity securities in the future at times and prices that we deem appropriate.

Geopolitical conditions, including military action, terrorist attacks and other acts of war, political risks, civil unrest widespread pandemics, and elongated interruptions of transoceanic telecommunications lines, may materially and adversely affect the markets on which our common stock trades, the markets in which we operate, our operations and our profitability.

     Terrorist attacks and other acts of war, and any response to them, may lead to armed hostilities and such developments would likely cause instability in financial markets. Armed hostilities and terrorism may directly impact our facilities, critical shipping ports, personnel and operations that are located in the United States and internationally, as well as those of our OEM customers, suppliers, third party manufacturer and customers. Furthermore, these perils may result in temporary halts of commercial activity in the affected regions, and may result in the interruption of our supply chain or reduced demand for our products. These developments could have a material adverse effect on our business and the trading price of our common stock.

Compliance with Sarbanes-Oxley Act of 2002.

     We are exposed to significant costs and risks associated with complying with increasingly stringent and complex regulations of corporate governance and disclosure standards. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules require growing expenditure of management time and external resources. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal controls, and attestations of the effectiveness of our internal controls by our independent registered public accounting firm. This process has required us to hire additional personnel and outside advisory services and has resulted in significant accounting, audit and legal expenses. We expect to continue to incur significant expense in future periods to comply with regulations pertaining to corporate governance as described above. In 2006 we implemented an ERP system, which was an extremely complicated, time consuming and expensive process. We will continue to upgrade and enhance our ERP system and data extraction tools to help us manage an increasingly more complex business model and establish additional internal processes and controls, all of which could result in additional significant expenses. Despite our efforts to continually enhance our systems, we cannot guarantee that our systems will continue to adequately help us manage our business.

Computer viruses and other forms of tampering with our computer systems or servers may disrupt our operations and adversely affect net income.

     Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results or financial condition.

Our facilities and the facilities of our suppliers and customers are located in regions that are subject to natural disasters.

     Our California facilities, including our principal executive offices, are located near major earthquake faults, and close to areas that have recently been impacted by wildfires. Any bodily injury or property damage to the facilities or the surrounding infrastructure as a result of such occurrences could have a material adverse effect on our business, results of operations or financial condition. Additionally, some of our products are manufactured, sold or transported in regions which have historically experienced natural disasters. Any earthquake or other natural disaster, including a hurricane or tsunami, affecting a country in which our products are manufactured or sold could adversely affect our business, results of operations and financial condition.

Item 6. Exhibits

     The following exhibits are included as part of this quarterly report on Form 10-Q:

Exhibit
Number	Description
3.1	Certificate of Incorporation of Dot Hill Systems Corp. (1)
3.2	Amended and Restated Bylaws of Dot Hill Systems Corp. (2)
4.1	Certificate of Incorporation of Dot Hill Systems Corp. (1)
4.2	Amended and Restated Bylaws of Dot Hill Systems Corp. (2)
4.3	Form of Common Stock Certificate. (3)
4.4	Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on May 19, 2003. (4)
4.5	Form of Rights Certificate. (4)
4.6	Warrant to Purchase Shares of Common Stock dated January 4, 2008. (5)
10.1	Product Purchase Agreement dated September 10, 2007 by and between Dot Hill Systems Corp. and Hewlett-Packard Company.*
10.2	Amendment One to Product Purchase Agreement dated January 4, 2008, by and between Dot Hill Systems Corp. and Hewlett-Packard Company.*
10.3	Description of 2008 Executive Compensation Plan. (6)
31.1	Certification pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Confidential treatment has been requested from the SEC.
(1)	Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 19, 2001 and incorporated herein by reference.
(2)	Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 26, 2007 and incorporated herein by reference.
(3)	Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 14, 2003 and incorporated herein by reference.
(4)	Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on May 19, 2003 and incorporated herein by reference.
(5)	Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 7, 2008 and incorporated herein by reference.
(6)	Filed as item 5.02(e) of our Current Report on Form 8-K filed with the SEC on April 3, 2008 and incorporated herein by reference.

41

SIGNATURES

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

	Dot Hill Systems Corp.
Date: May 12, 2008
	By:	/s/ DANA W. KAMMERSGARD
		Dana W. Kammersgard
		Chief Executive Officer, President and
		Director
		(Principal Executive Officer)
Date: May 12, 2008
	By:	/s/ HANIF I. JAMAL
		Hanif I. Jamal
		Chief Financial Officer, and Treasurer
		(Principal Financial and Accounting
		Officer)

EX-10.1

Exhibit 10.1

Dot Hill Systems PPA: PRO02542-060507

***Text Omitted and Filed Separately
with the Securities and Exchange Commission.
Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4) and 240.24b-2.

PRODUCT PURCHASE AGREEMENT

Dot Hill Systems

Agreement # PRO02542-060507

HP Confidential

Dot Hill Systems PPA: PRO02542-060507

TABLE OF CONTENTS

1. Scope of Agreement	1
1.1 Definitions	1
1.2 General	1
1.3 Eligible Purchasers	1
1.4 Term of Agreement	1
1.5 Sale and Purchase	1
1.6 Committed Volume	1
2. Ordering and Shipment of Product. Ordering and Shipment of Product terms are set forth in Exhibit D (Ordering and Shipment of Product)	1
3. Prices and Payment Terms. Prices, payment terms and other pricing terms will be as follows:	1
3.1 Prices	1
3.2 Payment Terms	1
3.3 Discounts and Rebates	1
3.4 Sales Tax and Duties	1
3.5 Financial Condition	1
3.6 Invoices	1
4. Competitive Pricing	1
4.1 General. Supplier will maintain competitive pricing of Products for HP throughout the Term	2
4.2 Competitive Offerings	2
4.3 [...***...] Pricing	2
4.4 New Product Offerings	2
5. Inspection and Audit Rights	2
5.1 Inspection and Audit Rights	2
6. Engineering Process, Design Changes and Quality	3
6.1 Quality	3
7. Warranties	3
7.1 Product General Warranties	3
7.2 Warranty Periods	3
8. Epidemic Failure Warranty	4
9. Safety	4
10. Product Returns; Non-Conforming Product	4
11. Support; Other Services	4
12. Business Recovery Plan; Loss Control	5
13. Confidential Information	6
14. Marketing and Licenses	1
14.4 Software License	1
15. Intellectual Property Ownership Warranty and Indemnification	2
15.1 Intellectual Property Ownership	2
16. Delaying Causes	1
17. Events of Default and Remedies	1
18. General Indemnity	3
18. General Indemnity	3
19. Limitation of Liability	4
20. Termination	5
21. Additional Obligations of Supplier	5
21.5 Social and Environmental Responsibility	1
21.6 Product Content	2
22. Miscellaneous	2
22.5 Assignment	3
22.6 No Waiver	3
22.14 Disputes/Escalation Process	5

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EXHIBIT INDEX

1. Exhibit A — Definitions	20-24
2. Exhibit B — Product Description and Specifications	25
3. Exhibit C — Eligible Purchasers Under this Agreement	26-27
4. Exhibit D — Ordering and Shipment of Product	28-29
5. Exhibit E — Pricing	30
6. Exhibit F — Engineering Process or Design Changes	31
7. Exhibit G — Quality	32
8. Exhibit H — Product Returns; Non-Conforming Product	33
9. Exhibit I — Manufacturing Rights	34
10. Exhibit J — Recipients for Notices and Relationship Managers	35
11. Exhibit K — Service and Support Requirements	36
12. Exhibit L — Third Party and Open Source Software Components	37
13. Exhibit M — Flexibility Agreement	38
14. Exhibit N — Quality Compensation Exhibit	39-42
15. Exhibit O — Governmental Compliance	43
16. Exhibit P — Insurance	44
17. Exhibit Q — Industrial Design of the Product	45

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PRODUCT PURCHASE AGREEMENT

AGREEMENT NO. [INSERT # ]

This PRODUCT PURCHASE AGREEMENT (“Agreement”) is entered into as of the 10^th day of September, 2007 (the “Effective Date”) by and between Hewlett-Packard Company, a Delaware corporation having its principal place of business located at 3000 Hanover Street, Palo Alto, California 94304 (“HP”), and Dot Hill Systems Corp.(“Supplier”), organized and operating under the laws of Delaware with its principal place of business at 2200 Faraday Avenue, Suite 100, Carlsbad, CA 92008, HP and Supplier are collectively referred to herein as the “Parties”.

RECITALS

WHEREAS, Supplier wishes to sell, and HP wishes to purchase, goods or services, or both, upon the terms and conditions hereinafter provided.

NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, Supplier and HP hereby agree as follows:

1. Scope of Agreement

1.1	Definitions. Definitions for capitalized terms used in this Agreement are set forth either in the main body of this Agreement where used or in Exhibit A (Definitions).
1.2	General. The goods to be provided under this Agreement are set forth in Exhibit B (Product Description and Specifications) (the “Goods”). Services may be provided under this Agreement (the “Services”) in connection with the furnishing of Goods or as primary performance. As used in this Agreement, unless the context otherwise requires, “Product” refers interchangeably to any Goods or any Services, or both in combination, and “Product” includes both singular and plural forms. Product provided by Supplier to HP and Eligible Purchasers during the Term will be furnished under this Agreement and will be governed by and subject to this Agreement in all cases.
1.3	Eligible Purchasers. The entities eligible to purchase under this Agreement are listed in Exhibit C (Eligible Purchasers Under This Agreement).
1.4	Term of Agreement. This Agreement will be effective upon execution by the Parties and covers a period (the “Term”) which commences as of the Effective Date and continues for one (1) year and thereafter continues unless terminated earlier under the terms of this Agreement, provided that in no event will this Agreement continue longer than three (3) years from the Effective Date unless extended or renewed upon mutual written agreement of the Parties.
1.5	Sale and Purchase. During the Term, Supplier will produce (or procure) and sell to HP, and HP will order and purchase from Supplier, the item(s) and volume of Product that HP may order and Supplier may agree to supply from time to time. By mutual written agreement the Parties may add or delete Products from coverage under this Agreement.
1.6	Committed Volume. Nothing in this Agreement obligates HP to purchase any minimum quantity of Product. This Agreement sets forth the terms and conditions during the Term which govern Orders and Acknowledgments for Product. Any Order or Acknowledgment or other legally binding volume commitment for Product which is entered during the Term will remain governed by this Agreement notwithstanding expiration or termination of this Agreement for any reason. Unless otherwise agreed, if HP fails, for any reason or no reason, to purchase committed volume, Supplier’s sole and exclusive remedy will be to give HP written notice of termination except that HP will have up to [...***...] following receipt of Supplier’s notice of termination within which to purchase Product at the then current volume rate and pricing.

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1.6.1 Unless agreed to otherwise in Exhibit M (Flexibility Agreement), in no event will HP be liable for any monetary damages for failure to purchase committed volume; provided that HP will remain obligated to pay amounts due and owing under Sections 3.2 (Payment Terms) and 3.4 (Sales Taxes and Duties). Unless otherwise agreed, if Supplier is unable, for any reason or no reason, to furnish or delays furnishing committed volume, HP may purchase such committed volume, or any part thereof, from other source(s), and such purchase(s) will be aggregated with purchases hereunder for purposes of determining HP’s compliance with this Agreement.

2.	Ordering and Shipment of Product. Ordering and Shipment of Product terms are set forth in Exhibit D (Ordering and Shipment of Product).
3.	Prices and Payment Terms. Prices, payment terms and other pricing terms will be as follows:

3.1	Prices. Prices for Product are as set forth in Exhibit E (Pricing).
3.2	Payment Terms. Payments will be issued [...***...] after receipt of a valid invoice or receipt of the Goods or Services, whichever is later. No invoice may be dated or submitted earlier than date of Delivery. Any prompt payment discount will be calculated from the same date. Payment will be in U.S. currency unless otherwise stated. [...***...]
3.3	Discounts and Rebates. Discounts and rebates may be negotiated by the Parties from time to time during the Term.
3.4	Sales Tax and Duties. Unless otherwise agreed, prices are exclusive of all taxes or duties (other than taxes levied on Supplier’s income) that Supplier may be required to collect or pay upon purchase, sale or shipment of Product. Any such taxes or duties must appear as a separate item on Supplier’s invoice. [...***...] Where applicable, HP will provide Supplier with an exemption resale certificate.
3.5	Financial Condition. Except for HP Subsidiaries and HP Affiliates, any credit line extended to an Eligible Purchaser will be subject to Supplier’s normal credit standards and approval procedures in effect from time to time during the Term.

3.5.1 HP may review Supplier’s performance capability under this Agreement at HP’s discretion, and Supplier will make available to HP, upon written request, information as may be reasonable, customary and sufficient to show Supplier’s then current performance capability, including financial condition. If the financial condition of either Party materially and adversely changes from its financial condition as of the date of this Agreement, then the other Party will have the right to demand adequate assurance of due performance.

3.6

Invoices. HP may require Supplier to submit invoices electronically, at Supplier’s sole expense, in which case Supplier is thereby authorized to, and will, transmit the required information in electronic format. HP may utilize a third party, at HP’s sole discretion, to facilitate HP’s order and invoicing processes that may entail disclosure of information about the Supplier, this Agreement, and the receipt and processing of any purchase order, invoice and related documentation.

3.7

Right of Offset. Either party, at its option, shall have the right to setoff or deduct from the other party’s invoice any credits, refunds or claims of any kind, provided that: (i) the party subject to the setoff or deduction has had forty-five (45) days from notice of the amounts due to make payment but fails to do so, and; (ii) the party subject to the setoff or deduction has confirmed, in writing or by email, the amount and the validity of the credit, refund or claim.

4. Competitive Pricing.

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     4.1 General. Supplier will maintain competitive pricing of Products for HP throughout the Term.

     4.2 Competitive Offerings. At any time during the Term, unless otherwise agreed, HP may notify Supplier that HP has received a bona fide offer to deliver Product, or a substantial equivalent, under written contract in approximately comparable volume, mix, service level and duration of committed sale as the undelivered or unperformed portion of any committed volume under this Agreement at pricing lower than pricing in effect under this Agreement or at lower total cost to HP. If [...***...] of the date of such notice Supplier does not reduce its pricing sufficiently to meet the terms of such offer and advise HP of such reduction, HP may purchase from such offer any or all of the undelivered or unperformed portion of any committed volume under this Agreement. The quantity so purchased will be deleted from any HP purchase requirements. Anything in the foregoing to the contrary notwithstanding, this provision will not apply to [...***...]

     4.3 [...***...] Pricing. At any time during the Term, unless otherwise agreed, [...***...], Supplier will [...***...], unless prohibited by Applicable Law, [...***...].

     4.4 New Product Offerings. At any time during the Term HP may notify Supplier that HP has received a bona fide offer to deliver goods which have superior technical specifications or superior attributes or capabilities as compared with Product, and to the extent it deems itself able to do so, HP may provide specifics so that Supplier may revise specifications for Product or otherwise offer such substitute goods to HP hereunder. If within a commercially reasonable time after such notice Supplier is unable to sell or fails to offer to sell HP Product with revised specifications (which are acceptable to HP) or such substitute goods at reasonable pricing and otherwise meeting the terms of such offer, HP may purchase from such offeror any or all of the undelivered or unperformed portion of any committed volume under this Agreement. The quantity so purchased will be deleted from HP’s purchase requirements.

5. Inspection and Audit Rights.

     5.1 Inspection and Audit Rights. HP, at its expense, may engage an independent third party (“Auditor”) to inspect and audit, on an annual basis, or more frequently if Supplier has breached any of its obligations under this Agreement, Supplier’s books and records relating to Supplier’s performance of its obligations under this Section 5.1 and that are reasonably required to determine Supplier’s compliance with Supplier’s obligations under this Section 5.1.

     5.1.1 HP will provide Supplier reasonable notice, not less than [...***...] in advance, of such inspection and audit.

     5.1.2 Supplier will refund the amount of any overcharge or other discrepancy as may reasonably be determined by such inspection and audit, and if the final report of such inspection and audit reveals an overcharge or other discrepancy of five percent (5%) or more during the relevant time period, Supplier will also reimburse HP for all reasonable costs of the inspection and audit.

     5.1.3 Supplier will cooperate fully with all such inspection and audit requests; provided that (i) in no event will material containing any information that is protected under court order or the written directions of regulatory authorities be required to be disclosed and (ii) material may be redacted by Supplier to the extent necessary to protect against any invasion of personal privacy.

