e10vq

/s/ DANA W. KAMMERSGARD

/s/ HANIF I. JAMAL

Dana W. Kammersgard

Hanif I. Jamal

Chief Executive Officer

Chief Financial Officer

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVo8WMWbZo9p7WuJpL9a2yLpgeQs/LHaFT/F/dTS/iQ+QVuWtc3D9fHerEryaAhJ xhqazEqwm2dy2dCfsawl5A== 0000936392-08-000718.txt : 20081110 0000936392-08-000718.hdr.sgml : 20081110 20081110151033 ACCESSION NUMBER: 0000936392-08-000718 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081110 DATE AS OF CHANGE: 20081110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOT HILL SYSTEMS CORP CENTRAL INDEX KEY: 0001042783 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 133460176 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13317 FILM NUMBER: 081175128 BUSINESS ADDRESS: STREET 1: 2200 FARADAY AVENUE STREET 2: SUITE 100 CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 760-931-5500 MAIL ADDRESS: STREET 1: 2200 FARADAY AVENUE STREET 2: SUITE 100 CITY: CARLSBAD STATE: CA ZIP: 92008 FORMER COMPANY: FORMER CONFORMED NAME: BOX HILL SYSTEMS CORP DATE OF NAME CHANGE: 19970722 10-Q 1 a50174e10vq.htm FORM 10-Q e10vq

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 September 30, 2008


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 (Do not check if a smaller reporting company)		Smaller reporting company o

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 46,308,431 shares of common stock, $0.001 par value, outstanding as of November 3, 2008.

DOT HILL SYSTEMS CORP.

FORM 10-Q
For the Quarter Ended September 30, 2008
INDEX


Part I. Financial Information
Item 1. Financial Statements		3
Unaudited Condensed Consolidated Balance Sheets at December 31, 2007 and September 30, 2008		3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2007 and 2008		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2008		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		34
Part II. Other Information
Item 1. Legal Proceedings		35
Item 1A. Risk Factors		36
Item 6. Exhibits		53
Signatures		54
EX-2.1
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1

Part I. Financial Information

Item 1. Financial Statements

DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)


	December 31,			September 30,
	2007			2008
ASSETS
Current Assets:
Cash and cash equivalents	$	82,358		$	56,524
Accounts receivable, net of allowance of $302 and $312		32,445			48,213
Inventories		9,013			12,613
Prepaid expenses and other		3,968			3,938

Total current assets		127,784			121,288
Property and equipment, net		9,599			7,352
Intangible assets, net		2,280			5,607
Other assets		264			338

Total assets	$	139,927		$	134,585

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	28,472		$	34,944
Accrued compensation		3,115			3,564
Accrued expenses		6,227			4,055
Deferred revenue		1,409			1,168
Short term note payable		—			248
Income taxes payable		143			348

Total current liabilities		39,366			44,327
Long term note payable		—			670
Other long-term liabilities		4,132			4,755

Total liabilities		43,498			49,752

Commitments and Contingencies (Note 12)
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 46,308 shares issued and outstanding at December 31, 2007 and September 30, 2008, respectively		46			46
Additional paid-in capital		294,193			299,895
Accumulated other comprehensive loss		(3,100	)		(3,228	)
Accumulated deficit		(194,710	)		(211,880	)

Total stockholders’ equity		96,429			84,833

Total liabilities and stockholders’ equity	$	139,927		$	134,585

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(In Thousands, Except Per Share Amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
NET REVENUE	$	45,691		$	76,641		$	155,331		$	200,494
COST OF GOODS SOLD		39,166			67,700			135,208			180,165

GROSS PROFIT		6,525			8,941			20,123			20,329

OPERATING EXPENSES:
Sales and marketing		3,677			2,990			11,456			10,909
Research and development		5,746			6,940			16,617			21,489
General and administrative		2,424			3,309			9,416			10,291
Legal settlement		—			(200	)		—			(4,036	)

Total operating expenses		11,847			13,039			37,489			38,653

OPERATING LOSS		(5,322	)		(4,098	)		(17,366	)		(18,324	)

OTHER INCOME:
Interest income		1,255			309			3,794			1,374
Other (expense) income, net		—			(19	)		—			61

Total other income, net		1,255			290			3,794			1,435

LOSS BEFORE INCOME TAXES		(4,067	)		(3,808	)		(13,572	)		(16,889	)
INCOME TAX EXPENSE (BENEFIT)		56			(117	)		255			281

NET LOSS	$	(4,123	)	$	(3,691	)	$	(13,827	)	$	(17,170	)

NET LOSS PER SHARE:
Basic and diluted	$	(0.09	)	$	(0.08	)	$	(0.30	)	$	(0.37	)

WEIGHTED AVERAGE SHARES USED TO CALCULATE NET LOSS PER SHARE:
Basic and diluted		45,717			46,223			45,451			46,078

COMPREHENSIVE LOSS:
Net loss	$	(4,123	)	$	(3,691	)	$	(13,827	)	$	(17,170	)
Foreign currency translation adjustments		(1,251	)		(27	)		(1,692	)		(128	)
Net unrealized loss on short-term investments		(2	)		—			(2	)		—

Comprehensive loss	$	(5,376	)	$	(3,718	)	$	(15,521	)	$	(17,298	)

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Nine Months Ended
	September 30,
	2007			2008
Cash Flows From Operating Activities:
Net loss	$	(13,827	)	$	(17,170	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,031			4,385
Loss on disposal of property and equipment		213			57
Reduction in bad debt reserve		(45	)		(153	)
Issuance of warrant to customer		—			2,282
Share-based compensation expense		1,647			2,224
Changes in operating assets and liabilities:
Accounts receivable		10,887			(15,566	)
Inventories		(2,646	)		(3,578	)
Prepaid expenses and other assets		332			(42	)
Accounts payable		(9,076	)		6,710
Accrued compensation and expenses		(2,644	)		(2,042	)
Deferred revenue		2,569			(251	)
Income taxes payable		11			205
Other long-term liabilities		551			(147	)

Net cash used in operating activities		(6,997	)		(23,086	)

Cash Flows From Investing Activities:
Purchases of property and equipment		(3,776	)		(1,503	)
Purchase of intangible assets		—			(2,482	)
Purchases of short-term investments		(5,425	)		—

Net cash used in investing activities		(9,201	)		(3,985	)

Cash Flows From Financing Activities:
Proceeds from sale of stock to employees		967			912
Proceeds from exercise of stock options and warrants		163			284

Net cash provided by financing activities		1,130			1,196

Effect of Exchange Rate Changes on Cash		143			41

Net Decrease in Cash and Cash Equivalents		(14,925	)		(25,834	)
Cash and Cash Equivalents, beginning of period		99,663			82,358

Cash and Cash Equivalents, end of period	$	84,738		$	56,524

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	—		$	—

Cash paid for income taxes	$	217		$	78

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Construction in progress costs incurred but not paid	$	768		$	108

Promissory note for intangible assets purchase	$	—		$	918

Contingent payment for intangible assets purchase	$	—		$	1,070

See accompanying notes to unaudited condensed consolidated financial statements.

DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

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, 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.

Basis of Presentation

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 (See Note 13). 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 and nine months ended September 30, 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, 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. We currently have three customers that each account for more than 10% of our total net revenue: Sun Microsystems, or Sun; Hewlett Packard, or HP; and NetApp Inc., or NetAPP. We typically incur significant design and development costs prior to being designed in with our original equipment manufacturer, or OEM, partners. Our agreements with our OEM partners do not contain any minimum purchase commitments, do not obligate our OEM partners to purchase their storage solutions exclusively from us and may be terminated at any time upon notice from the applicable partner.


	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2007					2008					2007					2008
	Amount		%			Amount		%			Amount		%			Amount		%
Sun	$	26,516		58.0	%	$	12,467		16.3	%	$	103,918		66.9	%	$	55,966		27.9	%
HP		164		0.0	%		33,712		44.0	%		961		0.0	%		59,656		29.8	%
NetAPP		7,178		15.7	%		15,857		20.7	%		12,811		8.2	%		43,928		21.9	%
Other customers less than 10%		11,833		26.3	%		14,605		19.0	%		37,641		24.9	%		40,944		20.4	%

Total net revenue	$	45,691		100.0	%	$	76,641		100.0	%	$	155,331		100.0	%	$	200,494		100.0	%

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 Financial Accounting Standards Board, or 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 loss.

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. Our adoption of FASB Statement No. 157 related to financial assets and liabilities in the quarter ended March 31, 2008 had no impact on our condensed consolidated financial statements. We are currently evaluating the impact, if any, that FASB Statement No. 157 may have on our future condensed consolidated financial statements related to non-financial assets and liabilities.

Recent Accounting Pronouncements

In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations. FASB Statement No. 141(R) 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 statements to evaluate the nature and financial effects of the business combination. This statement also requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. FASB Statement No. 141(R) 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 condensed consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends FASB Statement No. 142, Goodwill and Other Intangible Assets, to improve the consistency between the useful life of a recognized intangible asset under FASB Statement No. 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, Business Combinations, and other U.S. GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively, therefore, the impact of the implementation of this pronouncement cannot be determined until the transactions occur.

2. Share-Based Compensation

We account for share-based compensation in accordance with 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 grants, 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 and nine months ended September 30, 2007 and 2008.

As of September 30, 2008, total unrecognized share-based compensation cost related to unvested stock options was $6.2 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 (amounts in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Cost of goods sold	$	86	$	102	$	256	$	306
Sales and marketing		116		14		341		301
Research and development		230		247		597		705
General and administrative		238		297		453		912

Share-based compensation expense before taxes		670		660		1,647		2,224
Related deferred income tax benefits		—		—		—		—

Share-based compensation expense, net of income taxes	$	670	$	660	$	1,647	$	2,224

Net share-based compensation expense per basic and diluted common share	$	0.01	$	0.01	$	0.04	$	0.05


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Share-based compensation expense is derived from:
Stock options	$	549	$	587	$	1,340	$	1,953
2000 ESPP		121		73		307		271

Share-based compensation expense before taxes	$	670	$	660	$	1,647	$	2,224

Share-based compensation expense recognized during the three and nine months ended September 30, 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 September 30, 2008 has been adjusted for changes in estimated forfeitures.

To estimate compensation expense under FASB Statement No.123(R) for the nine months ended September 30, 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
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
Risk-free interest rate		4.50	%		2.79	%		4.75	%		1.89	%
Expected dividend yield		—	%		—	%		—	%		—	%
Volatility		68	%		68	%		68	%		68	%
Expected life	5.2 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 granted restricted stock and options to purchase common stock to our employees and a director under the 2000 EIP. The restricted stock typically vests upon the completion of specific performance goals or over four years, with 25% of the shares vesting one year from the date of grant and the remaining shares vesting ratably thereafter on a monthly basis. The 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 restricted stock is surrendered or 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 restricted stock was not vested or the option was not exercised shall continue to be available under the 2000 EIP. As of September 30, 2008, 320,878 shares of restricted stock had been granted and were outstanding under the 2000 EIP, options to purchase 6,274,642 shares of common stock were outstanding under the 2000 EIP and 1,425,014 shares of common stock remained available for grant under the 2000 EIP.

On August 11, 2008, under the 2000 EIP, we granted selected executives and key employees performance – based restricted stock awards whose vesting is contingent on our meeting specific goals, including internal earnings targets in the quarter ended December 31, 2008 and the quarter ended March 31, 2009. The cumulative total number of shares awarded is equal to 320,878, and vest over a period of approximately 5 to 8 months. The fair value of each share grant was estimated on the date of grant using the number of shares granted multiplied by the share price on the date of the grant. As of September 30, 2008, no compensation cost has been recognized related to this award.

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 September 30, 2008, options to purchase 530,000 shares of common stock were outstanding under the 2000 NEDSOP and options to purchase 383,124 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 361,806 and 368,498 shares issued for the 2000 ESPP during the nine months ended September 30, 2007 and 2008, respectively.

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


						Weighted average		Aggregate intrinsic
				Weighted average		remaining contractual		value (in
	Number of shares			exercise price		term (in years)		thousands)
Outstanding at December 31, 2007		6,672,095		$	5.36
Granted		1,959,000			2.39
Exercised		(128,090	)		2.22
Forfeited		(840,400	)		3.65
Expired		(855,961	)		7.20

Outstanding at September 30, 2008		6,806,644		$	4.54		7.14	$	140,620
Vested and expected to vest at September 30, 2008		6,343,607		$	4.68		6.98	$	136,948
Exercisable at September 30, 2008		3,798,156		$	5.76		5.66	$	125,120

The weighted average grant-date fair values of options granted during the three months ended September 30, 2007 and 2008 were $1.79 per share and $1.42 per share, respectively.

The weighted average grant-date fair values of options granted during the nine months ended September 30, 2007 and 2008 were $2.07 per share and $1.45 per share, respectively.

During the nine months ended September 30, 2008, cash generated from share-based compensation arrangements amounted to $0.3 million from the exercise of options and $0.9 million from the purchase of shares through the 2000 ESPP. We issue new shares from the respective plan share reserves upon the grant of restricted stock, 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 September 30, 2007 and 2008 was $0.6 million and $0.4 million, respectively. The total fair value of options to purchase common stock that vested during the nine months ended September 30, 2007 and 2008 was $2.3 million and $2.0 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, restricted stock, 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				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Shares used in computing basic net loss per share		45,717		46,223		45,451		46,078
Dilutive effect of warrants and common stock equivalents		—		—		—		—

Shares used in computing diluted net loss per share		45,717		46,223		45,451		46,078

For the three months ended September 30, 2007, outstanding options to purchase 6,559,539 shares of common stock with exercise prices ranging from $1.34 to $17.14 per share and outstanding warrants to purchase 456,554 shares of common stock at prices ranging from $3.25 to $4.50 were not included in the calculation of diluted loss per share because their effect was antidilutive. For the nine months ended September 30, 2007, outstanding options to purchase 6,191,525 shares of common stock with exercise prices ranging from $1.34 to $17.14 per share and outstanding warrants to purchase 1,082,699 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 and nine months ended September 30, 2008, outstanding options to purchase 6,806,644 shares of common stock with exercise prices ranging from $1.34 to $16.36 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 September 30, 2008, we had $56.5 million in cash and cash equivalents. Pursuant to FASB Statement No. 157 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, Aaa, AA, A-1 or P-1, as reported by two rating agencies.

Substantially all of our cash and cash equivalents are maintained with two major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

A summary of our cash and cash equivalents by major security type is as follows (in thousands):


	September 30,
	2008
Cash	$	42,154
Commercial paper		1,822
Institutional money market funds		10,048
U.S Treasury and agency obligations		2,500

Cash and cash equivalents	$	56,524

5. Inventories

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


	December 31,		September 30,
	2007		2008
Purchased parts and materials	$	1,187	$	1,324
Finished goods		7,826		11,289

Total inventory	$	9,013	$	12,613

Inventories are net of an allowance for excess and obsolete inventory of approximately $2.2 million as of December 31, 2007 and September 30, 2008, respectively.

6. Acquisition

In September 2008 we acquired certain identified RAIDCore and Network Attached Storage, or NAS, assets of Ciprico, for approximately $4.5 million consisting of cash consideration of $2.3 million, an unsecured non-interest bearing promissory note in the amount of $0.9 million, and contingent consideration in the amount of $1.1 million. Additionally, we incurred $0.2 million in acquisition related costs, primarily consisting of legal fees. Payments under the promissory note are due in equal monthly installments over a 42-month period commencing October 1, 2008. We are also required to pay Ciprico earn-out payments of up to $2.0 million over the 42 months following the date of acquisition. The earn-out payments are payable on a quarterly basis and are equal to 6.67% of RaidCore and NAS net revenue for the quarterly period. The contingent consideration liability fair value, as of the acquisition date, is $1.1 million, of which $0.3 million is included in accrued expenses and $0.8 million is included in other long-term liabilities. The purchase price was allocated to the assets acquired based on estimated fair values on the transaction date, resulting in the recording of RaidCore technology of $4.3 million and NAS technology of $0.2 million. The RaidCore and NAS assets are being amortized on a straight-line basis over four years and three years, respectively. Our primary reasons for the acquisition were to allow us to broaden our product portfolio in the RAID market while allowing us to sell into the Band 1 market, and to pursue opportunities at current and target OEM customers.

7. 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 (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


	September 30, 2008
			Accumulated
	Gross		Amortization			Net
Core technology	$	5,000	$	(5,000	)	$	—
RaidCore Technology		4,256		(16	)		4,240
NAS Technology		214		(1	)		213
Licensed Patent Portfolio		2,570		(1,416	)		1,154

Total intangible assets	$	12,040	$	(6,433	)	$	5,607

Amortization expense related to intangible assets totaled $0.5 million and $0.3 million for the three months ended September 30, 2007 and 2008, respectively. Amortization expense related to intangible assets totaled $1.7 million and $1.1 million for the nine months ended September 30, 2007 and 2008, respectively.

Estimated future amortization expense related to intangible assets as of September 30, 2008 is as follows (in thousands):


Years ending December 31,
2008 (remaining 3 months)	$	412
2009		1,649
2010		1,647
2011		1,117
2012		782

Total	$	5,607

8. 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 (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
Balance, beginning of period	$	1,380		$	1,453		$	663		$	1,381
Charged to operations		623			1,091			2,725			2,710
Deductions for costs incurred		(719	)		(850	)		(2,104	)		(2,397	)

Balance, end of period	$	1,284		$	1,694		$	1,284		$	1,694

Our deferred product maintenance revenue activity for the three and nine months ended September 30, 2007 and 2008 is as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
Balance, beginning of period	$	587		$	546		$	581		$	695
New warranty revenue contracts		1,151			287			1,850			1,197
Revenue recognized		(354	)		(322	)		(1,047	)		(1,381	)

Balance, end of period	$	1,384		$	511		$	1,384		$	511

9. Income Taxes

We recorded an income tax expense of $0.1 million and an income tax benefit of $0.1 million for the three months ended September 30, 2007 and 2008, respectively. Our effective income tax rate was (3.07)% for the three months ended September 30, 2008, which differs from the federal statutory rate due to our U.S. and foreign deferred tax asset valuation allowance position, foreign taxes and state taxes.

We recorded an income tax expense of $0.3 million and $0.3 million for the nine months ended September 30, 2007 and 2008, respectively. Our effective income tax rate of 1.64% for the nine months ended September 30, 2008 differs from the 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, or FIN 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No.109. 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 September 30, 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 September 30, 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations regarding 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, respectively, 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 began 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 IRC 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.

10. 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	)
Foreign currency translation		(231	)

Balance, March 31, 2008		(3,331	)
Foreign currency translation		129

Balance, June 30, 2008		(3,202	)
Foreign currency translation		(26	)

Balance, September 30, 2008	$	(3,228	)

11. Credit Facilities

In August 2008, we entered into a credit agreement with Silicon Valley Bank to provide for a revolving credit facility for cash advances and letters of credit of up to an aggregate of $30 million based upon an advance rate of 85% of eligible accounts receivable. The credit agreement expires three years from the effective date of the credit agreement. Borrowings under the credit facility bear interest at the prime rate and are secured by substantially all of our accounts receivable, deposit and securities accounts. The agreement provides for a negative pledge on our inventory and intellectual property, subject to certain exceptions, and contains usual and customary covenants for an arrangement of its type, including an obligation of Dot Hill to maintain at all times a net worth of $55 million (subject to certain increases). The agreement also includes provisions to increase the financing facility by $20 million subject to our meeting certain requirements, including $40 million in borrowing base for the immediately preceding 90 days, and Silicon Valley Bank locating a lender willing to finance the additional facility. In addition, if our cash and cash equivalents net of the total amount outstanding under the credit facility fall below $20 million (measured on a rolling three-month basis), the interest rate will increase to prime plus 1% and additional restrictions will apply. On October 7, 2008 we issued a letter of credit to our contract manufacturer in China in the amount of $7.0 million.

In August 2008, we terminated our credit agreement dated July 1, 2004, as amended, with Wells Fargo Bank, National Association, effective as of August 6, 2008. The credit agreement was terminated as it was no longer necessary given the establishment of our revolving credit facility with Silicon Valley Bank. There were no early termination penalties associated with the termination of the credit agreement and no outstanding borrowings under the credit line established by the credit agreement at the time of its termination.

12. 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 Technology, Inc., or 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. On October 5, 2006, Crossroads and Dot Hill amended the original Settlement and License Agreement to state that Dot Hill would pay to Crossroads $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 $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 $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. We have entered into a settlement, the terms of which are confidential, and the Court has dismissed the entire action with prejudice.

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, which the Court granted on September 2, 2008. The plaintiffs subsequently filed a Third Amended Consolidated Complaint on October 10, 2008. The outcome of this action is uncertain, and no amounts have been accrued as of September 30, 2008.

In addition, three complaints purporting to be derivative actions were 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 demurrers to two of those cases, in which we sought dismissal, were 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 July 13, 2007, all of the derivative actions were consolidated for pre-trial proceedings. We filed a motion to dismiss the consolidated matters pursuant to the SLC’s directive on May 30, 2008. Pursuant to an order issued by the federal court hearing the related federal securities class action, discovery in this state consolidated derivative action is stayed. The outcome of this action is uncertain, and no amounts have been accrued as of September 30, 2008.

In August 2007, a securities lawsuit was filed in California state court by a single former stockholder against us and 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 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, which was granted on May 16, 2008. The plaintiff was granted leave to amend. Pursuant to an order issued by the federal court hearing the related federal securities class action, discovery in this state securities action is stayed. The outcome of this action is uncertain, and no amounts have been accrued as of September 30, 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 results 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.

Other Litigation

We may be involved in certain other legal actions and claims from time to time 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.

13. Warrant

In January 2008, we amended our Product Purchase Agreement, or Agreement, originally entered into with HP in September 2007, to allow for sales to additional divisions within HP. 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 in which the Agreement was signed.

14. 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:
September 30, 2007:
Net revenue	$	42,953	$	528	$	2,210	$	45,691
Gross profit	$	4,998	$	129	$	1,398	$	6,525
September 30, 2008:
Net revenue	$	75,217	$	94	$	1,330	$	76,641
Gross profit	$	8,084	$	4	$	853	$	8,941


	SANnet		Legacy and
	Family		Other		Services		Total
Nine months ended:
September 30, 2007:
Net revenue	$	149,566	$	768	$	4,997	$	155,331
Gross profit	$	17,390	$	196	$	2,537	$	20,123
September 30, 2008:
Net revenue	$	195,391	$	306	$	4,797	$	200,494
Gross profit	$	17,399	$	62	$	2,868	$	20,329

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
September 30, 2008	$	129,333	$	1,305	$	3,947	$	134,585

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 and our intent, belief or current expectations 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, 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, Hewlett Packard, or HP, Sun Microsystems, or Sun, NetAPP, Inc., or NetAPP, Fujitsu Siemens Computers, or Fujitsu Siemens, Motorola, NEC, Sepaton and Stratus Technologies.

In January 2008, we amended our Product Purchase Agreement, or Agreement, originally entered into with HP in September 2007, to allow for sales to additional divisions within HP. We began volume shipments to HP in the second quarter of 2008. In September 2008, we further amended our Agreement. The September 2008 amendment provides us with the ability to earn a total of $3.0 million of which $1.7 million and $1.3 million can be earned for the three months ended September 30, 2008 and for the three months ended December 31, 2008, respectively. These amounts represent a reimbursement from HP which was negotiated to compensate and effectively defer the price reductions provided to HP, effective July 1, 2008. We are required to meet certain unit shipment quantities during the third and fourth quarter of 2008 in order to earn these reimbursements. We do not anticipate future concessions from HP of this nature subsequent to December 31, 2008. For the three months ended September 30, 2008, we earned the first reimbursement of $1.7 million and have included this amount in our net revenues and gross profit.

We have been shipping our products to Sun for resale to Sun’s customers since October 2002 and continue to do so. The decline in Sun net revenue 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 revenue from Sun to continue to decline over future periods. Since the beginning of 2007, 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 during 2008. Pursuant to our Master Purchase Agreement with Fujitsu Siemens, we jointly developed 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.

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.

We outsource 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. From 2002 to 2007, we 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 supplies Dot Hill with manufacturing, assembly and test services from its facilities in China and SYNNEX provides Dot Hill with final assembly, testing and configure-to-order services through its facilities in Fremont, California and Telford, United Kingdom. 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.

In September 2008, we entered into a manufacturing agreement with Foxconn Technology Group, or Foxconn. Under the terms of the agreement, Foxconn will supply us with manufacturing, assembly and test services from its facilities in China and final integration services including final assembly, testing and configure-to-order services, through its world wide facilities. The agreement provides for an initial three-year term that is automatically renewed at the end of such three-year term for additional one-year terms unless and until the agreement is terminated by either party. We do not anticipate shipping products for general availability under the Foxconn agreement until the first half of 2009.

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 and Series 5000 family of products.

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.

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 of America. 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. We currently have three customers that each account for more than 10% of our total net revenue; Sun Microsystems, or Sun, Hewlett Packard, or HP, and NetApp Inc., or NetAPP. We typically incur significant design and development costs prior to being designed in with our OEM partners. Our agreements with our OEM partners do not contain any minimum purchase commitments, do not obligate our OEM partners to purchase their storage solutions exclusively from us and may be terminated at any time upon notice from the applicable partner.


	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2007					2008					2007					2008
	Amount		%			Amount		%			Amount		%			Amount		%
Sun	$	26,516		58.0	%	$	12,467		16.3	%	$	103,918		66.9	%	$	55,966		27.9	%
HP		164		0.0	%		33,712		44.0	%		961		0.0	%		59,656		29.8	%
NetAPP		7,178		15.7	%		15,857		20.7	%		12,811		8.2	%		43,928		21.9	%
Other customers less than 10%		11,833		26.3	%		14,605		19.0	%		37,641		24.9	%		40,944		20.4	%

Total net revenue	$	45,691		100.0	%	$	76,641		100.0	%	$	155,331		100.0	%	$	200,494		100.0	%

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 net 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 our agreement to manufacture product for this customer. The upfront nonrefundable payment has been deferred and 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

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 Financial Accounting Standards Board, or 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 loss.

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 FASB issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, 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. 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 our belief 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.

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 revenue for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		85.7			88.3			87.0			89.9

Gross profit		14.3			11.7			13.0			10.1

Operating expenses:
Sales and marketing		8.0			3.9			7.4			5.4
Research and development		12.6			9.1			10.7			10.7
General and administrative		5.3			4.3			6.0			5.1
Legal settlement		—			(0.3	)		—			(2.0	)

Total operating expenses		25.9			17.0			24.1			19.3

Operating loss		(11.6	)		(5.3	)		(11.1	)		(9.1	)
Other income, net		2.7			0.4			2.4			0.7
Income tax expense (benefit)		0.1			(0.1	)		0.2			0.1

Net loss		(9.0	)%		(4.8	)%		(8.9	)%		(8.6	)%

(percentages may not aggregate due to rounding)

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2008

Net Revenue


	Three Months Ended
	September 30,
							%
	2007		2008		Increase		Change
	(in thousands, except percentages)
Net Revenue	$	45,691	$	76,641	$	30,950		67.7	%

The increase in net revenue is primarily attributable to an increase in net revenue from HP, who sells a version of our Series 2000 family of products, and from NetAPP, partially offset by a decrease in net revenue from Sun who sells our SANnet II family of products under the ST-3000 brand product line. Our net revenue from HP for the three months ended September 30, 2008 totaled $33.7 million, or 44.0% of total net revenue. There was no significant net revenue from HP for the three months ended September 30, 2007. The substantial increase in HP net revenue is due to the launch and market acceptance of the HP MSA 2000 product line in March 2008, which is based on Dot Hill supplied products. Additionally, the HP net revenue included a $1.7 million reimbursement from HP which was negotiated to compensate and effectively defer the price reductions provided to HP effective July 1, 2008. We achieved certain unit shipment quantities for the three months ended September 30, 2008 to earn the reimbursement. The entire amount is also reflected in gross profit. Our net revenue from NetAPP increased $8.7 million, or 121%, from the three months ended September 30, 2007 as compared to the three months ended September 30, 2008. For the three months ended September 30, 2007, net revenue from NetAPP totaled $7.2 million, or 15.7% of our total net revenue, compared to $15.9 million, or 20.7% of our total net revenue, for the three months ended September 30, 2008. The rapid growth in net revenue from NetAPP was driven by NetAPP’s product launch during the third quarter of 2007. Our net revenues from Sun decreased $14.0 million, or 53%, from the three months ended September 30, 2007 as compared to the three months ended September 30, 2008. For the three months ended September 30, 2007, net revenue from Sun totaled $26.6 million, or 58.2%, of our total net revenue, compared to $12.5 million, or 16.3% of our total net revenue, for the three months ended September 30, 2008. The decline in Sun net revenue 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 revenue from Sun to continue to decline over future periods.