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     5.1.4 Any such Auditor will execute a confidentiality agreement in favor of Supplier containing terms no less restrictive than those set forth in Section 13 of this Agreement prior to receipt of any of the information referenced above; provided that such Auditor may disclose such information only to HP and Supplier; and provided further that (i) the identity of Supplier’s other customers, details of specific customer transactions and actual costs incurred by Supplier will not be disclosed to HP and (ii) aggregated pricing, aggregate costs and other information not identifiable to an individual or source may be disclosed to HP. HP’s right of inspection and audit under this Section 5 (Audit Rights) will continue and survive for [...***...] after expiration or any termination of this Agreement.

6. Engineering Process, Design Changes and Quality. Terms pertaining to engineering process and/or design changes for the Product are set forth in Exhibit F (Engineering Process or Design Changes).

6.1 Quality. Supplier will maintain the quality system specified in Exhibit G (Quality) of this Agreement.

7. Warranties.

7.1 Product General Warranties. Supplier represents and warrants that all Product will:

7.1.1	Be manufactured, processed, and assembled by Supplier or Supplier’s authorized Subcontractors.
7.1.2	Conform to Specifications, including without limitation, HP’s General Specification for the Environment.
7.1.3	Be new,
7.1.4	Contain first-quality components, raw materials and parts.
7.1.5	Be free from defects in design, material and workmanship.
7.1.6	Be free and clear of all liens, encumbrances, restrictions, and other claims against title or ownership.
7.1.7	Comply with the intellectual property warranty terms set forth in Section 15 (Intellectual Property Ownership Warranty and Indemnification).

7.2 Warranty Periods.

7.2.1	All warranties set forth in Section 7.1 will survive any inspection, delivery, acceptance or payment by HP.
7.2.2	The warranties set forth in sub-sections 7.1.2 and 7.1.5 are effective upon Delivery, are continuing, and will remain in effect for and expire [...***...] following Supplier’s delivery of the Product (“Product Warranty Period”).
7.2.3	The warranties set forth in Sections 7.1.1, 7.1.3, 7.1.4 and 7.1.6 are made and effective at Delivery.

7.3	Services and Support Warranty. Supplier warrants that all Services and Support will be provided in a professional and workmanlike manner by competent, experienced personnel possessing suitable expertise in the subject matter.
7.4	[...***...] Warranty. Supplier warrants that Product [...***...].

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7.5	Compliance with Applicable Law. Supplier warrants that it will comply with all Applicable Law in its performance under this Agreement.
7.6	Warranty Exclusions. Except for Sections 7.1.6 and 7.1.7, the warranties set forth in this Section 7 will not apply to any Product to the extent such Product does not function property as a result of: (i) has been improperly installed, repaired, altered or otherwise modified (other than by Supplier or Supplier’s Subcontractors), (ii) has been subjected to misuse, abuse, negligence or accident, (other than by Supplier or Supplier’s Subcontractors).
7.7	Warranty Remedies. If, during the Product Warranty Period, Products are found to breach any warranty specified in this Agreement, then in addition to any other remedies expressly provided for in this Agreement, HP may return Products to Supplier [...***...] for repair or replacement (in Supplier’s discretion), or if neither alternative is available on commercially reasonable terms, credit. Any Product corrected or furnished in replacement shall, from the date of delivery of those replacement Products, be subject to the provisions of this Sub-Section and Section 7 for [...***...] from the date of delivery or the remaining period of the original Product Warranty Period, whichever is longer. The remedy set forth in this section 7.7 shall be the sole and exclusive remedy for a breach of the warranties set forth herein.
7.8	Disclaimer of Warranties. EXCEPT AS EXPLICITLY STATED HEREIN, THERE ARE NO WARRANTIES, EXPRESS. IMPLIED OR OTHERWISE, PROVIDED OR MADE, AND ALL PRODUCTS, SERVICES OR OTHER ITEMS ARE PROVIDED “AS IS” AND WITHOUT ANY WARRANTIES. SUPPLIER HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS.

8.	Epidemic Failure Warranty. Supplier also represents and warrants that during the Product Warranty Period, all Product will comply with the terms of the warranty against Epidemic Failure as set forth in Exhibit N (Quality Compensation). In the event that Supplier breaches this warranty, HP shall have the remedies set forth in Exhibit N (Quality and Compensation), in addition to any other remedies available under this Agreement.
9.	Safety. If the Goods supplied hereunder, or Services performed hereunder, involve any risk of injury or death to persons, or damage to property, Supplier shall provide notice to the appropriate individuals identified in Exhibit J (Recipients for Notices) and follow the procedures set forth in Section 4 of Exhibit F (Engineering Process or Design Changes), as well as any other applicable provisions in this Agreement. Supplier shall also provide HP with a written description of the nature and extent of such risk, including a description of any precautions which should be taken to minimize risk.
10.	Product Returns; Non-Conforming Product. Terms pertaining to product returns and/or non-conforming Product are set forth in Exhibit H (Product Returns; Non-Conforming Product).
11.	Support; Other Services.

11.1

General. Supplier will maintain such number of qualified personnel and do all that is necessary to satisfy the Support and service level obligation set forth in Exhibit K (Service and Support Requirements).

11.2

HP Property. HP may loan to Supplier HP Property solely for use in providing Services, Support or in Supplier’s manufacturing, testing or adapting Product. All HP Property will be segregated from Supplier’s property and identified as the sole property of HP. HP Property may not be transferred, assigned, loaned or otherwise encumbered by Supplier in any way. HP Property may be loaned to third parties for fulfillment of Supplier’s obligations hereunder only upon HP’s prior written consent, provided that Supplier assumes all responsibility and liability for the HP Property, as set forth herein, while in the possession of such third parties. Supplier will return, at its expense, HP Property in good condition, reasonable wear and tear excepted, upon HP’s request or in all events

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	upon termination or expiration of this Agreement. Prior to HP Property being loaned to Supplier, Supplier will execute HP’s standard Equipment Loan Agreement.
11.3	Survival of Support Obligations. Unless otherwise stated in Exhibit K (Service and Support Requirements), Supplier’s obligations to provide Support will continue throughout the Term and for [...***...] after the last Delivery of Product under this Agreement, even if this Agreement is terminated or expires.

11.3.1	Supplier may not discontinue Support for Product for which manufacture or supply is discontinued in accordance with Exhibit I (Discontinuance of Product and Manufacturing Rights). In addition, if HP issues notice to Supplier that HP is ending the life of a Product, Supplier must continue to provide Support pursuant to this section.
11.3.2	In the event of any expiration or termination of this Agreement Supplier may [...***...].

11.4 Supplier Support of Third Parties. Supplier may independently offer and provide maintenance and support services to third parties, [...***...].

12. Business Recovery Plan; Loss Control

12.1	Business Recovery Plan; Loss Control. Supplier will develop and keep current a formal Business Continuity Plan (“BRP”) that details Supplier’s strategies for response to and recovery from a broad spectrum of potential physical or financial disasters that could disrupt operations and timely delivery of Product or Services required pursuant to this Agreement. Upon request, Supplier will make its Business Continuity Plan available to HP or its designated representative for review.
12.2	Loss Control. Supplier will be responsible for maintaining its facilities, the Hubs to which Supplier may ship Products, Supplier Managed Inventory (“SMI”) and all warehouse and storage facilities and operations (except HP Warehouses) in accordance with applicable and prudent safety, security, and fire protection standards and Supplier’s BRP. Supplier will allow HP and its designated representative to perform on-site audits of such facilities and operations and will cooperate in the resolution of recommendations for improvement.
12.3	Production [...***...]. If, for some reason, [...***...], Supplier [...***...].
	Notwithstanding the foregoing, and regardless as to whether [...***...] Supplier hereby agrees to:
	[...***...]

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[...***...]

13. Confidential Information.

13.1 Confidential Information. During the Term, either Party may provide or disclose information that is designated as “Confidential Information” (“Discloser”) to the other Party (“Recipient”).

13.1.1	Confidential Information may include, but is not limited to, information or data concerning the Discloser’s products or product plans, business operations, strategies, customers and related business information that is marked as confidential or, if disclosed orally, is memorialized in a writing within ten (10) business days of such disclosure.
13.1.2	Confidential Information shall include without limitation, each Party’s business plans, roadmaps, volume data, technical data, and Specifications, irrespective of any lack of confidentiality marking.
13.1.3	The Recipient shall protect, and will ensure its employees and subcontractors protect, such Confidential Information by using the same degree of care (but no less than a reasonable degree of care) to prevent the unauthorized use, dissemination, disclosure or publication of such Confidential Information of a like nature.
13.1.4	The Recipient may disclose the Confidential Information to only those employees and subcontractors who have a need to know and who are under an obligation of confidentiality at least as restrictive as that contained in this section.
13.1.5	Confidential Information of a Party may be used only for purposes of exercising and fulfilling the Parties’ respective rights and obligations under this Agreement. Each Recipient may reassign its employees who have had access to such Confidential Information. If a Recipient or any of its Affiliates is requested or required by subpoena, court order, or similar process or applicable governmental regulation to disclose any Confidential Information, the Parties agree that the Recipient will provide the Discloser with

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	prompt notice of such request or obligation so that the Discloser may seek an appropriate protective order or procedure if it elects to do so.
13.1.6	Each Party’s obligation under this Section 13.1 with respect to Confidential Information shall expire three (3) years from the date of disclosure except for Technical Information or other technical or product trade secret information, which will expire only upon the existence of one of the exclusions, set forth below.
13.1.7	Exclusions. The foregoing confidentiality obligations will not apply to any information that (a) is known by the Recipient prior to disclosure as evidenced by tangible records, (b) was developed by the Recipient prior to disclosure or is subsequently developed independently and without reference to the disclosure, (c) is or becomes publicly available through no fault of the Recipient, (d) is rightfully received from a third party with no duty of confidentiality, (e) is disclosed by the Recipient with the Discloser’s written approval or (f) is disclosed under operation of law.
13.1.8	Existing Confidential Disclosure Agreements. The Parties agree that this Section 13 is intended to supplement any existing confidential disclosure agreements that are in effect as of the Effective Date of this Agreement.

13.2 No Publication. Supplier shall not publicize or disclose the terms or existence of this Agreement, nor shall Supplier use the name(s), trademark(s), or trade name(s) of HP, HP Subsidiaries or HP Affiliates, except as follows: (i) With the prior written consent of HP; or (ii) as may otherwise be required by law. HP may impose, as a condition of its consent, any restrictions which HP deems appropriate, in its sole discretion. Supplier shall provide ten (10) days advance written notice to HP prior to disclosure and provide HP with the proposed text and context of the disclosure.

14. Marketing and Licenses

14.1	Marketing Authority. HP will have the authority worldwide to market Product and HP Products containing Product to the extent it deems appropriate. Nothing in this Agreement precludes HP from independently developing, purchasing, licensing or marketing any product which performs the same or similar function as Product. HP will have the right to use its own business and license terms for all marketing and distribution of Product and HP Products.
14.2	No Rights in Marks. Except as otherwise set forth in Section 14.3 (Private Labeling), nothing in this Agreement grants either Party any rights in the Marks of the other Party; provided that HP may use the name of Supplier and the name of any Product in advertising and marketing Product or HP Products.
14.3	Private Labeling. If during the Term HP requests Supplier to produce HP private label versions of Product, Supplier will ensure that Product contains HP Marks, serial number format and packaging as specified by HP and conforms to HP specifications for external appearance. Supplier will make commercially reasonable efforts to fulfill such request, as long as there is no material change in form or dimensions of Product. [...***...] Except as provided herein, Supplier will have no other right or license in any HP Marks.
14.4	Software License.

14.4.1 If Product includes Software, then subject to the terms and conditions of this Agreement, Supplier hereby grants to HP, a nonexclusive, worldwide, fully paid-up, upon HP’s payment to Suppliers of all applicable fees and royalties for each Product, license to use, reproduce, for archival purposes only, and distribute the Software solely as integrated with Product or HP Products. These rights will extend to HP Subsidiaries, Affiliates and third party channels of distribution for those Products that such entities acquire from Supplier in their capacity as Eligible Purchasers. The rights granted herein include the right to use and

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	distribute updates to such Software directly with the Product or indirectly (without the Product) to customers of the HP Product.
14.4.2	If any Software is licensed from a third party or subject to a third party license (including, without limitation, open source software), Supplier shall identify each software component and identify the corresponding third party license in Exhibit L (Third Party and Open Source Software Components).
14.4.3	If any Software is subject to a license which requires the distribution of source code (e.g., GPL/ LGPL licenses), Supplier agrees to provide HP with all such source code.

14.5 Documentation License. For purposes of this Agreement, Supplier hereby grants HP a non-exclusive, perpetual, irrevocable, worldwide fully paid-up license to use, reproduce, and distribute, in connection with distribution or sale of HP Products and prepare derivative works in HP’s name all Documentation furnished by Supplier under this Agreement. HP may reproduce such Documentation without Supplier’s logo or other identification of source, subject to affixing copyright notices to all copies of Documentation that attribute the ownership rights in such Documentation to Supplier and its licensors. These rights with respect to the Documentation will extend to Eligible Purchasers and, to the extent related to distribution or sale of HP Products, to HP Subsidiaries, Affiliates and third party channels of distribution as may be authorized by HP and solely in their capacity as an Eligible Purchaser of Products under this Agreement.

15. Intellectual Property Ownership Warranty and Indemnification

15.1 Intellectual Property Ownership.

15.1.1	Each Party will maintain all right, title, and interest in and to its own Pre-Existing Intellectual Property irrespective of any disclosure of such Pre-Existing Intellectual Property to the other party, subject to any licenses granted herein.
15.1.2	Notwithstanding anything to the contrary in this Agreement, there is no assignment of any of HP’s Intellectual Property Rights to Supplier or Supplier’s Intellectual Property Rights to HP.
15.1.3	Industrial Design. The Parties agree that HP owns all right, title, and interest in and to the Developed Materials and any derivatives, improvements or modifications thereto and any Intellectual Property Rights related to any and all of the above. “Developed Materials” means the Industrial Design of the Product as identified in Exhibit Q. Supplier warrants that Supplier can assign to HP all right, title and interest in and to the Developed Materials to HP. Supplier hereby irrevocably transfers, conveys and assigns to HP all of its right, title and interest in the Developed Materials to HP. To the extent permitted by law, Supplier waives any moral rights, such as the right to be named as author, the right to modify, the right to prevent mutilation and the right to prevent commercial exploitation, whether arising under the Berne Convention or otherwise. Supplier will sign any necessary documents and will assist HP, at HP’s expense, in preparing and executing any documents necessary for HP to obtain protection for the Developed Materials on a worldwide basis. All works of authorship included in the Developed Materials shall bear the following copyright notice: © Copyright 2006 [INSERT YEAR OF ACTUAL PUBLICATION.] Hewlett-Packard Development Company, L.P.
15.1.4	Tools. If HP pays the Supplier to produce any Tools, the Parties agree that HP owns all right, title, and interest in and to the Tools and any derivatives, improvements or modifications thereto and any Intellectual Property Rights related to any and all of the above. Supplier warrants that Supplier can assign to HP all right, title and interest in and to the Tools. Supplier hereby irrevocably transfers, conveys and assigns to HP all of its right, title and interest in the Tools to HP. To the extent permitted by law, Supplier waives any

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moral rights, such as the right to prevent mutilation and the right to prevent commercial exploitation, whether arising under the Berne Convention or otherwise. Supplier will sign any necessary documents and will assist HP, at HP’s expense, in preparing and executing any documents necessary for HP to obtain protection for the Tools on a worldwide basis. All works of authorship included in the Tools shall bear the following copyright notice: © Copyright 2006 [INSERT YEAR OF ACTUAL PUBLICATION.] Hewlett-Packard Development Company, L.P.

15.1.5

Products. The Parties agree that if Supplier creates any derivatives, improvements or modifications to the Products and/or Documentation, ownership of said derivatives, improvements or modifications [...***...].

15.2 Intellectual Property Warranties. Supplier represents and warrants with regard to the Product including Software and Documentation, that:

15.2.1	Supplier will own or have all the necessary copyright licenses for HP to fully exploit the Product, including the Software and Documentation as intended herein;
15.2.2	the Product does not constitute and will not constitute a misappropriation of the trade secrets of any third party;
15.2.3	any Supplier Marks on the Product do not infringe any third party trademark rights;
15.2.4	to the best of Supplier’s knowledge, the Product and the use thereof, does not infringe on any patent of any third party, and there are no claims of such infringement;
15.2.5	the Product does not infringe and will not infringe upon any other third-party Intellectual Property Rights;
15.2.6	HP does not and will not need to procure any rights or licenses to any patents or other third-party Intellectual Property Rights to fully exploit the Product;
15.2.7	there are no patent markings on any part of the external housing of the Product;
15.2.8	that the Software will not (i) contain lock out devices or have any virus, disabling device, time bomb, Trojan horse, back door or any other harmful component, (ii) replicate, transmit or activate itself without control of a person operating the computing equipment on which it resides, (iii) alter, damage or erase any data or other computer programs without control of a person operating the computing equipment on which it resides or (iv) contain any code, key, node lock, time-out or other function whether implemented by electronic, mechanical or other means which restricts or may restrict use or access to programs or data based on residency on a specific hardware configuration, frequency or duration of use, or other limiting criteria;
15.2.9	Supplier will assign to HP the benefits of all warranties applicable to any third party software acquired by HP from Supplier; and
15.2.10	Supplier represents and warrants that Supplier complies with and shall continue to comply with all licenses (including, without limitation, all open source licenses) associated with any software component included in the Product and Documentation.
15.2.11	If Supplier breaches this Intellectual Property Warranty, HP may immediately terminate this Agreement in whole or in part and may immediately cancel any unfilled Accepted Orders

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without liability, such remedies being in addition to any other remedies provide by this Agreement, or otherwise available to HP under law or equity.

15.3 Supplier’s Duty to Defend. Subject to the provisions of 15.4 and except as provided in Section 15.7, Supplier will indemnify, defend and hold harmless HP, HP Subsidiaries, HP Affiliates and Eligible Purchasers and its customers (including without limitation end users, distributors and resellers), officers, directors, employees, agents and representatives (“Indemnitees”) from and against any claims or liabilities relating to any claim that:

15.3.1	any Product;
15.3.2	any Software included in the Product;
15.3.3	any Documentation;
15.3.4	a Supplier Mark or
15.3.5	anything else provided as part of Supplier’s Support,

	or use of any of the foregoing, constitutes a misappropriation or infringement of any third party’s Intellectual Property Rights (all of the foregoing being referred to as an “IP Claim”). Without limiting the generality of the foregoing, Supplier will pay losses and damages, liabilities, judgments, awards, costs and expenses including reasonable attorneys’ fees, expert witness fees and bonds incurred by Indemnitees and any award in connection with, arising from or with respect to any such claim or agreed to by Supplier in any settlement of that claim.
	The combination of the Product with an HP Product will not void Supplier’s Intellectual Property Warranty and concomitant indemnification obligations provided that the IP Claim would apply regardless of the combination. However, [...***...].
15.4	HP’s Duty to Notify and Tender of Claims. HP will give Supplier written prompt notice of any IP Claim. If Supplier assumes defense of such IP Claim without reservations of rights, HP will provide Supplier the authority, information and reasonable assistance (at Supplier’s expense) necessary to defend. Supplier will control defense, and HP will not settle such IP Claim without Supplier’s consent, not to be unreasonably withheld. Should Supplier not diligently pursue resolution of such IP Claim or fails to provide HP with reasonable assurance that it will diligently pursue resolution, then HP may, without in any way limiting its other rights and remedies, defend the claim and collect all reasonable costs of doing so from Supplier. Any settlement or compromise Supplier desires to enter into will be subject to HP’s prior approval, which HP agrees not to unreasonably withhold, delay or condition. HP and any other Indemnitee may, at its expense, in its or their discretion, participate in the defense of such IP Claim. Section 22.14 (Disputes/Escalation Process) shall not apply to this section.
15.5	Limitation on Settlement. Supplier will only enter into a compromise or settlement that will not have the effect of creating any liability or obligation (whether legal or equitable) on HP unless HP otherwise agrees in writing. In addition, Supplier shall obtain a full and complete release of any and all claims that the third party claimant may have against HP.
15.6	Remedies for Infringing Product. If the use, manufacture, sale, combination, or importation of the Product (“Infringing Product”) is enjoined and Supplier has indemnification obligations pursuant to this Section 15, Supplier will, at its sole expense and option:

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(i)	procure for HP the right to continue using or combining the Infringing Product, as the case may be;
(ii)	replace the Infringing Product with a non-infringing product of equivalent function, form factor, and performance; or
(iii)	modify the Infringing Product to be non-infringing, without materially detracting from function, form factor, or performance.

15.7 Exclusions. Nothing in this Section 15 shall apply to any Products or parts to the extent that such Products or parts (i) have been modified (other than by Supplier or Supplier’s Authorized Contractors), (ii) have been used in a manner contrary to Specifications, or (iii) the infringement arises out of Supplier’s compliance with a design that HP required Supplier to implement.

16. Delaying Causes.

16.1	Delaying Causes. Neither Party will be liable for any delay in performance under this Agreement caused by any act of God or other cause beyond Supplier’s reasonable control and without Supplier’s fault or negligence including but not limited to fire, flood, war, embargo, riot or an unforeseeable intervention of any government authority, which causes complete business interruption (a “Delaying Cause”). A Delaying Cause does not include delays in transportation, shortages of materials, delays by manufacturers or subcontractors or economic considerations or inefficiencies. No Delaying Cause will suspend or excuse either Party’s obligations as set forth in Section 13 (Confidential Information), Section 15 (Intellectual Property Ownership Warranty and Indemnification), Exhibit P (Insurance), and Section 18 (Indemnity).
16.2	Occurrence of a Delaying Cause. Any Party whose performance is affected by a Delaying Cause will notify the other Party promptly upon commencement of a Delaying Cause and will provide its best estimate of the expected duration of such occurrence. Upon notice to Supplier during pendency of a Delaying Cause, HP may terminate any unfilled Accepted Orders without liability. Any Party whose performance is affected by a Delaying Cause will exercise reasonable diligence to overcome and affect cessation of the Delaying Cause and to mitigate effects thereof. Performance of the Parties’ respective obligations to purchase and sell Product will be suspended to the extent affected by, and for the duration of, a Delaying Cause, and during pendency of a Delaying Cause affecting Supplier’s ability to make timely Delivery, HP may purchase replacement Product elsewhere and deduct the quantity of Product affected thereby from its purchase requirements without affecting eligibility or entitlement to pricing hereunder. If, however, Supplier’s performance is delayed for reasons set forth above for a cumulative period of [...***...] or more, HP, notwithstanding any other provision of this Agreement to the contrary, may terminate this Agreement and/or any Order issued hereunder by notice to Supplier.
16.3	Resumption of Performance. The Parties will resume performance under this Agreement once the Delaying Cause ceases, and HP may, upon written notice not later than [...***...] following such cessation, extend the Term up to the length of time the Delaying Cause endured.

17. Events of Default and Remedies

17.1 Events of Default. A Party will be in default under this Agreement upon the occurrence of any of the following events (each an “Event of Default”):

17.1.1	A Party fails to pay or perform any payment obligation when and as due under this Agreement or any Accepted Order after [...***...] receipt of written notice from the other Party;
17.1.2	A Party fails to perform any obligation under this Agreement or any Accepted Order, other than as set forth in Section 17.1.1, when such failure continues for [...***...] after written notice thereof is given or, if such failure cannot reasonably be cured within said [...***...], but is capable of cure within a longer period not exceeding [...***...]

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	and the Party commences to cure such failure promptly upon receipt of such written notice and thereafter proceeds with reasonable diligence to cure such failure, for such longer period as may be necessary for the Party to cure the same with reasonable diligence;
17.1.3	Any representation or warranty made by a Party in connection with this Agreement proves to be false in any material respect; provided that if such representation or warranty is capable of being cured, then the Party may cure such misrepresentation or breach of warranty within [...***...] after written notice thereof is given or, if such misrepresentation or breach of warranty cannot reasonably be cured within said [...***...] and the Party commences to cure same promptly and thereafter proceeds with reasonable diligence to cure same, for such longer period as may be necessary for the Party to cure the same with reasonable diligence; or
17.1.4	A Party makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they mature, applies to any court for the appointment of a trustee or receiver for any of its properties, or commences any voluntary proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation or other similar law of any jurisdiction; or any such application or any such proceeding is filed or commenced against said Party and said Party indicates its approval, consent or acquiescence thereto; or there is filed or commenced against said Party an involuntary proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment or debt, dissolution, liquidation or other similar law of any jurisdiction and such proceeding is not dismissed, and remains in effect, for thirty (30) days or more; or an order is entered adjudicating said Party bankruptcy or insolvent; or
17.1.5	Except as may be permitted under Section 22.5 (Assignment), a Party transfers all or substantially all of its properties or merges with or into any other entity or there is otherwise any change in controlling interest or ownership of a Party, without the prior written consent of the other Party; or
17.1.6	A Party assigns or attempts to assign this Agreement or any Accepted Order to a competing entity or in case of an assumption or delegation of performance of this Agreement or any Accepted Order by a competing entity, if in the other Party’s reasonable determination such assignment or performance would be detrimental to the performance of this Agreement or any Accepted Order or to its business interests or prospects.

17.2	Rights and Remedies Upon Default. The Party not in default may terminate this Agreement or any Accepted Order upon written notice to the other Party and/or may enforce, by all proper and legal suits and other means, its right hereunder, with or without terminating this Agreement or any Accepted Order. All rights and remedies will be cumulative and may be exercised singly or concurrently.
17.3	Cover Costs. Upon a [...***...]. Supplier will be responsible for [...***...] (“Cover Costs”) [...***...]. Cover Costs may include, but are not limited to: [...***...]. Notwithstanding anything herein to the

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contrary: [...***...].

17.4 Additional Remedies. Unless otherwise specifically stated, all remedies expressed in this Agreement are in addition to any legal, contractual, equitable, or statutory rights that may exist.

18.	General Indemnity
18.	General Indemnity

18.1 Indemnity. Supplier shall defend, indemnify, and hold harmless HP, HP’s Subsidiaries, HP Affiliates and all Eligible Purchasers purchasing under this Agreement, and their respective directors, officers, employees and agents from and against any and all claims, losses, liens, demands, attorneys’ fees, damages, liabilities, costs, expenses, obligations, causes of action, or suits (collectively “Claims”) to the extent that such Claims are caused by, arise out of, or are connected in any way with:

(a)	any act or omission, whether active or passive and whether actual or alleged, or willful misconduct, of Supplier, its employees, or agents;
(b)	the breach of this Agreement (including, but not limited, to the costs associated with any Product recall) by Supplier, its employees or agents of any of its contractual obligations, covenants, undertakings, or promises under this Agreement, or,
(c)	property loss, damage, personal injury or death, caused by Supplier, Supplier’s Product (includes Goods and Services), its employees or agents.

A Claim relating to or arising out of Section 18.1 (a), (b) or (c) is hereinafter referred to as an “Indemnified Claim”.

18.1.1	Supplier shall, at its own expense, defend any third party Indemnified Claim and Supplier will pay all costs, including attorneys’ and experts’ fees and litigation costs.
18.1.2	Supplier will not have any obligation to defend, indemnify or hold harmless hereunder when [...***...].
18.1.3	Supplier’s obligations to defend, indemnify and hold harmless hereunder will not be limited or otherwise affected by any insurance, self-insurance or retention of risk which it may carry or assume.

18.2 HP’s Duty to Notify. HP will give Supplier prompt notice of any third party claim that constitutes an Indemnified Claim. HP will provide Supplier the authority, information and reasonable assistance (at Supplier’s expense) necessary to defend. Supplier will control the defense, and HP will not settle any such Indemnified Claim without Supplier’s consent, not to be unreasonably withheld; provided that if Supplier does not diligently pursue resolution of the Indemnified Claim, or, fails to provide HP with reasonable assurance that it

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will diligently pursue resolution, HP may, without in any way limiting its other rights and remedies, defend the Indemnified Claim and collect all costs of doing so from Supplier. Any settlement or compromise Supplier desires to enter into will be subject to HP’s approval. HP and any other Indemnitee may, in its or their discretion, participate in the defense of such claim or action.

19. Limitation of Liability.

     19.1. Limitation on General Damages. A party’s aggregate liability to the other party under this Agreement for any claims, whether in contract, warranty, negligence, tort, strict liability, or otherwise, for loss or damage arising out of, in connection with, or resulting from this Agreement, or the performance or breach thereof, will not exceed the greater of:

19.1.1. [...***...], or,

19.1.2. [...***...].

19.1.3. Notwithstanding anything herein to the contrary, the limitations on liability set forth in this Section 19.1 shall not apply to Supplier’s liability and responsibilities in Epidemic Failure situations under any Corrective Action Plan as more fully described in Section 2 of Exhibit N (Quality and Compensation).

19.2 Exclusion for Special Damages. NEITHER PARTY WILL BE LIABLE FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF DATA, PROFITS OR REVENUE, COST OF CAPITAL OR DOWNTIME COSTS), OR FOR ANY EXEMPLARY OR PUNITIVE DAMAGES ARISING OUT OF ANY PERFORMANCE OF THIS AGREEMENT OR ANY ORDER, REGARDLESS OF WHETHER SUCH DAMAGES ARE BASED IN TORT, WARRANTY, CONTRACT OR ANY OTHER LEGAL THEORY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

19.3. Exceptions to Liability Limitation and Exclusion. Nothing in Section 19 (“Limitation of Liability”) excludes, disclaims, limits or otherwise affects:

     19.3.1. Either party’s liability for any third party claims for personal injury, death, or claims for physical damage to property; or,

     19.3.2. [...***...]

19.4. Limitation to Products. Notwithstanding anything herein to the contrary, Supplier shall have no liabilities or responsibilities with respect to [...***...].

20. Termination

20.1 Termination for Convenience. HP may terminate this Agreement at any time without liability for damages and without need to show cause upon [...***...] prior written notice. Upon

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	termination pursuant to this Section, HP will accept delivery of, and pay for, [...***...], Order Changes, of Exhibit D (Ordering and Shipment of Product). HP will purchase and pay for upon delivery to HP [...***...]; provided that Supplier will mitigate to the maximum extent feasible;. Supplier may terminate this Agreement at any time without liability for damages and without need to show cause upon [...***...] prior written notice.
20.2	Termination for Default. Either Party may terminate this Agreement or any Accepted Order in accordance with Section 17 (Events of Defaults and Remedies).
20.3	Termination for Cause. Either Party may terminate this Agreement or any Accepted Order pursuant to any other right granted to or reserved in that Party under this Agreement or any Accepted Order or as may exist at law or in equity, as may be limited or otherwise affected by this Agreement.
20.4	Effect of Termination. Notwithstanding expiration or any termination of this Agreement or any Accepted Order, Sections 3.2 (Payment Terms), 11.3 (Survival of Support Obligations), 13 (Confidential Information), 15 (Intellectual Property Protection and Warranty), 18 (Indemnity), 19 (Limitation of Liability), 22.11 (Governing Law), 22.14 (Disputes/Escalation Process), Exhibit A (Definitions), Exhibit I ( Discontinuance of Product and Manufacturing Rights), Exhibit K (Services and Support Requirements), Exhibit P (Insurance), all licenses granted to HP under Sections 14.4 (Software License) and 14.5 (Documentation License), and any obligations that HP may have under Exhibit M (Flexibility Agreement) will survive. HP’s audit rights under Section 5 (Audit Rights) will survive for three (3) years after expiration or termination of this Agreement.

21. Additional Obligations of Supplier

21.1	Governmental Compliance. Supplier, its agents, employees will comply with all Applicable Law and will contractually obligate its Subcontractors to comply with all Applicable Law in its performance of this Agreement, including but not limited to the specific requirements referenced Exhibit O (Governmental Compliance). Upon request, Supplier agrees to certify compliance with any Applicable Law or regulations. HP is neither responsible for monitoring Supplier’s nor Supplier’s Subcontractor’s compliance with any Applicable Law.
21.2	Trade and Logistics. HP’s compliance and operational requirements regarding Trade and Logistics are set forth in detail at https://h20168.www2.hp.com/supplierextranet/index.do. Supplier and each Supplier shipping location has the obligation for ensuring compliance with U.S. and other national export, import, customs, and trade-related laws and regulations. Supplier also understands that it is responsible for developing and implementing procedures to ensure compliance with HP’s Trade and Logistics Requirements.
21.3	Personal Data Use and Protection.

21.3.1 “Personal Data” Defined. “Personal Data” means information related to any identified, or identifiable, person or legal entity, including any HP or Supplier employees and/or customers. “Personal Data” shall also mean any additional data deemed personal data by any applicable personal data law or directive.