Cost of Goods Sold


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Cost of Goods Sold	$	39,166		85.7	%	$	67,700		88.3	%	$	28,534		72.9	%

The increase in cost of goods sold in absolute dollars was primarily due to a 67.7% increase in net revenue. The increase in cost of goods sold as a percentage of net revenue was attributable to a change in product and customer sales mix. Net revenue from our highest margin product, sold to Sun and other SANnet II customers, declined as a percentage of total net revenue. Sun net revenue declined from 58.2% of total net revenue for the three months ended September 30, 2007 to 16.3% of total net revenue for the three months ended September 30, 2008. This was replaced by lower margin net revenue from our Series 2000 products, primarily sold to HP and to a lesser extent to Fujitsu Siemens, as well as net revenue from product sold to NetAPP. Cost of goods sold as a percentage of net revenue associated with our Series 2000 products, improved significantly from the three months ended September 30, 2007 as compared to the three months ended September 30, 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 cost of goods sold. Also, we substantially 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. In September 2008, we entered into a manufacturing agreement with Foxconn. Foxconn will supply us with manufacturing, assembly and test services from its facilities in China and final integration services including final assembly, testing and configure-to-order services through its worldwide facilities. We do not anticipate shipping products for general availability under the Foxconn agreement until the first half of 2009. Additionally, the Series 2000 product cost of goods sold has improved due to our ability to leverage the higher volumes from HP to negotiate lower component costs. In addition, we have also initiated several value engineering projects to lower product costs. 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 September 30, 2007 as compared to the three months ended September 30, 2008 primarily for the same reasons as for 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 revenue from Sun and other SANnet II customers with higher margins to HP and NetAPP and other customers with lower margins, we anticipate cost of goods sold will continue to be a higher percentage of net revenue throughout 2008 in comparison to corresponding periods in the prior year.

Gross Profit


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Gross Profit	$	6,525		14.3	%	$	8,941		11.7	%	$	2,416		37.0	%

The slight increase in gross profit in absolute dollars for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily attributable to an increase in net revenue of $31.0 million, or 67.7%, and a change in product and revenue mix. Net revenue on our highest margin product, sold to Sun, declined as a percentage of total net revenue from 58.2% of net revenue for the three months ended September 30, 2007 to 16.3% of net revenue for the three months ended September 30, 2008. This was replaced by lower margin net revenue from our Series 2000 products and net revenue from NetAPP. Net revenue from our Series 2000 products and net revenue from NetAPP represented 29.2% of our net revenue for the three months ended September 30, 2007 compared to 73.9% of our net revenue for the three months ended September 30, 2008. Additionally, the increase in gross margin in absolute dollars is due to the $1.7 million reimbursement from HP further discussed in net revenue above, as well as $0.3 million related to a legal settlement.

Sales and Marketing Expenses


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net						%
	Amount		Revenue			Amount		Revenue			(Decrease)			Change
	(in thousands, except percentages)
Sales and Marketing Expenses	$	3,677		8.0	%	$	2,990		3.9	%	$	(687	)		(18.7	)%

The decrease in sales and marketing expenses in both absolute dollars and as a percentage of net revenue was primarily attributable to a decrease in salaries, commissions and other employee related costs and intangible asset amortization. Salaries and commissions each decreased by approximately $0.2 million due to a lower overall headcount. The lower overall headcount also contributed to a $0.2 million decrease in other employee-related costs. Intangible asset amortization decreased by $0.1 million due to the applicable asset becoming fully amortized in 2007.

Research and Development Expenses


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Research and Development Expenses	$	5,746		12.6	%	$	6,940		9.1	%	$	1,194		20.8	%

The increase in research and development expense in absolute dollars was primarily due to an increase in project materials, employee-related costs and non-recurring engineering costs. Project materials increased by $0.4 million, and primarily consisted of work on HP specific projects. Employee-related costs increased by $0.6 million, due to increased headcount to support HP and other development projects as well as the hiring of new employees to support development activities related to our recent acquisition of assets from Ciprico. Non recurring engineering costs increased by $0.2 million as the three months ended September 30, 2007 included the benefit of non-recurring engineering recovery billed to NetAPP.

General and Administrative Expenses


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
General and Administrative Expenses	$	2,424		5.3	%	$	3,309		4.3	%	$	885		36.5	%

The increase in general and administrative expenses in absolute dollars was primarily due to a $1.3 million foreign currency gain for the three months ended September 30, 2007 compared to a $0.1 million gain for the three months ended September 30, 2008. This difference is primarily due to the change in functional currency for our operation in the Netherlands from the Euro to the United States dollar effective January 1, 2008. Other general and administrative expenses decreased $0.3 million primarily due to lower legal costs as a result of a higher than expected reimbursement from our insurance carrier for legal services incurred to defend our stockholder litigation cases.

Legal Settlement


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net						% of Net						%
	Amount		Revenue			Amount			Revenue			(Decrease)			Change
	(in thousands, except percentages)
Legal settlement	$	—		0.0	%	$	(200	)		(0.0	)%	$	(200	)		(100.0	)%

The proceeds from a legal settlement of $0.2 million reflects a claim we filed in December 2006 against Infortrend for breach of the settlement agreement with Crossroads whereby Infortrend withheld $1.475 million for Taiwanese taxes. Such amount is reported as a reduction in operating expenses.

Other Income, net


	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net						%
	Amount		Revenue			Amount		Revenue			(Decrease)			Change
	(in thousands, except percentages)
Other Income, net	$	1,255		2.7	%	$	290		0.4	%	$	(965	)		(76.9	)%

The decrease in other income, net is primarily due to a decrease in interest income of $0.9 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 $84.7 million as of September 30, 2007 to $56.5 million as of September 30, 2008.

Income Taxes

We recorded an income tax benefit of $0.1 million for the three months ended September 30, 2008 compared to an income tax expense of $0.1 million for the three months ended September 30, 2007. Our effective income tax rate of (3.07)% for the three months ended September 30, 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.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2008

Net Revenue


	Nine Months Ended
	September 30,
							%
	2007		2008		Increase		Change
	(in thousands, except percentages)
Net Revenue	$	155,331	$	200,494	$	45,163		29.1	%

The increase in net revenue is primarily attributable to an increase in net revenue from HP, who sells a version of our Series 2000 family of products, and from NetAPP, partially offset by a decrease in net revenue from Sun who sells our SANnet II family of products under the ST-3000 brand product line. Our net revenue from HP for the nine months ended September 30, 2008 totaled $59.7 million, or 29.8% of total net revenue. The $59.7 million in net revenue from HP for the nine months ended September 30, 2008 is net of a $2.3 million reduction in net revenue, representing the fair value of the warrant issued to HP to induce them to enter into the agreement with us. Net revenue from HP for the nine months ended September 30, 2007 was approximately $1.0 million. The substantial increase in HP net revenue is due to the launch and market acceptance of the HP MSA 2000 product line in March 2008, which is based on Dot Hill supplied products. Additionally, the HP net revenue included a $1.7 million reimbursement from HP which was negotiated to compensate and effectively defer the price reductions provided to HP effective July 1, 2008. We achieved certain unit shipment quantities for the three months ended September 30, 2008 to earn this reimbursement. Our net revenue from NetAPP increased $31.1 million, or 243%, from the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2008. For the nine months ended September 30, 2007, net revenue from NetAPP totaled $12.8 million, or 8.2% of our total net revenue, compared to $43.9 million, or 21.9% of our total net revenue, for the nine months ended September 30, 2008. The rapid growth in net revenue from NetAPP was driven by NetAPP’s product launch during the third quarter of 2007. Our net revenues from Sun decreased $48.0 million, or 46%, from the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2008. For the nine months ended September 30, 2007, net revenue from Sun totaled $104.1 million, or 67.0% of our total net revenue, compared to $56.0 million, or 27.9% of our total net revenue, for the nine months ended September 30, 2008. The decline in Sun net revenue 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.

Cost of Goods Sold


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Cost of Goods Sold	$	135,208		87.0	%	$	180,165		89.9	%	$	44,957		33.3	%

The increase in cost of goods sold in absolute dollars was primarily due to a 29.1% increase in net revenue. The increase in cost of goods sold as a percentage of net revenue was primarily attributable to a change in product and customer sales mix. Net revenue on our highest margin product, sold to Sun and other SANnet II customers, declined as a percentage of total net revenue. Sun net revenue declined from 67.0% of total net revenue for the nine months ended September 30, 2007 to 27.9% of total net revenue for the nine months ended September 30, 2008. This was replaced by lower margin net revenue from our Series 2000 products, primarily sold to HP and to a lesser extent to Fujitsu Siemens, as well as net revenue from product sold to NetAPP. Cost of goods sold associated with our Series 2000 products improved significantly from the nine months ended September 30, 2007 as compared to the nine months ended September 30, 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 cost 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 has improved due to our ability to leverage the higher volumes from HP to negotiate lower component costs. In addition, we have also initiated several value engineering projects to lower product costs. 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 nine months ended September 30, 2007 as compared to the nine months ended September 30, 2008 primarily for the same reasons as for 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 revenue from Sun and other SANnet II customers with higher margins to HP and NetAPP and other customers with lower margins, we anticipate cost of goods sold will continue to be a higher percentage of net revenue throughout 2008 in comparison to corresponding periods in the prior year.

Gross Profit


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Gross Profit	$	20,123		13.0	%	$	20,329		10.1	%	$	206		1.0	%

The increase in gross profit in absolute dollars for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily attributable to an increase in net revenue of $45.2 million, or 29.1%. The decrease in gross profit as a percentage of revenue was due to a change in product mix. Net revenue on our highest margin product, sold to Sun, declined as a percentage of total net revenue from 67.0% of net revenue for the nine months ended September 30, 2007 to 27.9% of net revenue for the nine months ended September 30, 2008. This was replaced by lower margin net revenue from our Series 2000 products and net revenue from NetAPP. Net revenue from our Series 2000 products and net revenue from NetAPP represented 21.8% of our net revenue for the nine months ended September 30, 2007 compared to 64.2% of our net revenue for the nine months ended September 30, 2008. Additionally, the decrease in gross margin as a percentage of net revenue for the nine months ended September 30, 2008 includes a $2.3 million reduction in net revenue, representing the fair value of the warrant issued to HP This decrease is partially offset by an increase in gross margin in both absolute dollars and as a percentage of net revenue of $1.7 million from HP further discussed in net revenue above, as well as $0.3 million related to a legal settlement.

Sales and Marketing Expenses


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net						%
	Amount		Revenue			Amount		Revenue			Decrease			Change
	(in thousands, except percentages)
Sales and Marketing Expenses	$	11,456		7.4	%	$	10,909		5.4	%	$	(547	)		(4.8	)%

The decrease in sales and marketing expenses in both absolute dollars and as a percentage of net revenue was primarily attributable to a decrease in intangible asset amortization of $0.5 million, travel and lodging of $0.2 million and salaries of $0.1 million. Intangible asset amortization decreased by $0.5 million due to the asset becoming fully amortized in 2007. Salaries decreased by approximately $0.1 million due to a lower overall headcount. Travel and lodging expenses decreased as a result of lower headcount. These decreases were offset by an increase of $0.2 million in severance costs related to employees in our Netherlands office and a $0.2 million in increase in allocated costs.

Research and Development Expenses


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
Research and Development Expenses	$	16,617		10.7	%	$	21,489		10.7	%	$	4,872		29.3	%

The increase in research and development expenses in absolute dollars was primarily due to a $1.9 million increase in project materials, as well as a $0.4 million increase in outside testing and tooling to support development projects for our OEM customer HP. Consulting expense increased $0.3 million primarily due to the development of an ASIC chip. Additionally, salaries increased $0.6 million due to increased headcount to support HP and other projects as well as the hiring of new employees to support development activities related to our recent acquisition of assets from Ciprico. General overhead expense increased $0.7 million due to higher overhead expenses and an increased allocation percentage. The nine months ended September 30, 2007 included the benefit of $0.3 million of non-recurring engineering recovery billed to NetAPP. Finally, stock compensation increased $0.2 million and vacation pay increased $0.2 million primarily due to the additional headcount.

General and Administrative Expenses


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(in thousands, except percentages)
General and Administrative Expenses	$	9,416		6.1	%	$	10,291		5.1	%	$	875		9.3	%

The increase in general and administrative expenses was primarily due to a foreign currency gain for nine months ended September 30, 2007 of $1.6 million compared to a foreign currency gain of $0.2 million for the nine months ended September 30, 2008. This difference is primarily due to the decision to change the functional currency for our operation in the Netherlands from the Euro to the United States dollar effective January 1, 2008. Additionally, legal fees decreased $1.3 million as a result of the Special Litigation Committee completing the majority of its work in 2007. The nine months ended September 30, 2008 included a reimbursement for legal fees from our insurance carrier of $0.2 million. This decrease was offset by increases in share-based compensation of $0.5 million, recruiting of $0.3 million, other professional fees of $0.3 million and consultants of $0.2 million. Share-based compensation increased due to the granting of a larger number of stock options in the first half of 2008 relative to 2007. Recruiting increased due to fees incurred while locating and hiring key talent within the organization. The increase in consulting/other professional fees is primarily due to expenses associated with IT consultants for our Oracle production environment.

Legal Settlement


	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2008
			% of Net						% of Net						%
	Amount		Revenue			Amount			Revenue			(Decrease)			Change
	(in thousands, except percentages)
Legal settlement	$	—		0.0	%	$	(4,036	)		(2.0	)%	$	(4,036	)		(100.0	)%

Legal settlement proceeds were received from two cases. The proceeds from the first legal settlement of $3.8 million reflects a February 2007 claim we filed for arbitration in Denver, Colorado alleging that the representative of the, Chaparral Network Storage, Inc., or 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. The proceeds from the second legal settlement of $0.2 million reflects a claim we filed in December 2006 against Infortrend for breach of the settlement agreement with Crossroads whereby Infortrend withheld $1.475 million for Taiwanese taxes. Such amounts are reported as a reduction in operating expenses.

Other Income, net


	Nine Months Ended					Nine Months Ended
	Jun 30, 2007					September 30, 2008
			% of Net					% of Net						%
	Amount		Revenue			Amount		Revenue			(Decrease)			Change
	(in thousands, except percentages)
Other Income, net	$	3,794		2.4	%	$	1,435		0.7	%	$	(2,359	)		(62.2	)%

The decrease in other income, net is due to a decrease in interest income of $2.4 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 $84.7 million as of September 30, 2007 to $56.5 million as of September 30, 2008.

Income Taxes

We recorded an income tax expense of $0.3 million for the nine months ended September 30, 2007 compared to an income tax expense of $0.3 million for the nine months ended September 30, 2008. Our effective income tax rate of 1.64% for the nine months ended September 30, 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.

As of December 31, 2007, we had federal and state net operating losses of approximately $144.0 million and $77.0 million, respectively, 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 acquisition of 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 IRC Section 382 limitation for those years.

Liquidity and Capital Resources

The primary drivers affecting liquidity and cash are working capital requirements and net profits or losses. Working capital has been needed to support inventory requirements at some of our larger OEM customers, and more recently our acquisition of Ciprico’s RAIDCore and NAS assets. 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 payment terms ranging between net thirty and net forty-five days. 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, which has increased our cash usage levels. 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 September 30, 2008, we had $56.5 million of cash and cash equivalents and $77.0 million of working capital. Cash equivalents include highly liquid investments purchased with an original maturity of 90 days or less and consist principally of money market funds, U.S. treasury and agency obligations and commercial paper.

For the nine months ended September 30, 2008, net cash used in operating activities was $23.1 million compared to cash used in operating activities of $7.0 million for the nine months ended September 30, 2007. Net cash used in operating activities for the nine months ended September 30, 2008 was attributable to the net loss of $17.2 million consisting of cash and non cash activities. The operating activities that affected cash consisted primarily of lower gross profit, resulting largely from the changes in customer and product mix, lower interest income, due primarily to lower cash balances and lower reinvestment rates, and increased research and development expense, much of which is associated with the ramp in product sales to HP. The non-cash operating activities included in the net loss that did not affect cash consisted of the following: depreciation and amortization of $4.4 million; share-based

compensation expense of $2.2 million; and 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 $6.7 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, $0.5 million from another legal settlement and income taxes of $0.2. Cash flows from operations were negatively impacted by a $15.6 million increase in accounts receivable due to higher net revenues during the quarter ended September 30, 2008 as compared to the quarter ended December 31, 2007. Additionally, there was a $3.6 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. The increase in inventory would have been $3.3 million higher had it not been for quarter end hub pulls in the same amount from two of our larger customers to support their year end demand. These customer pulls may have an impact on our net revenue projections for the three months ended December 31, 2008. Furthermore, there was a $2.0 million decrease in accrued compensation and expenses primarily due to a $0.6 million reduction in restructuring costs as a result of the closing of our Netherlands office, a $0.3 million decrease in deferred revenue as a result of our NetAPP revenue recognition of $0.5 million offset by new service contracts of approximately $0.3 million, a $0.2 million decrease in other long-tem liabilities primarily due to the amortization of our deferred rent and a $1.3 million reduction in other accrued manufacturing costs.

Cash used in investing activities for the nine months ended September 30, 2008 was $4.0 million compared to $9.2 million of cash used in investing activities for the nine months ended September 30, 2007. Cash used during the nine months ended September 30, 2008 was primarily due to the purchase of certain indentified intangible assets from Ciprico in the amount of $2.5 million and $1.5 million for the addition of computer hardware and software assets.

Cash provided by financing activities for the nine months ended September 30, 2008 was $1.2 million compared to cash provided by financing activities of $1.1 million for the nine months ended September 30, 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 $0.9 million, and the proceeds received from the sale of common stock to employees under our employee stock purchase plan of $0.3 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. Similar to the $1.7 million in additional net revenue received as a reimbursement from HP for price reductions provided to HP effective July 1, 2008, we may receive up to an additional $1.3 million for the three months ended December 31, 2008. If we receive this amount it will have a positive impact on our net revenues, gross margin and net loss from operations for the three months ended December 31, 2008. We do not anticipate future concessions from HP of this nature subsequent to December 31, 2008.

In August, 2008, we entered into a credit agreement with Silicon Valley Bank to provide for a revolving credit facility for cash advances and letters of credit of up to an aggregate of $30 million based upon an advance rate of 85% of eligible accounts receivable. The credit agreement expires three years from the effective date of the credit agreement. Borrowings under the credit facility bear interest at the prime rate and are secured by substantially all of our accounts receivable, deposit and securities accounts. The agreement provides for a negative pledge on our inventory and intellectual property, subject to certain exceptions, and contains usual and customary covenants for an arrangement of its type, including an obligation of Dot Hill to maintain at all times a net worth of $55 million (subject to certain increases). The agreement also includes provisions to increase the financing facility by $20 million subject to our meeting certain requirements, including $40 million in borrowing base for the immediately preceding 90 days, and Silicon Valley Bank locating a lender willing to finance the additional facility. In addition, if our cash and cash equivalents net of the total amount outstanding under the credit facility fall below $20 million (measured on a rolling three-month basis), the interest rate will increase to prime plus 1% and additional restrictions will apply. In August 2008, we terminated its credit agreement dated July 1, 2004, as amended, with Wells Fargo Bank, National Association, effective as of August 6, 2008. The credit agreement was terminated as it was no longer necessary given the establishment of Dot Hill’s revolving credit facility with Silicon Valley Bank. There were no early termination penalties associated with the termination of the credit agreement and no outstanding borrowings under the credit line established by the credit agreement at the time of its termination.

The following table summarizes our contractual obligations as of September 30, 2008 (in thousands).


Contractual Obligations	Total		2008		2009		2010		2011		2012		2013
Operating Lease Obligations	$	6,964	$	424	$	1,523	$	1,508	$	1,527	$	1,564	$	418

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.

Off — Balance Sheet Arrangements

At September 30, 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. 141(R), Business Combinations. FASB Statement No. 141(R) 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. This statement also requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. FASB Statement No. 141(R) 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 condensed 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 September 30, 2008. For investment securities, the table presents carrying values at December 31, 2007 and September 30, 2008. These investment securities are not subject to maturity dates.


	December 31, 2007			September 30, 2008
	(amounts in thousands)
Cash equivalents	$	78,157		$	14,370
Average interest rate		4.8	%		2.9	%

We have a line of credit agreement, which accrues interest on any outstanding balances at a variable rate. As of September 30, 2008, we had no balance under this line. On October 7, 2008 we issued a letter of credit to our contract manufacturer in China in the amount of $7.0 million.

Foreign Currency Exchange Rate Risk

As we sell products or services in foreign currencies, we are regularly required to convert the payments received into U.S. Dollars or utilize such foreign currencies as payments for expenses of our business, which gives rise to foreign exchange gains and losses. Given the uncertainty as to when and what specific foreign currencies we may be required or decide to accept as payment from our international customers, we cannot predict the ultimate impact that such a decision would have on our business, gross margins and results of operations. While we monitor our foreign currency exposures, we do not currently maintain an active foreign currency hedging program.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, evaluated 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 the end of the period covered by this report. Based upon that evaluation, our 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 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.

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

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, which the Court granted on September 2, 2008. The plaintiffs subsequently filed a Third Amended Consolidated Complaint on October 10, 2008. The outcome of this action is uncertain, and no amounts have been accrued as of September 30, 2008.

Other Litigation

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 31, 2007 and subsequent filings with the SEC. 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 quarterly 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% and 27.9% of our net revenues for the year ended December 31, 2007 and the nine months ended September 30, 2008, respectively. In addition, sales to NetAPP accounted for 12.5% and 21.9% of our net revenues for the year ended December 31, 2007 and for the nine months ended September 30, 2008, respectively. Furthermore, for the nine months ended September 30, 2008, HP accounted for 29.8% of net revenues. 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.

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 current 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.

Recent turmoil in the credit markets and the financial services industry may negatively impact the Company’s business, results of operations, financial condition or liquidity.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, they may have a material adverse effect on our liquidity and financial condition if our ability to borrow money to finance our operations from our existing lender under our bank credit agreement or obtain credit from trade creditors were to be impaired. In addition, the recent economic crisis could also adversely impact our customers end user customers’ ability to finance the purchase of electronic components from us or our suppliers’ ability to provide us with product, either of which may negatively impact the our business and results of operations.

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 could also result when we cannot pass increased material costs onto our customers such as steel and freight costs which have increased as a result of higher fuel costs

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 are unable to pass along cost increases to our customers, 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.

Our efforts to accommodate our customers’ aggressive 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 incur 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 and Sun has informed us that it intends to phase out our products over the next several quarters. 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. 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 store 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 $12.6 million as of September 30, 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 could 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.

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

For the three months ended September 30, 2008, we incurred a net loss of $3.7 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. Revenue levels achieved from HP and our other customers, the mix of products sold to our 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.

Our available cash and cash equivalents as of September 30, 2008 totaled $56.5 million. We presently expect cash and cash equivalents, and cash generated from operations to be sufficient to meet our operating and capital requirements through at least the next 12 months. Our future capital requirements will depend on, and could increase substantially as a result of many factors, including:

	•		the increased working capital requirements due to contractual requirements with NetAPP, HP and Fujitsu Siemens;

	•		Our need 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 consolidate our facilities and relocate employees and assets;

	•		the success of our manufacturing strategy and plans to move the manufacturing of some of our products to a new contract manufacturing partner could result in additional operating and capital expenses;

	•		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, including the current financial crisis;

	•		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, especially considering the current financial crisis. Any sales of convertible debt or equity securities in the future may have a substantial dilutive effect on our existing stockholders. In our agreement with Silicon Valley Bank, we have pledged substantially all of our accounts receivable and are restricted from pledging inventory and intellectual property. Consequently, any issuance of convertible debt would have to be on an unsecured basis and our ability to borrow more money on a secured basis would be impaired. As such, we may not be able to issue secured debt on commercially reasonable terms 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 to Foxconn could impact our operating results.

Our decision to enter into a manufacturing agreement with Foxconn, in September 2008 may result in additional costs or capacity constraints that could negatively impact expected gross margins and revenues. As a consequence of transitioning to Foxconn, we could also have a surplus of raw materials at our other contract manufacturers: MITAC; SYNNEX; and Flextronics. This could result in lower margins. In addition, if we experience any product quality or manufacturing capacity issues, revenues from customers as well as their satisfaction with our products could be negatively impacted.

The pricing we received from our contract manufacturers was predicated on volume expectations. If we are unable to meet those volume expectations, our contract manufacturers may become less responsive to us and seek to increase prices, which could potentially negatively impact margins and profits.

In addition, our new relationship with Foxconn may negatively impact our relationship with MITAC, SYNNEX and Flextronics, which could negatively 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, our data management services software and our RaidCore software;

	•		component shortages which can result in expedite fees, overtime or increased use of air freight; and

	•		increased freight costs resulting from higher fuel prices, or from the need to expedite shipments of components to our contract manufacturer or finished goods to some of our customers and their hub locations.

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)
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	)
Second Quarter 2008		71.0		(7.4	)
Third Quarter 2008		76.6		(3.7	)


*		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:

	•		general economic conditions which could impact the timing of customer orders and capital spending and other conditions in the global economy that may impact IT spending;

	•		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, SYNNEX and Foxconn 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;

	•		restructuring costs associated with facilities closures, consolidations, and headcount reductions;

	•		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.

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 Foxconn, 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 Foxconn, 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 Senior Vice President and Chief Financial Officer, 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.

In addition, should we decide to consolidate facilities, we may face difficulties retaining key employees at the facility subject to closure, which may adversely affect the transfer of knowledge and processes to any consolidated facility in a timely manner.

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 September 30, 2008, our executive officers, directors and their affiliates beneficially owned approximately 9.4% 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.

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 September 30, 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 September 30, 2008, 37% of our common stock was owned by five 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
	2.1	Amended and Restated Asset Purchase and Technology License Agreement dated September 17, 2008 by and between Dot Hill Systems Corp. and Ciprico Inc.

	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	Manufacturing and Purchase Agreement dated September 24, 2008 by and between Dot Hill Systems Corp. and Hon Hai Precision Industry LTD. *


	10.2	Amendment Eight to Product Purchase Agreement dated September 30, 2008 by and between Dot Hill Systems Corp. and Hewlett Packard Company. *

	10.3	Loan and Security Agreement dated August 1, 2008 by and between Dot Hill Systems Corp. and Silicon Valley Bank. (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 26, 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 an exhibit to our Current Report on Form 8-K filed with the SEC on August 5, 2008 and incorporated herein by reference.

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.