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21.3.2 Supplier Obligations. With regard to any Personal Data that Supplier receives from HP and/or HP Customers to perform Supplier’s obligations under this Agreement, Supplier shall comply with all of the following obligations:

(i)	Supplier shall comply with all applicable data protection laws and/or directives, all applicable export laws.
(ii)	Supplier’s use of the Personal Data is limited to performance of Supplier’s obligations under this Agreement. Supplier may only disclose Personal Data to those Supplier employees that have a need to know in order to perform Supplier’s obligations under this Agreement. Said Supplier employees must be bound by confidentiality obligations no less restrictive that those contained in Section 13 (Confidential Information) of this Agreement.
(iii)	Supplier may not disclose Personal Data to any third party without the advance, written permission of HP. Supplier shall immediately notify HP if Supplier becomes aware of any unauthorized use of disclosure of Personal Data.
(iv)	Supplier shall use the same degree of care as it uses to protect its own information of similar nature (but never less than a reasonable degree of care) to prevent unauthorized use, dissemination or publication of Personal Data. Personal Data shall also be considered Confidential Information and treated in accordance with the requirements for Confidential Information under this Agreement.
(v)	Supplier shall, at HP’s request, and upon termination of this Agreement, deliver to HP any Personal Data in Supplier’s possession and, if copies were made, destroy all copies of Personal Data. Supplier’s Personal Data obligations stated herein shall survive expiration or termination of this Agreement.
(vi)	Personal Data in Storage Devices. As to Personal Data contained in data storage devices that may be returned to Supplier for “Supply Chain Processes” (“Supply Chain Processes” is defined as repair, refurbishment, recycle or scrap):

(a)    Supplier shall implement and maintain appropriate security processes to ensure that unauthorized persons will not have access to data storage devices returned to Supplier;

(b)    Supplier will not access Personal Data on the data storage device beyond that point which is required to repair or refurbish the data storage device;

(c)    Supplier will not provide access to the data storage device except to Supplier’s employees who require access in order to perform Supplier’s Supply Chain Processes.

(d)    Personal Data contained in data storage devices, where the data storage device is not returned to originator, will not be retained longer than is required for Supplier to perform its Supply Chain Process, at which point said Personal Data will be destroyed in accordance with leading industry practices.

21.4

Insurance. Without limiting any of the obligations or liabilities of Supplier, Supplier will maintain, at its own expense, as long as this Agreement is in effect, insurance policies of the kind and limits listed in the attached Exhibit P (Insurance).

21.5

Social and Environmental Responsibility. Supplier warrants that in all countries in which Supplier and, to Supplier’s knowledge, information and belief, Supplier’s authorized subcontractors do business, its and their operations comply with all applicable laws and regulations governing labor and employment, employee health and safety, protection of the environment, and ethical practices, including but not limited to, laws and regulations relating to working hours, working conditions, wages, benefits, child labor, forced labor, freedom of association and equal employment opportunity. Supplier agrees to sign HP’s Supplier Social and Environmental Responsibility Agreement and comply with HP’s Supplier Code of Conduct, including establishment of

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	management systems as described therein, as set out at http://www.hp.com/hpinfo/globalcitizenship/environment/supplychain/index.html.
21.6	Product Content.

21.6.1	Supplier will furnish HP any information reasonably requested by HP to confirm the material composition of the Products or of any parts, components or other constituents of the Products or of their packaging all as supplied to HP under this Agreement or as used in any manufacturing processes.
21.6.2	Each chemical substance contained in Products is on the inventory of chemical substances compiled and published by the United States Environmental Protection Agency pursuant to the Toxic Substances Control Act.
21.6.3	Supplier will provide to HP prior to shipment a complete and accurate Material Safety Data Sheets (MSDS) for any Product for which such a data sheet is required under Applicable Law or in order for HP to sell Product in any country.

21.7

Packaging and Shipment. All Products will be shipped in conformance with all applicable national and international transportation requirements including, where applicable, regulations regarding chemicals and hazardous materials, dangerous goods, or fumigation and aeration. All packaging materials, including pallets, will be free of pests and comply with national and international regulations regarding Solid Wood Packing Materials (SWPM) where applicable. All packaging for Products will comply with HP’s General Specification for the Environment.

21.8

Access to Information Systems. In order to fulfill its obligations under this Agreement, [...***...]

22. Miscellaneous

22.1 Notices. Except for HP’s email notifications to Supplier for content changes at HP’s website references stated in this Agreement as noted in section 22.2 below, all other notices that are required to be given under this Agreement will be in writing and will be sent to the respective address as set forth in Exhibit J (Recipients for Notices), or such other address as each Party may designate by notice given in accordance with this Section. Any such notice may be delivered by hand, by overnight courier, by first class pre-paid letter or by facsimile or electronic mail transmission, and will be deemed to have been received: (a) by hand delivery, at the time of delivery; (b) by overnight courier, on the second business day after delivery to the carrier; (c) by first class mail, four (4) business days after day of mailing; and (d) by facsimile or electronic mail, immediately upon confirmation of transmission, provided however, for notice of termination or default, a confirmatory copy is sent pre-paid by first class mail or overnight courier or is hand delivered by the end of the next business day.

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22.2	Website References. Wherever in this Agreement an HP web site or web address is stated, access may require assistance of HP personnel, or HP may require Supplier to enter into one or more separate agreements concerning access or use thereof. HP reserves all rights, from and after the Effective Date of this Agreement, to revise, withdraw or otherwise modify (variously and collectively, “Change”) the contents of any web site or web address stated in this Agreement. Supplier will be required to comply with all such Changes ten Days after email notification of such Change is sent by HP to Supplier. If Supplier does not accept such Change, Supplier will provide notice of non-acceptance as set forth in Section 22.1 (Notices); provided that HP must receive notice of non-acceptance within fourteen (14) days after HP has provided Supplier notice of such Change, or Supplier will be deemed to have accepted such Change. Any use of a web site or address by Supplier after its receipt of HP’s notice of Change will constitute Supplier’s acceptance of such Change, notwithstanding any notice of non-acceptance or objection HP may receive thereafter.
22.3	Exhibits; Other Documents. The Exhibits attached to this Agreement and all other documents referred to herein are hereby incorporated by this reference and made part of this Agreement. Unless an Exhibit specifically refers to and amends a term of this Agreement, the terms and conditions of this Agreement will control and take precedence over conflicting terms in an Exhibit.
22.4	Independent Contractors. The relationship of the Parties established under this Agreement is that of independent contractors, and neither Party is a partner, employee, agent or joint venturer of or with the other. Nothing in this Agreement precludes either Party from independently developing, manufacturing, selling or supporting products similar to Product.
22.5	Assignment.

22.5.1	Neither this Agreement nor any right, license, privilege or obligation provided herein or in any Accepted Order may be assigned, transferred or shared by either Party without the other Party’s prior written consent, not to be unreasonably withheld, and any attempted assignment, transfer or sharing without consent is void; provided that Supplier may perform its obligations hereunder through any Subsidiary or Affiliate for whose performance Supplier will be responsible and remains liable and HP may assign any Order to an HP Subsidiary or HP Affiliate for whose performance HP will be responsible and remains liable.
22.5.2	Any merger, consolidation, reorganization, transfer of substantially all or a material portion of the assets of a Party, or other change in control or ownership will be considered as assignment of the purposes of this Agreement; provided that either Party may merge with or into any of its Subsidiaries, Affiliates or parent companies and may assign this Agreement or any Accepted Order to any of its Subsidiaries, Affiliates or parent companies without need for consent.
22.5.3	The assigning Party must ensure that the assignee assumes in writing or by operation of law the assigning Party’s obligations, and no assignment will relieve the assigning Party of its obligations, under this Agreement and any assigned Accepted Orders. This Agreement will inure to the benefit of and will be binding on the permitted successors and assigns of the Parties.

22.6 No Waiver.

22.6.1

No modification or waiver of, or amendment to, or release from, any provision of this Agreement or any Accepted Order and no waiver of, or release from, any breach or default hereunder, will be of any force or effect unless contained in a writing which is signed by the Party which is sought to be bound thereby, nor may same be held or considered to be a modification or waiver of, or amendment to, or release from, any other provision, nor be a waiver of or release from any other breach or default.

22.6.2

No modification or waiver of, or amendment to, or release from, any provision of this Agreement and no waiver of, or release from, any breach or default hereunder, will result

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from any conflicting, different or printed provisions of any subsequently dated sales or purchase order, order acknowledgment, or a confirmation thereof, for Product, unless such subsequent provision is stated conspicuously on the face of any such order, acknowledgment or confirmation and such order, acknowledgment or confirmation is agreed in a writing signed by an authorized representative of the Party to be bound thereby.

22.6.3

The Parties contemplate that from time to time order, acknowledgment and confirmation forms may be utilized, and the provision of this Agreement will govern and control such forms except to the extent of any such subsequent provision as aforesaid. The failure of any Party to enforce any provision of this Agreement, or to exercise any right, will not be considered a waiver of that provision or right.

22.7	No Third Party Beneficiary. This Agreement does not confer any right or remedy other than to the Parties hereto and their respective permitted successors and assigns, and no action may be brought against any Party hereto by any third party claiming as a third party beneficiary to this Agreement or any Accepted Order. Nothing in this Agreement is intended to relieve or discharge any obligation or liability of any third party to any Party to this Agreement, and nothing herein confers, or is intended to give any third party, any right of subrogation.
22.8	Headings; Interpretation. The Section titles and headings used in this Agreement are for reference only and do not limit or extend the meaning of any provision of this Agreement, and will not be used in interpretation of any provision of this Agreement. All terms defined in this Agreement in the singular form will have comparable meanings when used in the plural form and vice versa. References in this Agreement to “Sections”, and “Exhibits” are to sections and exhibits herein or hereto unless otherwise indicated. The words “include” and “including” and words of similar import when used in this Agreement will not be construed to be limiting or exclusive.
22.9	Severability. If any provision in this Agreement is held invalid or unenforceable by a body of competent jurisdiction, such provision will be construed limited or, if necessary, severed only to the extent necessary to eliminate such invalidity or unenforceability. The Parties will negotiate a valid, enforceable substitute provision that most nearly effects the Parties’ original intent in entering into this Agreement or to provide an equitable adjustment in the event no such provision can be added. The other provisions of this Agreement will remain in full force and effect.
22.10	Entire Agreement. This Agreement, together with the Exhibits, comprise the entire understanding between the Parties with respect to the subject matter hereof and supersede any previous or contemporaneous communications, representations or agreements, whether oral or written, with respect thereto; provided that any separate non-disclosure agreement between the Parties will continue unchanged and in full force and effect according to its terms. For purposes of construction and interpretation, this Agreement will be deemed to have been drafted by both Parties, and no ambiguity will be construed in favor of or against either Party.
22.11	Governing Law. This Agreement and any dispute related to or arising out of this Agreement will be governed in all respects by New York law without reference to any choice or conflict of laws provisions of New York or the law of any other jurisdiction. The Parties exclude application of the 1980 United Nations Convention on Contracts for the International Sale of Goods, if applicable. The Parties hereby submit to the jurisdiction of the courts of California with subject matter jurisdiction, and waive any venue objections against the United States District Court for the Northern District of California, San Jose Branch and the Superior and Municipal Courts of the State of California, Santa Clara County, in any litigation arising under this Agreement.
22.12	Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. If this Agreement is executed in counterparts, no signatory hereto will be bound until all Parties have duly executed, or caused to be duly executed, a counterpart of this Agreement.

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22.13

Authority of Signatory. If HP or Supplier executed this Agreement by agent or representative, such agent or representative by his/her act of signing this Agreement individually warrants and represents to the Parties, and HP and Supplier warrant and represent respectively to each other, that he/she is authorized to execute, acknowledge and deliver this Agreement on behalf of HP or Supplier, as the case may be, and thereby to bind the respective Party to the same.

22.14

Disputes/Escalation Process.

22.14.1	The escalation process for Support is set forth in Exhibit K (Service and Support Requirements).
22.14.2	Supplier and HP will attempt in good faith to resolve all disputes under this Agreement by mutual agreement before initiating any legal action or attempting to enforce any rights or remedies hereunder; provided that nothing herein will prevent either Party from giving notice at any time of default as set forth in Section 17 (Events of Defaults and Remedies) or termination as set forth in Section 20 (Termination).
22.14.3	In the event of a dispute, and as a required precondition to initiating legal action (other than for an injunction or restraining or protective order), either Party must give notice to the other Party, and within [...***...] after receipt of the notice, HP’s procurement representative and his/her corresponding functional-level counterpart at Supplier will meet to discuss and attempt to resolve the dispute.
22.14.4	If a resolution mutually recognized as such by both Parties is not achieved within [...***...] thereafter, the dispute will be referred to senior officers of the Parties of comparable rank or position who will meet to discuss and attempt a resolution of the dispute.
22.14.5	If within [...***...] after referral the dispute remains unresolved, both Parties may pursue any or all rights and remedies as may exist at law or in equity, as may be limited or otherwise affected by this Agreement.
22.14.6	If either Party fails to meet or discuss a dispute as provided above, such Party covenants not to commence a suit as to that dispute, other than for an injunction or restraining or protective order. The failure or refusal of either Party to meet and discuss any dispute as provided above will entitle the other Party to immediately exercise and pursue any such right or remedy, including commencement of a suit as to the dispute. Nothing herein will prevent either Party, at any time, from suggesting referral of any dispute to mediation before a mutually acceptable mediator under mutually acceptable rules and procedures.

IN WITNESS WHEREOF, the Parties, intending to be legally bound, have executed this Agreement by their respective authorized representatives as of the Effective Date.

DOT HILL SYSTEMS CORP.	HEWLETT-PACKARD COMPANY
/s/ Dana Kammersgard	/s/ Jeff J. Kato
Authorized Signature	Authorized Signature
9/4/07	9/10/2007
Date	Date
Dana Kammersgard	Jeff J. Kato
Printed Name	Printed Name
President & CEO	Director of Nearline Disk SWD
Title	Title

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EXHIBIT A
DEFINITIONS

1. Definitions. As used in this Agreement, and in addition to other terms elsewhere defined in this Agreement, each of the following terms has the indicated meanings:

“Accepted Order” means an Order as to which Supplier has issued its Acknowledgment accepting the Order or which is deemed accepted as set forth in Exhibit D, Section 1.4 or which otherwise constitutes a contract under Applicable Law, is legally binding or legally enforceable.

“Acknowledgment” means a written or electronic acknowledgment or confirmation issued by Supplier in response to and following Supplier’s receipt to of an Order issued by HP or an Eligible Purchaser to Supplier for Delivery of Product.

“Affiliate” means an entity whose voting shares are owned less that fifty percent (50%), but at least ten percent (10%), by a Party to this Agreement and which is not controlled by, or under common control with, a Party to this Agreement as its Subsidiary.

“Applicable Law” means all constitutions, laws, statutes, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits and legally binding requirements of all federal, state and local governmental authorities applicable to any Party’s performance under this Agreement.

“Auditor” has the meaning given it in Section 5.1 (Audit Rights).

“Blanket Purchase Order” has the meaning given it in Section 1.3 of Exhibit D (Ordering and Shipment of Product), Section 1.3.

“BRP” has the meaning given it in Section 12 (Business Recovery Plan; Loss Control).

“Business Day” (whether initial letters are capitalized or not) means a Day other than a Saturday, Sunday or a Day on which U.S. commercial banks in California, or, if different, commercial banking institutions in the location at which performance of an act or obligation under this Agreement is to occur, are closed or required to close under Applicable Law.

“Confidential Information” has the meaning set forth in Section 13.1 (Confidential Information).

“Control” (including the terms “controlling”, “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise.

“Cover Costs” has the meaning given it in Section 17.3 (Cover Costs).

“Day” (whether initial letter is capitalized or not) means a calendar day and includes Saturdays, Sundays and holidays, except that, in the event that an obligation to be performed under this Agreement falls due on a day other than a Business Day, the obligation will be deemed due on the first Business Day thereafter.

“Delaying Cause” has the meaning set forth in Section 16.1 (Delaying Causes).

“Delivery” or “Deliver” means, in accordance with an Accepted Order and this Agreement, delivery to a common carrier for shipment and arrival of Product at the receiving area, as HP or an Eligible Purchaser may designate, and Supplier may agree, from time to time during the Term.

“Delivery Date” means the date specified in an Accepted Order for the Delivery of Product by Supplier to the destination required under the Accepted Order.

“Developed Materials” means the Industrial Design of the Product as identified in Exhibit Q (Industrial Design of the Product).

HP Confidential

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EXHIBIT A
DEFINITIONS (CONTINUED)

“Discontinued Product” has the meaning set forth in Exhibit I (Discontinuance of Product and Manufacturing Rights) Section 1.1.

“Documentation” means the technical documentation that Supplier will provide with Product from time to time during the Term and to the extent HP may reasonably request and show need for access.

“Effective Date” has the meaning given it in the introduction to this Agreement.

“Eligible Purchaser” means any legal entity which is authorized to purchase Product pursuant to this Agreement as provided in Section 1.3 of this Agreement and that is identified in Exhibit C (Eligible Purchaser Under This Agreement).

“Emergency Order” has the meaning set forth in Section 1.5 Exhibit D (Ordering and Shipment of Product).

“Engineering Change” has the meaning set forth in Exhibit F (Engineering Process or Design Changes) at Section 1 (Engineering Process or Design Changes).