Date: November 10, 2008


	Dot Hill Systems Corp.
	By:	/s/ DANA W. KAMMERSGARD
		Dana W. Kammersgard
		Chief Executive Officer, President and Director (Principal Executive Officer)

Date: November 10, 2008


	By:	/s/ HANIF I. JAMAL
		Hanif I. Jamal
		Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)

EX-2.1 2 a50174exv2w1.htm EX-2.1 exv2w1

Exhibit 2.1

EXECUTION VERSION

AMENDED AND RESTATED

ASSET PURCHASE AND TECHNOLOGY LICENSE AGREEMENT

This Amended and Restated Asset Purchase and Technology License Agreement is made and entered into as of this 17^th day of September, 2008 (“Effective Date”) by and between Dot Hill Systems Corp., a Delaware corporation (“Buyer”) and Ciprico Inc., a Delaware corporation (“Seller”).

Recitals

A. Seller is a provider of intelligent storage software solutions for servers, professional workstations and digital media workflows (the business that Seller is engaged in, the “Business”).

B. Buyer and Seller entered into that certain Asset Purchase and Technology License Agreement dated September 16, 2008 (the “Initial Agreement”).

C. Buyer and Seller desire to enter into this Amended and Restated Asset Purchase and Technology License Agreement to replace the Initial Agreement in its entirety.

D. Seller wishes to sell to Buyer certain of the assets used in connection with the Business at the price and on the other terms and conditions specified in detail below, and Buyer wishes to so purchase and acquire such assets from Seller.

E. Buyer desires to grant and Seller desires to receive licenses relating to certain other of such assets of the Business, subject to and in accordance with the terms and conditions set forth in this Agreement.

F. Seller desires to grant and Buyer desires to receive licenses relating to certain other of such assets of the Business, subject to and in accordance with the terms and conditions set forth in this Agreement.

Agreement

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE 1
DEFINITIONS

1.1 Definitions. Unless otherwise defined herein, terms used herein shall have the meanings set forth below:

“Acquired Assets” shall have the meaning set forth in Article 2.1(a) hereof.

“Affiliate” of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where “control” means the possession, directly

or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities or otherwise.

“Affiliated Group” means an affiliated group as defined in section 1504 of the Code (or any analogous combined, consolidated or unitary group defined under state, local or foreign income Tax Law) of which Seller is or has been a member.

“Agreement” means this Asset Purchase and Technology License Agreement, including all the Schedules hereto, as the same may be amended, modified or waived from time to time in accordance with its terms.

“Allocation” shall have the meaning set forth in Article 3.4, hereof.

“Alternative Transaction” means any transaction occurring after Effective Date involving the consummation of the sale pursuant to section 363(b) of the Bankruptcy Code of all or a material portion of the Acquired Assets by the Seller to a purchaser or purchasers other than the Buyer and/or one or more of its Affiliates at any time during the pendency of the Chapter 11 Case. Without limiting the foregoing, An Alternative Transaction shall include any sale to any of the Seller’s secured creditors, including a bid or bids made for the Acquired Assets pursuant to Bankruptcy Code section 363(k).

“Appliances” shall mean computer storage appliance products, and related solutions and services. By way of example only and without limitation, such computer storage appliance products currently produced, marketed, or sold by Seller include Seller’s DiMeda®, MediaVault™, and Talon™ product lines, and such future storage appliance solutions as Seller may bring to market from time to time.

“Assumed Executory Contracts” means all Contracts identified in Schedule 2.1(a)(iv).

“Assumed Obligations” shall have the meaning set forth in Article 2.2(a) hereof.

“Auction” shall mean the auction conducted by Seller pursuant to the Bidding Procedures Order and Article 9.2(c) hereof for substantially all of the Acquired Assets.

“Bankruptcy Code” means Title 11 of the United States Code.

“Bankruptcy Court” means the United States Bankruptcy Court for the District of Minnesota.

“Bid” or “Bids” shall have the meaning set forth in Article 7.9 hereof.

“Bidders” shall have the meaning set forth in Article 7.9 hereof.

“Bidding Procedures Order” means the order of the Bankruptcy Court, in the form reasonably acceptable to the Buyer which includes, among other things, (i) the Breakup Fee, Expense Reimbursement and all other payments to Buyer arising under this Agreement as obligations of the Seller having super-priority as administrative expenses under section 364(c)(1) of the Bankruptcy Code in the Chapter 11 Case, (ii) Buyer’s designation as the stalking horse

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bidder together with the provisions of this Agreement to be performed by Seller before the Closing; (iii) obligations setting a deadline for the filing of objections to the entry of the Sale Order, (iii) scheduling the Auction in accordance with the terms of this Agreement, (iv) scheduling the Sale Hearing, (v) providing for competitive bidding procedures pursuant to which competing offers may be solicited, made and accepted and containing the terms specified in Articles 9.2(c) and 12.2 hereof and (vi) approving and implementing the provisions of Articles 7.6, 7.7, 9.2(c) and 12.2 hereof.

“Books and Records” means all records and lists of Seller related solely to the Acquired Assets including: all analysis reports, marketing reports and creative material pertaining to the Acquired Assets, all records relating to past or present customers, suppliers or personnel of Seller (including customer lists, mailing address lists, e-mail address lists, recipient lists, sales records, correspondence with customers, customer files and account histories, supply lists and records of purchases from and correspondence with suppliers and any other written or electronic identifiable data relating to past or present customers or suppliers of the Business with regard to the Acquired Assets which has been created by Seller or its representatives, agents or employees), all records relating to all product, business and marketing plans of Seller, and all books, ledgers, files, reports, plans, drawings and operating records of every kind of Seller; provided, however, “Books and Records” shall not include Seller’s minute books, stock books and Tax Returns.

“Breakup Fee” shall have the meaning set forth in Article 9.2(c)(i) hereof.

“Broadcom License” shall mean the intellectual property licensed to Seller by Broadcom Corporation (“Broadcom”) pursuant to that certain Technology License and Asset Purchase Agreement between Broadcom and Seller dated June 6, 2006, as amended by the First Amendment to the Technology License and Asset Purchase Agreement, dated June 30, 2008, between Broadcom and Seller, including but not limited to the RAIDCore Licensed Technology.

“Business” shall have the meeting set forth in Recital A, above.

“Buyer” shall have the meaning set forth in the preamble hereof.

“Chapter 11 Case” the case commenced by Seller, on the Petition Date, under chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court, Case No. BKY 08 — 43731.

“Claim” shall have the meaning set forth in section 101(5) of the Bankruptcy Code.

“Closing” shall have the meaning set forth in Article 11.1 hereof.

“Closing Date” shall have the meaning set forth in Article 11.1 hereof.

“Closing Note” shall have the meaning set forth in Article 3.1(a)(iv) hereof.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Confidentiality Agreement” means the Confidentiality Agreement, dated as of July 28, 2008, between Buyer and Seller.

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“Contract” means any agreement, contract, lease, commitment or other binding arrangement or understanding, whether written or oral, to which Seller is a party and which Seller is permitted under the Bankruptcy Code and applicable law to assume and assign other than an Employee Benefit Plan.

“Damages” shall have the meaning set forth in Article 14.1.

“DIP Loan” means the Post-Petition Loan and Security Agreement and related promissory note and loan documents, dated August 28, 2008.

“Disclosure Schedules” shall have the meaning set forth in Article 5.1 hereof.

“Dollars” or “$” means dollars of the United States of America.

“Employee Compensation Obligations” shall mean any obligations of the Seller, whether they arose before or after the Petition Date, with respect to any unpaid wages, salary, health benefits, severance obligations, change of control obligations, unused vacation or sick leave earned and accrued (to the extent not paid) or similar Liability, with respect to all employees, former employees, retirees of Seller, or any dependents or beneficiaries thereof and the Rehired Employees.

“Excluded Assets” shall have the meaning set forth in Article 2.3 hereof.

“Excluded Contracts” shall have the meaning set forth in Article 2.3(a) hereof.

“Excluded Environmental Liabilities” means any Liability or investigatory, corrective or remedial obligation, arising under environmental Laws with respect to Seller or any predecessor or Affiliate of Seller, arising out of or relating to the operation, use or environmental condition of the Business, the Acquired Assets prior to the Closing (including any arising from the on-site or off-site Release, threatened Release, treatment, storage, disposal, or arrangement for disposal of, or exposure to Hazardous Substances) whether or not constituting a breach of any representation or warranty herein and whether or not set forth on any Disclosure Schedule.

“Excluded Liabilities” shall have the meaning set forth in Article 2.4 hereof.

“Expense Reimbursement” shall have the meaning set forth in Article 9.2(c)(i) hereof.

“Facility” means Seller’s lease of that certain real property located at 7003 Lake Street West, Suite 400, St. Louis Park, Minnesota.

“Facility Payment” is defined in Article 9.11(c).

“Facility Services” means, (i) the right of Buyer and Rehired Employees to use and occupy a portion of the Facility, and (ii) all costs and fees associated with Buyer and Rehired Employees’ use and occupancy of the Facility, including utilities, telephone, internet connections, taxes, equipment, supplies and janitorial services.

“Field of Use” shall mean use as installed in or embedded in Appliances.

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“Final Order” means an Order as to which the time to file an appeal, a motion for rehearing or reconsideration or a petition for writ of certiorari has expired and no such appeal, motion or petition has been filed.

“GAAP” means, at a given time, United States generally accepted accounting principles, consistently applied.

“Governmental Authority” means any United States federal, state or local or any foreign government, governmental regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body.

“HBA Intellectual Property” means the Intellectual Property reasonably necessary to reproduce, modify, manufacture, troubleshoot, implement, interface and integrate with, and distribute the host bus adapter cards manufactured, sold, or distributed by Buyer, including board layouts, BOMs, manufacturing processes, chip designs, mask works, specifications, know-how, trade secrets, software, tooling, molds, supplier lists, and the source code for any software comprising part of the RAIDCore Assets or RAIDCore Licensed Technology, including any improvements to any of the foregoing, including the assets and materials set forth in Exhibit 1.1(a).

“Highest or Best Bid” shall have the meaning set forth in Article 9.2(c)(vii) hereof.

“Indebtedness” with respect to any Person means any obligation of such Person for borrowed money, and in any event shall include (i) any obligation incurred for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the Ordinary Course of Business, (ii) the face amount of all letters of credit issued for the account of such Person, (iii) obligations (whether or not such Person has assumed or become liable for the payment of such obligation) secured by Liens, (iv) capitalized lease obligations, (v) all guarantees and similar obligations of such Person, (vi) all accrued interest, fees and charges in respect of any indebtedness and (vii) all prepayment premiums and penalties, and any other fees, expenses, indemnities and other amounts payable as a result of the prepayment or discharge of any indebtedness.

“Intellectual Property” shall mean, all of the following in any jurisdiction in the world, (i) inventions (whether or not patentable or reduced to practice), all improvements thereto, and patents, patent applications, patent disclosures and all prosecution history files, together with all reissuances, continuations, continuations-in-part, revisions, extensions, reexaminations and counterparts thereof; (ii) works of authorship (whether or not copyrightable), and copyrights, mask works and copyrightable works, and applications, registrations and renewals in connection therewith; (iii) trade secrets and other confidential or proprietary information (including, where confidential or proprietary, ideas, research and development, formulas, software, compositions, manufacturing, production and other processes and techniques, methods, designs, technical and other data, charts, plans, diagrams, drawings and specifications, customer and supplier lists and business, marketing and other plans, studies and proposals); (iv) computer software (including source code, executable code data, databases and documentation) and systems; (v) copies and tangible embodiments of any of the foregoing in whatever form or medium; (vi) all other intellectual property, proprietary rights and all other general intangibles (including rights relating

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to products under development); and (vii) the right to sue and recover for any past, present or future infringement, misappropriation, dilution or any other causes of action, and to recover or collect any damages, proceeds, income, royalties or other payments in connection with or relating to any of the foregoing. A Schedule of patents, patent applications, trademarks, service marks, logos, and registered copyrights is attached hereto and marked as Exhibit 1.1(b).

“Instruments of Assignment” means those documents and instruments necessary for the Seller to effect the sale, conveyance, assignment, transfer and delivery of the Acquired Assets to Buyer or its designees, including assignment and assumption agreements, bills of sale and other documents of assignment and transfer, all in form and substance reasonably satisfactory to Buyer, each in recordable form to the extent necessary to duly assign such rights to Buyer.

“Knowledge” or “Knowledge of Seller” shall mean the actual knowledge of each of Seller’s Chief Executive Officer and Chief Financial Officer.

“Law” means any law, statute, regulation, ruling, or Order of, administered or enforced by or on behalf of, any Governmental Authority, or common law.

“Liability” means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due and regardless of when asserted), including any liability for Taxes.

“Lien” or “Liens” means any lien (statutory or otherwise), hypothecation, encumbrance, Claim, Liability, security interest, interest, mortgage, pledge, restriction, charge, instrument, license, preference, priority, security agreement, easement, covenant, encroachment, option, right of recovery, Tax (including foreign, federal, state and local Tax), Order of any Governmental Authority, of any kind or nature (including (i) any conditional sale or other title retention agreement and any lease having substantially the same effect as any of the foregoing, (ii) any assignment or deposit arrangement in the nature of a security device, (iii) any claim based on any theory that Buyer is a successor, transferee or continuation of Seller or the Business, and (iv) any leasehold interest, license or other right, in favor of a Third Party or a Seller, to use any portion of the Acquired Assets), whether secured or unsecured, choate or inchoate, filed or unfiled, scheduled or unscheduled, noticed or unnoticed, recorded or unrecorded, contingent or non-contingent, material or non-material, known or unknown.

“Macrovision License” means that certain “Software License and Services Agreement, dated September 13, 2007 by and between Seller and Macrovision Corporation.

“Material Adverse Change” or “Material Adverse Effect” means any event, condition, development or effect that individually or in the aggregate with all other events, changes, conditions, developments and effects, is or is reasonably likely to be materially adverse to (i) the Acquired Assets and Assumed Obligations or (ii) the ability of Seller to perform its obligations under this Agreement, provided, however, that none of the following shall be deemed in and of itself, either alone or in combination, to constitute, and none of the following shall be taken into account in determining whether there has been or will be, a Material Adverse Change or a Material Adverse Effect: (a) changes in economic conditions generally or in the industries in which Seller

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operates, except to the extent such changes have a disproportionate effect on Seller, (b) any change of Law, accounting standards or regulatory policy, (c) changes or adverse conditions in the securities markets, including those relating to debt financing, except to the extent such changes have a disproportionate effect on Seller, and (d) any actions specifically required to be taken pursuant to this Agreement.

“NAS Intellectual Property” means all of the following in any jurisdiction throughout the world, but only as it relates to the NAS source code and related technology for Seller’s Networked-Attached Storage and utility software as it exists on the Closing Date: (i) computer software (including source code, executable code data, databases and documentation) and systems; (ii) copies and tangible embodiments of any of the foregoing in whatever form or medium; (iii) inventions (whether or not patentable or reduced to practice), all improvements thereto, and patents, patent applications, patent disclosures and all prosecution history files, together with all reissuances, continuations, continuations-in-part, revisions, extensions, reexaminations and counterparts thereof; (iv) works of authorship (whether or not copyrightable), and copyrights, mask works and copyrightable works, and applications, registrations and renewals in connection therewith; (v) trade secrets, know-how and other confidential, proprietary or business information (including ideas, research and development, formulas, compositions, designs, technical and other data, charts, plans, and diagrams); and (vi) the right to sue and recover for any future infringement, misappropriation, dilution or any other causes of action, and to recover or collect any damages, proceeds, income, royalties or other payments in connection with or relating to any of the foregoing. An Exhibit describing the NAS Intellectual Property is attached hereto and marked as Exhibit 1.1(c).

“NAS Agreement” means that certain “NAS Joint Ownership Agreement” between Buyer and Seller by which Buyer and Seller shall become the joint owners of the NAS Intellectual Property.

“NAS Rights” means the rights and interests that Buyer obtains under the NAS Agreement.

“Net Revenue” (i) means gross sales less adjustments as in accordance with generally accepted accounting principles (GAAP) adopted by and stated in Buyer’s SEC filings (ii) means for purposes of service and maintenance contracts, revenue recognized on a straight line basis over the contract service period; and (iii) shall only exclude units shipped on a zero revenue base related specifically to customer evaluation and potential customer evaluation, demonstration or loan until such time, if any, that a purchase order including the applicable price is obtained.

“Obligations” means all sums due and owing from Seller to Buyer under the DIP Loan.

“Order” means any decree, order, injunction, rule, judgment, consent of or by any Governmental Authority.

“Ordinary Course of Business” means the operation of the Business by Seller in the usual and ordinary course in a manner substantially similar to the manner in which Seller operated on the Effective Date, subject to any obligations as a debtor under the Bankruptcy Code or any order of the Bankruptcy Court.

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“Permits” means licenses, permits, approvals, certificates of occupancy, authorizations, operating permits, registrations, plans and the like.

“Permitted Liens” means easements, covenants, conditions, restrictions and other similar matters of record on real property, leasehold estates or personally that do not in any material respect detract from the value thereof and do not individually or in the aggregate in any material respect interfere with the present use of the property subject thereto.

“Person” means any corporation, partnership, joint venture, limited liability company, organization, entity, authority or natural person.

“Petition Date” means July 28, 2008.

“Proceeding” means any claim, charge, complaint, dispute, demand, action, investigation, inquiry, audit, suit in equity or at Law, administrative, regulatory or quasi-judicial proceeding, arbitration, account, contribution, and/or other causes of action of whatever kind or character.

“Purchase Price” shall have the meaning set forth in Article 3.1 hereof.

“Qualifying Bid” shall have the meaning set forth in Article 9.2(c)(vi) hereof.

“RAIDCore Assets” shall mean all Intellectual Property owned by Seller that exists at Closing and is associated with, modifies, or implements the RAIDCore Licensed Technology.

“RAIDCore License” is defined at Article 4.1.

“RAIDCore Licensed Technology” shall mean that certain Intellectual Property set forth in Exhibit 1.1(d) hereto, and software that is designed to control a disk storage subsystem consisting of multiple hard disk drives to share or replicate data among the drives in accordance with industry standard RAID (Redundant Array of Independent Drives) level definitions, licensed to Seller by Broadcom, pursuant to the Broadcom License.

“Rehired Employees” shall have the meaning set forth in Article 9.10(a) hereof.

“Rule” or “Rules” means the Federal Rules of Bankruptcy Procedure.

“Sale Hearing” means the hearing of the Bankruptcy Court to approve this Agreement and the transactions contemplated herein.

“Sale Motion” shall have the meaning set forth in Article 7.6(b) hereof.

“Sale Order” means the Final Order of the Bankruptcy Court, in form reasonably acceptable to the Buyer and to be filed with the Bankruptcy Court on or before two (2) business days before the Sale Hearing to be entered by the Bankruptcy Court pursuant to sections 363 and 365 of the Bankruptcy Code.

“Schedules” means the schedules attached hereto (including the Disclosure Schedules).

“Seller” shall have the meaning set forth in the preamble hereof.

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“Seller Intellectual Property” means the NAS Intellectual Property, the HBA Intellectual Property, the RAIDCore Assets and the RAIDCore Licensed Technology.

“Subsequent Payments” is defined in Article 3.2.

“Subsidiary” means, with respect to any Person, any corporation a majority of the total voting power of shares of stock of which is entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or any partnership, limited liability company, association or other business entity a majority of the partnership or other similar ownership interest of which is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes of this definition, a Person is deemed to have a majority ownership interest in a partnership, limited liability company, association or other business entity if such Person is allocated a majority of the gains or losses of such partnership, limited liability company, association or other business entity or is or controls the managing director or general partner of such partnership, limited liability company, association or other business entity.

“Tax” and, with correlative meaning, “Taxes” mean with respect to any Person (i) all federal, state, local, county, foreign and other taxes, assessments or other government charges, including any income, alternative or add-on minimum tax, estimated gross income, gross receipts, sales, use, ad valorem, value added, transfer, capital stock franchise, profits, license, registration, recording, documentary, intangibles, conveyancing, gains, withholding, payroll, employment, social security (or similar), unemployment, disability, excise, severance, stamp, occupation, premium, real property, personal property, unclaimed property, environmental or windfall profit tax, custom duty or other tax, governmental fee or other like assessment, charge, or tax of any kind whatsoever, together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such tax (domestic or foreign) whether such Tax is disputed or not, (ii) Liability for the payment of any amounts of the type described in clause (i) above relating to any other Person as a result of being party to any agreement to indemnify such other Person, being a successor or transferee of such other Person, or being a member of the same affiliated, consolidated, combined, unitary or other group with such other Person, or (iii) Liability for the payment of any amounts of the type described in clause (i) arising as a result of being (or ceasing to be) a member of any Affiliated Group (or being included (or required to be included) in any Tax Return relating thereto).

“Tax Return” means any report, return, declaration, claim for refund or other information or statement relating to Taxes, including any schedules or attachments thereto and any amendments thereof.

“Third Party” means any Person other than Seller, Buyer or any of their respective Affiliates.

“Transaction Documents” means this Agreement, and all other agreements, instruments, certificates and other documents to be entered into or delivered by any party in connection with the transactions contemplated to be consummated pursuant to this Agreement.

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“WARN Act” means the federal Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. (1988) and any similar Minnesota statutes or provisions, if any.

1.2 Rules of Construction. Unless the context otherwise clearly indicates, in this Agreement:

(a) the singular includes the plural;

(b) “includes” and “including” are not limiting;

(c) “may not” is prohibitive and not permissive; and

(d) “or” is not exclusive.

ARTICLE 2
ACQUIRED ASSETS

2.1 Purchase and Sale of Acquired Assets.

(a) Subject to the terms and conditions set forth in this Agreement, at the Closing Seller shall sell, contribute, convey, assign, transfer and deliver to Buyer, free and clear of all Liens, Claims, and other interests and encumbrances (whether arising prior to or subsequent to the Chapter 11 Case, but except for the Assumed Obligations and Permitted Liens) to the fullest extent allowed by Law, and Buyer shall purchase, acquire and take assignment and delivery of, for the consideration specified in Article 3.1, all properties, assets, rights, titles and interests of every kind and nature, owned, licensed or leased by Seller (including indirect and other forms of beneficial ownership) as of the Closing Date, whether tangible or intangible, personal and wherever located and by whomever possessed, in and to the following assets (all of the assets to be sold, assigned, transferred and delivered to Buyer hereunder herein called the “Acquired Assets”); provided, that the Acquired Assets shall not include the Excluded Assets retained by Seller pursuant to Article 2.3:

(i) the RAIDCore Assets;

(ii) all RAIDCore Licensed Technology;

(iii) the NAS Rights;

(iv) all of Seller’s rights existing under the Assumed Executory Contracts, including the Broadcom License (for the avoidance of doubt, a list of such Assumed Executory Contracts is set forth in Schedule 2.1 (a)(iv)), as determined by Buyer, to the extent that such Assumed Executory Contracts (A) have been entered into after the petition for the Chapter 11 Case, (B) have been assumed prior to the date of this Agreement pursuant to an Order of the Bankruptcy Court or (C) are assumed by Seller pursuant to Article 2.1(b);

(v) as identified in Schedule 2.1(a)(v), all owned machinery, equipment (including all transportation and office equipment), fixtures, trade fixtures, computer and

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information technology equipment and related data, owned by Seller wherever located, but only as it relates to the Acquired Assets;

(vi) as identified in Schedule 2.1(a)(vi), all owned office supplies, production supplies, spare parts, other miscellaneous supplies, and other tangible property of any kind wherever located, including all property of any kind located in any building, office or other space leased, owned or occupied by Seller or in any warehouse where any of Seller’s properties and assets may be situated, but only as it relates to the Acquired Assets;

(vii) as identified in Schedule 2.1(a)(vii), all security deposits and advances, but only as they relate to the Acquired Assets;

(viii) as identified in Schedule 2.1(a)(viii), all claims, including deposits, prepayments, warranties, guarantees, refunds, reimbursements, causes of action, rights of recovery, rights of set-off and rights of recoupment of every kind and nature (whether or not known or unknown or contingent or non-contingent), but only as it relates to the Acquired Assets;

(ix) copies of all Books and Records, including, but not limited to, data and information that may reside or is otherwise located on equipment, computers or other storage devices that Buyer does not acquire as part of this Agreement;

(x) other than as set forth on Schedule 2.1(x), all Permits, licenses, certifications and approvals from all permitting, licensing, accrediting and certifying agencies, and the rights to all data and records held by such permitting, licensing and certifying agencies, but only as they relate to the Acquired Assets;

(xi) the HBA Intellectual Property;

(xii) as identified in Schedule 2.1(a)(xii), all goodwill as a going concern and all other intangible properties but only as it relates to the Acquired Assets;

(xiii) as identified in Schedule 2.1(a)(xiii), all of Seller’s rights to be indemnified from Third Parties, but only as they relate to the Acquired Assets;

(xiv) as identified in Schedule 2.1(a)(xiv), all rights to proceeds under insurance policies, but only as they relate to the Acquired Assets; and

(xv) as identified in Schedule 2.1(a)(xv), all security deposits relating to Assumed Executory Contracts.

(b) Notwithstanding anything in this Agreement to the contrary, (i) Buyer may revise Schedule 2.1(a)(iv) to eliminate or add any Contract from Schedule 2.1(a)(iv) and exclude from or include in, as applicable, the definition of Assumed Executory Contracts such Contract by providing written notice to Seller up to two (2) business days prior to the Sale Hearing and (ii) in the case of any such revision, Seller shall give notice to the other parties to any such Contract within twenty-four (24) hours of such addition or elimination, and Seller shall use all reasonable efforts to obtain any necessary Bankruptcy Court approval for the assumption and assignment to Buyer of such additional Assumed Executory Contracts.

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(c) At any time, Seller may immediately move to reject any Excluded Contract upon notice to Buyer and Buyer shall have the right to inform Seller up to fifteen (15) days following the date of the notice thereof to require the Seller to assume and assign such Excluded Contract to Buyer provided any applicable cure costs shall be borne by Buyer.

2.2 Assignment and Assumption of Liabilities.

(a) Subject to the terms and conditions set forth in this Agreement, including Article 2.4 hereto, Buyer shall only assume from Seller and thereafter be responsible for the payment, performance or discharge of the Liabilities and obligations of Seller under the Assumed Executory Contracts arising after the Closing (the “Assumed Obligations”).

(b) Article 2.2(a) shall not limit any claims or defenses Buyer may have against any party other than Seller. The transactions contemplated by this Agreement shall in no way expand the rights or remedies of any Third Party against Buyer or Seller.

2.3 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, the following assets of Seller shall be retained by Seller and are not being sold or assigned to Buyer hereunder (all of the following are referred to collectively as the “Excluded Assets”):

(a) the avoidance powers granted to Seller under the Bankruptcy Code and causes of action and remedies granted pursuant to or incorporated in Sections 502, 510, 541(a)(3) and (4), 544, 545, 547 through 551 and 553 of the Bankruptcy Code;

(b) any leases, including the lease for the Facility, contracts, agreements, licenses, commitments or similar arrangements other than the Assumed Executory Contracts listed on Schedule 2.1(a)(iv) (taking into account any revisions to Schedule 2.1(a)(iv) made by Buyer pursuant to Article 2.1(b)) (the “Excluded Contracts”);

(c) Cash and cash equivalents as of the Closing Date, and all bank accounts of Seller;

(d) all rights to proceeds under any director and officer liability insurance policies of Seller for claims arising prior to the Closing;

(e) all assets maintained pursuant to or in connection with any employee benefit plan;

(f) all accounts receivable;

(g) all inventory;

(h) any Contract related to indebtedness for borrowed money, including the Convertible Note Purchase Agreement between Seller and certain investors dated December 26, 2007;

(i) any equity securities of any issuer owned by Seller and any notes receivable issued by any shareholder of the Seller in connection with the exercise of Seller’s stock options;

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(j) this Agreement, Seller’s rights under this Agreement and all cash and non-cash consideration payable or deliverable to Seller pursuant to the terms and provisions hereof;

(k) any assets that are not identified in Article 2.1; and

(l) the corporate minute books of Seller.

2.4 No Other Liabilities Assumed. Seller acknowledges and agrees that pursuant to the terms and provisions of this Agreement, Buyer will not assume, or in any way be liable or responsible for, any Liability of Seller (including Liabilities relating to the pre-petition or post-petition operation of the Business, the Excluded Assets or to the Acquired Assets (and the use thereof)), whether relating to or arising out of the Business, the Excluded Assets or the Acquired Assets or otherwise, other than the Assumed Obligations. In furtherance and not in limitation of the foregoing, except as specifically set forth in Article 2.2, neither Buyer nor any of its Affiliates shall assume, and shall not be deemed to have assumed, any Liability of any kind or nature whatsoever of Seller resulting from, arising out of, relating to, in the nature of, or caused by (a) Indebtedness (other than Assumed Executory Contracts which are capitalized leases), (b) any Excluded Asset or Excluded Contract, (c) Taxes or escheat obligations of any kind or nature, (d) any Claim arising out of facts, events, circumstances, actions or inactions occurring on or prior to the Closing, (e) any employee benefit plan, (f) any Excluded Environmental Liabilities, (g) any Employee Compensation Obligation, (h) any breach of contract, breach of warranty, tort, infringement or other violation of the rights of another Person (including any Seller Intellectual Property rights) or any lawsuits or violations of Law, (i) any other obligation of Seller or any predecessor or Affiliate of Seller whatsoever or any ERISA Affiliate other than the Assumed Obligations, or (j) any Liability of Seller arising under the WARN Act (whether prior to or after Closing), if any, including any such Liabilities arising out of or resulting in connection with the Closing and/or the consummation of the transactions contemplated by this Agreement (collectively, any such obligations, the “Excluded Liabilities”).

2.5 Deemed Consents. In its notice and motion to assume and assign Contracts to Seller, Debtor shall request that the Bankruptcy Court deem the non-debtor party to such contract or lease to have consented to the sale and the assumption and assignment of said contract or lease, and the Sale Order shall provide and acknowledge such deemed consent.

2.6 Obligations in Respect of Assumed Executory Contracts. To the extent that any Assumed Executory Contract is subject to a cure pursuant to section 365 of the Bankruptcy Code, Seller shall be responsible for such cure and shall pay any amounts related to such cure obligations; provided, however, that Buyer shall be responsible for any amounts related to such cure obligations under the Macrovision License (the “Cure Costs”). Buyer shall be responsible for paying all costs and expenses accrued under any Assumed Executory Contract subsequent to the Closing Date.

2.7 Post-Closing Assignment of Contracts. With respect to any Contract which is not set forth on Schedule 2.1(a)(iv), and provided such Contract has not been rejected by Seller pursuant to section 365 of the Bankruptcy Code, upon written notice(s) from Buyer, as soon as practicable, Seller shall take all actions reasonably necessary to assume and assign to Buyer pursuant to section 365 of the Bankruptcy Code any Contract(s) set forth in Buyer’s notice(s), and

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any applicable cure costs shall be borne by Buyer. The covenant set forth in Article 2.7 shall survive the Closing, subject to the rights of Seller under Article 2.1(c). Notwithstanding anything in this Agreement to the contrary, on the date any Contract is assumed and assigned to Buyer pursuant to this Article 2.7, such Contract shall be deemed an Assumed Executory Contract and deemed scheduled on Schedule 2.1(a)(iv) under the appropriate heading for all purposes under this Agreement.

ARTICLE 3
CONSIDERATION

3.1 Purchase Price.

(a) Purchase Price. The consideration to be paid by Buyer to Seller for the Acquired Assets shall be:

(i) cash in the amount of $2,250,000, less credit for all outstanding Obligations (the “Cash Purchase Price”);

(ii) assumption of the Assumed Obligations;

(iii) Subsequent Payments, if any, as determined in accordance with Article 3.2; and

(iv) an unsecured promissory note in the form attached hereto as Exhibit 3.1(a)(iv) in the original principal amount of $1,000,000.00 (the “Closing Note”).

(b) Payment. On the Closing Date, Buyer shall pay and deliver to Seller, by wire transfer of immediately available funds, the Cash Purchase Price.

3.2 Subsequent Payments. Except as otherwise provided herein, Buyer shall pay to Seller additional payments equal to six and two-thirds percent (6.67%) of the Net Revenue received by Buyer from the RAIDCore Assets, the RAIDCore Licensed Technology and the NAS Rights (the “Subsequent Payments”). Such Subsequent Payments will be (i) paid quarterly within sixty (60) days of the end of the respective calendar quarter, (ii) paid for a time period not to exceed 42 months after the Closing Date, and (iii) equal to 6.67% of Net Revenue received by Buyer from the RAIDCore Assets, the RAIDCore Licensed Technology and the NAS Rights, up to, but not exceeding, $30,000,000 of Net Revenue received by Buyer from any combination of the RAIDCore Assets, the RAIDCore Licensed Technology and the NAS Rights. In the event that RAIDCore is sold in an embedded context, where the price of the embedded RAIDCore component cannot be independently established or verified, the six and two thirds percent (6.67%) royalty provided for above shall be applied to the following allocated RAIDCore component value: When sold with host bus adapter cards, the price allocated to the RAIDCore component will be $35/unit (6.67% royalty= $2.33/unit); when sold as embedded in an appliance that includes at least one motherboard (regardless of the number of such boards and the presence or absence of hard disk drives), then the price allocated to the RAIDCore component will be $50/unit (royalty=$3.34/unit); and when sold in software form only, as part of a bundle that includes other software (e.g. Snapshots, RAID 6, or the like), then the price allocated to the RAIDCore component will be $5.00/unit (royalty=$0.33/unit). For purposes of calculating Subsequent

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Payments, when the value of the NAS Rights embedded into products sold are not readily ascertainable or independently verifiable, the Net Revenue received shall be based on 5% of the total price of the end product sold with a maximum of $750 per product sold. Subsequent Payments will be accompanied by reports for applicable products, quantities and revenues of Buyer (“Reports”). Seller, its agents, representatives or advisors (provided the foregoing are subject to the terms of the Confidentiality Agreement) shall be entitled to request for review copies of relevant contracts, books and records and other specifically identified documents in order to confirm the accuracy of the Reports (“Audit.”) Audits may be conducted no more frequently than once a year, only for a period of four (4) years after the Closing, and shall be conducted at the Buyer’s premises (or a location selected by the Buyer) on no less than seven (7) days prior written notice to Buyer. Audits shall be conducted during Buyer’s regular business hours and in a fashion so as not to disturb Buyer’s business operations. Seller shall be responsible for the payment of all fees and costs associated with an Audit. In the event that an Audit results in a finding of the existence of an undisputed (i) underpayment relative to the data set forth in a Report, Buyer shall pay to Seller the difference between the amount already paid to the Seller and the discrepancy within 10 business days, or (ii) overpayment relative to the data set forth in a Report, Seller shall pay Buyer the overpayment within 10 business days, and in failing to do so, Buyer may offset the overpayment against future Subsequent Payments. Buyer’s obligation to make Subsequent Payments to Seller pursuant to this Article 3.2 shall cease when Buyer’s Subsequent Payments reach two million dollars ($2,000,000) in the aggregate.

3.3 Fair Price. Seller acknowledges that the Purchase Price for the Acquired Assets is both fair and reasonable and fairly represents the fair market value obtainable for the Acquired Assets between a willing buyer and willing seller. The Purchase Price is in excess of the amount Seller could reasonably expect to receive upon a forced liquidation of such Acquired Assets.

3.4 Tax Allocation. Buyer shall, within 120 days after the Closing Date, prepare and deliver to Seller a schedule allocating the Purchase Price (and any other items that are required for federal income tax purposes to be treated as part of the purchase price) among the Acquired Assets in accordance with the requirements of section 1060 of the Code (such schedule, the “Allocation”). Buyer and Seller shall report and file all Tax Returns (including amended Tax Returns and claims for refund) consistent with the Allocation, and shall take no position contrary thereto or inconsistent therewith (including in any audits or examinations by any Governmental Authority or any other proceeding). Buyer and Seller shall cooperate in the filing of any forms (including Form 8594 under section 1060 of the Code) with respect to such Allocation. Notwithstanding any other provision of this Agreement, the terms and provisions of this Article 3.4 shall survive the Closing without limitation.

3.5 Sales, Use and Other Taxes. Any sales, purchases, transfer, stamp, documentary stamp, use or similar taxes which may be payable by reason of the sale of the Acquired Assets under this Agreement are or the transactions contemplated herein shall be paid by Seller if not determined to be exempt under Section 1146(a) of the Bankruptcy Code.

ARTICLE 4
LICENSES AND AGREEMENTS

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4.1 RAIDCore License. At Closing, Buyer shall grant to Seller a license generally in the form of Exhibit 4.1, attached hereto with regard to the RAIDCore Technology (the “RAIDCore License”). As set forth in greater detail in Exhibit 4.1: (i) the RAIDCore License shall be a worldwide, royalty bearing license for use of the RAIDCore Technology in Seller’s DiMeda, MediaVault and Talon product lines only; (ii) no royalty shall be due from Seller to Buyer for two (2) years following the Closing Date, but, notwithstanding the foregoing, during this initial two year period, Seller shall be required to account for and pay to Buyer all royalties and fees, if any, Buyer is required to pay to Broadcom, in accordance with the provisions of the Broadcom License, based on sales or other activities by Seller; (iii) commencing two years after the Closing Date, Seller shall pay Buyer royalties and other fees as provided by the RAIDCore License; (iv) Seller may assign the RAIDCore License, and Buyer will not unreasonably withhold its consent to assignment the RAIDCore License by Seller, to no more than an aggregate of three (3) concurrent assignees to whom Seller (w) sells its entire right, title and interest in its DiMeda, MediaVault, and/or Talon product lines of Appliances (including all Intellectual Property rights and inventory associated with such product line, including the associated trademark and all rights under the RAIDCore License with respect to any future versions of such product line) including a sale of such product lines as part of the sale by Seller of all or substantially all of Seller’s business, or (x) exclusively licenses the right to produce and sell the DiMeda, MediaVault, and/or Talon product lines of Appliances provided, however, that (y) the RAIDCore License, as assigned, shall be limited to distribution of copies of RAIDCore Licensed Technology with the DiMeda, MediaVault, and/or Talon product lines of Appliances purchased from Seller by the assignee in connection with such assignment; and (z) be limited to one transferee or assignee per product line at any given time, provided that Seller may subsequently transfer or assign such rights to other third parties if the prior transferee or assignee defaults on their obligations or otherwise forfeits their rights such that the assignment is cancelled and all rights hereunder revert to Seller.

4.2 RAIDCore Support. For a period of six (6) months after the Closing Date (“Support Period”), Buyer will provide Seller with development time and support up to a maximum of one full-time equivalent software engineer, per month, and related test time, per month (“Development Time”). During the Support Period, Development Time in excess one full-time equivalent software engineer, per month, and related test time, per month, shall be reimbursed to Buyer at the actual burdened cost of the software engineer, including travel and expenses. Seller shall not be entitled to more than the equivalent of one (1) such person’s time per month, with a lifetime maximum of six (6), one (1) persons months of Development Time. At the conclusion of the Support Period, Buyer shall have no obligation to provide to Seller any additional Development Time.

4.3 NAS Agreement. At Closing, Seller and Buyer shall execute the NAS Agreement, which shall generally be in the form of Exhibit 4.3, attached hereto.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER

5.1 Seller’s Representations and Warranties. Seller represents and warrants to Buyer to the best of its Knowledge that the statements contained in this Article 5 are correct and complete as of the Closing Date, except as expressly set forth in the schedules relating to this Article 5 (the “Disclosure Schedules”). The information disclosed in any numbered part of the

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Disclosure Schedule shall be deemed to relate to and to qualify only the particular representation or warranty set forth in the corresponding numbered section in this Agreement and shall not be deemed to relate to or to qualify any other representation or warranty unless the applicability of such disclosure to such other representation or warranty is reasonably apparent on its face. The mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself).

5.2 Validity of Agreement. Subject to any necessary authorization from the Bankruptcy Court, Seller has full power and authority to execute and deliver the Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. All Transaction Documents to which Seller is a party have been duly executed and delivered by Seller, except such Transaction Documents that are required by the terms hereof to be executed and delivered by Seller after the date hereof, in which case such Transaction Documents will be duly executed and delivered by Seller at or prior to the Closing, and, subject to any necessary authorization from the Bankruptcy Court, all Transaction Documents constitute, or will constitute, as the case may be, the valid and binding agreements of Seller, enforceable against Seller in accordance with their terms.

5.3 Organization, Standing and Power. Seller is duly organized, validly existing and in good standing under the Laws of the State of Delaware and is qualified to do business in every jurisdiction in which it is required to be qualified. Subject to any necessary authorization from the Bankruptcy Court, Seller has all requisite corporate power and authority to own, lease and operate its properties, to carry on the Business as now being conducted, to execute and deliver the Transaction Documents, subject to Bankruptcy Court authorization and to perform its obligations thereunder, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other Laws affecting creditors’ rights generally from time to time, and to general equitable principles.

5.4 No Conflicts. Except as set forth in Schedule 5.4, and subject to the approval of the Bankruptcy Court, including pursuant to the entry of the Sale Order, none of the execution, delivery or performance of this Agreement and the Transaction Documents by Seller will (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of Seller’s Certificate of Incorporation or Bylaws, (b) result in the creation or imposition of any Lien upon any of the properties or assets of Seller, or (c) result in a violation or breach of any term or provision of any Law or Order applicable to Seller, other than such violations or breaches which would not materially and adversely affect the validity or enforceability of this Agreement of the Transaction Documents.

5.5 No Consents. No consent, approval or action of, filing with or notice to any Governmental Authority is required to be obtained by Seller in connection with the execution, delivery and performance of this Agreement or any of the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby, except (a) for consents, approvals or actions of and filings with or notice to the Bankruptcy Court and (b) where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice would not materially and adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or any of the Transaction Documents or to perform its obligations hereunder or thereunder or have a Material Adverse Effect on the condition of the Business.

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5.6 Legal Proceedings. Except as set forth on Schedule 5.6:

(a) Other than the Chapter 11 Case, there are no Proceedings pending or, to the Knowledge of Seller, threatened against, relating to or affecting Seller with respect to the Business or any of the Acquired Assets which would (i) result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Transaction Documents, or (ii) have a Material Adverse Effect on the Business; and

(b) Except for Orders of the Bankruptcy Court, there are no Orders outstanding against Seller.

5.7 Title to Property. Subject to receipt of the approval of the Bankruptcy Court pursuant to the Sale Order, Seller has, or at the Closing will have, the right to deliver to Buyer good, valid and marketable title to, or a valid leasehold interest or license in, all of the Acquired Assets free and clear of all Liens, Claims, and encumbrances and interests (other than Permitted Liens).

5.8 Brokers. Except for the retention of Craig-Hallum Capital Group LLC, Seller has not incurred any liability to any broker or agent with respect to the payment of any commission regarding the consummation of the transaction contemplated hereby. To the extent that any claims for commissions, fees or other compensation, including, without limitation, the fees of Craig-Hallum Capital Group LLC and any other brokerage fees, finder’s fees, or commissions, are ever asserted against Buyer in connection with this transaction, all such claims shall be paid by Seller whose actions form the basis of such claim and Seller shall indemnify, defend (with counsel reasonably satisfactory to Buyer), protect, and save and hold Seller harmless from and against any and all such claims or demands asserted by any person, firm or corporation in connection with the transaction contemplated hereby. This indemnification obligation shall be governed by Seller’s obligations under Article 14.1.

5.9 Intellectual Property. Except as set forth on Schedule 5.9, Seller (a) owns and possesses all right, title and interest in and to (or has the right to use pursuant to a license or other permission) the Seller Intellectual Property; (b) has no obligation to compensate any Person for the right to use any of the Seller Intellectual Property (except, in the case of Seller Intellectual Property that is licensed, for obligations pursuant to the applicable license agreement); (c) has not granted to any Person any license (except in the Ordinary Course of Business), option or other similar rights in or to any of the Seller Intellectual Property; (d) has not received any written notice from any Person (except for routine notices sent from the Patent and Trademark office and/or the Copyright Office) that challenges the validity or enforceability of any of the Seller Intellectual Property; (e) has not received any notice from any Person challenging Seller’s ownership of, or right to use, any of the Seller Intellectual Property; and (f) to the Knowledge of Seller, no Person is infringing upon or has misappropriated any of the Seller Intellectual Property.

5.10 Contracts. Except as set forth on Schedule 5.10, to the extent related to the Acquired Assets, Seller is not a party to any material Contract. Except as set forth on Schedule 5.10, Seller is not in default under any of the Assumed Contracts to which Seller is a party, all of which are in full force and effect.

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5.11 Tax Returns and Audits. Seller has timely filed all federal, state and local tax returns which are required to have been filed by it and, to the actual Knowledge of Seller, timely paid all amounts required to be paid by it. To the Knowledge of Seller, there are no claims for or investigations or audits of taxes pending or threatened against Seller.

5.12 “AS IS” Transaction. BUYER HEREBY ACKNOWLEDGES AND AGREES THAT, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ARTICLE 5.1-5.11 ABOVE, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY MATTER RELATING TO THE ACQUIRED ASSETS OR ASSUMED OBLIGATIONS, INCLUDING, WITHOUT LIMITATION, INCOME TO BE DERIVED OR EXPENSES TO BE INCURRED IN CONNECTION WITH THE ACQUIRED ASSETS, THE PHYSICAL CONDITION OF ANY PERSONAL PROPERTY COMPRISING A PART OF THE ACQUIRED ASSETS OR WHICH IS THE SUBJECT OF ANY OTHER LEASE OR CONTRACT TO BE ASSUMED BY BUYER AT THE CLOSING, THE VALUE OF THE ACQUIRED ASSETS (OR ANY PORTION THEREOF), THE TRANSFERABILITY OF ACQUIRED ASSETS, THE TERMS, AMOUNT, VALIDITY OR ENFORCEABILITY OF ANY ASSUMED OBLIGATIONS, THE MERCHANTABILITY OR FITNESS OF THE PERSONAL PROPERTY OR ANY OTHER PORTION OF THE ACQUIRED ASSETS FOR ANY PARTICULAR PURPOSE, OR ANY OTHER MATTER OR THING RELATING TO THE ACQUIRED ASSETS OR ANY PORTION THEREOF. WITHOUT IN ANY WAY LIMITING THE FOREGOING, SELLER HEREBY DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE AS TO ANY PORTION OF THE ACQUIRED ASSETS. BUYER FURTHER ACKNOWLEDGES THAT BUYER HAS CONDUCTED AN INDEPENDENT INSPECTION AND INVESTIGATION OF THE PHYSICAL CONDITION OF THE ACQUIRED ASSETS AND ALL SUCH OTHER MATTERS RELATING TO OR AFFECTING THE ACQUIRED ASSETS AS BUYER DEEMED NECESSARY OR APPROPRIATE AND THAT IN PROCEEDING WITH ITS ACQUISITION OF THE ACQUIRED ASSETS, EXCEPT FOR ANY REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLE 5.1-5.11 BUYER IS DOING SO BASED SOLELY UPON SUCH INDEPENDENT INSPECTIONS AND INVESTIGATIONS. ACCORDINGLY, BUYER WILL ACCEPT THE ACQUIRED ASSETS AT THE CLOSING “AS IS,” “WHERE IS,” AND “WITH ALL FAULTS.”

ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller as follows:

6.1 Organization. Buyer is validly existing and in good standing under the Laws of the State of Delaware and has the full power and authority to execute, deliver and perform this Agreement and to consummate all transactions contemplated hereby.

6.2 Authority. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Buyer and do not and will not violate any provisions of its organizational documents, any applicable Law or any agreement or instrument by which it is

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bound or Order binding upon it. This Agreement constitutes a valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other Laws affecting creditors’ rights generally from time to time in effect, and to general equitable principles.

6.3 No Conflicts or Violations. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby by Buyer do not and shall not (a) conflict with or result in any breach of any of the terms, conditions or provisions of, (b) constitute a default under, (c) result in a violation of, (d) give any Third Party the right to modify, terminate or accelerate any obligation under, or (e) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or other Governmental Authority, under any agreement or instrument to which Buyer is bound or affected, or any Law to which Buyer is subject or any Order to which Buyer is subject.

6.4 Brokers. Buyer has incurred no Liability to any broker, finder or agent with respect to the payment of any commission regarding the consummation of the transactions contemplated hereby.

6.5 Financing. Buyer has sufficient funds available to consummate the transactions contemplated hereby.

6.6 No Other Representations or Warranties. Except for the representations and warranties and covenants contained in this Agreement, Buyer does not make any other express or implied representation or warranty with respect to the transactions contemplated hereby, and Buyer disclaims any other representations or warranties, whether made by it or any of its Affiliates, officers, directors, employees, agents or representatives.

ARTICLE 7
COVENANTS OF SELLER; OTHER AGREEMENTS

7.1 Consents and Approvals.

(a) Seller, at Seller’s sole cost and expense, shall use commercially reasonable efforts (i) to obtain all necessary consents and approvals, as reasonably requested by Buyer, to consummate the purchase and sale of the Acquired Assets and the assignment of the Assumed Obligations, together with any other necessary consents and approvals to consummate the transactions contemplated hereby, including obtaining the Bidding Procedures Order and Sale Order, (ii) to make, as reasonably requested by Buyer, all filings, applications, statements and reports to all authorities that are required to be made prior to the Closing Date by or on behalf of Seller or any of its Affiliates pursuant to any applicable Law in connection with this Agreement and the transactions contemplated hereby and (iii) to obtain, as requested by Buyer, all required consents and approvals (if any) necessary to assign and transfer Seller’s Permits to Buyer at Closing and, to the extent that one or more of Seller’s Permits are not transferable, to assist Buyer in obtaining replacements therefor. In the event that certain of Seller’s Permits, or any Contract or other license or agreement necessary for the operation of the Business as presently conducted are not transferable or replacements therefor are not obtainable on or before the Closing, but such

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Permits, Contracts or other licenses or agreements are obtainable after the Closing, Seller shall continue to use such commercially reasonable efforts in cooperation with Buyer after the Closing as may be required to obtain all required consents and approvals to transfer, or obtain replacements for, such Permits, Contracts or other licenses or agreements after Closing and shall do all things necessary to give Buyer the benefits that would be obtained under such Permits, Contracts or other licenses or agreements, in each case at Seller’s sole cost and expense.

(b) Each of the parties shall give any other notices to, make any other filings with, and use reasonable best efforts to obtain, any other authorizations, consents and approvals of any Governmental Authority in connection with the matters contemplated by this Agreement.

7.2 Access to Information and Facilities. Seller agrees that, prior to the Closing Date, Buyer and its representatives (including its accountants, advisors, consultants and legal counsel) shall, upon reasonable notice and so long as such access does not unreasonably interfere with the business operations of Seller, have reasonable access during normal business hours to all of Seller’s business facilities and shall be entitled to make such reasonable investigation of the properties, businesses and operations of Seller (including any environmental audits and investigations or to conduct a physical inventory of the Inventory) and such examination of the Books and Records and financial condition of Seller as it reasonably requests and to make extracts and copies to the extent necessary of the Books and Records. Prior to the Closing Date, within 15 days after the end of each calendar month, Seller shall provide the Buyer with Seller’s interim monthly and year-to-date financial statements for such month which shall include those parts of the internal management reports as requested by the Buyer relating to such calendar month. Such interim financial statements shall (a) fairly present the financial condition of Seller as of the respective dates thereof and the results of operations and cash flows for the periods covered thereby (subject to changes resulting from normal year-end adjustments for recurring accruals (which shall not be material individually or in the aggregate) and to the absence of footnote disclosure) and (b) be in accordance with the Books and Records (which shall be accurate and complete).

7.3 Conduct of the Business Pending the Closing. Except as otherwise expressly contemplated by this Agreement, from the date hereof until the Closing Date, Seller shall: (a) conduct the Business in the Ordinary Course of Business; (b) use commercially reasonable efforts to preserve intact the Business, to keep available the services of its current employees and agents and to maintain its relations and goodwill with its suppliers, customers, distributors and any others with whom or with which it has business relations; (c) maintain and operate the Acquired Assets in the Ordinary Course of Business and repair and continue normal maintenance, normal wear and tear expected; (d) continue to operate the Business in all material respects in compliance with all Laws applicable to Seller or the Business; (d) continue to (i) conduct the Business, (ii) maintain the books and records of the Business in the Ordinary Course of Business (iii) maintain the employees of Seller; (e) promptly advise Buyer in writing of the occurrence of any event that has had, or is reasonably expected to have, a Material Adverse Effect; (f) not sell, lease transfer, mortgage, encumber, alienate or dispose of the Acquired Assets; (g) not institute new methods of accounting that will vary materially from the methods used by Seller as of the date of this Agreement except as may be required by GAAP; (h) not enter into any Contract or purchase order not in the Ordinary Course of Business; (i) not sell Inventory, other than in the Ordinary Course of

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Business; and (j) not take any action inconsistent with this Agreement or with the consummation of the Closing.

7.4 Notification of Certain Matters.

(a) Seller shall give notice to Buyer, within twenty-four (24) hours of Seller’s Knowledge of the occurrence of the event giving rise to a notice obligation pursuant to this Article 7.4, of (i) the occurrence or nonoccurrence of any event that causes or would be likely to cause, directly or indirectly, any Material Adverse Effect on Seller, or (ii) any material failure of Seller to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. Notwithstanding the foregoing, the delivery of any notice pursuant to this Article 7.4(a) shall not (x) be deemed to amend or supplement any of the Disclosure Schedules, (y) be deemed to cure any breach of any representation, warranty covenant or agreement or to satisfy any condition or (z) limit or otherwise affect the remedies available hereunder to the party receiving such notice.

(b) Seller shall add Buyer, and Buyer’s counsel, to Seller’s so-called “Rule 2002 notice list” and otherwise provide notice to Buyer of all matters that are required to be served on Seller’s creditors pursuant to the Bankruptcy Code and Rules.

7.5 Further Assurances. Buyer and Seller shall each execute all documents and take all actions as may be reasonably required to carry out the provisions of this Agreement and the transactions contemplated hereby. Buyer and Seller shall each use commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions set forth in Article 9 and Article 10, respectively, of this Agreement.

7.6 Bankruptcy Actions.

(a) Buyer acknowledged that Seller (i) has filed and served a motion (together with supporting papers and with notice thereof, on interested parties as required by the Bankruptcy Code and Rules) seeking entry of the Bidding Procedures Order on the Bankruptcy Court’s docket and (ii) the Bankruptcy Court entered the Bidding Procedures Order on the docket on August 28, 2008.

(b) Buyer acknowledged that Seller has filed with the Bankruptcy Court one or more motions seeking to approve the transaction contemplated hereby (subject to filing further motions and pleadings as necessary) (collectively, the “Sale Motion”), which seek the Bankruptcy Court’s approval of this Agreement, Seller’s performance under this Agreement and the assumption and the assignment of the Assumed Executory Contracts (and to the extent contested by a Contract counterparty, Buyer’s providing evidence thereof), pursuant to section 365 of the Bankruptcy Code. Buyer shall take such actions as are reasonably requested by Seller to assist Seller in obtaining a finding by the Bankruptcy Court that the Buyer is deemed to have purchased the Acquired Assets in good faith pursuant to section 363(m) of the Bankruptcy Code and that it has the necessary qualifications to show adequate assurance of future performance with respect to the Assumed Executory Contracts as required by section 365 of the Bankruptcy Code.

(c) A list of the Assumed Executory Contracts (as set forth on Schedule 2.1(a)(iv)) shall be filed as an exhibit to the Sale Motion if required by the Bankruptcy

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Court and otherwise shall be described in sufficient detail to provide adequate notice to the non-debtor party to such contracts. Upon revision of Schedule 2.1(a)(iv) by Buyer pursuant to Article 2.1(b), Seller shall add any Assumed Executory Contracts to the exhibit or remove Assumed Executory Contracts from the exhibit, as applicable. Such exhibit shall set forth the amounts necessary to cure defaults under each of such Assumed Executory Contracts as determined by Seller based on the Books and Records. In cases in which Seller is unable to establish that a default exists, the relevant cure amount shall be set at $0.00.