“Epidemic Failure” has the meaning set forth in Section 8.1 (Epidemic Failure) and Exhibit N (Quality and Compensation).

“Event of Default” has the meaning given it in Section 17.1 (Events of Default).

“Forecast” means HP’s non-binding estimate of purchases of Product over [...***...], or such other period as may be designated by the Parties.

“Goods” has the meaning given it in Section 1.2 (General).

“HP” has the meaning given it in the introduction to this Agreement.

“HP Contractor” or “Contractor” means any third party which performs work for HP or HP Subsidiaries or Affiliates and which requires Product from Supplier. HP Contractors are independent contractors of HP or its Subsidiaries or Affiliates and are not legally related to HP or its Subsidiaries or Affiliates as agent, employee, partner, joint venturer or in any other manner.

“HP-Owned Technology” means the Industrial Design of the Product as identified in Exhibit Q (Industrial Design of the Product).

“HP Products” means the HP products or systems that include or incorporate Products.

“HP Property” means all property including without limitation models, tools, equipment, copies of designs and documentation and other materials that may be furnished to Supplier by HP or on HP’s behalf or separately paid for by HP for use by Supplier in connection with this Agreement or any Order.

“HP Warehouse” means any facility which is owned, leased, rented or use of which is otherwise arranged by HP where HP inventory, including raw material, components and work-in-process, may be stored.

“HP’s General Specification For the Environment” means the requirements and specifications set out in HP’s General Specification for the Environment, [...***...]. For purposes of this Agreement such requirements and specifications are part of the Specifications for Product.

“Hubs” means Supplier’s logistic service providers which store, maintain or handle Supplier Managed Inventory.

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EXHIBIT A
DEFINITIONS (CONTINUED)

“Indemnitees” has the meaning given it in Section 15.3 (Supplier’s Duty to Defend).

“Industrial Design” means the design, shape, color, aesthetics, and/or texture of the “face” or front of the Product, including the HP logo affixed thereto, as further described on Exhibit Q (Industrial Design of the Product), and excluding any manufacturing processes to produce any or all of the foregoing features.

“Infringing Product” has the meaning set forth in Section 15.6 (Remedies for Infringing Product).

“Intellectual Property Rights” means any ideas, whether or not patentable, inventions, discoveries, processes, works of authorship, marks, names, know-how, and any and all rights in such materials on a worldwide basis, including any rights in patents, inventor’s certificates, utility models, copyrights, moral rights, trade secrets, mask works, trade names and marks and other analogous rights.

“IP Claim” has the meaning set forth in Section 15.3 (Supplier’s Duty to Defend).

“Lead Time” means the time between the date an Order is issued and the Delivery Date.

“Mark” (whether initial letter is capitalized or not) means any trademark, service mark, trademark and service mark application, trade dress, trade name, logo, insignia, symbol, design or other marking identifying a party or its products.

“Month” or “Year” means calendar month and year.

“Non-cancelable Order” means an Accepted Order that due to agreement of the Parties may not be rescheduled or canceled by HP, except as set forth in Section 1.10 of Exhibit D (Ordering and Shipment of Product). Any Accepted Order for Unique Product will be deemed to be a Non-cancelable Order.

“Non-conforming Product” means any Product which at any time during the applicable warranty period does not comply with the Specifications or otherwise does not comply with the requirements of an Accepted Order or this Agreement.

“Non-SMI” has the meaning set forth in Exhibit D (Ordering and Shipment of Product) Section 1.9.

“Notice Period” has the meaning given it in Exhibit I (Discontinuance of Product and Manufacturing Rights) Section 1.1.

“Order” means a written or electronic purchase order or release issued by HP or an Eligible Purchaser to Supplier for Delivery of Product.

“Parts” means the spares replacements, components and other items that may be supplied in conjunction with or as additions to Product.

“Personal Data Use and Protection” has the meaning given it in Section 21.3 (Personal Data Use and Protection).

“Pre-Existing Intellectual Property” means the Intellectual Property Rights of a Party existing prior to the commencement of any work performed pursuant to the Agreement and all Intellectual Property Rights that are created outside of the scope of this Agreement without the use of the other party’s confidential information or materials.

“Product” or “Products” includes any Goods and Services set forth in Exhibit B (Product Description and Specifications), Parts, Software and all related Documentation and other deliverables provided pursuant to this Agreement.

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EXHIBIT A
DEFINITIONS (CONTINUED)

“Production Failure” has the meaning given it in Section 12.3 (Production Failure).

“Product Failure Alternative Facility” has the meaning given it in Section 12.3.3.

“Product Warranty Period” has the meaning given it in Section 7.2.2.

“Return Materials Authorization” or “RMA” has the meaning set forth in Exhibit H (Product Returns; Non-Conforming Product) Section 1.1.

“Schematics” means construction and assembly drawings, photo-tooling for Printed Circuit Boards (PCBs), and codes, software or firmware for custom or proprietary components.

“Services” has the meaning set forth in Section 1.2 of this Agreement and in Exhibit K (Services and Support Requirements).

“Shipment” (whether initial letter is capitalized or not) means the date of shipment from Supplier’s facility, or in the case of Product shipped from a third party warehouse, the date of shipment from the third party warehouse to HP or an Eligible Purchaser’s facility.

“Software” means all source code, firmware, embedded code, object code, microcode, and executable files that are contained in or distributed with the Product, including all updates and upgrades thereto, and the related documentation.

“Specifications” means Supplier’s standard specifications for Product, the technical and functional requirements for Product set forth in Exhibit B (Product Description and Specifications), HP’s General Specifications for the Environment, and any other requirements which may be attached hereto or referred to herein or agreed to by the Parties or which may be published in Supplier’s manuals and technical data sheets for Product in effect on the date Supplier Delivers the corresponding Order.

“Subcontractor” means any third party, under contract or other arrangement with Supplier, with responsibility for supply of components or parts for Product, Support of Product, or for assembly, storage or configuration of Product.

“Subsidiary” means an entity controlled by, or under common control with, a Party to this Agreement, through ownership or control of fifty percent (50%) or greater of the voting power of the shares or other means of ownership or control, for as long as such ownership or control continues to exist.

“Supplier” has the meaning given it in the introduction to this Agreement.

“Supplier IP” means the intellectual property that is created by Supplier under this Agreement, including that which is described in Exhibit B (Product Description and Specifications) (but that is not funded by HP and is not Industrial Design) and to which Supplier will retain all Intellectual Property Rights, as per Exhibit Q (Industrial Design of the Product).

“Supplier Managed Inventory” or “SMI” means a program or process for Supplier’s inventory to be stored at Hubs or within Supplier’s designated area within an HP Warehouse.

“Supplier Management Process” or “SMP” has the meaning given it in Exhibit G (Quality) Section 5 (Supplier Rating).

“Support” means technical support and other Services as set forth in Exhibit K (Service and Support Requirements), standard services Supplier customarily provides for Product, or substantial equivalent, and services for Product mutually agreed to be provided by Supplier to HP; provided that if Product includes or constitutes Software, Support also includes fixes, updates and upgrades, unless otherwise agreed.

HP Confidential

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EXHIBIT A
DEFINITIONS (CONTINUED)

“Technical Information” means Supplier’s manufacturing information and technology to produce Product and provide Support, including without limitation: (i) specifications, software, schematics, designs, drawings, or other materials pertinent to the most current revision level of manufacturing of Product; (ii) copies of all inspection, manufacturing, test and quality control procedures and any other work processes; (iii) jig, fixture and tooling designs; (iv) supplier history files; (v) support documentation; and (vi) any additional technical information or materials that may be agreed to by the Parties.

“Term” has the meaning set forth in Section 1.4 (Term of Agreement).

“Tools” means the jigs, fixtures, tools, molds, dies, stamps, prototypes, schematics, designs, and all documentation and material relating thereto that Supplier, its subcontractors, agents, and/or employees generate that relate to the Industrial Design of the Product.

“Unique Product” means Product that is unique in nature, customer-specific to HP and cannot be resold by Supplier to customers other than HP without major modification.

HP Confidential

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EXHIBIT B
PRODUCT DESCRIPTION AND SPECIFICATIONS

1.	Product Description.
	[...***...]
2.	Product Specifications.
	Product will conform to Specifications. Specifications include without limitation:

2.1	[...***...].
2.2	Safety and regulatory agency requirements
2.3	HP’s Packing and Shipping Requirements specified in Section 21 of the Agreement
2.4	Technical requirements specified in Accepted Orders
2.5	The attached Statement of Work, [...***...]

3. Changes to Specifications, SOW or other technical requirements.

If the parties mutually agree, in writing, to changes to the Specifications, the SOW, or any other technical requirements under this Agreement, such changes will automatically be made a part of this Agreement, including this Annex B, without the need to make a formal amendment to the Agreement. Emails that are exchanged between authorized members of either party, that explicitly confirm the agreement by both parties to a technical change shall constitute the parties mutually, written agreement for purposes of this section.

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***Confidential Treatment Requested

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EXHIBIT C
ELIGIBLE PURCHASERS UNDER THIS AGREEMENT

1. All entities listed in Section 2 of this Exhibit C may purchase Product pursuant to this Agreement; provided that:

1.1	Nothing in this Agreement makes HP liable or otherwise responsible for any purchase or obligation of any HP Subsidiary, HP Affiliate or HP Contractor;
1.2	Except for HP Subsidiaries and HP Affiliates, any credit line extended to an Eligible Purchaser will be subject to Supplier’s normal credit standards and approval procedures in effect from time to time during the Term;
1.3	Any purchase by any such Eligible Purchaser is for production of HP Products or is otherwise related to HP Products; and
1.4	As may reasonably be requested by Supplier, HP will provide reasonable confirmation that any such purchase by any such Eligible Purchaser is intended by HP for HP Products.
1.5	Each Eligible Purchaser will state, when purchasing Product pursuant to this Agreement, as may be reasonably acceptable in form and substance to Supplier, that such Eligible Purchaser is purchasing Product pursuant to this Agreement and agrees to be bound by its terms and conditions.

1.5.1 With respect to any Accepted Order for Product, [...***...]. In addition, all of Supplier’s warranties specified in this Agreement run to Eligible Purchaser, and said Eligible Purchaser will be entitled to exercise HP’s right of this Agreement. Even if HP purchases Product from Supplier for resale to Eligible Purchaser, all of Supplier’s warranties will run to Eligible Purchaser. [...***...]; provided that nothing herein restricts or otherwise limits modification or waiver of this Agreement, or part hereof, with respect to any such Order upon mutual agreement in writing between Supplier and any Eligible Purchaser, and provided further that:

1.5.1.1	Any termination by Supplier or an Eligible Purchaser and any exercise of rights and remedies by Supplier or an Eligible Purchaser are limited, in each case, to the Accepted Orders from such Eligible Purchaser;
1.5.1.2	In the event of Non-conforming Product, the Eligible Purchaser under the Accepted Order out of which the Non-conforming Product arises, or HP acting on its own behalf or that of such Eligible Purchaser may, in each such case, make claims and exercise all available rights and remedies, but there can be no double recovery for any occurrence;
1.5.1.3	HP may treat any default in performance by Supplier under an Accepted Order with an Eligible Purchaser as an Event of Default whereupon HP may exercise all available rights and remedies. Supplier may treat any default in performance by an Eligible Purchaser as an Event of Default whereupon Supplier may exercise all available rights and remedies; and
1.5.1.4	Anything in this Agreement to the contrary notwithstanding, any liability disclaimer or limitation in this Agreement applicable to HP or Supplier will be applicable to each Eligible Purchaser and to Supplier.

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2. List of Eligible Purchasers. The Parties will meet as necessary to formally update this Exhibit C to accurately reflect entities qualifying as Eligible Purchasers.

A.	Corporate Name:
	Address:
B.	Corporate Name:
	Address:
C.	Corporate Name:
	Address:
D.	Corporate Name:
	Address:
E.	Corporate Name:
	Address:

HP Confidential

Dot Hill Systems PPA: PRO02542-060507

EXHIBIT D
ORDERING AND SHIPMENT OF PRODUCT

1. Ordering and Shipment of Product.

1.1	In General. HP or an Eligible Purchaser may purchase Product in one or more of the following ways: (a) by issuing an Order, (b) by issuing a Blanket Purchase Order, or (c) according to any applicable SMI process.
1.2	Orders. Each sale and purchase of Product under this Agreement will be initiated by an Order issued to Supplier by HP or an Eligible Purchaser. Each Order will include quantity and price, shipping destination, proposed Delivery Date and other instructions or requirements pertinent to the Order. HP or an Eligible Purchaser may schedule regular intervals for Deliveries in such Order. This Agreement applies to all Orders for Product and all Acknowledgements of Orders whether or not the Order or Acknowledgment refers to this Agreement. Any preprinted terms in any Orders or Acknowledgements that attempt to add to, modify, or contradict the terms of this Agreement are not to be given effect unless specifically agreed to in a signed writing.
1.3	Blanket Purchaser Order. HP or an Eligible Purchaser may issue a Blanket Purchase Order to indicate that it may order the listed Products within the period covered by such Blanket Purchase Order. Blanket Purchase Orders do not represent a commitment by HP or the Eligible Purchaser to buy the volume indicated. Blanket Purchaser Orders will include the quantity, part number and revision level of the Product. A Blanket Purchase Order will be used for fulfillment purposes until the earlier of the expiration of such Blanket Purchase Order or depletion of the quantity or dollar limit for the Products under such Blanket Purchase Order. Supplier will honor and fulfill all Forecasts it received from HP and/or the Eligible Purchaser that are associated with a Blanket Purchase Orders as per its obligations set forth in Exhibit M (Flexibility Agreement). Supplier is deemed to have Acknowledged and accepted a Blanket Purchase Order upon submission if such document conforms to this Agreement.
1.4	Order Acceptance and Acknowledgment. Each Order will be deemed to have been placed as of date of issuance of the Order by HP, subject to receipt by Supplier. Supplier will promptly confirm to HP receipt of an Order electronically or through facsimile. Within [...***...] following receipt of the Order, Supplier will issue an Acknowledgment which accepts or rejects the Order; provided that if [...***...] after issuance of the Order HP has not received Supplier’s Acknowledgment or rejection, the Order will be deemed accepted as issued. Unless otherwise expressly agreed by HP, Delivery must be in strict conformity with Accepted Orders.
1.5	Emergency Orders. HP or an Eligible Purchaser may issue Orders on an emergency basis (“Emergency Order”). Subject to availability of Product, Supplier will fill Emergency Orders upon acceptance thereof by Supplier.
1.6	Forecasts. As Supplier may reasonably request, but no more frequently than [...***...], HP will provide a rolling Forecast of projected Orders. Any quantities listed in any Forecast or other correspondence between the Parties are estimates made by HP as an accommodation to Supplier and do not constitute a commitment by HP to purchase any such quantity. HP may revise any Forecasts as necessary.
1.7	Lead Time. Lead Time for each item of Product [...***...]. Either party may request a change in Lead Times at any time, and any change announced by Supplier will apply unless otherwise agreed; provided that Lead Times may not be materially lengthened on less than [...***...] prior notice.
1.8	Non-conforming Orders. HP and Supplier recognize that from time-to-time circumstances may arise that require flexibility and cooperation in the order and delivery of supply outside the requirements of this Exhibit D. HP will use reasonable commercial efforts to place Orders for Product within Forecasts and Lead Times and for Orders exceeding Forecasts or shortening Lead

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EXHIBIT D
ORDERING AND SHIPMENT OF PRODUCT (CONTINUED)

	Time, Supplier will [...***...].
1.9	Inventory Requirements. HP may request Supplier to deliver Product either through a non-Supplier Managed Inventory (“Non-SMI”) process or to use an SMI process, as may be agreed by the Parties. There is no inventory requirement under a non-SMI process. Use of an SMI process, whether with Hubs, HP Warehouse or otherwise, may require additional or different terms and conditions and is subject to mutual agreement. Inventory requirements for an SMI process may be agreed by the Parties. Without limiting any of the obligations or liabilities of Supplier, Supplier will maintain, at its own expense, as long as this Agreement is in effect, insurance policies of the kind and limits listed in Exhibit P (Insurance).
1.10	Order Changes. To the extent that Order changes are addressed in Exhibit M (Flexibility Agreement), those terms will control the increase or decrease of Orders as well as any liability that HP may have in relation to the increase, decrease or cancellation of Orders with respect to finished goods, raw materials, or Work in Progress. Absent an Order change issue being addressed in Exhibit M (Flexibility Agreement), this Section 1.10 will control.