(d) Seller will provide Buyer with a reasonable opportunity to review and comment upon the proposed form of the Bidding Procedures Order and the Sale Order.

7.7 Exclusivity; Solicitation.

(a) Buyer and Seller acknowledge that under the Bankruptcy Code the sale of Acquired Assets is subject to approval of the Bankruptcy Court. Buyer and Seller acknowledge that to obtain such approval Seller must demonstrate that is has taken reasonable steps to obtain the highest or best price possible for the Acquired Assets, including giving notice of the transactions contemplated by this Agreement to creditors and other interested parties as ordered by the Bankruptcy Court, providing information about the Acquired Assets to responsible bidders, entertaining higher or better offers from responsible bidders and, if necessary, conducting an Auction.

(b) Seller represents that, other than the transactions contemplated by this Agreement, Seller is not a party to or bound by any agreement with respect to a possible merger, sale, restructuring, refinancing or other disposition of all or any material part of the Business or the Acquired Assets.

(c) Seller acknowledges it has solicited other potential bids for the sale of the Business through the date of this Agreement. Pursuant to such efforts, and as consideration for substantial expenditures of time, effort and expense undertaken and continuing by the Buyer in connection with the completion of its due diligence review of the business and the preparation, negotiation, and execution of this Agreement, Seller acknowledges and agrees that (i) the Buyer shall be the stalking horse bidder at the Auction, (ii) no Person other than the Buyer shall be the stalking horse bidder at the Auction and Seller shall not participate in any negotiations for the purpose of naming any Person other than the Buyer as the stalking horse bidder in the Auction, and (iii) Seller shall actively oppose any effort by any other Person to be the stalking horse bidder; provided that consistent with its fiduciary duties to elicit the highest and best offer for the Acquired Assets and to conduct the Auction, Seller may solicit, encourage and negotiate higher or better offers for the Acquired Assets under the terms of the Bidding Procedures Order, and provided further that Seller may (A) in response to an acquisition proposal for some or all of the Acquired Assets that was not solicited after the date hereof, participate in negotiations or discussions with, request clarifications from, or furnish information to, any person which makes such acquisition proposal, and (B) continue discussions and negotiations and continue to provide information to any person, group or other entity with which Seller has been conducting such discussions or negotiations.

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7.8 Confidentiality; Non-Disclosure. Seller acknowledges and agrees that any materials developed by Buyer or any of its representatives (including its accountants, advisors, environmental, labor, employee benefits and any other consultants, lenders and legal counsel) are the property of Buyer and are confidential, shall be maintained as confidential by Seller and shall not be disclosed to any other Person. In the event Seller is required to disclose any such confidential information by Law or regulation as advised by counsel, or as may be necessary or appropriate in connection with the Chapter 11 Case, Seller shall promptly notify Buyer in writing, which notification shall include the nature of the legal requirement and the extent of the required disclosure, and shall cooperate with Buyer to obtain a protection order and otherwise preserve the confidentiality of such information consistent with applicable Law. Information subject to the confidentiality obligations in this Article 7.8 does not include any information which (x) at the time of disclosure is generally available to or known by the public (other than as a result of its disclosure in breach of this Agreement) or (y) becomes available on a non-confidential basis from a Person who is not bound by a confidentiality agreement with the Buyer or its Affiliates or who is not otherwise prohibited from transmitting the information

7.9 Other Bids. Buyer acknowledges that both before and after entry of the Bidding Procedures Order on the Bankruptcy Court’s docket, Seller may solicit bids (“Bids”) from other prospective purchasers (collectively, “Bidders”) for the sale of all or substantially all of the Acquired Assets, on terms and conditions substantially the same in all respects to this Agreement (or improved terms) and in accordance with the procedures set forth in the Bidding Procedures Order and Article 9.2(d) below.

7.10 Excluded Assets and Liabilities. Subsequent to the Closing, Seller agrees to indemnify, defend, protect, and save and hold Buyer harmless with respect to the Excluded Assets and Excluded Liabilities, provided, however, that Seller’s obligations under this section shall be governed by Article 14.1.

7.11 Non-Seller Subsidiaries. Solely with regard to the Acquired Assets, to the extent that any Affiliate of Seller owns any property, assets, rights, titles or interests of any kind and nature which are or were heretofore used primarily in connection with the Acquired Assets (other than the type of assets of any Affiliate of Seller described in Article 2.3(a)), Seller hereby covenants that it will (and it will cause its Affiliates to), from time to time, prior to or subsequent to the Closing, without further consideration, do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all further acts, conveyances, transfers, assignments and assurances as reasonably may be required to convey or transfer to Buyer any such property, assets, rights, titles or interests free and clear of all Liens and Liabilities.

7.12 Taxes.

(a) On or prior to the Closing (or after the Closing when due and payable, to the extent such Taxes are due and payable after the Closing), Seller shall pay all sales taxes, use taxes, payroll taxes, and Taxes which will be owed by Seller and attributable to periods prior to the Closing.

(b) Any sales, use, purchase, transfer, franchise, deed, fixed asset, stamp, documentary stamp, use or other Taxes and recording charges due and which may be payable by

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reason of the sale of the Acquired Assets or the assumption of the Assumed Obligations under this Agreement or the transactions contemplated herein shall be borne and timely paid by Seller, and Seller shall prepare and timely file all Tax Returns required to be filed in connection with such payments.

(c) Seller shall indemnify, defend (with counsel reasonably satisfactory to Buyer), protect, and save and hold Buyer harmless from and against any and all Claims, charges, interest or penalties assessed, imposed or asserted in relation to Seller’s obligations under this Article 7.12, provided, however, that Seller’s obligations under this section shall be governed by Article 14.1.

ARTICLE 8
COVENANTS OF PURCHASER

8.1 Assumed Obligations. Subsequent to the Closing, Buyer agrees to be responsible for the payment and performance of the Assumed Obligations.

8.2 Operation. Buyer shall be obligated to discharge, pay, perform and satisfy all of the duties, liabilities and obligations arising, from and after the Closing, from the ownership, maintenance, operation, use, development, sale or leasing of, or other operation of business with respect to the Acquired Assets and the Assumed Executory Contracts.

8.3 Further Assurances. Buyer shall execute such documents and take such further actions as may be reasonably required to carry out the provisions of this Agreement and the transactions contemplated hereby. Buyer shall use commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions set forth in Article 10 of this Agreement.

All of Buyer’s covenants set forth in this Article 8 shall survive the Closing.

ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER

The obligations of Buyer under this Agreement are subject to satisfaction of the following conditions precedent on or before the Closing Date, unless waived by the Buyer in its sole and absolute discretion.

9.1 Warranties True as of Both Present Date and Closing Date; Covenants.

(a) All of the representations and warranties of Seller shall be true and correct in all material respects on and as of the Closing Date (except for representations and warranties made as of a specified date, which shall be true and correct as of that date) with the same force and effect as though made on and as of the Closing Date.

(b) Seller shall have performed and complied in all material respects with the obligations and covenants required by this Agreement to be performed or complied with by Seller on or prior to the Closing Date.

9.2 Bankruptcy Conditions.

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(a) The Bidding Procedures Order shall have been entered on the docket by the Clerk of the Bankruptcy Court as soon as practicable and no later than twelve (12) days after the execution of this Agreement. The Sale Order shall have been entered on the docket by the Clerk of the Bankruptcy Court on or before sixty (60) days following the date of Effective Date.

(b) The Sale Order shall approve this Agreement and sale of the Acquired Assets, free and clear of all Liens, Claims, and other interests and encumbrances (whether arising prior to or subsequent to the Chapter 11 Case, but except for the Assumed Obligations and Permitted Liens), approve and authorize the assumption and assignment of the Assumed Executory Contracts and the Assumed Executory Contracts shall have been actually assumed and assigned to Buyer such that the Assumed Executory Contracts will be in full force and effect from and after the Closing with non-debtor parties being barred and enjoined from asserting against Buyer, among other things, defaults, breaches or claims (including, without limitation, cure claims under section 365 of the Bankruptcy Code, except as otherwise specifically provided in the Sale Order) existing as of the Closing or by reason of the Closing.

(c) The Bidding Procedures Order shall provide, among other things, that:

(i) upon the first to occur of (A) the date Seller consummates an Alternative Transaction, (B) ninety (90) days after the Seller files a chapter 11 plan contemplating the sale or retention of the Acquired Assets by Seller in a manner substantially inconsistent with the terms of this Agreement, or (C) the confirmation of a plan of reorganization of Seller by the Bankruptcy Court that does not contemplate the transactions contemplated by this Agreement, Seller shall immediately (x) pay (in cash) to Buyer a breakup fee equal to five percent (5%) of the Cash Purchase Price offered by Buyer for the Acquired Assets (the “Breakup Fee”) and (y) reimburse Buyer (in cash) for all actual out-of-pocket costs and expenses (including reasonable attorneys’ fees and expenses) incurred by Buyer in connection with the Chapter 11 Case and the negotiation, execution and delivery of this Agreement up to an aggregate amount of $100,000 (“Expense Reimbursement”);

(ii) Seller is authorized without further Order of the Bankruptcy Court to pay any amounts that become due and payable to Buyer pursuant to this Agreement (including, without limitation, the Breakup Fee and Expense Reimbursement) and, pursuant to section 507(a)(2) of the Bankruptcy Code, Buyer shall have an allowed administrative expense priority claim for such amounts;

(iii) no party submitting any other offer to purchase the Acquired Assets or a Qualifying Bid shall be entitled to any expense reimbursement, breakup, or termination or similar fee or payment;

(iv) prior to receipt by a prospective Bidder of any non-public information (including, without limitation, business and financial non-public information and access to representatives of Seller) from Seller, each Bidder shall be required to execute an appropriate confidentiality agreement, in a form acceptable to Buyer and Seller;

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(v) as part of any Bid, each Bidder, other than Buyer, shall submit a copy of this Agreement marked to show changes, along with any other bid package requirements to Seller and Buyer, and place into escrow a cash deposit of no less than $225,000;

(vi) (A) an initial Bid will not be considered by Seller as qualified to participate in an Auction to purchase the Acquired Assets unless such Bid is for an amount equal to or greater than the aggregate of the sum of (I) $2,750,000 in cash; and (II) additional consideration having a value exceeding the Subsequent Payments; (a) any overbid Bids thereafter must be higher than the then existing lead Bid in increments of not less than $100,000 in cash; provided, however, any overbid Bids by Buyer thereafter shall only be required to be equal to the sum of: (I) the then existing lead Bid plus (II) $100,000 less (III) the dollar value of the Breakup Fee and Expense Reimbursement; and (b) a higher Bid will not be considered by Seller as qualified for the Auction if: (I) such Bid contains financing or due diligence contingencies of any kind; (II) such Bid is not received by Seller and Buyer in writing on or prior to the third (3rd) day prior to the Auction; or (IV) such Bid does not contain evidence that the Person submitting it has received debt and/or equity funding commitments or available cash sufficient in the aggregate to finance the purchase contemplated thereby, including proof of deposit into escrow of no less than $250,000 in cash (each Bid which meets the foregoing criteria constitutes, as applicable, a “Qualifying Bid”);

(vii) if one or more Qualifying Bids are submitted in accordance with the Bidding Procedures Order, Seller will conduct the Auction in accordance with the Bid Procedures and consistent with this Agreement. At the Auction, Seller shall have the right to select the highest or best Bid from Buyer and any Person who submitted a Qualifying Bid pursuant to Article 9.2(c)(vi) (the “Highest or Best Bid”), which may be determined by considering, among other things: (A) the number, type, and nature of any changes to this Agreement requested by each Bidder; (B) the extent to which such modifications are likely to delay closing of the sale of the Acquired Assets and the cost to Seller of such modifications or delay; (C) the total consideration to be received by Seller; (D) the likelihood of the Bidder’s ability to close a transaction and the timing thereof; and (E) the net benefit to the estate, taking into account Buyer’s rights to the Breakup Fee and Expense Reimbursement;

(viii) at the Auction, Buyer shall have the right, but not the obligation, to: (A) submit further Bids along with a markup of this Agreement and (B) at any time, request that Seller announce, subject to any potential new Bids, the then current Highest or Best Bid and, to the extent Buyer requests, use reasonable efforts to clarify any and all questions Buyer may have regarding Seller’s announcement of the then current Highest or Best Bid;

(ix) unless otherwise agreed to by Buyer, only the Persons who submitted Qualified Bids, the Buyer, Seller’s pre-petition and post-petition lenders, any official committee appointed in the Chapter 11 Case, and the United States Trustee may participate in the Auction; and

(x) Seller shall not contest any argument by Buyer that it has standing to contest the Highest or Best Bid selected by Seller.

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(d) Notwithstanding Articles 9.2(a) and 11, nothing in this Agreement shall preclude Buyer or Seller from consummating the transactions contemplated herein if Buyer, in its sole discretion, waives the requirement that the Sale Order or any other Order shall have become Final Orders. No notice of such waiver of this or any other condition to Closing need be given except to Seller’s pre-petition and post-petition lenders, any official committee appointed in the Chapter 11 Case, and the United States Trustee, it being the intention of the parties hereto that Buyer shall be entitled to, and is not waiving, the protection of section 363(m) of the Bankruptcy Code, the mootness doctrine and any similar statute or body of Law if the Closing occurs in the absence of Final Orders.

9.3 Material Adverse Change. There shall not have occurred a Material Adverse Change since the date of this Agreement.

9.4 Litigation. No Order shall have been entered that restrains or prohibits the consummation of the transactions contemplated by this Agreement.

9.5 Approvals. All authorizations, consents, filings and approvals necessary to permit Seller to perform the transactions contemplated hereby shall have been duly obtained, made or given, shall be in form and substance reasonably satisfactory to Buyer, shall not be subject to the satisfaction of any condition that has not been satisfied or waived and shall be in full force and effect. All terminations or expirations of waiting periods (and any extension thereof) imposed by any Governmental Authority necessary for the transactions contemplated under this Agreement, if any, shall have occurred.

9.6 Instruments of Assumption. Buyer shall have executed and delivered to the Buyer the Instruments of Assumption.

9.7 NAS Agreement and RAIDCore License. Buyer and Seller shall have entered into the RAIDCore License and the NAS Agreement.

9.8 Broadcom License Agreement. Prior to Closing the Bankruptcy Court shall have approved the Seller’s assumption of an assignment to Buyer of the Broadcom License.

9.9 Other License Agreements. Prior to Closing, the Bankruptcy Court shall have approved the Seller’s assumption of and assignment to Buyer of the Macrovision License.

9.10 Other Employment Matters.

(a) Prior to the Effective Date, with Seller’s prior permission and authority, Buyer has made offers of employment to several employees of the Business and those employees have resigned their positions with Seller and are working for Buyer as of the Effective Date. Subject to Bankruptcy Court approval, Buyer shall pay Seller the sum of $6,500 to reimburse Seller for August 2008 healthcare and related benefits paid by Seller for employees of the Business who resigned their positions with Seller and were working for Buyer before August 31, 2008. Following the Effective Date, Buyer has Seller’s permission and authority to make offers of employment to additional employees of the Business upon terms and conditions determined by Buyer, with such employment, if any, commencing at such time as is mutually agreed upon by the employee and Buyer (those persons who have accepted offers of employment and who are actually

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employed by the Buyer referred to collectively as the “Rehired Employees”). For purposes of clarification, Seller shall be responsible for all Employee Compensation Obligations owed to any Rehired Employee.

(b) Nothing contained in this Agreement shall confer upon any employee of Seller, Buyer or any Rehired Employee, before or after Closing, any right with respect to continuance of employment by Buyer, Seller or any of their respective Affiliates, nor shall anything herein interfere with the right of Buyer, Seller or any of their respective Affiliates to terminate the employment of any employee, including any Rehired Employee, at any time, with or without notice and for any or no reason, or restrict Buyer, Seller or any of their respective Affiliates in modifying any of the terms or conditions of employment of any employee, including any Rehired Employee, before or after Closing.

(c) Subject to Bankruptcy Court approval, commencing August 18, 2008, Buyer shall reimburse Seller for Facility Services in the amount of $1,000 per day plus $10,500 per month only for the months of September 2008 and October 2008 (“Facility Payment”). Buyer shall remit the Facility Payment to Seller on the 20^th calendar day of each month, or the next business day thereafter if the 20^th day of the month falls on a weekend or holiday. For the month of August 2008, the Facility Payment shall be remitted within two (2) business days following Bankruptcy Court approval of this Article 9.10(c). Buyer may terminate its use of Facility Services and obligation to make the Facility Payment on not less than thirty (30) days prior written notice to Seller. Seller may terminate Buyer’s use of the Facility Services on not less than thirty (30) days notice days prior written notice to Buyer. All payments set forth in this Article 9.10 are subject to set off by Buyer against Seller’s obligation to pay the Loan Fee to Buyer as that term in defined in Section 2.6 of the DIP Loan.

9.11 Schedules. Seller shall have delivered to Buyer completed Schedules as required by this Agreement. Such Schedules shall be deemed to be complete and this condition satisfied when they are reasonably acceptable to Buyer. After receipt of the Schedules, Buyer shall have five (5) days to review, comment on and ask Seller questions regarding the information provided in the Schedules. Buyer and Seller shall work together in good faith to resolve any questions or issues related to the Schedules so that such Schedules are reasonably acceptable to Buyer. Buyer shall not be able to claim that the Schedules are not reasonably acceptable to it unless the information contained in the Schedules discloses or reveals evidence of a Material Adverse Change to or Material Adverse Effect as of the date of delivery of the Schedules or as of the Closing.

9.12 Closing Certificate. Seller shall have delivered to Buyer a certificate signed by Seller, dated the date of the Closing Date (in form and substance reasonably satisfactory to Buyer), certifying that the conditions specified in Articles 9.1 and Article 9.2 have been satisfied as of the Closing.

ARTICLE 10
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

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The obligations of Seller under this Agreement are, subject to the satisfaction of the following conditions precedent by Seller on or before the Closing Date, unless waived by the Seller in its sole and absolute discretion.

10.1 Compliance. All of the representations and warranties of Buyer contained herein shall continue to be true and correct at the Closing in all material respects, all covenants and obligations to be performed by Buyer prior to the Closing shall have been performed in all material respects, and Buyer shall have certified the foregoing to Seller in writing.

10.2 Purchase Price. Seller shall have received the total Cash Purchase Price in immediately available funds.

10.3 Instruments of Assumption. Buyer shall have executed and delivered to the Buyer the Instruments of Assumption.

10.4 Closing Deliveries. Buyer shall have delivered to Seller a certificate signed by Buyer, dated the date of the Closing (in form and substance reasonably satisfactory to Seller) certifying that the conditions specified in Article 10.1, above have been satisfied as of the Closing.

10.5 Litigation. No Order shall have been entered that restrains or prohibits the consummation of the transactions contemplated by this Agreement.

10.6 Bankruptcy Court. The Sale Order approving this Agreement and the sale of the Acquired Assets to Buyer, free and clear of all Liens, Claims, and other interests and encumbrances (whether arising prior to or subsequent to the Chapter 11 Case, but except for the Assumed Obligations and Permitted Liens), approving and authorizing the assumption and assignment of the Assumed Executory Contracts and the Assumed Executory Contracts shall have been entered on the Bankruptcy Court’s docket.

10.7 NAS Agreement and RAIDCore License. Buyer and Seller shall have entered into the RAIDCore License and the NAS Agreement.

ARTICLE 11
CLOSING

11.1 Closing. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, the closing of the transaction contemplated by this Agreement (the “Closing”) will take place at the offices of Cooley Godward Kronish, LLP, 101 California Street, 5th Floor, San Francisco, CA 94114 at 11:00 a.m. Pacific Time no later than the first business day after the date on which the conditions set forth in Articles 9 and 10 have been satisfied or waived, or on such other date or place as Buyer and Seller may determine (the “Closing Date”).

11.2 Deliveries by Seller.

At the Closing, Seller shall deliver or procure delivery to Buyer of:

(a) the Instruments of Assumption duly executed by Seller Buyer;

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(b) an affidavit from Seller, dated as of the Closing Date, in form and substance required under the Treasury Regulations issued pursuant to section 1445 of the Code certifying under penalties of perjury that Seller is not a foreign person pursuant to section 1445(b)(2) of the Code;

(c) an assignment and assumption agreement with respect to Seller’s Permits and warranties in form and substance reasonably acceptable to Buyer, whereby Seller shall assign to Buyer all of their respective rights in and to any Permits and warranties relating (directly or indirectly) to the Acquired Assets or the Business, to the extent such Permits and warranties are assignable;

(d) copies of all the Books and Records, and any data related to the Acquired Assets;

(e) such other instruments, in form and substance, reasonably satisfactory to Buyer, as are necessary to vest in Buyer good and marketable title in and to the Acquired Assets in accordance with the provisions hereof;

(f) all tangible Acquired Assets, which Buyer shall collect from Seller’s facility or other locations specified by Seller;

(g) the duly executed RAIDCore License;

(h) the duly executed NAS Agreement;

(i) such documentation as may be necessary to change the authorized signatories on any bank accounts to be transferred hereby or powers of attorney relating (directly or indirectly) to the Acquired Assets; and

(j) a certified copy of the Sale Order.

11.3 Deliveries by Buyer. At the Closing, Buyer will deliver to Seller (a) (i) the Instruments of Assumption duly executed by Buyer, (ii) the duly executed RAIDCore License and the NAS Agreement and (b) an amount equal to the Cash Purchase Price in immediately available funds.

11.4 Form of Instruments. To the extent that a form of any document to be delivered hereunder is not attached as a Schedule or exhibit hereto, such documents shall be in form and substance, and shall be executed and delivered in a manner, reasonably satisfactory to Buyer and Seller.

ARTICLE 12
TERMINATION; TERMINATION PAYMENT

12.1 Termination.

This Agreement may be terminated prior to the Closing as follows:

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(a) by mutual written agreement of Buyer and Seller;

(b) by either Buyer or Seller if there shall be in effect a Final Order restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby;

(c) by either Buyer or Seller (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein), if there shall have been a material breach or misrepresentation of any of the representations or warranties or a material breach of any of the covenants or obligations set forth in this Agreement on the part of Seller, on the one hand, or the Buyer on the other hand, which breach would give rise to the failure of the conditions set forth in Articles 9 and 10, as applicable, and such breach is not cured within five (5) days following written notice to the party committing such breach or which breach, by its nature, cannot be cured prior to the Closing;

(d) by Buyer or Seller (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if it shall have reasonably determined that a material condition set forth in Articles 5, 9 and 10 for the benefit of the terminating party has not been or cannot be fulfilled or satisfied prior to the Termination Date and has not been waived by the terminating party, provided that the terminating party shall not be responsible for the failure of such condition to be satisfied;

(e) by Buyer if Seller (i) seeks or supports Bankruptcy Court approval of an Alternative Transaction (other than to or by Buyer) or ninety (90) days after the Seller files a chapter 11 plan contemplating the sale or retention of the Acquired Assets by Seller in a manner substantially inconsistent with the terms of this Agreement or (ii) executes and delivers an agreement or understanding of any kind with respect to an any of the items described in the foregoing clause (i);

(f) by Buyer or Seller if the Bankruptcy Court enters an order approving any Alternative Transaction (other than the sale of the Business and the Acquired Assets to Buyer);

(g) by Buyer or Seller on any day on or after October 15, 2008 (the “Termination Date”) if the Closing shall not have been consummated by such date (or by such later date as shall be mutually agreed to by Buyer and Seller in writing), unless the Closing has not occurred due to a material failure of the terminating party to perform or observe its covenants or obligations as set forth in this Agreement required to be performed or observed by it on or before the Closing Date;

(h) by the Buyer if there is an event of default under the terms of the DIP Loan; and

(i) by Buyer or Seller if the Bankruptcy Court fails to approve the Bidding Procedures Order.

12.2 Breakup Fee and Expense Reimbursement.

(a) Upon the first to occur of (i) the date Seller consummates an Alternative Transaction or (ii) following approval of the Bidding Procedures Order, ninety (90) days after the

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Seller files a chapter 11 plan contemplating the sale or retention of the Acquired Assets by Seller in a manner substantially inconsistent with the terms of this Agreement, Seller shall immediately pay (in cash) to Buyer the Breakup Fee and Expense Reimbursement, which shall be a super-priority administrative expense claim senior to all other administrative expense claims of Seller under section 364(c)(1) of the Bankruptcy Code.

(b) If Buyer terminates this Agreement pursuant to Article 12.1(c) as a result of a material breach or default by Seller and Seller is not in material breach of this Agreement, Seller shall pay to Buyer $150,000 as complete liquidated damages hereunder, such payment to constitute a super-priority administrative obligation of Seller under section 364(c)(1) of the Bankruptcy Code. Notwithstanding the foregoing, Seller shall not be in breach of the provisions of this Article 12.1(b) if the Bankruptcy Court declines to enter a Sale Order that delivers title to the Acquired Assets to Buyer in a form that is satisfactory to Buyer.

(c) If Seller terminates this Agreement pursuant to Article 12.1(c) as a result of a material breach or default by Buyer, and provided Seller is not in material breach of this Agreement, Buyer shall pay to Seller $150,000 as complete liquidated damages hereunder.

(d) Each of the parties’ obligations to make payments pursuant to this Article 12.2 shall survive termination of this Agreement, other than in an instance in which this Agreement is terminated as a result of the Bankruptcy Court’s failure to approve the Bidding Procedures Order (for reason other than Seller’s breach of an obligation under this Agreement).

12.3 Effect of Termination or Breach. If the transactions contemplated hereby are not consummated (a) this Agreement shall become null and void and of no further force and effect, except (i) for this Article 12.3 and (ii) for the provisions of this Agreement and that expressly or impliedly survive termination of this Agreement, each of provisions set forth in (i) and (ii) above to survive the termination of this Agreement; (b) the receipt by Buyer of (i) the Breakup Fee and Expense Reimbursement, which shall be payable in accordance with Article 12.2(a), or (ii) in situations by which this Agreement is terminated pursuant to Article 12.2(b), shall be Buyer’s sole and exclusive remedy other than for claims based on actual fraud, and the Buyer shall not be entitled to any other damages, losses, or payment from Seller, and Seller shall have no further obligation of Liability of any kind to the Buyer or its Affiliates on account of this Agreement; and (c) if this Agreement is terminated for any reason other than the termination of this Agreement by Seller pursuant to Article 12.1(c), Seller shall not be entitled to any damages, losses, or payment from Buyer, and Buyer shall have no further obligation or Liability of any kind to Seller or any of its Affiliates on account of this Agreement. The Buyer’s obligations under the Confidentiality Agreement shall survive the termination of this Agreement. Notwithstanding anything provided here to the contrary, in the event that this Agreement is terminated as a result of the failure of the Bankruptcy Court to approve the Bidding Procedures Order (for reason other than Seller’s breach of an obligation under this Agreement), Seller shall not be obligated to pay him or her the Breakup Fee or Expense Reimbursement.

ARTICLE 13
ADDITIONAL POST-CLOSING COVENANTS

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13.1 Joint Post-Closing Covenants of Buyer and Seller. Buyer and Seller jointly covenant and agree that, from and after the Closing Date, Buyer and Seller will each use commercially reasonable efforts to cooperate with each other in connection with any Proceeding, investigation or audit of the other relating to (a) the preparation of an audit of any Tax Return of Seller or Buyer for all periods prior to or including the Closing Date and (b) any audit of Buyer and/or any audit of Seller with respect to the sales, transfer and similar Taxes imposed by the Laws of any state or political subdivision thereof, relating to the transactions contemplated by this Agreement. In furtherance hereof, Buyer and Seller further covenant and agree to promptly respond to all reasonable inquiries related to such matters and to provide, to the extent reasonably possible, substantiation of transactions and to make available and furnish appropriate documents and personnel in connection therewith. All costs and expenses incurred in connection with this Article 13.2 referred to herein shall be borne by the party who is subject to such action.

13.2 Certain Consents. If consent of a Third Party which is required in order to assign any Acquired Asset (or Claim, right or benefit arising thereunder or resulting therefrom) is not obtained prior to the Closing Date, or if an attempted assignment would be ineffective or would adversely affect the ability of Seller to convey its interest in question to Buyer, Seller will cooperate with Buyer and use commercially reasonable efforts in any lawful arrangement to provide that Buyer shall receive the interests of Seller in the benefits of such Acquired Asset. If any consent or waiver is not obtained before the Closing Date and the Closing is nevertheless consummated, Seller agrees to continue to continue to use commercially reasonable efforts to obtain all such consents as have not been obtained prior to such date.

ARTICLE 14
POST-CLOSING AGREEMENTS

14.1 Seller’s Indemnification.

(a) Indemnity. Seller shall indemnify and hold Buyer harmless from and against any and all liabilities, losses, damages (excluding incidental, special, consequential and punitive damages), claims, deficiencies, costs and expenses (including reasonable attorney fees and other costs and expenses incident to any suit, action or proceeding), net of any insurance proceeds payable with respect thereto (collectively, “Damages”) arising out of or resulting from, and will pay to Buyer the amount of Damages suffered thereby, together with any amount which it may pay or become obligated to pay on account of:

(i) the breach or inaccuracy of any warranty or representation by Seller in this Agreement;

(ii) Seller’s failure to perform or observe any term, provision, covenant or condition hereunder applicable to Seller; and

(iii) any Excluded Liability.

(b) Limitations. Notwithstanding anything to the contrary herein, the aggregate liability of Seller for Damages under this Agreement shall not exceed $500,000, to be paid exclusively from one or more setoffs by Buyer against amounts otherwise due to Seller as Subsequent Payments (the “Cap”); provided, however, that such Cap shall not apply for Damages

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resulting from common law fraud of Seller, which claims for Damages shall be a super-priority administrative expense claim senior to all other administrative expense claims of Seller under section 364(c)(1) of the Bankruptcy Code and shall not be limited to setoffs against Subsequent Payments.

14.2 Survival. Except as otherwise provided in this agreement to the contrary, the representations and warranties of Seller and Buyer set forth in this Agreement and the indemnification obligations under Articles 14.1 of this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby and continue until thirty (30) months following the Closing Date, at which time they shall expire. If an indemnification claim is properly asserted in writing by written notice prior to such expiration of the representation, warranty or obligation (including the indemnification obligations under Articles 14.1 of this Agreement) that is the basis for such claim, then such representation, warranty or obligation (including the indemnification obligations under Articles 14.1 of this Agreement) shall survive until, but only for the purpose of, the resolution of such claim.

ARTICLE 15
MISCELLANEOUS

15.1 Expenses. Subject to payment of the Breakup Fee and the Expense Reimbursement, and as provided in article as provided in Article 12.2 hereof, each party hereto shall bear its own costs and expenses, including attorneys’ fees, with respect to the transactions contemplated hereby. Notwithstanding the foregoing, in the event of any action or proceeding to interpret or enforce this Agreement, the prevailing party in such action or proceeding (i.e., the party who, in light of the issues contested or determined in the action or proceeding, was more successful) shall be entitled to have and recover from the non-prevailing party such costs and expenses (including all court costs and reasonable attorneys’ fees) as the prevailing party may incur in the pursuit or defense thereof.

15.2 Entire Agreement. This instrument and the documents to be executed pursuant hereto contain the entire agreement between the parties relating to the sale of the Acquired Assets. Any oral representations or modifications concerning this Agreement or any such other document shall be of no force and effect excepting a subsequent modification in writing, signed by the party to be charged.

15.3 Modification. This Agreement may be modified, amended or supplemented only by a written instrument duly executed by all the parties hereto.

15.4 Closing Date. All actions to be taken on the Closing pursuant to this Agreement shall be deemed to have occurred simultaneously, and no act, document or transaction shall be deemed to have been taken, delivered or effected until all such actions, documents and transactions have been taken, delivered or effected.

15.5 Severability. Should any term, provision or paragraph of this Agreement be determined to be illegal or void or of no force and effect, the balance of the Agreement shall survive except that, if Buyer cannot acquire and Seller cannot sell substantially all of the Acquired

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Assets, either party may terminate this Agreement, and it shall be of no further force and effect, unless both parties agree in writing to the contrary.

15.6 Captions. All captions and headings contained in this Agreement are for convenience of reference only and shall not be construed to limit or extend the terms or conditions of this Agreement.

15.7 Further Assurances. Each party hereto will execute, acknowledge and deliver any further assurance, documents and instruments reasonably requested by any other party hereto for the purpose of giving effect to the transactions contemplated herein or the intentions of the parties with respect thereto.

15.8 Waiver. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

15.9 Binding Nature; Assignment. Subject to approval of the Bankruptcy Court, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without prior written consent of the other party (which shall not be unreasonably withheld or delayed); except that (a) Buyer may assign any of its rights and obligations hereunder to any Affiliate or Subsidiary of Buyer (whether wholly owned or otherwise) or to its lenders and, following the Closing, in whole or in part to any successor-in-interest to any Person acquiring all or any portion of the Business or the Acquired Assets; (b) following the Closing, the rights and interests of Seller hereunder may be assigned to a trustee appointed under chapter 11 or chapter 7 of the Bankruptcy Code; (c) following the Closing, other than as provided in the RAIDCore License or the NAS Agreement, this Agreement may be assigned to any entity appointed as a successor to Seller pursuant to a confirmed chapter 11 plan; and (d) as otherwise provided in this Agreement. Seller hereby agrees that Buyer may grant a security interest in its rights and interests hereunder to its lenders, and Seller will sign a consent with respect thereto if so requested by Buyer or its lenders (upon approval by the Bankruptcy Court as necessary), and that the terms of this Agreement shall be binding upon any subsequent trustee appointed under chapter 11 or chapter 7 of the Bankruptcy Code.

15.10 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of California, without giving effect to choice of law principles.

15.11 Good Faith. All parties hereto agree to do all acts and execute all documents required to carry out the terms of this Agreement and to act in good faith with respect to the terms and conditions contained herein before and after Closing.

15.12 Construction. In the interpretation and construction of this Agreement, the parties acknowledge that the terms hereof reflect extensive negotiations between the parties and that this Agreement shall not be deemed, for the purpose of construction and interpretation, drafted by either party hereto.

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15.13 Counterparts. This Agreement may be signed in counterparts. The parties further agree that this Agreement may be executed by the exchange of facsimile signature pages.

15.14 Time is of the Essence. Time is of the essence in this Agreement, and all of the terms, covenants and conditions hereof.

15.15 Publicity. Except as otherwise required by applicable law, the parties agree that they will not make any public statements or releases pertaining to the transaction contemplated herein without first mutually conferring and agreeing on the substance thereof. Notwithstanding the foregoing, the parties hereby agree that no public statements will be made until the motions described in Article 7.6 above are consummated, unless otherwise required by the U.S. securities laws or other applicable law.

15.16 Bankruptcy Court Jurisdiction. BUYER AND SELLER AGREE THAT FOR SO LONG AS THE CHAPTER 11 CASE IS OPEN ON THE DOCKET OF THE BANKRUPTCY COURT, THE BANKRUPTCY COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER ALL DISPUTES AND OTHER MATTERS RELATING TO (i) THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT OR ANY ANCILLARY DOCUMENT EXECUTED PURSUANT HERETO; AND/OR (ii) THE ACQUIRED ASSETS AND/OR ASSUMED LIABILITIES, AND BUYER EXPRESSLY CONSENTS TO AND AGREES NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION. AFTER THE CHAPTER 11 CASE IS CLOSED ON THE DOCKET, THE PARTIES CONSENT TO JURISDICTION OF THE SUPERIOR COURT IN AND FOR THE COUNTY OF SAN DIEGO, CALIFORNIA OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA OVER ALL DISPUTES AND OTHER MATTERS RELATING TO THE FOREGOING..

15.17 Notices. Any notice, request, instruction or other document to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given, (a) when received if given in person, (b) on the date of transmission if sent by telex, telecopy, email or other wire transmission (with answer back confirmation of such transmission, and, if sent by email, provided that a copy of such notice, request or instruction or other document be sent by overnight delivery), (c) upon delivery, if delivered by a nationally known commercial courier service providing next day delivery service (such as Federal Express), or (d) upon delivery, or refusal of delivery, if deposited in the U.S. mail, certified or registered mail, return receipt requested, postage prepaid:


To Seller:		Ciprico Inc.

		7003 W Lake Street, Suite 400
		St. Louis Park, MN 55426
		Attn: Steven D. Merrifield
		Fax: 952-540-2402
		smerrifield@ciprico.com

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With a copy to: with a copy (which
shall not constitute notice to):

		Fredrikson & Byron, P.A.
		900 Second Avenue South, Ste. 4000
		Minneapolis, Minnesota 55402
		Attn: Clint Cutler
		Fax: 612-492-7077
		ccutler@fredlaw.com

To Buyer:

		Dot Hill Systems Corp.
		200 Faraday Avenue, Suite 100
		Carlsbad California 92008
		Hanif Jamal
		Fax: 760-431-4457
		Hanif.Jamal@dothill.com

with a copy (which shall not
constitute notice) to:

		Cooley Godward Kronish LLP
		101 California Street, 5th Floor
		San Francisco, California 94111
		Attn: Robert L. Eisenbach III
		Fax: (415) 693-2222
		reisenbach@cooley.com

or to such other individual or address as a party hereto may designate for itself by notice given as herein provided.

15.18 No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and nothing contained herein, express or implied, is intended to confer on any Person other than the parties hereto or their successors and permitted assigns and any Persons named as an indemnitee herein, any rights, remedies, obligations, Claims, or causes of action under or by reason of this Agreement.

15.19 Closing Actions. All deliveries, payments and other transactions and documents relating to the Closing shall be interdependent, and none shall be effective unless and until all are effective (except to the extent that the party entitled to the benefit thereof has waived satisfaction — or performance thereof as a condition precedent to the Closing).

15.20 Conflict between Transaction Documents. The parties hereto agree and acknowledge that to the extent any terms and provisions of this Agreement are in any way

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inconsistent with or in conflict with any term, condition or provision of any other agreement or document referred to herein other than the DIP Loan agreement, this Agreement shall govern and control. Notwithstanding the foregoing, to the extent any terms and provisions of this Agreement are in any way inconsistent with or in conflict with any term, condition or provision of the express terms and provisions of the RAIDCore License or the NAS Agreement, the express terms of the RAIDCore License and/or the NAS Agreement (as applicable) shall govern and control.

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In Witness Whereof, the parties hereto have executed this Amended and Restated Asset Purchase and Technology License Agreement as of the day and year first above written.


Dot Hill Systems Corp.
By:	/s/ Dana W. Kammersgard
	Name:	Dana W. Kammersgard
	Its:	Chief Executive Officer and President


Ciprico Inc. Debtor and Debtor In Possession
By:	/s/ Steven D. Merrifield
	Name:	Steven D. Merrifield
	Its:	Chief Executive Officer

EXHIBIT 1.1(a)

HBA Intellectual Property

	1.		All schematic drawings, Gerber tapes, PIC code, eye diagram reports, BOMs and source CAD design files as may exist that are required to produce the following RAIDCore RC51xx, RC52xx, RC54xx series boards, and all production test scripts and test equipment as may exist that are required to test/verify the hardware functionality of the boards:

	•		RC5110/5152-08

	•		RC5210/5252-08

	•		RC5252-04

	•		RC5452-004 (Phoenix 4i)

	•		RC5452-400 (Phoenix 4e)

	•		RC5452-016 (Phoenix 16)

	•		RC5452-404 (Phoenix 4i/4e)

	•		Rev 2 RC5452-016 (Phoenix 16 based on Odin II)

	2.		The RAIDCore Licensed Technology.

EXHIBIT 1.1(b)
Intellectual Property

See Exhibits 1.1(c)-(d)

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EXHIBIT 1.1(c)
NAS Intellectual Property

A. Registered Copyrights: None

B. Patents: None

C. Registered or trademarks: None

D. Source Code and test materials: NAS source code for software known internally as Hydra, as implemented in Ciprico product DiMeda DM1716, and corresponding source code build data and software test scripts.

For the avoidance of doubt, no other technology is included in the NAS Intellectual Property, and the NAS Intellectual Property does not include any aspect of or technology implemented in the DiMeda DM1716 other than the source code corresponding to the NAS-functionality build implemented thereon.

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EXHIBIT 1.1(d)
RAIDCore Licensed Technology

A. Registered Copyrights: None

B. Patents: None

C. Unregistered Trademarks: RAIDCORE, Hyperraid

D. Registered Trademarks: FULCRUM, U.S. Reg. No. 3,395,839

E. Source Code, Build Instructions, and Test Scripts:

1. RAIDCore and Ciprico VST RAID software source code stack implementing the features set out in the RAIDCore RC5400 series data sheets and VST Pro data sheets attached, to the extent that such features are implemented by the RAIDCore and/or VST RAID software, for the following operating systems (to the extent completed/applicable):

	•		Windows XP/2003 32 and 64 bit

	•		Windows Vista (all variants) 32 and 64 bit

	•		Windows 2008 32 and 64 bit

	•		Redhat v9 32 and 64 bit

	•		RHEL v4, 5 32 and 64 bit

	•		SuSE v10.1, 10.2 32 and 64 bit

	•		SuSE Ent Server v10 32 and 64 bit

	•		OS-X 10.4 and 10.5 for Mac

2. Supporting application GUI software source code and command-line software source code as may exist for RAIDCore RC5400 and VST Pro products.

3. All source and object code as may exist, and where applicable, compiled versions of Intel x86 compatible motherboard BIOS code supporting Intel ICHxR/ESB2, AMD SB600, AMD SB700 and Broadcom HT1000/1100 chipsets (drivers and configuration utility).

4. All source code owned and developed by Ciprico as may exist for controlling the licensing and upgrade process for the software above, including the Macrovision FNO license server hardware and software (to the extent owned and developed by Ciprico).

5. All build scripts, test scripts, support documentation, and bug-tracking databases, as may exist, for reproduction of the executables corresponding to any source code above.

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Exhibit 3.1(a)(iv)

PROMISSORY NOTE


$1,000,000.00		September , 2008

FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged, Dot Hill Systems Corp., a Delaware corporation (the “Payor”) promises to pay to Ciprico Inc., a Delaware corporation and debtor-in-possession (the “Payee”), or Payee’s assigns, the principal amount of One Million Dollars ($1,000,000.00) or so much of said principal sum as may be outstanding in accordance with the provisions of this Promissory Note (the “Note”).

1. Payment Terms. Payments in the amount of $23,809.52 each shall be due and payable on a monthly basis beginning on October 1, 2008, with the final payment and any additional unpaid amounts due hereunder payable in full on March 1, 2012. No interest shall accrue on the unpaid principal amount of this Note.

2. Prepayment. This Note may be prepaid from time to time in whole or in part without permission or penalty.

3. Currency. Payment of this Note shall be made in lawful money of the United States of America.

4. Default. Each of the following shall constitute an “Event of Default” under this Note:

(a) The Payor shall fail to make when due any payment under this Note, if such default is not cured within ten (10) business days after the due date thereof.

(b) The Payor shall fail to comply with any material agreement, covenant, condition, provision, or term contained in this Note or any other agreement between Payor and Payee.

(c) The Payor applies for, consents to, or acquiesces in the appointment of a trustee, receiver, or other custodian for the Payor or any substantial part of the property of the Payor, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent, or acquiescence, a trustee, receiver, or other custodian is appointed for the Payor or for a substantial part of the property of the Payor and is not discharged within sixty (60) days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is commenced in respect of the Payor, and if such case or proceeding is not commenced by the Payor, it is consented to or acquiesced in by the Payor or remains for sixty (60) days undismissed; or the Payor takes any action to authorize, or in furtherance of, any of the foregoing.

-1-

5. Remedies.

(a) If any Event of Default shall occur, the principal amount of this Note less any payments of principal that have therefore been paid may, at the option of Payee, become immediately due and payable upon written notice to Payor. Payor hereby waives diligence, presentment, protest, demand for payment, notice of protest and non-payment, notice of dishonor, and any and all other notices or demands in connection with the delivery, acceptance, performance, default, acceleration or enforcement of this Note.

(b) In addition to the remedies set forth above, upon the occurrence of any Event of Default Payee may exercise all rights and remedies under any applicable law and may offset any and all balances, credits, deposits (general or special, time or demand, provisional or final), accounts or monies of Payor then or thereafter with Payee, or any obligations of Payee, against the indebtedness then owed by Payor to Payee.

(c) The undersigned agrees to pay all costs of collection, including attorneys’ fees, in the event this Note is not paid when due or otherwise upon the occurrence of an Event of Default.

6. No Waiver. No delay on the part of Payee in exercising any power or right hereunder will operate as a waiver thereof nor will any single or partial exercise of any power or right hereunder preclude other or further exercises thereof or the exercise of any other power or right.

7. Governing Law. This Note shall be construed and enforced in accordance with, and governed by, the laws of the State of Delaware.

8. Payment Date. In case any payment date is not a business day, then payment may be made on the next succeeding business day with the same force and effect as if made on such original date and no interest will accrue for the period after such date.

9. Construction. If any provision of this Note is prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition without invalidating the remainder of such provision or this Note.

10. Amendments. This Note may not be and will not be deemed or construed to have been modified, amended, rescinded, canceled, or waived, in whole or in part, except by written instruments signed by the Payor and the Payee.

11. Cancellation. After all the principal at any time owed on this Note has been paid in full, this Note shall be surrendered to the Payor for cancellation.

12. Notice. Any demand, notice, or other communication to be given hereunder shall be in writing and personally delivered, sent by courier guaranteeing overnight delivery, or sent by registered or certified mail, return receipt requested, postage prepaid as follows:

-2-


To Payee:		Ciprico Inc. 7003 W Lake Street, Suite 400 St. Louis Park, MN 55426 Attn: Steven Merrifield Fax: 952-540-2402 smerrifield@ciprico.com

To Payor:		Dot Hill Systems Corp. 200 Faraday Avenue, Suite 100 Carlsbad California 92008 Hanif Jamal Fax: 760-431-4457 Hanif.Jamal@dothill.com

or as to any party, to such other address as shall be designated by such party in a notice to the other party. All such demands, notices, and other communications shall be deemed duly given three (3) days after deposit with the United States Postal Service, properly addressed and postage prepaid in the manner described above, or upon actual receipt if personally delivered or delivered by overnight courier.

IN WITNESS WHEREOF, the Payor has executed and delivered this Note as of the above stated date.


Dot Hill Systems Corp.
By:
	Name:	Dana W. Kammersgard
	Its: Chief Executive Officer and President

-3-

Exhibit 4.1

RAIDCORE SOFTWARE LICENSE AGREEMENT

This RAIDCore Software License Agreement is made and entered into as of the Closing (as defined therein) of the APA (as defined herein) (“Effective Date”), by and between Dot Hill Systems Corp., a Delaware corporation (“Licensor”), and Ciprico Inc., a Delaware corporation (“Reseller”).

Recitals

A. Reseller is selling to Licensor, and Licensor is purchasing from Reseller, certain assets under an Asset Purchase and Technology License Agreement, dated as of September 17, 2008 (the “APA”).

B. Pursuant to the APA, Reseller is assigning to Licensor all of Reseller’s rights under a Technology License and Asset Purchase Agreement between Broadcom Corporation (“Broadcom”) and Reseller, dated June 6, 2006, as amended by the First Amendment to the Technology License and Asset Purchase Agreement, dated June 30, 2008, between Broadcom and Reseller (“Broadcom License”);

C. Reseller wishes to obtain a license from Licensor, and Licensor is willing to grant to Reseller, a license to distribute certain Broadcom software included in technology licensed from Broadcom under the Broadcom License, together with improvements or derivative works thereof made by or for Reseller included in the assets purchased by Licensor from License under the APA, on and subject to the terms and conditions set forth in this Agreement.

Agreement

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE 1
DEFINITIONS

1.1 Definitions. Unless otherwise defined herein, terms used herein shall have the meanings set forth below:

“Agreement” means this RAIDCore Software License Agreement, as the same may be amended, modified or waived by parties from time to time in accordance with its terms.

“Appliance(s)” means Reseller’s DiMeda^®, MediaVault™, and Talon™ product lines of computer storage appliance product(s), and related solutions and services produced, marketed, or sold by Reseller under the DiMeda^®, MediaVault™, and Talon™ trademarks as of the date of the APA, and any future versions of such computer storage appliance products(s) that Reseller may bring to market from time to time under the DiMeda^®, MediaVault™, and Talon™

trademarks based on and using substantially the same technology (or improvements thereto) as such existing product(s).

“Broadcom” and “Broadcom License” shall have the meanings set forth in the preamble hereof.

“End User Agreement” means a written, legally enforceable agreement that (i) is consistent with and does not exceed the scope of this Agreement; (ii) stipulates that the Licensed RAIDCore Software is licensed, not sold, and that title to and ownership of the Licensed RAIDCore Software and any portion thereof remain with Broadcom and Licensor; (iii) disclaims all express and implied warranties on behalf of Broadcom or Licensor, and excludes liability of Broadcom or Licensor for any special, indirect, exemplary, incidental or consequential damages; and (iv) prohibits the user from (a) copying the Licensed RAIDCore Software, except as reasonably necessary for internal back-up purposes, or (b) from modifying the Licensed RAIDCore Software, or (c) attempting to reverse engineer, decompile or disassemble any portion of the Licensed RAIDCore Software, or (d) exporting the Licensed RAIDCore Software or any underlying technology in contravention of any applicable U.S. or foreign export laws and regulations.

“Intellectual Property Rights” means any and all now known or hereafter existing (a) rights associated with works of authorship, including copyrights and moral rights; (b) trade secret rights; (c) patents; (d) other proprietary rights in intellectual property of every kind and nature, excluding any trademark, trade name, trade dress and service mark rights and similar rights; and (e) all registrations, applications, renewals, extensions, or reissues of the foregoing, in each case in any jurisdiction throughout the world.

“Licensed RAIDCore Software” shall mean that (a) software that is designed to control a disk storage subsystem consisting of multiple hard disk drives to share or replicate data among the drives in accordance with industry standard RAID (Redundant Array of Independent Drives) level definitions, licensed to Seller by Broadcom, pursuant to the Broadcom License, including but not limited to that software set forth in Exhibit A attached hereto; and (b) any and all derivative works, alterations, enhancements, revisions, engineering changes or modifications to or related to such software that were made by or for Licensor, or by or for Reseller prior to the assignment of the Broadcom License to Licensor and included in the Acquired Assets purchased by Licensor from Reseller under the APA.

“Licensor” shall have the meaning set forth in the preamble hereof.

“RAIDCore Assets” shall mean have the meaning set forth in Section 1.1 of the APA.

“Reseller” shall have the meaning set forth in the preamble hereof.

1.2 Rules of Construction. Unless the context otherwise clearly indicates, in this Agreement: the singular includes the plural; “includes” and “including” are not limiting; “may not” is prohibitive and not permissive; and “or” is not exclusive.

ARTICLE 2
LICENSE GRANT

2.1 License Grants. Subject to strict compliance with the terms and conditions of this Agreement, including without limitation Reseller’s payment obligations hereunder, Licensor hereby grants to Reseller, under Intellectual Property Rights in Licensed RAIDCore Software and the RAIDCore Assets, a personal, non-exclusive, non-transferable (except as provided in Article 6 below), terminable (as provided in Article 5 below), worldwide, royalty-bearing license during the term of this Agreement, to distribute and sublicense copies of the Licensed RAIDCore Software only in object code form as part of or for use in Appliances sold by Reseller.

2.2 License Restrictions.

(a) No other use, distribution or application of the Licensed RAIDCore Software by Reseller is permitted except those expressly set forth herein.

(b) Licensed RAIDCore Software is licensed, not sold, and title to and ownership of the Licensed RAIDCore Software and any portion thereof remain with Broadcom or Licensor, as applicable.

(c) Nothing in this Agreement grants Reseller any license or right to, and Reseller shall not: (i) modify the Licensed RAIDCore Software, or (iii) attempt to reverse engineer, decompile or disassemble any portion of the Licensed RAIDCore Software; or (iii) export the Licensed RAIDCore Software or any underlying technology in contravention of any applicable U.S. or foreign export laws and regulations.

(d) Reseller shall distribute copies of the Licensed Software solely to contract manufactures, resellers, and end users of Appliances pursuant and subject to an End User Agreement.

2.3 Proprietary Notices. Reseller shall not remove, efface or obscure any copyright or trademark notices from the Licensed RAIDCore Software. Reseller shall not remove reproductions of the Licensor’s and Broadcom’s copyright notice with each copy of the Licensed RAIDCore Software. Reseller acknowledges that any symbols, trademarks, tradenames, and service marks adopted by Broadcom or Licensor to identify the Licensed RAIDCore Software belong to Licensor or Broadcom and that Reseller shall have no rights therein nor any right to use such symbols, trademarks, tradenames, and service marks in or in connection with the distribution or marketing of the Licensed RAIDCore Software.

2.4 Ownership. Licensor (or Broadcom, as applicable) shall retain all right, title and interest, including any and all Intellectual Property Rights, in and to the Licensed RAIDCore Software except for the license rights expressly set forth herein. Reseller hereby covenants that it will not allege or assert any claim that the Licensed RAIDCore Software infringes any Intellectual Property Rights owned or controlled by Reseller.

2.5 No Other Rights Granted. Apart from the license rights expressly set forth in this Agreement, Licensor does not grant and Reseller does not receive any right, title or interest nor any security interest or other ownership interest in any Intellectual Property Rights relating to

the Licensed RAIDCore Software, nor in any copy of any part of the foregoing. For the avoidance of doubt, no license is granted under this Agreement to any Licensed Board Designs or Licensed Marks (as those terms are defined in the Broadcom License). Licensor reserves any and all rights not expressly granted to Reseller hereunder. Licensor shall be under no obligation under this Agreement to provide any support or maintenance for the Licensed RAIDCore Software to Reseller or to any end users to which Reseller distributes the Licensed RAIDCore Software. Any obligation by Licensor to provide support or maintenance shall be solely as expressly set forth in, and shall be governed by the terms and conditions of, the APA; provided that Licensor agrees to provide to Reseller standard level 3 customer support that Licensor makes generally available to reseller customers of Licensed RAIDCore Software. For the avoidance of doubt, Reseller acknowledges and agrees that no license or rights are granted to Reseller under this Agreement to or with respect to any Licensed Board Designs or Licensed Marks (as those terms are defined in the Broadcom License), or to make, have made, use, import or sell RAID Controller Cards (as that term is defined in the Broadcom License) based on any such Licensed Board Designs, or to access, use or distribute the source code for the Licensed RAIDCore Software.

ARTICLE 3
ROYALTIES

3.1 Royalties.

(a) Prior to Second Anniversary. Subject to Section 3.1(c), the license granted under Section 2.1 shall be royalty-free for any copies of the Licensed RAIDCore Software distributed by Reseller prior to the second anniversary of the Effective Date.