1.10.1	HP and Eligible Purchaser may, without charge, postpone, decrease or increase any Accepted Order by notice to Supplier as set forth in this Section; provided that any increase in quantity or any rescheduling to an earlier Delivery Date [...***...].
	At any time prior to Shipment, HP and Eligible Purchaser may postpone any Accepted Order; provided that [...***...]. At any time prior to Shipment, HP and Eligible Purchaser may decrease any Accepted Order; [...***...].
1.10.2	Accepted Orders for Product may be canceled at any time prior to Supplier’s commencement of production.

1.11

Purchase Reports. Within [...***...] after close of each HP fiscal quarter, Supplier will provide HP a report which details purchases of Product by HP and all Eligible Purchasers by item, quantity and purchase location, showing total quantities shipped, total dollars invoiced, returns, percent of on-time and on-quality orders and such other information as HP and Supplier may mutually determine is appropriate. Reports will be sent to HP’s and Eligible Purchaser’s respective Purchaser locations and a report detailing HP’s and Eligible Purchaser’s total purchases will be sent to HP’s primary contact set forth in Exhibit J (Recipients for Notice).

1.12

Delivery, Shipment and Packaging. Supplier will comply with the terms for delivery, shipment and packaging as set forth in the website referenced in Section 21.2 of this Agreement (Trade and Logistics).

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EXHIBIT E

PRICING

Supplier will provide a Product and Parts/Spares pricing schedule to HP [...***...]. The pricing schedule will include Supplier’s part number, HP’s part number, description and quarterly pricing for new Product and new and repair Parts/Spares based on HP’s fiscal quarter. Supplier agrees to provide [...***...] and Supplier agrees that [...***...]. Supplier agrees to provide [...***...].

Pricing provided is in US$ dollars.

Initial pricing is per the table below. Per unit pricing for the Product does not include [...***...]. All future pricing changes will be managed via a working spreadsheet submitted via HP’s web based e-sourcing tool. All future price changes are automatically incorporated into this Agreement as reference.

[...***...]

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EXHIBIT F
ENGINEERING PROCESS OR DESIGN CHANGES

1.	Supplier Proposed Changes. Except as set forth in this Exhibit F, Supplier will not make or incorporate in Product any of the following changes if such changes affect [...***...] (each an “Engineering Change” and collectively, “Engineering Changes”):
	[...***...]

2. Disk Drive Firmware Qualification and Change Management. Supplier is responsible for identifying and qualifying a version of disk drive firmware for use in the Product shipped by HP. HP requires that the selected, qualified version of firmware will be kept under change control. Supplier will identify to HP the drive firmware revision they have presently qualified and have incorporated into the Product and any prototypes of the Product being purchased by HP for development and testing.

3. Notice of Proposed Change. Supplier will notify HP in writing of any proposed Engineering Change. [...***...], Supplier may not provide Product involving an Engineering Change to HP for production usage until HP has notified Supplier, in writing, that it has completed its qualification testing.

2.1	If any Engineering Change [...***...].
2.2	If as a result of such an Engineering Change HP would be unable to utilize Product due to a failure under HP’s qualifications, Supplier will continue to provide Product without the Engineering Change until Supplier and HP resolve any qualification issues.
2.3	If a resolution mutually recognized as such by both Parties is not achieved within a reasonable time, Supplier may, [...***...].

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Notwithstanding anything to the contrary herein, HP shall not unreasonably withhold, delay or condition its approval to any Engineering Change that Supplier desires to implement to the Products. All Engineering Changes will be documented in Supplier’s electronic engineering change system. HP shall document promptly its approval or rejection of each Engineering Change that Supplier requests in the same system.

3. HP Proposed Changes. HP may change HP supplied drawings or designs or the Specification at any time prior to manufacture, effective upon notice to Supplier. If any such change affects price, component obsolescence, quality performance or delivery schedules of Product, an impact proposal prepared by Supplier will be presented to HP for approval prior to Supplier initiating any change. Supplier may make written claim for any equitable adjustment related to such change within [...***...] from the date HP gives notice to Supplier of such change, or such claim will be deemed untimely and adjustment with respect thereto will be waived, renounced, released and forever barred.

4. Safety Standard Changes. Supplier will provide HP oral notice, to be followed by written notice, or email notice within [...***...] of Supplier having knowledge of the need for any upgrade, substitution or other change required to make Product meet applicable safety standards or requirements of Applicable Law. HP may require that all affected Product be reworked to meet such standards or requirements and Supplier, in its discretion, will accomplish the same by either requesting that Product be returned to Supplier for upgrade to current revisions or be upgraded by Supplier or HP in the field.

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aur

EXHIBIT G
QUALITY

1. Quality System. Supplier will maintain a quality system that ensures compliance with this Agreement and meets at least one (1) of the following:

1.1	Currently certified to the applicable ISO 9000 series of standards for the Products;
1.2	Maintains a quality management system and manual that complies with the applicable ISO 9000 quality systems series of standards;
1.3	[...***...]; or,
1.4	[...***...].

2. Documentation. Supplier, upon written request from HP, will provide to HP copies of Supplier’s quality system documentation and supporting test documentation. The Parties will create and maintain a combined team to provide oversight of Supplier’s quality systems to ensure Supplier’s compliance with this Agreement.

3. HP’s Right to Inspect Facilities. With reasonable advance notice and in compliance with Supplier’s security and safety requirements, HP and/or its designated representative may inspect Supplier’s production and repair facilities (including but not limited to Product, raw materials, equipment associated manufacturing processes, test and inspection data, reliability data, failure analysis data, corrective action data, and training data) to ensure compliance with this Agreement. HP’s inspection may be for any reason related to this Agreement, including to ensure Supplier’s compliance with HP’s requirements. Supplier will inform its Subcontractors and suppliers of HP’s right to inspect their facilities and will use reasonable efforts to secure such rights at no charge to HP.

4. Reports. Supplier will provide quality-related reports and such other reports and information as HP may reasonably request.

5. Supplier Rating. HP periodically reviews its suppliers through the Procurement Management Process (“PMP”). Supplier will participate in the PMP review process.

HP Confidential

***Confidential Treatment Requested

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EXHIBIT H

PRODUCT RETURNS; NON-CONFORMING PRODUCT

1. Product Returns; Non-conforming Product.

1.1	Return Material Authorization. Product received by HP and Eligible Purchasers but not yet shipped to HP customers may be returned to Supplier as set forth in this Exhibit H. Product returned to Supplier will be accompanied by a Return Materials Authorization (“RMA”). Unless Supplier reasonably requires further verification, Supplier will provide an RMA within [...***...] of HP’s request. [...***...].
1.2	Return Charges. All Non-conforming Product will be returned to Supplier [...***...], and all replacement Product will be shipped by Supplier at Supplier’s expense.
1.3	Duty to Remove Marks or Destroy Non-conforming Product. Supplier will not sell, transfer or otherwise relinquish possession of Product which bears any HP Mark, part number or identifier, including any HP packaging, copyright, color or design scheme or code, other than as may be Ordered for Delivery by HP or Eligible Purchasers.

1.3.1	Supplier will not sell, transfer or otherwise relinquish possession, dispose of, or reuse or remanufacture Non-conforming Product which bears any HP Mark, part number or other such identifier unless Supplier removes same therefrom, even if such removal would result in destruction of the affected Product or Non-conforming Product.
1.3.2	Supplier will not represent any Product as built for HP or to HP specifications; provided that nothing herein limits or otherwise affects Supplier’s right to represent Product as functional in or compatible with any HP Products or as complying with or conforming to specifications for HP Products, when such representation is true and correct in all material respects.
1.3.3	All manufacturing overruns of HP branded Product or defective HP branded Product will be destroyed by Supplier in a secure manner upon HP’s authorization or reworked to remove any HP Mark, part number or other such identifier. At no time may an HP branded Product be sold or transferred to another party without HP’s prior written authorization.

1.4 Recycle or Disposal. Supplier will recycle or dispose of any excess or waste Product including manufacturing overruns, damaged or defective Product, and Non-conforming Product returned to Supplier and non-repairable Non-conforming Product returned to Supplier in compliance with the provisions of this Agreement, Applicable Law and any specific instructions received from HP. Any proceeds received by Manufacturer on account of any recycling or destruction carried out under this section will be credited to HP. Other than instances of excess, waste, damaged or defective Products as set forth above, HP shall be responsible for the disposal of Product by or for its Customers, including any WEEE initiatives required.

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EXHIBIT I

DISCONTINUANCE OF PRODUCT AND MANUFACTURING RIGHTS

1. Discontinuance of Product.

1.1	Lifetime Buy Rights. Unless otherwise agreed, Supplier may discontinue the manufacture or supply of any Product no earlier [...***...] after date of first Delivery to HP of the Product. If thereafter Supplier determines to discontinue the manufacture or supply of the Product (a “Discontinued Product”), Supplier will give written notice to HP no less than [...***...] in advance of the last date the Discontinued Product can be ordered (the “Notice Period”). During the Notice Period, HP may purchase from Supplier a commercially reasonable quantity of the Discontinued Product under the terms of this Exhibit I.
	[...***...]
1.2	Survival of Lifetime Buy Rights. Supplier’s obligations to provide lifetime buy rights as set forth in Section 1.1 [...***...] will continue and survive expiration or any termination of the Agreement for [...***...] after expiration or any termination of this Agreement. Notwithstanding any expiration or termination of this Agreement, Supplier may, at its discretion, provide lifetime buy rights as set forth in Section 1.1 for [...***...] following any such expiration or termination.
	[...***...]

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	[...***...]
1.4	Survival of Lifetime Buy Rights. Supplier’s obligations to provide [...***...] will continue and survive expiration or any termination of the Agreement for [...***...] after expiration or any termination of the Agreement.

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EXHIBIT J
RECIPIENTS FOR NOTICES

For HP:		For Supplier:
Name:	Mike Prus	Name:	Bart Asquith
Title:	Commodity Manager	Title:	Director, OEM Sales
Address:	200 Forest Street	Address:	7420 East Dry Creek Pkwy
	Marlboro, MA 01752		Longmont, CO 80503
Phone Number:	508-467-2525	Phone Number:	408-377-7474
Fax Number:	508-467-2636	Fax Number:	408-377-7113
Email:	[...***...]	Email:	[...***...]

The Agreement will be facilitated by a management sponsor from each party.

The sponsors will conduct quarterly reviews concerning status of the Agreement and outlook for the future. Each sponsor will act, respectively, as an escalation path for issues arising under the Agreement during the Term with the objective of timely resolution.

The individuals indicated in this Exhibit may be re-designated at any time by their respective employers with appropriate information to the other party.

	HP NAME, ADDRESS,	SUPPLIER	SUPPLIER NAME, ADDRESS,
HP TITLE	PHONE, FAX, E-MAIL	EQUIVALENT TITLE	PHONE, FAX, E-MAIL
Program Manager	Kevin Collins	Technical Account	Paul Holladay
	3404 E Harmony Rd.	Manager	7420 E. Dry Creek Pkwy
	Ft. Collins, CO 80528		Longmont, CO 80503
	970-898-4672		303-845-3341 (office)
	[...***...]		[...***...] (cell)
			303-845-3655 (fax)
			[...***...]
Procurement Manager	Grant Reoch	Vice President WW OEM	Garrett Wein
	20555 Tomball Parkway	Sales	7420 E. Dry Creek Pkwy
	Houston, Texas 77070		Longmont, CO 80503
	281-518-0146		[...***...] (cell)
	[...***...]		[...***...]
Procurement Quality	Tim Love	Director Quality	Tom Chalmers
Engineer	20555 Tomball Parkway	Assurance and	2200 Faraday Ave
	Houston, Texas 77070	Configuration	Suite 100
	281-518-2043	Management	Carlsbad, Ca. 92008
	[...***...]		[...***...] (cell)
			760 431-4416 (desk)
			760 931-5528 (fax)
			[...***...]

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	HP NAME, ADDRESS,	SUPPLIER	SUPPLIER NAME, ADDRESS,
HP TITLE	PHONE, FAX, E-MAIL	EQUIVALENT TITLE	PHONE, FAX, E-MAIL
Commodity Manager	Mike Prus	Director, OEM Sales	Bart Asquith
	200 Forest Street		7420 E. Dry Creek Pkwy
	Marlboro, MA 01752		Longmont, CO 80503
	508-467-2525 (office)		[...***...] (cell)
	[...***...]		408-377-7177 (fax)
			[...***...]
Director Nearline Disk	Jeff Kato	EVP WW Field	Phil Davis
Systems	3404 E Harmony Rd.	Operations	7420 E. Dry Creek Pkwy
	Ft. Collins, CO 80528		Longmont, CO 80503
	970-898-3181		303-845-3200 (office)
	[...***...]		[...***...]
Services Commodity Manager	Suzi Garrison	VP of Customer Service	Steven Craig
	20555 Tomball Parkway		7420 E. Dry Creek Pkwy
	Houston, Texas 77070		Longmont, CO 80503
	281-927-2911		303-845-3251 (office)
	[...***...]		[...***...] (cell)
Product Safety and	Jeff Doolittle	Compliance Manager	Roger Mannering
Environmental Compliance	3404 E Harmony Rd.		2200 Faraday Ave
Representative	Ft. Collins, CO 77070		Suite 100
	870-898-3121		Carlsbad, Ca. 92008
	[...***...]		760-931-5595 (office)
			[...***...] (cell)
			[...***...]

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EXHIBIT K

SERVICE & SUPPORT REQUIREMENTS

K.1 SCOPE: This Exhibit K provides additional terms and conditions applicable to Supplier’s provision of the Parts identified in Exhibit E to be used for maintenance (“Spares”) and associated services to repair in and out of warranty Spares (“Services”).

K.2 SHIPMENT AND RETURNS:

K.2.1 GENERAL: Supplier will ship Spares from, and accept returns shipped to, one of [...***...] its facilities, located in [...***...], and other locations agreed to in writing by HP and Supplier. Supplier will promptly ship Spares and repair materials returned from HP. Unless HP requests a later date, Lead-Time for Spares will not exceed [...***...] and Lead-Time to repair or replace returned Spares will not exceed [...***...] from receipt of Spares. If any returned Spares are damaged and not repairable, Supplier will notify HP within [...***...] of receipt of such Spare and that such Spare will be disposed of as scrap at Supplier’s location or returned to HP. Provisions regarding forecasts or lead times set forth in Exhibit D are not applicable to the scope of this Exhibit K.

K.2.2 PRIORITY DELIVERY: In addition to any requirements regarding emergency orders that may be in the Agreement, if HP notifies Supplier that HP is experiencing a critical support situation, [...***...].

K.2.3 RMA PROCEDURE: HP will request an RMA number prior to return of any Spares and other material to Supplier. HP will provide quantity and part numbers of Spares to be returned, and will make best efforts to provide the serial number. Notwithstanding the timeframes set forth in Exhibit H, Supplier will provide the RMA number within [...***...] of HP’s request. [...***...]

K.3 TERM OF AVAILABILITY: Notwithstanding the provisions of Section 11.3 (Survival of Support Obligations) of the Agreement, Supplier will provide Spares and Services during the Term of Availability. The Term of Availability means, for each Spare the period beginning when the Spare is first shipped to HP and continuing for a minimum of [...***...] from the date Supplier last ships HP volume shipments of any Product that the Spare is used to support. Supplier must provide written notification to HP at least [...***...] prior to discontinuing provision of Spares and Services, and this notification shall identify by name and product number, the Spares affected. Supplier will fulfill HP’s order for “last buy” quantities of Spares based on such notification.

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K.4 PRICING: Purchase prices for Spares and Services are identified in Exhibit E. In the event of a change in the prices that Supplier charges HP for Products, HP and Supplier will negotiate changes to pricing for related Spares and Services within [...***...] of such changed Products pricing. Pricing changes are [...***...]. All Spares returned to Supplier [...***...], and all replacement Spares shipped by Supplier will be delivered at Supplier’s risk and expense. Terms of Sale and passage of title will be treated in the same manner as the way Products are provided for in the Agreement.

K.5 NON-REPAIRABLE SPARES WARRANTY RECOVERY: HP and Supplier may document Spares that are not economical to repair. HP will not return such Spares to Supplier. HP will scrap such Spares and advise Supplier of the identity of the scrapped Spares (through serial numbers or another reasonable method) and the quantities of in-warranty Spares that are scrapped. Supplier will issue a credit to HP based on the then current purchase price of the in-warranty Spare in the Schedule of Spares.

K.6 RIGHTS AND ASSISTANCE TO REPAIR: In the event that Supplier fails to continue to provide Spares and Services during the Term of Availability as required by the Agreement, Supplier:

[...***...]

K.7 QUALITY: Notwithstanding provisions of Section 7.1 (Product General Warranties) of the Agreement that Products be new, Spares must [...***...]