(b) On and after the Second Anniversary. Subject to Section 3.1(c), for each copy of the Licensed RAIDCore Software distributed by Reseller on or after the second anniversary of the Effective Date, Reseller shall pay to Licensor a royalty equal to Licensor’s then-current royalty rate (or other fee or consideration paid by Licensor’s other licensees) offered to Licensor’s customers for licensing of the Licensed RAIDCore Software (or the closest functional equivalent then marketed by Licensor), provided that if Licensor licenses any other reseller, distributor or other like customer to distribute Licensed RAIDCore Software of equivalent features and functionality for a royalty lower than the applicable royalty payable by Reseller hereunder, Licensor shall promptly notify Reseller and offer to lower the royalty payable by Reseller to such lower royalty effective as of the date when such lower royalty is payable by the third party. Prior to the second anniversary of the Effective Date and from time to time thereafter, Licensor shall notify Reseller of the royalty rate payable under this Section 3.1(b).

(c) Pre-Second Anniversary Royalties and Commissions. Notwithstanding the provisions of Section 3.1(a), until the second anniversary of the Effective Date, Reseller shall pay Licensor the following:

(i) a royalty equal to two percent (2%) of Revenue of Reseller for all sales of RAID Controller Cards by or for Reseller; and

(ii) a commission equal to twenty percent (20%) of all Revenue of Reseller related to the Licensed RAIDCore Software (other than distributions of the Licensed RAIDCore Software incorporated with RAID Controller Cards) for operation with a Broadcom integrated circuit products. The parties agree that the Revenue of Reseller related to such Licensed RAIDCore Software that is not separately priced from the price of the Appliance with which it is sold shall be fifty dollars ($50).

For purposes of this provision, the terms “Revenue” and “RAID Controller Cards” shall have the meanings set forth in the Broadcom License. If the royalties payable to Broadcom under the Broadcom License arising from the licenses granted to Reseller under this Agreement and the exercise thereof by Reseller prior to the second anniversary hereof or the delivery of copies of Licensed RAIDCore Software hereunder prior to the second anniversary hereof are greater than the royalties specified in item (i), Licensor may so notify Reseller and the royalty rate specified in item (i) shall be increased to the actual royalty rate payable to Broadcom.

(d) Reports and Payments. Reseller shall submit a written report to Licensor for each calendar quarter during the term of this Agreement setting forth: (a) the number of copies of Licensed RAIDCore Software distributed by Reseller during such quarter, separately for each Appliance product line; (b) amount recorded by Reseller in its financial statements in accordance with Generally Accepted Accounting Principles and consistent with Reseller’s current policies with respect to such distributed copies, separately for (i) each Appliance product line, (ii) all sales of RAID Controller Cards by or for Reseller and (iii) Licensed RAIDCore Software (other than distributions of the Licensed RAIDCore Software incorporated with RAID Controller Cards) distributed for operation with a Broadcom integrated circuit products; (c) the amount of any royalties and commissions, if any, payable under this Agreement; and (d) any other information that may be reasonably requested by Licensor for the purpose of confirming that the proper amounts have been paid hereunder. Such reports shall be submitted, and payment of the applicable royalties shall be due and payable to Licensor, no later than thirty (30) days after the end of each calendar quarter. All amounts owed to Licensor under this Agreement will be paid in U.S. dollars.

3.2 Taxes. All amounts payable under this Agreement by Reseller are exclusive of all taxes, duties, customs fees, and other similar government charges and fees or customs fees (other than taxes levied on Licensor’s income) that Licensor may be required to collect or pay upon purchase, sale or shipment of Licensed RAIDCore Software. If Reseller wishes to claim a tax exemption, Reseller must give Licensor a tax exemption certificate acceptable to the relevant taxing authority.

3.3 Records; Audit Rights. During the term of this Agreement and for a period of two (2) years after expiration or termination of this Agreement, Reseller agrees to keep all usual and proper records and books of account and all usual and proper entries relating to this Agreement in accordance with generally accepted accounting principles. Licensor may conduct an audit of Reseller’s records, including such financial and other business records as may be relevant, to allow Licensor to confirm Reseller’s compliance with the terms of this Agreement and the correctness of all payments made or due to Licensor hereunder.

3.4 Audit Procedures. Any such audit will be conducted by an auditor designated by Licensor or by an independent certified public accountant selected by Licensor, and will be conducted only with reasonable advance written request no more than twice in any twelve (12) month period, unless an underpayment as described below is found, in which case Licensor may conduct an additional audit following each such finding during the same twelve (12) month period. The audit will be conducted during regular business hours and will be conducted in such a manner as not to unreasonably interfere with Reseller’s normal business activities. Licensor agrees that it shall be responsible for the payment of the reasonable fees and costs of the auditor unless the auditor determines that Reseller has underpaid Licensor hereunder by an amount in excess of five percent (5%) of the amounts actually due, in which event Reseller shall be responsible and shall pay the audit costs. Reseller will remit to Licensor any underpayment within thirty (30) days of Reseller’s receipt of an invoice for such fee. Licensor recognizes and agrees that information learned during an audit is confidential and that such information may be used only in further disposition of the audit.

ARTICLE 4
DISCLAIMERS OF WARRANTIES; LIMITATIONS OF LIABILITY

4.1 Disclaimer of Warranties; “AS IS” Transaction. RESELLER ACKNOWLEDGES AND AGREES THAT NEITHER RESELLER NOR BROADCOM MAKES ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO LICENSED RAIDCORE SOFTWARE, AND THAT LICENSED RAIDCORE SOFTWARE AND COPIES OF THEREOF AND ANY LICENSES OR RIGHTS HEREUNDER ARE FURNISHED AND LICENSED “AS IS” AND “WITH ALL FAULTS.” WITHOUT IN ANY WAY LIMITING THE FOREGOING, RESELLER, FOR ITSELF AND AND FOR BROADCOM DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, TITLE OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS.

4.2 Limitations of Liability. IN NO EVENT WILL LICENSOR OR BROADCOM BE LIABLE FOR ANY CONSEQUENTIAL, EXEMPLARY, SPECIAL, INDIRECT, OR INCIDENTAL DAMAGES, OR ANY DAMAGES FOR LOST DATA OR LOST PROFITS, ARISING FROM OR RELATING TO THIS AGREEMENT, WHETHER IN CONTRACT OR TORT OR OTHERWISE, EVEN IF SUCH PARTY OR PERSON KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES. WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL LICENSOR’S TOTAL CUMULATIVE LIABILITY ARISING FROM OR RELATING TO THIS AGREEMENT EXCEED THE GREATER OF (1) AN AMOUNT EQUAL TO THE SUM OF ALL AMOUNTS PAID BY RESELLER UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTH PERIOD IMMEDIATELY PRECEDING THE EVENT FIRST GIVING RISE TO LIABILITY IN THE CASE OF LIABILITY ARISING AFTER THE SECOND ANNIVERSARY HEREOF OR (2) AN AMOUNT EQUAL TO RESELLER’S REVENUE FROM LICENSED RAIDCORE SOFTWARE DURING THE TWELVE (12) MONTH PERIOD IMMEDIATELY PRECEDING THE EVENT FIRST GIVING RISE TO LIABILITY IN THE CASE OF LIABILITY ARISING BEFORE THE SECOND ANNIVERSARY HEREOF, OR (3) ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000). THE PARTIES ACKNOWLEDGE THAT THE TERMS OF THIS SECTION REFLECT THE ALLOCATION OF RISK SET FORTH IN

THIS AGREEMENT AND THAT NEITHER PARTY WOULD NOT ENTER INTO THIS AGREEMENT WITHOUT THESE LIMITATIONS OF LIABILITY.

ARTICLE 5
TERM; TERMINATION

5.1 Term. The term of this Agreement shall commence on the Effective Date and continue for an initial term of four (4) years, unless terminated earlier as provided in Section 5.2. The term of this Agreement shall automatically renew for additional successive one (1) year terms, unless either party shall give notice to the other party, not later than thirty (30) days before the expiration of the then current term, that it does not wish to renew.

5.2 Termination.

This Agreement may be terminated as follows:

(a) By Reseller at any time upon ninety (90) days written notice to Licensor;

(b) by mutual written agreement of Licensor and Reseller;

(c) by Licensor, upon written notice to Reseller, if the Broadcom License shall terminate or the assignment of the Broadcom License contemplated by the APA shall not be effective; or

(d) by Licensor, upon written notice to Reseller, if there shall have been a material breach or misrepresentation of any of the terms or conditions set forth in this Agreement on the part of Reseller, and such breach is not cured within thirty (30) days following written notice to Reseller of such breach.

5.3 Effect of Termination or Breach. Upon termination of this Agreement, all licenses granted to Reseller hereunder shall immediately terminate, and Reseller shall destroy any copies of Licensed RAIDCore Software in its possession and furnish a certificate of such destruction, certified by an officer of Reseller, within fifteen (15) days following the date of termination. End User Agreements for Licensed RAIDCore Software distributed by Reseller in accordance and compliance with the terms and conditions of this Agreement prior to termination, and the provisions of Sections 2.4, 3.2, 3.3, 3.4, 3.5, 5.3 and Article 9, shall survive termination of this Agreement and remain in effect in accordance with their terms.

ARTICLE 6
ASSIGNMENT

6.1 Binding Nature; Assignment.

(a) This Agreement (including the licenses and rights granted to Reseller hereunder) shall not be assignable by Reseller, without the prior written consent of Licensor, which Licensor may withhold in its sole discretion except as provided in Section 6.1(b) .

(b) Notwithstanding Section 6.1(a), Licensor will not unreasonably withhold its consent to assignment of this Agreement by Reseller to no more than an aggregate of three concurrent assignees to whom Reseller sells its entire right, title and interest in or exclusively licenses the worldwide right to manufacture and sell its DiMeda®, MediaVault™, and/or Talon™ product lines of Appliances (including all Intellectual Property Rights and inventory associated with such product line, including without limitation the associated trademark and all rights under this Agreement with respect to any future versions of such product line) including a sale of such product lines as part of the sale by Reseller of all or substantially all of Reseller’s business, provided that (i) the Agreement as assigned shall not include this Section 6.1(b) and no further transfer or assignment of the Agreement or any licenses or rights granted hereunder shall be permitted by the assignee; (ii) the licenses granted under this Agreement shall be limited to distribution of copies of Licensed RAIDCore Software only with the DiMeda®, MediaVault™, and/or Talon™ product lines of Appliances purchased from Reseller by the assignee in connection with such assignment; and (iii) the assignee agrees to comply with all the provisions of this Agreement (as amended in accordance with this Section 6.1(b)). Assignment by Reseller of this Agreement shall not relieve Reseller of its obligations or liabilities under this Agreement arising prior to such assignment. For the avoidance of doubt, Reseller may assign its rights hereunder to one assignee (or exclusive licensee) per product line at any given time, provided that Seller may subsequently transfer or assign such rights to other third parties if the prior transferee or assignee defaults on its obligations or otherwise forfeits its rights such that the assignment or exclusive license is cancelled and all rights hereunder revert to Reseller.

(c) Any attempted assignment or transfer made in violation of this Section 6.1 shall be null and void. Subject to the provisions of this Section, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

ARTICLE 7
MISCELLANEOUS

7.1 Entire Agreement. This instrument, together with the APA and NAS Joint Ownership Agreement, contains the entire agreement between the parties relating to the sale of the subject matter of this Agreement. Any oral representations or modifications concerning this Agreement or any such other document shall be of no force and effect excepting a subsequent modification in writing, signed by the party to be charged. Nothing in this Agreement shall modify or supersede the terms of the APA, provided that to the extent any terms and provisions of this Agreement conflict with any term, condition or provision of the express terms and provisions of the APA, the express terms of this Agreement shall govern and control.

7.2 Modification. This Agreement may be modified, amended or supplemented only by a written instrument duly executed by both the parties hereto.

7.3 Severability. Should any term, provision or paragraph of this Agreement be determined to be illegal or void or of no force and effect, the balance of the Agreement shall survive.

7.4 Captions. All captions and headings contained in this Agreement are for convenience of reference only and shall not be construed to limit or extend the terms or conditions of this Agreement.

7.5 Further Assurances. Each party hereto will execute, acknowledge and deliver any further assurance, documents and instruments reasonably requested by any other party hereto for the purpose of giving effect to the transactions contemplated herein or the intentions of the parties with respect thereto.

7.6 Waiver. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

7.7 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of California, without giving effect to choice of law principles.

7.8 Construction. In the interpretation and construction of this Agreement, the parties acknowledge that the terms hereof reflect extensive negotiations between the parties and that this Agreement shall not be deemed, for the purpose of construction and interpretation, drafted by either party hereto.

7.9 Counterparts. This Agreement may be signed in counterparts. The parties further agree that this Agreement may be executed by the exchange of facsimile signature pages.

7.10 Time is of the Essence. Time is of the essence in this Agreement, and all of the terms, covenants and conditions hereof.

7.11 Bankruptcy Court Jurisdiction. THE PARTIES AGREE THAT FOR SO LONG AS THE CHAPTER 11 CASE BKY 08-43731 (“THE CHAPTER 11 CASE”) IS OPEN ON THE DOCKET OF THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA, SUCH BANKRUPTCY COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER ALL DISPUTES AND OTHER MATTERS RELATING TO THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE PARTIES EXPRESSLY CONSENT TO AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION. AFTER THE CHAPTER 11 CASE IS CLOSED ON THE DOCKET, THE PARTIES CONSENT TO JURISDICTION OF THE SUPERIOR COURT IN AND FOR THE COUNTY OF SAN DIEGO, CALIFORNIA OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA OVER ALL DISPUTES AND OTHER MATTERS RELATING TO THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT.

7.12 Notices. Any notice, request, instruction or other document to be given hereunder by a party hereto shall be in writing and shall be deemed to have been given, (a) when received if given in person, (b) on the date of transmission if sent by telex, telecopy, email or other wire transmission (with answer back confirmation of such transmission, and, if sent by email, provided that a copy of such notice, request or instruction or other document be sent by overnight delivery), (c) upon delivery, if delivered by a nationally known commercial courier

service providing next day delivery service (such as Federal Express), or (d) upon delivery, or refusal of delivery, if deposited in the U.S. mail, certified or registered mail, return receipt requested, postage prepaid:


To Reseller:		Ciprico Inc. 7003 W Lake Street, Suite 400 St. Louis Park, MN 55426 Attn: Steven Merrifield Fax: 952-540-2402 smerrifield@ciprico.com

With a copy to:
with a copy (which shall not constitute
notice to):		Fredrikson & Byron, P.A. 900 Second Avenue South, Ste. 4000 Minneapolis, Minnesota 55402 Attn: Clint Cutler Fax: 612-492-7077 ccutler@fredlaw.com

To Licensor:		Dot Hill Systems Corporation 200 Faraday Avenue, Suite 100 Carlsbad California 92008 Hanif Jamal Fax: 760-431-4457 Hanif.Jamal@dothill.com

with a copy (which shall not
constitute notice) to:		Cooley Godward Kronish LLP 101 California Street, 5th Floor San Francisco, California 94111 Attn: Robert L. Eisenbach III Fax: (415) 693-2222 reisenbach@cooley.com

or to such other individual or address as a party hereto may designate for itself by notice given as herein provided.

7.13 Attorneys Fees. In the event of any action or proceeding to interpret or enforce this Agreement, the prevailing party in such action or proceeding (i.e., the party who, in light of the issues contested or determined in the action or proceeding, was more successful) shall be entitled to have and recover from the non-prevailing party such costs and expenses (including all court costs and reasonable attorneys’ fees) as the prevailing party may incur in the pursuit or defense thereof.

7.14 No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and nothing contained herein, express or implied, is intended to confer on any person or entity other than the parties hereto or their successors and permitted assigns, any rights, remedies, obligations, claims, or causes of action under or by reason of this Agreement, except that Broadcom shall be a third party beneficiary of any disclaimers or limitations of liability applicable to it under this Agreement.

In Witness Whereof, the parties hereto have executed this RAIDCore Software License Agreement as of the day and year first above written.


Dot Hill Systems Corp.
By:	/s/ Dana W. Kammersgard
	Name:	Dana W. Kammersgard
	Its: Chief Executive Officer and President


Ciprico Inc. Debtor and Debtor In Possession
By:	/s/ Steven D. Merrifield
	Name:	Steven D. Merrifield
	Its: Chief Executive Officer

EXHIBIT 1
LICENSED SOFTWARE

1. RAIDCore and Ciprico VST RAID software object code implementing the features set out in the RAIDCore RC5400 series data sheets and VST Pro data sheets, to the extent that such features are implemented by the RAIDCore and/or VST RAID software, for the following operating systems (to the extent completed/applicable):

	•		Windows XP/2003 32 and 64 bit

	•		Windows Vista (all variants) 32 and 64 bit

	•		Windows 2008 32 and 64 bit

	•		Redhat v9 32 and 64 bit

	•		RHEL v4, 5 32 and 64 bit

	•		SuSE v10.1, 10.2 32 and 64 bit

	•		SuSE Ent Server v10 32 and 64 bit

	•		OS-X 10.4 and 10.5 for Mac

2. Supporting application GUI software and command-line software object code as may exist for RAIDCore RC5400 and VST Pro products.

3. All object code as may exist, and where applicable, compiled versions of Intel x86 compatible motherboard BIOS code supporting Intel ICHxR/ESB2, AMD SB600, AMD SB700 and Broadcom HT1000/1100 chipsets (drivers and configuration utility).

Keys for the Licensed RAIDCore Software will be issued by Licensor upon request for copies of Licensed RAIDCore Software distributed by Reseller in accordance with this Agreement.

Exhibit 4.3

NAS JOINT OWNERSHIP AGREEMENT

This NAS Joint Ownership Agreement is made and entered into as of the Closing (as defined therein) of the APA (as defined herein) (“Effective Date”), by and between Dot Hill Systems Corp., a Delaware corporation (“Dot Hill”), and Ciprico Inc., a Delaware corporation
(“Ciprico”), each a “Party” and collectively the “Parties.”

Recitals

A. Ciprico is selling to Dot Hill, and Dot Hill is purchasing from Ciprico, certain assets under an Asset Purchase and Technology License Agreement, dated as of September 17, 2008 (the “APA”).

B. Pursuant to the APA, Ciprico is conveying an undivided one-half interest in certain Joint NAS Intellectual Property (as defined below) to Dot Hill, and Ciprico and Dot Hill agree that their joint ownership of the Joint NAS Intellectual Property shall be without right of accounting, and subject to the terms and conditions of this Agreement.

Agreement

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

ARTICLE 1
DEFINITIONS

1.1 Definitions. Unless otherwise defined herein, terms used herein shall have the meanings set forth below:

“Agreement” means this NAS Joint Ownership Agreement, as the same may be amended, modified or waived by the Parties from time to time in accordance with its terms.

“Broadcast Television” shall mean video or audio content creation designed and targeted for the broadcast television industry, including the editing, manipulation, and broadcasting of images or sounds in real-time using digital technology specifically designed and targeted for the broadcast television industry.

“Ciprico” shall have the meaning set forth in the preamble hereof.

“Digital Cinema” means computer software, systems, apparatus and applications designed and used for capturing, digital intermediate work, and archiving of digital of digital assets in the cinema industry as well as the delivery and distribution of copies of motion pictures to cinema theatres in digital form, and ancillary support and maintenance services therefor.

“Dot Hill” shall have the meaning set forth in the preamble hereof.

“Field” means the Use of Joint NAS Intellectual Property, and products implementing or embodying the Joint NAS Intellectual Property, in or for the Broadcast Television or Digital Cinema market.

“Joint NAS Intellectual Property” shall mean the Joint NAS Intellectual Property as defined in the APA, in existence as of the Closing.

“Specified Dot Hill OEM Customers” shall mean the following entities: IBM, Hewlett-Packard Co., Dell, Inc., Acer, Lenovo, Apple, HDS, NetApp, EMC, Sun Micro, Motorola, Alcatel-Lucent, Rackable, Verari, NEC, Toshiba, Fujitsu, Fujitsu-Siemens, DVS (Digital Video Systems), MaxData, Hammer, NewTech, Uniadex, Cray, Sepaton, Stratus, H3C, Lanner, Thecus, AMD, Quanta, and Mitac, SuperMicro and Tyan, and their respective successors.

“Use” means use, execute, reproduce, prepare and have prepared derivative works, disclose, publicly display, publicly perform, distribute and otherwise transfer, make, have made, import, offer to sell and sell, including for resale.

1.2 Rules of Construction. Unless the context otherwise clearly indicates, in this Agreement: the singular includes the plural; “includes” and “including” are not limiting; “may not” is prohibitive and not permissive; and “or” is not exclusive.

ARTICLE 2
PARTIES’ RESPECTIVE RIGHTS AND OBLIGATIONS FOR JOINT NAS
INTELLECTUAL PROPERTY

2.1 Use, Exploitation and Licensing.

(a) Field. Subject to the terms and conditions of this Agreement, Ciprico shall have the exclusive right, and Dot Hill grants to Ciprico a perpetual, irrevocable, world-wide, exclusive and royalty-free license, to Use the Joint NAS Intellectual Property and products incorporating or using the Joint NAS Intellectual Property solely in the Field and solely to customers other than Specified Dot Hill OEM Customers, and to license and assign (subject to Section 4.1) the Joint NAS Intellectual Property to third parties other than Specified Dot Hill Customers to Use solely in the Field. Ciprico shall be entitled to Use the Joint NAS Intellectual Property and products incorporating or using the Joint NAS Intellectual Property in the Field, and to license and assign (subject to Section 4.1) the Joint NAS Intellectual Property to third parties to Use in the Field (other than Specified Dot Hill OEM Customers), without the consent of or accounting to Dot Hill. Before selling, distributing or otherwise transferring Joint NAS Intellectual Property (or any product incorporating or using Joint NAS Intellectual Property) to any customer, reseller, integrator or other third party other than a Specified Dot Hill OEM Customer, Dot Hill (and any licensee or assignee of Dot Hill) must (a) provide such customer, reseller or other third party with written notice that such third party may not resell, redistribute or otherwise transfer or Use such Joint NAS Intellectual Property or product in the Field and (b) obtain the written agreement from any reseller or integrator that such reseller or integrator shall not resell, distribute or otherwise transfer or Use such Joint NAS Intellectual Property or product in or for use in the Field. Dot Hill shall not be entitled to, and shall not, Use the Joint NAS

Intellectual Property in the Field, or license or assign the Joint NAS Intellectual Property to third parties to Use in the Field, without the prior written consent of Ciprico, which Ciprico may withhold in its sole discretion, provided, however, that nothing in this Agreement shall prohibit Dot Hill from selling, distributing or otherwise transferring any product incorporating or using Joint NAS Intellectual Property to the Specified Dot Hill OEM Customers, or restrict or require Dot Hill to restrict the Specified Dot Hill OEM Customers from Using such products in the Field.

(b) Specified Dot Hill OEM Customers. Subject to the terms and conditions of this Agreement, Dot Hill shall have the exclusive right, and Ciprico grants to Dot Hill a perpetual, irrevocable, world-wide, exclusive and royalty-free license, to Use the Joint NAS Intellectual Property and products incorporating or using the Joint NAS Intellectual Property to or for Specified Dot Hill OEM Customers, and to license and assign (subject to Section 4.1) the Joint NAS Intellectual Property to Specified Dot Hill OEM Customers. Dot Hill shall be entitled to Use the Joint NAS Intellectual Property and products incorporating or using the Joint NAS Intellectual Property to or for Specified Dot Hill OEM Customers, and to license and assign (subject to Section 4.1) the Joint NAS Intellectual Property to Specified Dot Hill OEM Customers, without the consent of or accounting to Ciprico. Ciprico shall not sell, distribute or otherwise transfer Joint NAS Intellectual Property (or any product incorporating or using Joint NAS Intellectual Property) to any Specified Dot Hill OEM Customer, or to any reseller, integrator other third party for resale, distribution or other transfer to any Specified Dot Hill OEM Customer. For avoidance of doubt, nothing in this Agreement shall prohibit Ciprico from selling, distributing, licensing or assigning any product to Specified Dot Hill OEM Customers so long as such product does not incorporate or use any Joint NAS Intellectual Property.

(c) Other. Except as otherwise provided in Sections 2.1(a) and (b), Ciprico and Dot Hill shall each be entitled to Use the Joint NAS Intellectual Property and products incorporating or using the Joint NAS Intellectual Property, and to license and assign (subject to Section 4.1) the Joint NAS Intellectual Property to third parties, without the consent of or accounting to the other Party.

2.2 Enforcement.

(a) In the Field. Ciprico shall have the exclusive right to bring, maintain and settle any actions, suits or other proceedings to enforce the Joint NAS Intellectual Property against any infringers in the Field in any jurisdiction in the world. Ciprico shall be solely responsible for the costs of any such actions, suits or other proceedings, and shall be entitled to retain 100% of the proceeds of any judgment, award or settlement resulting therefrom.

(b) Notice; Cooperation. Each party will use reasonable efforts to notify the other party of any potential or suspected infringement of the Joint NAS Intellectual Property. Upon such notification, the parties shall meet to discuss any actions, suits or other proceedings to enforce the Joint NAS Intellectual Property, if the infringement does not pertain to the Field. At the other party’s request and expense, each party will cooperate with the other party in executing copyright registrations or other instruments necessary to confirm or perfect the other party’s ownership and enforcement rights in the Joint NAS Intellectual Property, and in being joined as a party to litigation where necessary. In the event that no agreement is reached regarding the

bringing of suit or other proceeding (“suit”) against a potential infringer outside the Field, the party sending such notification shall have the sole right to bring such suit, provided however that (a) the other party may participate in such suit and shall receive a percentage of any recovery, such percentage to be equal to the percentage contributed by that party (up to a maximum of 50%) of the entire total of costs and fees incurred by both parties in bringing such suit, and (b) no suit shall be brought by Ciprico against a Specified Dot Hill OEM Customer, inside or outside the Field, without Dot Hill’s prior written consent, which it may withhold in its sole discretion. In the event that one party (the “suing party”) commences a suit against a third-party in accordance with this provision, the other party will not grant a license to the third party under Joint NAS Intellectual Property while such suit is pending, unless (i) the suing party gives written consent to the grant of such license, which may be withheld in the suing party’s sole discretion; (ii) the other party is Ciprico and the potential infringement occurs in the Field and the third party is not a Specified Dot Hill OEM Customer; or (iii) the third-party is an already-existing and current customer, reseller, or licensee of the other party or the other party was in discussions with the third party with respect to a license or sale of Joint NAS Intellectual Property (or products incorporating or using Joint NAS Intellectual Property) at the time the suing party notified the other party of the potential infringement.

2.3 Patent Prosecution. The Joint NAS Intellectual Property does not currently include any issued patents or pending patent applications in any jurisdiction. Neither Party shall file any patent application with respect to Joint NAS Intellectual Property without prior written notice to the other Party and consultation with the other Party as described in this Section. In the event a Party wishes to file a patent application, the Parties shall discuss: (i) whether any patent application or applications should be filed on such Joint NAS Intellectual Property; (ii) which Party should prepare and file such application or applications (taking into account the scope of the fields to be claimed in the application); and (iii) the country or countries in which the same is to be filed. Unless otherwise mutually agreed, the patent prosecution expenses incurred in connection with jointly preparing and filing patent applications on Joint NAS Intellectual Property shall be divided equally between the Parties and any resulting patents shall be owned jointly by the Parties and subject to the terms of this Agreement. If after this consultation one Party declines to join in the filing of a patent application on Joint NAS Intellectual Property for which the other Party deems it reasonable and necessary to seek patent protection, then the latter Party may file and prosecute such patent application(s) at its sole expense. In such event, the filing Party will be the sole owner of the corresponding invention, patent application, or any resulting patents, and have the sole right to prosecute such patent application(s). The declining Party will assign its rights, title and interest in such invention(s), patent application(s), and resulting patents to the other Party in all applicable jurisdictions, subject to the licenses granted under this Agreement.