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[...***...]. Spares repaired by Supplier will conform to all Specifications, applicable to the Spare, for the longer of (i) the remaining warranty period, or (ii) [...***...] from Delivery. [...***...].

K.8 THIRD PARTY REPAIR SERVICES: HP may use a third party to manage aspects of its repair processes. Such third party repair center will be considered an Eligible Purchaser and the provisions of Exhibit C (“Eligible Purchaser”) of the Agreement shall apply. Notwithstanding the involvement of an Eligible Purchaser, HP shall remain entitled to all of its rights (including, but not limited to, warranty and indemnification) under the Agreement.

K.9 SUPPLIER MANAGEMENT PROGRAM: Supplier agrees to participate in HP’s Supplier Management Program and meet with HP at HP’s offices, as requested up to [...***...], in order to review Supplier’s performance, establish performance metrics to drive continuous improvements, and discuss other areas of mutual concern.

K.10 ORDER OF PRECEDENCE: Notwithstanding Section 22.3 of the Agreement, the terms of this Exhibit K (whether or not specific reference to made to a term of the Agreement), shall take precedence over the Agreement as such terms related to the scope of this Exhibit K.

K.11 SURVIVAL: In the event the Agreement terminates for any reason, this Exhibit K will continue as a stand alone support agreement, until the end of the latest Term of Availability, and all terms of the Agreement applicable to support will remain in full force and effect as a part of this stand alone support agreement. Agreement terms applicable to support include, without limitation, warranty, indemnification, remedies, pricing, payment, confidentiality, quality and general terms.

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EXHIBIT K-1
TECHNICAL SUPPORT AND MAINTENANCE REQUIREMENTS

1	DEFINITIONS
	In addition to the definitions set forth in the Agreement to which this exhibit is appended, the words below shall have the following meaning ascribed to them for the purposes of this Exhibit. In the event there is a conflict of terms or definitions between the Agreement and this Exhibit, the terms contained herein shall have precedence only as they pertain to this Exhibit.

1.1	“Action Plan” means [...***...]
1.2	“Current Version” means that version of the Software which is currently qualified by HP and in production and generally available to Customers. Examples: if v6.3 replaced v6.2, then v6.3 is the Current Version; if v6.0 replaced v5.0, then v6.0 is the Current Version.
1.3	“HP Customer” means the entity to which Hewlett-Packard is obligated to provide Services for Product(s) under Service Agreement(s).
1.4	“Level 1 Support” means [...***...]. Elevate to Level 2 as appropriate.
1.5	“Level 2 Support” means [...***...]. Elevate to Level 3 as appropriate.
1.6	“Level 3 Support” means [...***...].
1.7	“Level 4 Support” means [...***...]

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	[...***...].
1.8	“Media” means material that is electronically encoded with the Software(s) binary data, Documentation and/or technical product information.
1.9	“Prior Version” means that HP qualified release of the Software that is one version (major or minor) removed from the Current Version. Examples: if v6.3 replaced v6.2, then v6.2 is Prior Version; if v6.0 replaced v5.0, then v5.0 is the Prior Version.
1.10	“Problem” means a [...***...].
1.11	“Problem Resolution” means, [...***...]

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	[...***...]
1.12	“Software Information” means, [...***...].
1.13	“Supplier” shall include, when applicable, [...***...].
1.14	“Regions” means the three (3) groupings of countries where Hewlett-Packard does business (Americas, EMEA — Europe/Mid East/Africa, and AP/J — Asia Pacific/Japan).
1.15	“Revision” means any correction, modification, maintenance release, patch, bug fix, update, Upgrades, enhancement or new Version of the Software or Hardware.
1.16	“HP Services” means all services as provided by Hewlett-Packard Technology Services to its Customers under an HP Service Agreement related to the Products.
1.17	“HP Service Agreement(s)” means agreements between Hewlett-Packard and Customers for telephone support, rights to new Versions, and Update Services.

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1.18	“Service Implementation Plan (SIP)” means [...***...].
1.19	“Survival Period” means [...***...].
1.20	“Update” means any new Version of the Software or Hardware.
1.21	“Version” means that software release identification scheme generally in the form of X.YY where X represents a major release or base level version, and YY represents a minor release level.

2	Severity Definitions and Response Requirements
	Service requests to Supplier made by Hewlett-Packard will be handled in accordance with the following procedures and as may otherwise be specified in the Agreement. Hewlett-Packard will provide [...***...] and Supplier shall provide [...***...]
	Table 1 to this Exhibit summarizes the response requirements [...***...].
	When Hewlett-Packard requires backup support from Supplier, Hewlett-Packard will contact Supplier’s service delivery organization that will accept responsibility for handling the call [...***...]. For the purposes of this exhibit, [...***...].

2.1	Severity 1 Definition
	A Severity 1 problem [...***...]

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	[...***...]
2.2	Severity 2 Definition

A Severity 2 problem is [...***...]

2.3 Severity 3 Definition

A Severity 3 problem is [...***...]

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	[...***...]
2.4	Severity Level 4 Definition

“Severity 4” will be [...***...]

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Table 1

     Hewlett-Packard/Supplier Response Requirements

	Supplier
Severity	Response	Joint Action	Status	Interim Fix	Resolution	Level of
Level	Requirements	Plan	Updates	Target *	Target *	Effort
1	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]
2	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]
3	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]	[...***...]
4	[...***...]			[...***...]	[...***...]	[...***...]

* [...***...]

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3 Additional Support

3.1 Contact Information.

Supplier will provide Supplier’s point(s) of contact for Technical Support to HP as soon as practicable, but not more than [...***...] following the signing of this Agreement.

3.2 Product Materials.

Supplier will provide materials, including documentation, illustrations, and engineering updates/changes for the HP Product, as mutually agreed upon by the parties. Supplier will provide these changes in a format mutually agreed upon by the parties.

3.3 Prompt Provision of Updates.

3.3.1	Subject to HP approval, Supplier will provide updates/replacements for Software/Hardware, Maintenance Code, Documentation and Support Tools if Supplier (i) implements updates/replacements for its own similar products or (ii) if required to resolve Software and Hardware defects and keep Products current and functioning.
3.3.2	General Support. Subject to HP approval, Supplier will provide (i) updates to Support Tools, (ii) new Support Tools, and (iii) access to technical bulletins, documentation, products fixes/enhancements and the like. HP will have global access to any online resources available to Supplier’s own support organization.

3.4 Software Support.

Supplier will support the Current Version of Software, [...***...].

3.5 Training.

Supplier will provide [...***...].

3.6 Failure Analysis.

Supplier will provide technical support for failure analysis [...***...].

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EXHIBIT L
THIRD PARTY AND OPEN SOURCE SOFTWARE COMPONENTS

- [...***...]

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EXHIBIT M

FLEXIBILITY AGREEMENT

HP will provide a [...***...] rolling Forecast as defined in Exhibit D article 1.6 of this agreement. [...***...]

Supplier is authorized to use this Forecast to purchase within a reasonable lead time any materials required to support the base Forecast and the upside flexibility requirements described in this Exhibit M. Supplier will provide [...***...]. In the event of cancellation of any accepted order or termination of this agreement, for reasons other than Supplier’s default, HP’s liability will be limited as specified below.

HP shall be liable for:

[...***...]

Supplier will make commercially reasonable efforts to mitigate HP’s liability [...***...], or other methods of disposition that would serve to reduce HP’s overall liability. HP will promptly [...***...].

Supplier shall [...***...] to provide HP flexibility as set forth below, and shall [...***...].

In instances of materials or capacity constraint that adversely affect Supplier’s ability to meet HP’s then-existing or forecasted needs for Products, Supplier agrees to [...***...].

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Flex is defined as [...***...].

Notwithstanding anything herein to the contrary, if HP’s forecast is [...***...] than the actually ordered amount for any given [...***...], or is [...***...] than the actually ordered amount for any [...***...], Supplier will use [...***...] as the “forecasted” amount going forward, until [...***...].

[...***...]

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[...***...]

LISTS OF SPECIAL COMPONENTS

These lists of HP Unique and Long Lead Time Components will be reviewed and updated on a quarterly basis upon the mutual agreement of the parties.

HP Unique Components ***

[...***...]

Long Lead Time Components*

[...***...]

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[...***...]

Buffer Requirements and HUB Management:

[...***...]

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EXHIBIT N
QUALITY AND COMPENSATION EXHIBIT

1. Purpose of this Exhibit. Supplier’s obligations under Section 7 (Warranties) of the Agreement to provide defect-free, conforming products to HP are primary and material obligations of Supplier, and are not in any way changed by this Exhibit N. The purpose of this Exhibit is to set forth HP requirements for compensation and additional corrective actions by Supplier in the event that failures of Product to conform to Section 7 (Warranties) reach certain levels, as more fully described herein. The rights, remedies and obligations set forth in this Exhibit are in addition to, and are intended to supplement rights, remedies and obligations specified elsewhere in the Agreement and/or its Exhibits. Definitions for capitalized terms used in this Exhibit are to be found either where used in this Exhibit or in Section 6 of this Exhibit.

2. Epidemic Failure. For a period of [...***...] after Delivery, Supplier represents and warrants all Products against Epidemic Failure.

2.1.	“Epidemic Failure” means, [...***...]
2.2.	Any failure of Product to conform to Section 7 (Warranties) within [...***...] after Delivery constitutes an occurrence for purposes of calculating Epidemic Failure.
2.3.	If the parties mutually determine that an Epidemic Failure may occur, [...***...] and Supplier will take other appropriate action at Supplier’s expense to prevent any such occurrence and mitigate foreseeable consequences.
2.4.	Epidemic Failure Process. In the event HP or Supplier determines that there has been an Epidemic Failure, notice shall immediately be provided to the other party to resolve such situation pursuant to the terms and conditions of this Exhibit. [...***...].
2.5.	Epidemic Failure Remedies. After review of [...***...], the parties will [...***...]

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[...***...]

2.6. In the event of an Epidemic Failure, each party will [...***...], Supplier will [...***...], which may include, but may not be limited to, [...***...]; provided that HP will [...***...].

3. Field Failure Metrics, Targets and Limits. To ensure that HP quality requirements are met, Supplier agrees to [...***...] to comply with the applicable Failure Rate Metrics, Targets and Limits set forth in Table 1. The parties will review the Targets and Limits set forth in Table 1 annually for potential adjustment.

Table 1: Failure Rate Metric Targets & Limits

[...***...]

4. Engineering and Technical Services. Supplier shall provide engineering and technical services on a continuous basis in order to [...***...].

5. Corrective Action Plan and Compensation to HP.

5.1.	Corrective Action Plan. Whenever the Field Failure Metric Targets or Limits set forth in Table 1 [...***...], Supplier will [...***...].
5.2.	Compensation. Supplier will [...***...].

Table 2: Compensation Payments

[...***...]

5.3 [...***...] Notwithstanding anything herein to the contrary, if a failure of Products constitutes both an Epidemic Failure described in Section 2 and [...***...].

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6.	Definitions. In addition to terms defined where used in the body of this Exhibit, the following capitalized terms shall have the meanings set forth below when used in this Exhibit.
	AFR. AFR means [...***...]
	ARR. For the purpose of this exhibit, ARR means [...***...]
	Corrective Action Plan. This term refers to [...***...]. A Corrective Action Plan shall, [...***...]. Additionally, a Corrective Action Plan shall [...***...]. The action plan may [...***...].
	Eligible Purchasers. This term shall have the same meaning as it does in the Agreement to which this Exhibit attached; except, however, that [...***...].
	Failure. A Failure is [...***...]. Failures will [...***...]. Failures may [...***...].

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A Failure may also include [...***...].

[...***...] does not constitute a Failure.

[...***...] does not constitute a Failure [...***...].

[...***...] and does not constitute a Failure.

Product Recall. The term “Product Recall” means [...***...].

Service Return. This term means [...***...].

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EXHIBIT O
GOVERNMENTAL COMPLIANCE

As referenced at Section 21 (Additional Obligations of Supplier) of the Agreement, Supplier will comply with all Applicable Laws, including without limitation those established laws related to the following:

1.	Vocational Rehabilitation Act. Supplier warrants that its U.S. operations comply with the requirements of Executive Order 11246, the Vocational Rehabilitation Act and the Vietnam Era Veterans’ Readjustment Assistance Act.
2.	Accessibility. Supplier is in compliance with all applicable laws and regulations governing the accessibility of information technology for people with disabilities. Supplier will provide HP with information about accessibility features of Products.
3.	Procurement Regulations. HP is a commercial corporation that is also a contractor and subcontractor for the U.S. government. All of the Products to be purchased from Supplier by HP pursuant to a subcontract/purchase order in the United States, its territories, possessions, the District of Columbia and the Commonwealth of Puerto Rico are deemed to be “Commercial Items” as defined in Federal Acquisition Regulation (“FAR”) 2. 10 1, Part 12 and 52.202.1 (c). The clauses identified FAR 52.244-6 are hereby deemed incorporated into this Agreement with respect to all Commercial Items. In addition, Supplier is required to flow down FAR 52.219-9, Small Business Subcontracting Plan (January 2002).
4.	Pursuant to FAR 52.212-5(e) and/or FAR 44.402(b), Supplier agrees to comply with the following FAR clauses, which are hereby incorporated by reference into this Agreement, with the same force and effect as if they were presented in full:

     FAR 52.222-26, Equal Opportunity (February 1999)

     FAR 52.219-8, Utilization of Small Business Concerns (October 2000)

     APPLICABLE IF THE SUBCONTRACT/PURCHASE ORDER EXCEEDS $2,500: FAR 52.222-41, Service Contact Act of 1965, as Amended (May 1989) if the purchase order is principally for the furnishing of services through the use of service employees.

     APPLICABLE IF THE SUBCONTRACT/PURCHASE ORDER IS FOR $10,000 OR MORE: FAR 52.222-35, Affirmative Action for Disabled Veterans and Veterans of the Vietnam Ear (April 1998)

     FAR 52.222-36, Affirmative Action for Workers with Disabilities (June 1998)

5. Anti-Terrorism Security Measures. Supplier acknowledges that its failure to comply with the laws, or regulations of any applicable governmental authority, U.S. CTPAT or equivalent security guidelines or TAPA/HP security requirements will be considered by HP as negligence and failure on the part of Supplier to provide due care for HP shipments. Supplier will be liable for all fines and penalties imposed on HP, and other damages incurred by HP, relating to Supplier’s noncompliance with any such security regulations, guidelines or requirements.

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EXHIBIT P
INSURANCE

1. Worker’s Compensation Insurance. As required by Applicable Law having jurisdiction over Supplier’s employees wherever work is to be performed under this Agreement.

2. Employer’s Liability Insurance. In an amount keeping with the law of the nation, state, territory or province having jurisdiction over Supplier’s employees wherever work is to be performed under this Agreement or U.S. [...***...], whichever is greater.

3. General Liability Insurance. Including but not limited to premises and operations, products and completed operations, broad form contractual liability, broad form property damage and personal injury liability with a minimum limit of [...***...] combined single limit per occurrence and [...***...] in the aggregate, for claims of bodily injury, including death, and property damage that may arise from use of the Products, or a minimum limit of [...***...] combined single limit per occurrence and [...***...] in the aggregate for claims of acts or omissions of Supplier under this Agreement. Each policy obtained by Supplier will name HP, its officers, subsidiaries, directors and employees as additional insureds. Such insurance will apply as primary insurance and no other insurance will be called upon to contribute to a loss covered thereunder.

4. Claims Made Coverage. If any policies have “claims made” coverage, Supplier will maintain such coverages with HP named as an additional insured for a minimum of [...***...] after termination of this Agreement. Any such coverage must have a retroactive date no later than the date upon which work commenced under this Agreement.

5. Additional Requirements. All deductibles on policies providing coverage will be paid by Supplier.

In the event Supplier is self insured for matters described in Section 12 (Business Recovery Plan; Loss Control) of the Agreement, Supplier agrees to respond to all claims or losses made against or incurred by HP in the same fashion as if insurance had been purchased with the same or broader coverage terms than what is generally available to similar suppliers.

All insurance policies will be written by a company appropriately licensed, financially responsible and authorized to do business in the territory and jurisdiction where the project is located.

In no event will the coverages or limits of any insurance required under this Exhibit, or the lack or unavailability of any other insurance, be deemed to limit or diminish Supplier’s obligations or liability to HP under this Agreement.

In addition, where allowed by law, such policies will permit Supplier to waiver, on its own behalf and on behalf of its insurers, any rights of subrogation against HP, its Subsidiaries, officer directors and employee.

6. Supplier will furnish Certificates of Insurance acceptable to HP before any work is commenced hereunder by Supplier. The Certificate of Insurance will provide that there will be no cancellation of coverage without [...***...] prior written notice to HP. Dot Hill shall provide HP with [...***...] prior written notice of any reduction of coverage.

HP Confidential

***Confidential Treatment Requested

Dot Hill Systems PPA: PRO02542-060507

EXHIBIT Q
INDUSTRIAL DESIGN OF THE PRODUCT

1.	HP Industrial Design
	The following list of features and/or components: (i) constitute the Industrial Design; (ii) are the only pieces of Intellectual Property that are funded by HP under this Agreement [...***...], and; (iii) are HP-Owned Technology.
	[...***...]
2.	Supplier IP
	Unless specifically set forth above in Section 1, [...***...].
3.	Definitions. Terms not defined herein shall have those definitions as set forth in Exhibit A (Definitions).

HP Confidential

***Confidential Treatment Requested

EX-10.2

Exhibit 10.2

	***Text Omitted and Filed Separately
	with the Securities and Exchange Commission.
	Confidential Treatment Requested
	Under 17 C.F.R. Sections 200.80(b)(4)
	and 240.24b-2
	HP CONFIDENTIAL
	FOR DOT HILL ONLY

AMENDMENT ONE

TO PRODUCT PURCHASE AGREEMENT NO. PRO02542-060507

This Amendment One to the Product Purchase Agreement No. PRO02542-060507 signed by HP September 10, 2007, (the “Amendment One”) dated December 20, 2007 (the “Amendment One Effective Date”) is between DOT HILL SYSTEMS CORPORATION (“DOT HILL”), a Delaware corporation, with offices at 2200 Faraday Avenue, Carlsbad, CA, and Hewlett-Packard Company (“HP”), a Delaware corporation, with offices at 3000 Hanover Street, Palo Alto, California 94304. DOT HILL and HP may be referred to individually as a “Party” and collectively as “Parties.”

WHEREAS, DOT HILL and HP have entered into that certain Product Purchase Agreement signed by HP September 10, 2007, including all exhibits thereto, (collectively, the “Agreement”), whereby HP authorized DOT HILL to distribute and promote certain products and services pursuant to the terms and conditions contained therein;

WHEREAS, DOT HILL and HP each desires to amend the Agreement to include the production, associated maintenance, support, sale and distribution of additional Product as specified by HP herein;

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

TERMS

1.	§1.2 (General) is hereby amended by including at the end of current section the following:
	“Any Products acquired by HP and Eligible Purchasers from Supplier will be covered by the terms and conditions of this Agreement, whether or not set forth in Exhibit (B).”
2.	§1.4 (Term) is hereby amended from a one-year initial term to a [...***...] term.
3.	§3.7 (Right of Offset) is hereby amended by replacing “Either party” at the beginning of the section to “HP.”
4.	(new) §4.5 (Joint Material Cost Efforts) The Agreement is hereby amended by inclusion of the following provision:
	“The parties agree to work together to enable Supplier to reduce costs throughout the Product supply chain (“Joint Cost Reduction Efforts”). Joint Cost Reduction Efforts [...***...]

***Confidential Treatment Requested

HP CONFIDENTIAL
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	[...***...]. Joint Cost Reduction Efforts may [...***...].
	Supplier agrees to provide [...***...] on or before January 7, 2008, [...***...]. The parties expect the Joint Cost Reduction Efforts to [...***...].”
5.	(new) §4.6 (Material Cost Reductions) The Agreement is hereby amended by inclusion of the following provision:
	“Supplier will [...***...] such initial cost reductions [...***...], Supplier will automatically [...***...]. Such price reductions [...***...].”
6.	§7.2.2 (Warranty Periods) is hereby amended by replacing “[...***...]” to “[...***...].”
7.	§12.3 (Production [...***...]) is hereby amended by replacing the words “[...***...]” with “[...***...].”
8.	§12.3(b) (Production [...***...]) is hereby replaced in its entirety with the following provision, but (b)(i) through (v) shall remain:
	“[...***...]:”
9.	§12.3(d) (Production [...***...]) is hereby amended by replacing [...***...] with [...***...].”
10.	(new) §12.4 (Technical Information Deposit Escrow Agreement) The Agreement is hereby amended by inclusion of the following provision:
	“At HP’s request, Supplier agrees to deposit with an independent escrow agent the Technical Information pursuant to the terms of a Deposit Agreement [...***...]. During the term of this Agreement and any

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	extensions thereof, Supplier [...***...]. The parties agree to designate [...***...], as the escrow agent.”
11.	(new) §12.5 (Escrow Release) The Agreement is hereby amended by inclusion of the following provision:
	“Upon the occurrence of a “Release Condition” (as defined in the exhibit), and pursuant to the terms of the Deposit Agreement, [...***...]. In addition, upon such Release Condition, [...***...].”
12.	§14.4.1 (Software License) is hereby amended by including the words “irrevocable, perpetual (as to sublicenses granted hereunder)” after the word “worldwide” in the first sentence of the section.
13.	§15.3 (Supplier’s Duty to Defend) is hereby amended by:

(i)	including the following new subsection 15.3.6 as follows: “or combination of the Product with an HP Product where such combination is the intended purpose of the Products set forth in the product documentation.” and;
(ii)	Deleting the final paragraph in its entirety from Section 15.3 beginning with, “The combination of the...”

14.	§17.3 (Cover Costs) is hereby replaced in entirety with the following:
	“Cover Costs. Subject to the provisions of Article (17) of the Agreement, upon [...***...] (“Cover Costs”) [...***...]. Cover Costs may include, but are not limited to: [...***...]

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	[...***...].”
15.	Article 19 (Limitation of Liability) is hereby replaced in its entirety with the following: “HP WILL NOT BE LIABLE TO SUPPLIER FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF DATA, PROFITS OR REVENUE, COST OF CAPITAL OR DOWNTIME COSTS), OR FOR ANY EXEMPLARY OR PUNITIVE DAMAGES ARISING OUT OF ANY PERFORMANCE OF THIS AGREEMENT OR ANY ORDER, REGARDLESS OF WHETHER SUCH DAMAGES ARE BASED IN TORT, WARRANTY, CONTRACT OR ANY OTHER LEGAL THEORY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. [...***...].”
16.	§20.1 (Termination for Convenience) is hereby amended by deleting the last sentence of that section.
17.	(new) §21.9 (Product Supply Assurance) The Agreement is hereby amended by inclusion of the following:
	“Supplier agrees that, during the Term of the Agreement [...***...], Supplier will [...***...].”
18.	(new) §21.10 (Product Exclusivity) The Agreement is hereby amended by inclusion of the following provision:
	“For a period of [...***...] from date of first HP customer shipment of the respective Products, Supplier shall give HP product exclusivity for the following features: [...***...]”
19.	(new) §21.11 Critical Milestones. The Agreement is hereby amended by inclusion of the following provision:
	“Supplier shall meet the critical milestones (“Critical Milestones”) and associated dates as set forth in Exhibit (T) attached hereto. In the event Supplier [...***...]. Subject to the terms and conditions of Section 22.6 (No Waiver),

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	of the Agreement HP [...***...].”
20.	§22.5.2 (Assignment) is hereby amended by replacing “Either party” at the third line of the section to “HP.”
21.	§22.11 (Governing Law) is hereby amended by deleting the last sentence of that section.
22.	(new) §22.15 (Protective Rights) The Agreement is hereby amended by inclusion of Exhibit (R) (Protective Rights Agreement) attached hereto.
23.	Exhibit (A) (Definitions) shall be amended by replacing the definition of “Product” or “Products” in its entirety with the following: “Product” or “Products” includes any Goods, Services, Parts, Software, Documentation and other deliverables provided under this Agreement, whether or not same is set forth in Exhibit B (Product Description and Specifications).
24.	Exhibit (B) (Product Description and Specifications) attached to the Agreement shall be amended by inclusion at the end of Exhibit (B) of Exhibit (B-1) attached hereto.
25.	Exhibit (E) (Pricing) attached to the Agreement shall be amended by inclusion at the end of Exhibit (E) of Exhibit (E-1) attached hereto.
26.	Exhibit (I) (Manufacturing Rights) attached to the Agreement is hereby replaced in its entirety with Exhibit (I) attached hereto.
27.	Exhibit (N) (Quality Compensation Exhibit) attached to the Agreement is hereby replaced in its entirety with Exhibit (N) attached hereto.
28.	Exhibit (R) (Protective Rights Agreement) as attached hereto is hereby included in its entirety in the Agreement.
29.	Exhibit (S) (Technical Information Escrow Agreement) as attached hereto is hereby included in its entirety in the Agreement.
30.	(new) Exhibit (T) Critical Milestones as attached hereto is hereby included in its entirety in the Agreement.
31.	(new) Contingent Terms and Conditions Precedent to Final agreement. The parties hereto acknowledge certain terms and conditions shall be necessary to consummate the full agreement between the parties. Accordingly, HP and Supplier shall promptly and in good faith establish the following as soon as commercially reasonable after the Amendment One Effective Date, but in no event later than [...***...]

• Exhibit (D) Ordering and Shipment of Product (SC review)

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• Exhibit (G) Quality (SC review)

• Exhibit (K) Service and Support Requirements (team review; L1/L2 incremental support option / quote needed)

• Exhibit (M) Flex Agreement (SC review)

• (new) Stock Warrants Agreement (pending)

Except as expressly set forth herein, all other terms and conditions of the Agreement shall continue in full force and effect. Capitalized terms used but not defined herein shall have the meanings given thereto in the Agreement.

IN WITNESS WHEREOF, the parties have caused this Amendment One to be executed by their duly authorized representatives on the dates indicated below.

DOT HILL SYSTEMS CORP.		HEWLETT-PACKARD COMPANY
By:	/s/ Dana Kammersgard	By:	/s/ Robin Hensley
Name:	Dana Kammersgard	Name:	Robin Hensley
Title:	CEO	Title:	VP & General Manager,
			Entry Storage Division
Date:	12/20/07	Date:	1-7-2008

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HP CONFIDENTIAL
FOR DOT HILL ONLY

EXHIBIT (B-1)

ADDITIONAL PRODUCT DESCRIPTION AND SPECIFICATIONS

[...***...]

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[...***...]

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EXHIBIT (E-1)

ADDITIONAL PRODUCT PRICING

Subject to the provisions of Section 4.6 hereinabove, prices for the Products are as follows:

[...***...]

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EXHIBIT (I)

DISCONTINUANCE OF PRODUCT AND MANUFACTURING RIGHTS

1. Discontinuance of Product.

1.1	Lifetime Buy Rights. Unless otherwise agreed, Supplier may discontinue the manufacture or supply of any Product no earlier than [...***...] after date of first Delivery to HP of the Product. If thereafter Supplier determines to discontinue the manufacture or supply of the Product (a “Discontinued Product”), Supplier will give written notice to HP no less than [...***...] in advance of the last date the Discontinued Product can be ordered (the “Notice Period”). During the Notice Period, HP may (1) purchase from Supplier a commercially reasonable quantity of the Discontinued Product under the terms of this Exhibit I, [...***...].
1.2	Survival of Lifetime Buy Rights. Supplier’s obligations to provide lifetime buy rights as set forth in Section 1.1 [...***...] will continue and survive expiration or any termination of the Agreement for [...***...] after expiration or any termination of this Agreement, except for instances where HP terminates for convenience. Notwithstanding any expiration or termination of this Agreement, Supplier may, at its discretion, provide lifetime buy rights as set forth in Section 1.1 for [...***...] following any such expiration or termination.
1.3	[...***...]

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[...***...]

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EXHIBIT (N)

QUALITY AND COMPENSATION

1.

Purpose of this Exhibit. Supplier’s obligations under Section 7 (Warranties) of the Agreement to provide defect-free, conforming products to HP are primary and material obligations of Supplier, and are not in any way changed by this Exhibit N. The purpose of this Exhibit is to set forth HP requirements for compensation and additional corrective actions by Supplier in the event of failure of Product to conform to Section 7 (Warranties) as more fully described herein. The rights, remedies and obligations set forth in this Exhibit are in addition to, and are intended to supplement rights, remedies and obligations specified elsewhere in the Agreement and/or its Exhibits. Definitions for capitalized terms used in this Exhibit are to be found either where used in this Exhibit or in Section 6 of this Exhibit.

2.

Epidemic Failure. For a period of [...***...] after Delivery, Supplier represents and warrants all Products against Epidemic Failure.

2.1. “Epidemic Failure” means, [...***...]

2.2.	Any failure of Product to conform to Section 7 (Warranties) constitutes an occurrence for purposes of calculating Epidemic Failure.
2.3.	If HP determines that an Epidemic Failure may occur, [...***...].

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2.4.	Epidemic Failure [...***...]. In the event HP or Supplier determines that there has been an Epidemic Failure, [...***...].
2.5.	Epidemic Failure [...***...]. After [...***...], HP may [...***...] that the Epidemic Failure [...***...]
2.6.	[...***...]

3. Field Failure Metrics, Targets and Limits. To ensure that HP quality requirements are met, Supplier agrees to take all reasonable steps to comply with the applicable Failure Rate Metrics, Targets and Limits set forth in Table 1. [...***...].

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Table 1: Failure Rate Metric Targets & Limits
[...***...]

	[...***...]
4.	Engineering and Technical Services. Supplier shall provide engineering and technical services on a continuous basis in order to maintain Failure rates within the agreed upon Field Failure Metric Limits.
5.	Corrective Action Plan and Compensation to HP.

5.1.	Corrective Action Plan. Whenever the Field Failure Metric Targets or Limits [...***...].
5.2.	Compensation. Supplier will pay HP reasonable compensation payments [...***...].
5.3.	[...***...]. Notwithstanding anything herein to the contrary, if a failure of Products constitutes both an Epidemic Failure described in section 2 and [...***...], and if [...***...].

6. Catastrophic Failure. [...***...]

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	[...***...].
7.	Unplanned Firmware Upgrades. In the event it is determined an unplanned firmware upgrade is needed [...***...].
8.	Definitions. In addition to terms defined where used in the body of this Exhibit, the following capitalized terms shall have the meanings set forth below when used in this Exhibit:

AFR. “AFR” means [...***...]

ARR. For the purpose of this exhibit, ARR means [...***...]

Catastrophic Failures. Catastrophic Failures include but are not limited to [...***...]

CCFR. For the purpose of this exhibit, CCFR means [...***...]

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[...***...]

Corrective Action Plan. This term refers to [...***...].

Eligible Purchasers. This term shall have the same meaning as it does in the Agreement to which this Exhibit attached; except, however, that it shall also include, solely for the purposes of this Exhibit, HP authorized service providers, including without limitation, HP Repair Centers, HP’s Authorized Service Providers, and HP-authorized channel partners.

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Failure. A Failure is [...***...].

Product Recall. The term “Product Recall” means [...***...].

Service Return. This term means an HP Product that has been sent back from an end-user directly to the outsourced manufacturer from an Authorized Service Provider, or from one of HP’s channel partners.

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EXHIBIT (R)

PROTECTIVE RIGHTS EXHIBIT

[...***...]

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EXHIBIT (S)

TECHNICAL INFORMATION ESCROW AGREEMENT

Deposit Account Number                     

[...***...]

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HP CONFIDENTIAL
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[...***...]

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HP CONFIDENTIAL
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[...***...]

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[...***...]

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[...***...]

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[...***...]

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[...***...]

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[...***...]

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HP CONFIDENTIAL
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[...***...]

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HP CONFIDENTIAL
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[...***...]

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[...***...]

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HP CONFIDENTIAL
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[...***...]

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HP CONFIDENTIAL
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[...***...]

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[...***...]

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[...***...]

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[...***...]

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[...***...]

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[...***...]

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[...***...]

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EXHIBIT (T)

CRITICAL MILESTONES

The following initial critical milestones are established below. The parties intend to complete Critical Milestones as needed.

     [...***...]

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Dana W. Kammersgard, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dot Hill Systems Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 12, 2008

/s/ DANA W. KAMMERSGARD

Dana W. Kammersgard

Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Hanif I. Jamal, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Dot Hill Systems Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 12, 2008

/s/ HANIF I. JAMAL

Hanif I. Jamal

Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

DOT HILL SYSTEMS CORP.
OFFICERS’ CERTIFICATE

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Dana W. Kammersgard, Chief Executive Officer of Dot Hill Systems Corp. (the “Company”), and Hanif I. Jamal, Chief Financial Officer of the Company, each hereby certify that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.

In Witness Whereof, the undersigned have set their hands hereto as of the 12th day of May, 2008.

/s/ DANA W. KAMMERSGARD	/s/ HANIF I. JAMAL
Dana W. Kammersgard	Hanif I. Jamal
Chief Executive Officer	Chief Financial Officer

     This certification “accompanies” the Periodic Report, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Periodic Report), irrespective of any general incorporation language contained in such filing.