2.4 Improvements. For the avoidance of doubt, any improvements, enhancements or derivative works of the Joint NAS Intellectual Property created or otherwise developed by either Party after the Effective Date shall be sole and exclusive property of such Party, and shall not be jointly owned under this Agreement. However, such sole ownership shall not imply or be deemed to grant any right or license to Use any Joint NAS Intellectual Property incorporated or otherwise used in such improvement, enhancement or derivative work except as permitted by this Agreement.

ARTICLE 3
INDEMNIFICATION

3.1 Indemnification. Each party (an “Indemnitor” when obligated to indemnify the other party under this Section 3.1) shall indemnify and hold the other party harmless from and against any and all liabilities, losses, damages, claims, deficiencies, costs and expenses (including reasonable attorney fees and other costs and expenses incident to any suit, action or proceeding) arising out of or resulting from the Use or licensing to a third party solely by the Indemnitor of the Joint NAS Intellectual Property.

ARTICLE 4
ASSIGNMENT

4.1 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the Parties hereto without prior written consent of the other Party (which shall not be unreasonably withheld or delayed); except that (a) Dot Hill may assign any of its rights and obligations hereunder to any affiliate or subsidiary of Dot Hill (whether wholly owned or otherwise), to its lenders or, in whole or in part, to any successor-in-interest or any person acquiring all or any portion of the Business or the Acquired Assets (as those terms are defined in the APA); (b) Ciprico may assign any of its rights and obligations hereunder to any affiliate or subsidiary of Ciprico (whether wholly owned or otherwise), to its lenders or, in whole or in part, to any successor-in-interest; and (c) the rights and interests of Ciprico hereunder may be assigned to a trustee appointed under chapter 11 or chapter 7 of the Bankruptcy Code, or to any entity appointed as a successor to Ciprico pursuant to a confirmed chapter 11 plan. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective permitted successors and assigns. Any attempted assignment or transfer made in violation of this Section shall be null and void. Neither Party shall assign any interest in Joint NAS Intellectual Property unless such assignment is made subject to the rights and licenses granted and covenants undertaken by such Party under this Agreement.

ARTICLE 5
MISCELLANEOUS

5.1 Entire Agreement. This instrument, together with the APA and the RAIDCore Software License Agreement, contains the entire agreement between the Parties relating to the sale of the subject matter of this Agreement. Any oral representations or modifications concerning this Agreement or any such other document shall be of no force and effect excepting a subsequent modification in writing, signed by the Party to be charged. Nothing in this Agreement shall modify or supersede the terms of the APA, provided that to the extent any terms and provisions of this Agreement conflict with any term, condition or provision of the express terms and provisions of the APA, the express terms of this Agreement shall govern and control.

5.2 Modification. This Agreement may be modified, amended or supplemented only by a written instrument duly executed by both the Parties hereto.

5.3 Severability. Should any term, provision or paragraph of this Agreement be determined to be illegal or void or of no force and effect, the balance of the Agreement shall survive.

5.4 Captions. All captions and headings contained in this Agreement are for convenience of reference only and shall not be construed to limit or extend the terms or conditions of this Agreement.

5.5 Further Assurances. Each Party hereto will execute, acknowledge and deliver any further assurance, documents and instruments reasonably requested by any other Party hereto for the purpose of giving effect to the transactions contemplated herein or the intentions of the Parties with respect thereto.

5.6 Waiver. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the Party making the waiver.

5.7 Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of California, without giving effect to choice of law principles.

5.8 Construction. In the interpretation and construction of this Agreement, the Parties acknowledge that the terms hereof reflect extensive negotiations between the Parties and that this Agreement shall not be deemed, for the purpose of construction and interpretation, drafted by either Party hereto.

5.9 Counterparts. This Agreement may be signed in counterparts. The Parties further agree that this Agreement may be executed by the exchange of facsimile signature pages.

5.10 Time is of the Essence. Time is of the essence in this Agreement, and all of the terms, covenants and conditions hereof.

5.11 Bankruptcy Court Jurisdiction. THE PARTIES AGREE THAT FOR SO LONG AS THE CHAPTER 11 CASE BKY 08-43731 (“THE CHAPTER 11 CASE”) IS OPEN ON THE DOCKET OF THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA, SUCH BANKRUPTCY COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER ALL DISPUTES AND OTHER MATTERS RELATING TO THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE PARTIES EXPRESSLY CONSENT TO AND AGREE NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION. AFTER THE CHAPTER 11 CASE IS CLOSED ON THE DOCKET, THE PARTIES CONSENT TO JURISDICTION OF THE SUPERIOR COURT IN AND FOR THE COUNTY OF SAN DIEGO, CALIFORNIA OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA OVER ALL DISPUTES AND OTHER MATTERS RELATING TO THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT.

5.12 Notices. Any notice, request, instruction or other document to be given hereunder by a Party hereto shall be in writing and shall be deemed to have been given, (a) when received if

given in person, (b) on the date of transmission if sent by telex, telecopy, email or other wire transmission (with answer back confirmation of such transmission, and, if sent by email, provided that a copy of such notice, request or instruction or other document be sent by overnight delivery), (c) upon delivery, if delivered by a nationally known commercial courier service providing next day delivery service (such as Federal Express), or (d) upon delivery, or refusal of delivery, if deposited in the U.S. mail, certified or registered mail, return receipt requested, postage prepaid:


		To Ciprico:		Ciprico Inc.
				7003 W Lake Street, Suite 400
				St. Louis Park, MN 55426
				Attn: Steven Merrifield
				Fax: 952-540-2402
				smerrifield@ciprico.com

		With a copy to:
		with a copy (which
		shall not constitute
		notice to):		Fredrikson & Byron, P.A.
				900 Second Avenue South, Ste. 4000
				Minneapolis, Minnesota 55402
				Attn: Clint Cutler
				Fax: 612-492-7077
				ccutler@fredlaw.com

		To Dot Hill:		Dot Hill Systems Corporation
				200 Faraday Avenue, Suite 100
				Carlsbad California 92008
				Hanif Jamal
				Fax: 760-431-4457
				Hanif.Jamal@dothill.com

		with a copy
		(which shall not
		constitute notice) to:		Cooley Godward Kronish LLP
				101 California Street, 5th Floor
				San Francisco, California 94111
				Attn: Robert L. Eisenbach III
				Fax: (415) 693-2222
				reisenbach@cooley.com

or to such other individual or address as a Party hereto may designate for itself by notice given as herein provided.

5.13 Attorneys Fees. In the event of any action or proceeding to interpret or enforce this Agreement, the prevailing party in such action or proceeding (i.e., the party who, in light of the issues contested or determined in the action or proceeding, was more successful) shall be

entitled to have and recover from the non-prevailing party such costs and expenses (including all court costs and reasonable attorneys’ fees) as the prevailing party may incur in the pursuit or defense thereof.

5.14 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Parties hereto and nothing contained herein, express or implied, is intended to confer on any person or entity other than the Parties hereto or their successors and permitted assigns, any rights, remedies, obligations, claims, or causes of action under or by reason of this Agreement, except that Broadcom shall be a third party beneficiary of any disclaimers or limitations of liability applicable to it under this Agreement.

In Witness Whereof, the Parties hereto have executed this NAS Joint Ownership Agreement as of the day and year first above written.


Dot Hill Systems Corp.
By:	/s/ Dana W. Kammersgard
	Name:	Dana W. Kammersgard
	Its: Chief Executive Officer and President


Ciprico Inc. Debtor and Debtor In Possession
By:	/s/ Steven D. Merrifield
	Name:	Steven D. Merrifield
	Its: Chief Executive Officer

SCHEDULES TO

ASSET PURCHASE AND TECHNOLOGY
LICENSE AGREEMENT

By and Between

Dot Hill Systems Corp.

and

Ciprico Inc.

dated September 17, 2008

The Schedules are qualified in their entirety by reference to specific provisions of the Agreement, and are not intended to constitute, and shall not be construed as constituting, any representations or warranties of the Seller or the Buyer, except as and to the extent provided for in the Agreement, subject to the limitations therein. Certain of the information contained in the Schedules may not be required to be disclosed pursuant to the Agreement and such information is included for informational purposes only and shall not be deemed to alter any of the representations or warranties in the Agreement. Inclusion of information herein shall not be construed as an admission that such information is material to Seller or the Buyer.

Disclosures by attachments to the Schedules are deemed as though made herein. Capitalized terms used in the Schedules and not otherwise defined herein shall have the respective meanings assigned to such terms in the Agreement. Headings have been inserted in the Schedules for convenience of reference only and shall not have the effect of amending or changing the information presented. The disclosures set forth in any section of the Schedules relate only to the representations and warranties in the section of the Agreement in which such section of the Schedule is expressly referenced and to such other sections where such disclosure is readily apparent and reasonably relates.

Schedule 2.1(a)(iv)

Assumed Executory Contracts

1.		Broadcom License.

2.		Software License and Services Agreement between Macrovision Corporation and Seller dated September 13, 2007.

-2-

Schedule 2.1(a)(v)

Equipment

To be provided post-signing, but prior to Closing.

-3-

Schedule 2.1(a)(vi)

Office Supplies, Production Supplies, Spare Parts, and Other Miscellaneous Supplies

None.

-4-

Schedule 2.1(a)(vii)

Security Deposits and Advances

None.

-5-

Schedule 2.1(a)(viii)

Claims

None.

-6-

Schedule 2.1(a)(x)

Permits, Licenses, Certifications, Approvals

Seller’s PCI SIG vendor identification number.

-7-

Schedule 2.1(a)(xii)

Goodwill and Other Intangible Property

None

-8-

Schedule 2.1(a)(xiii)

Rights to be Indemnified

None

-9-

Schedule 2.1(a)(xiv)

Proceeds under Insurance Policies

None

-10-

Schedule 2.1(a)(xv)

Security Deposits relating to Assumed Executory Contracts

None

-11-

Schedule 5.4

No Conflicts

Software License and Services Agreement between Macrovision Corporation and Seller dated September 13, 2007.

-12-

Schedule 5.6

Legal Proceedings

None.

-13-

Schedule 5.9

Intellectual Property

Broadcom License

-14-

Schedule 5.10

Material Contracts

1.		Broadcom License

2.		Software License and Services Agreement between Macrovision Corporation and Seller dated September 13, 2007.

Defaults under Material Contracts

None

-15-

EX-10.1 3 a50174exv10w1.htm EX-10.1 exv10w1

Exhibit 10.1

***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.

MANUFACTURING AND PURCHASE AGREEMENT

“Dot Hill”

Dot Hill Systems Corporation
2200 Faraday Ave., Ste. 100
Carlsbad, CA 92008

“Supplier”

Hon Hai Precision Industry LTD
CMMSG-B/G NBDD,
8801 Fallbrook Dr.
Houston, TX 77064


The Effective Date of this Manufacturing and Purchase Agreement shall be:

		(to be completed by Dot Hill)

The following identified documents are incorporated herein by reference.

Manufacturing and Purchase Agreement

                         Appendix 1 — Products
                         Appendix 2 — Price Matrix
                         Appendix 3 — SUPPLIER Contract Quality Requirements

This Agreement and the Appendices identified above, constitutes the entire agreement between Dot Hill and SUPPLIER with respect to the subject matter hereof, and supersedes all prior and contemporaneous oral or written representations, proposals or agreements between the parties concerning the subject matter of this Agreement. In the event of any conflict between the terms of this Agreement and of any Appendix, the terms of the Appendix shall govern.


Accepted and agreed to by:		Accepted and agreed to by:

Dot Hill Corporation (Dot Hill)		SUPPLIER

Signed:	/s/ Dana W. Kammersgard	Signed:	/s/ Jackson Shih

	(Authorized Signature)		(Authorized Signature)

Name:	Dana W. Kammersgard	Name:	Jackson Shih


Title:	CEO	Title:	VP


Date:	9/24/08	Date:	9/24/08

This Manufacturing and Purchase Agreement (the “Agreement”) is entered into by and between Dot Hill and SUPPLIER.

For and in consideration of the mutual promises and covenants contained herein, the parties agree as follows:

SCOPE

This Agreement establishes the non-exclusive terms and conditions under which Dot Hill agrees to purchase from SUPPLIER and SUPPLIER agrees to manufacture and supply/sell to Dot Hill certain Products (as defined below).

2.		DEFINITIONS

2.1		“Product(s)” refers to the Dot Hill products described on the attached Appendix 1, as may be amended from time to time, which meet the specifications attached at Appendix 4

2.2		“Economic Order Quantity” means a quantity at which a desirable price break is achieved.

2.3		“Specifications” means specifications, drawings, Bills of Materials (“BOM”) for the Product as set forth at Appendix 4, which may be amended from time to time pursuant to the ECO provisions set forth herein

2.4		“Dot Hill Process Documentation” means documents provided by Dot Hill to SUPPLIER to define the process SUPPLIER shall use to manufacture the Products.

2.5		“SUPPLIER Process Documentation” means the documents used by SUPPLIER to define the process SUPPLIER shall use to manufacture the Products.

2.6		“SUPPLIER Contract Quality Requirements” means the requirements specified on Appendix 3, as provided by Dot Hill to SUPPLIER, to define the quality assurance procedures and requirements necessary in the manufacture of the Products.

2.7		“Engineering Change Order” or “ECO” means a change to a Specification, Dot Hill Process Documentation, SUPPLIER Process Documentation, or the Products.

2.8		“Engineering Change Request” or “ECR” means a notification from one party to the other, outlining in detail, the specific requirements of an Engineering Change Order.

2.9		“Manufacturability” means the ability to produce the Products to Dot Hill’s Specifications, Dot Hill Process Documentation, SUPPLIER Process Documentation, and SUPPLIER practices and manufacturing capabilities, in accordance with the terms stated in Appendix 3, including without limitation the testability of the Products utilizing the mutually agreed upon Product Acceptance Tests (as defined herein) resulting in commercially acceptable yields.

2.10		“Direct Ship Products” means Product(s) being shipped by SUPPLIER directly to Dot Hill’s Customer.

2.11		“Non-direct Ship Products” means all other Product(s) not being shipped by SUPPLIER directly to Dot Hill’s Customer.

2.12		“Product Acceptance Tests” means the testing array to be applied by SUPPLIER to individual Products as mutually agreed by the Parties in writing and set forth on Appendix 3.

2.13		“Finished Goods” means Product that has met the Product Acceptance Test criteria, and is ready for shipment.

2.14		“Transformation Costs” means all costs associated with the manufacture of the Products, excluding raw material costs.

2.15		“Purchase Order Release” means a blanket purchase order release or an outbound sales order release issued by Dot Hill to SUPPLIER.



Manufacturing and Purchase Agreement	1	Dot Hill /SUPPLIER

“Obsolete Material” means all material that has no forward forecast or material that is in excess of [...***...]

“Excess Material” means all material in excess of [...***...].

3		PRODUCTS

3.1		Products. SUPPLIER agrees to sell to Dot Hill the Products listed on Appendix 1. The Parties agree that changes (additions or deletions) to Appendix 1 may be made, provided the Parties mutually agree in writing to such changes. The Parties agree that additional Products may be added to Appendix 1 and Appendix 1 will be deemed amended upon Dot Hill’s issuance of a purchase order pursuant to SUPPLIER’s written quotation for the Products.

3.2		Product Specifications. SUPPLIER agrees to manufacture the Products in accordance with the Specifications, as set forth in Appendix 4 or as amended upon mutual agreement on terms, conditions, and price, from time to time or as per an ECO made pursuant to this Agreement.

3.3		Quality and Reliability Assurance. SUPPLIER agrees to manufacture the Products in accordance with the quality and reliability assurance requirements specified in Appendix 3 (SUPPLIER Contract Quality Requirements). Appendix 3 may be amended from time to time in writing as mutually agreed.

3.4		Identification of Products and Trademark Rights

3.4.1		Identification of Products. SUPPLIER and Dot Hill hereby agree that Products sold hereunder will be labeled and marketed by Dot Hill under Dot Hill’s (or its Customers’) trademarks. SUPPLIER shall have the right to affix and Dot Hill shall not remove or cover over any nameplate indicating model number, serial number, patent number and/or patent pending legends, and any other markings which may be required by law or by regulatory agencies, where covering over such nameplate would violate any laws, patents, or trademarks.

3.4.2		Trademark Rights.

3.4.2.1		Dot Hill shall provide to SUPPLIER for each Product a list and description of the trademarks, trade names, insignia, symbols, decorative designs or packaging designs (collectively the “Trademarks”) to be affixed by SUPPLIER to the finished Products or to the packaging of such finished Products. SUPPLIER agrees to affix the Trademarks in strict conformity with the then-current Dot Hill written instructions and standards received by SUPPLIER. However, nothing in this Agreement shall operate to confer on SUPPLIER any right to use any Trademark for any purpose other than in connection with the manufacture or repair of Products in accordance with this Agreement.

3.4.2.2		It is the intention of the parties to protect as fully as possible all of their rights to their respective trademarks. Therefore, no right is granted hereunder for either party to use the trademarks of the other party, except as specifically permitted in writing by such other party. Willful use of either party’s trademark by the other party contrary to the provisions of this Section shall constitute a material breach of this Agreement.

4.		MANUFACTURE OF PRODUCTS

4.1		Manufacture of Products. SUPPLIER shall manufacture for Dot Hill such quantities and types of Products as Dot Hill may order from time to time. SUPPLIER shall not, unless otherwise specified in a written agreement entered into by Dot Hill, manufacture or sell any Product except on Dot Hill’s behalf and as directed by Dot Hill hereunder. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to grant SUPPLIER any right to use Dot Hill’s name for any purpose other than as expressly provided herein or otherwise mutually agreed.

4.2		Manufacturability of Dot Hill Design.

4.2.1		New Products. Dot Hill may provide its Specification(s) and Dot Hill Process Documentation to SUPPLIER for new Products. SUPPLIER shall provide to Dot Hill a New Product Project Plan including without limitation feedback, risk assessment, and suggested improvements to Dot Hill in writing as to the Manufacturability of such design(s). Upon Dot Hill’s review of such New Product Project Plan submitted by SUPPLIER, and only upon mutual agreement and written authorization by Dot Hill, SUPPLIER shall commence production of the new Product.

4.3		Manufacture in Accordance with Specifications. SUPPLIER shall manufacture all Products in strict conformity with all applicable Specifications, SUPPLIER Process Documentation, Dot Hill Process Documentation, and SUPPLIER Contract Quality Requirements and all applicable laws and regulations. SUPPLIER shall not make any change in or deviate in any way from such Specifications



Manufacturing and Purchase Agreement	2	Dot Hill /SUPPLIER
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		except pursuant to an Engineering Change Order approved as provided in this Agreement. Further, SUPPLIER shall ensure, that SUPPLIER’s manufacturing processes shall meet the requirements of the regulatory agencies applicable to the manufacture of the Products, including without limitation Underwriters’ Laboratory (UL), U.S. Federal Communications Commission (FCC), and the Canadian Standards Association (CSA). In the event of a breach of this section, in addition to other remedies provided in this Agreement and available to Dot Hill at law, SUPPLIER shall be liable for and shall pay all costs associated with any retrieval, retest, rework, upgrades (including those in the field) and/or reinstallation required due to such breach, including without limitation material, labor, and overhead costs.

4.4		Location and Qualification of Manufacturing Operations. SUPPLIER shall manufacture all Products, in whole or in part, in its plants in [......], Longhua China, [......] unless Dot Hill authorizes SUPPLIER in writing to manufacture Products in another plant location. Other SUPPLIER facilities may manufacture Dot Hill Products only after meeting the certification and quality standards required by Dot Hill. Should the quality standards of any SUPPLIER facility fall below Dot Hill’s stated requirements for the manufacture of its Product, or if SUPPLIER requests that Dot Hill approve a different or additional facility for manufacture, and Dot Hill chooses to re-qualify the Products in light of the change in manufacturing facilities, SUPPLIER will, upon Dot Hill’s request: [......]*

1.		Secondary Supplier Management

		SUPPLIER CONTROLS

Supplier Selection

SUPPLIER shall not purchase any component or make-to-print part for use in the manufacture of any Product from any vendor other than those listed in Dot Hill AVL for components unless otherwise directed in writing by an authorized employee of Dot Hill. Dot Hill agrees to provide updated AVLs to SUPPLIER on a timely basis.

•

Although it is Dot Hill’s general policy to maintain a consistent approved AVL for each Product, SUPPLIER is encouraged to recommend substitutions to such list.

Dot Hill reserves the right to accept or reject any such recommendation in its discretion.

Supplier Qualification

	i.		In accordance with ISO9001:2000 requirements, SUPPLIER shall establish documented processes and criteria for the selection and qualification of suppliers and subcontractors The process and criteria shall be provided to Dot Hill Supplier Quality Engineering personnel for review and agreement.

	ii.		SUPPLIER shall notify Dot Hill Supplier Quality Engineering of the intent to qualify or re-qualify suppliers or subcontractors. Dot Hill may choose to participate in any Supplier management activities. Upon request by Dot Hill, SUPPLIER shall provide the results of supplier selection and monitoring activities to Dot Hill.

	iii.		For SUPPLIER-selected vendors, SUPPLIER shall perform capability studies of SUPPLIER-selected suppliers to ensure its long-term ability to provide compliant material. Upon request, the capability study and its results shall be provided to Dot Hill for review and approval.

Supplier Monitoring

	i.		SUPPLIER shall establish documented processes and criteria for the monitoring of its suppliers and subcontractors (including other SUPPLIER facilities). Upon request the process and criteria shall be provided to Dot Hill Supplier Quality Engineering personnel for review and agreement. Dot Hill may request reports of the results of the monitoring process including but not limited to Incoming inspection reports, supplier audit documents, product DPPM, root cause data, lot acceptance rates, ongoing reliability test data and any other supplier management data.

	ii.		SUPPLIER shall establish methods for the evaluation of AVL parts to be used in Dot Hill Products to ensure that all materials meet the requirements per applicable drawing, BOM and specification for such parts. The process and criteria shall be



Manufacturing and Purchase Agreement	3	Dot Hill /SUPPLIER
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			provided to Dot Hill Supplier Quality Engineering personnel for review and agreement. These methods shall be reviewed and updated upon revision to drawings, BOMs or specifications, and submitted to Dot Hill Supplier Quality Engineering.

	iii.		SUPPLIER shall perform First Article Inspection reports of all make-to-print items to be used in Dot Hill production, and shall submit them to Dot Hill Supplier Quality Engineering for review upon request.

	iv.		SUPPLIER shall maintain records of material evaluations that are performed upon receipt, and shall make such records available to Dot Hill upon request.

	d.		Supplier Data: SUPPLIER shall provide supplier performance reports, at a minimum to include yield and defect cause information, for all strategic make-to-print items (to be specified by Dot Hill). Reports will be provided [......]*.

	e.		Supplier Corrective Actions: SUPPLIER shall provide [......]* status of any initiated, in-work, and completed Supplier Corrective Action requests to suppliers of materials used in Dot Hill production.

	f.		Dot Hill requires process change notification from the Supplier and their critical component manufacturers. This notice should take place for: planned changes, unplanned changes, and when defects have been shipped. The Supplier is expected to monitor critical component suppliers, assist in the impact investigation, and provide testing.

			1. (PCN) product / process change notification — a planned change to supplier process that includes, but is not limited to change in manufacturing site, change in critical materials or source of materials, engineering change, changes in equipment, etc...

			2. (PDN) product / process deviation notification — an unplanned change to supplier process. A required notification that a Maverick Lot condition has occurred. (Maverick Lot — statistically significant change of outgoing product yield or identified critical characteristics.

			3. (PSDN) post shipment defect notification — provided by the supplier upon discovery of quality or reliability issues after product shipment.

4.5		Left intentionally blank

4.6		Dot Hill Engineering Change Orders.

4.6.1		In the event Dot Hill intends to implement an Engineering Change Order, Dot Hill shall provide a written Engineering Change Request to SUPPLIER outlining, in specific detail, the proposed change. SUPPLIER may at any time propose an ECO by providing an ECR to Dot Hill.

4.6.2		The recipient of an ECR will use commercially reasonable efforts to provide a preliminary response (acknowledging receipt of the ECR and all associated documentation) within [......], and a more detailed written response within [......] unless otherwise mutually agreed to in writing. Such detailed response shall include at a minimum, (i) the proposed implementation plan for such ECO; (ii) the likely pricing and scheduling impact of the ECO on any open purchase order; (iii) DFx analysis; and (iv) the target date for SUPPLIER implementing the ECO (collectively, the “ECO Project Plan”).

4.6.3		Dot Hill will notify the SUPPLIER program manager of any emergency ECR that requires a “Stop Build” or “Stop Ship” as further defined in the ECR by a written confirmation, which may be in the form of a confirming e-mail, facsimile or hard copy delivered to SUPPLIER. SUPPLIER will, within [......]* of acknowledging the written notice from Dot Hill, use best efforts to provide a written response to the emergency ECR issued by Dot Hill not to exceed [......]*.

4.6.4		In the event either party identifies an engineering change that must be implemented for reasons of safety or environment (“Safety or Environment Change”), the parties agree to notify the other party and cooperate and implement such Safety or Environment Change as soon as possible after discovery. Once such a Safety or Environment Change is discovered, the parties agree that no affected product shall be manufactured or shipped until such Safety or Environment Change has been implemented, notwithstanding any delay in scheduled delivery dates or changes to price. The SUPPLIER acknowledges that time is of the essence to resolve the Safety or Environmental change and will provide the necessary resources to assist Dot Hill’s resolution of the issue and resume product shipments. The parties further agree to cooperate in the implementation of such Safety or Environment Change on Product shipped prior to discovery of the hazard. In this regard,



Manufacturing and Purchase Agreement	4	Dot Hill /SUPPLIER
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		SUPPLIER agrees to prepare a quotation for the manufacture of field change kits or to implement factory retrofitting, as appropriate. Dot Hill and SUPPLIER shall mutually agree on a case-by-case basis on appropriate charges for the implementation of a Safety or Environment Change on WIP, finished goods awaiting shipment and in field Products taking into consideration the party responsible for the need to make the Safety or Environment Change.

4.6.6		The parties shall mutually agree in writing to each ECO, and to the implementation and all costs thereof. The Supplier shall not unreasonably withhold, delay or condition its approval to any ECO requested by Dot Hill. SUPPLIER shall not commence implementation of an ECO until both parties agree to such ECO in writing.

4.6.7		In the event SUPPLIER implements an unauthorized change, upon notification by Dot Hill, SUPPLIER shall be liable for, and shall pay all authorized costs associated with any retrieval, retest, rework (including field rework or upgrades) and/or reinstallation required due to such breach, including without limitation material, labor, and overhead costs.

4.6.8		Any obsolete material resulting from an ECO shall be dealt with in its entirety and be billed at the time of the ECO implementation. Excess material shall be addressed per Section 8.4 (Inventory Risk Limitation for Excess and Obsolete Inventory) below.

4.7		Dot Hill-owned Equipment and Tooling.

4.7.1		Dot Hill-owned equipment and tooling, including without limitation, HASS chambers, in-circuit test fixtures, computers, printers, custom fixtures and cabling (collectively, “Tooling”) furnished to SUPPLIER or developed by SUPPLIER for Dot Hill and paid for by Dot Hill shall be the property of Dot Hill and Dot Hill will provide instructions for marking as such. SUPPLIER may use such Tooling only for the manufacture of Dot Hill’s Products purchased directly by Dot Hill, unless otherwise mutually agreed in writing. On a [......]*, or upon request by Dot Hill, SUPPLIER shall provide a detailed list of such Tooling owned by Dot Hill which is in SUPPLIER’s possession, including part number and manufacturer.

4.7.2		SUPPLIER shall store, protect, preserve, and perform general maintenance on such Tooling in accordance with sound industry practice and Dot Hill’s requirements, but with no less care than SUPPLIER uses in the storage, protection, preservation, calibration and maintenance of its own property. Dot Hill is responsible for any mutually agreed upon cost associated with refurbishment including without limitation calibration, or the replacement of such Tooling, as well as general maintenance. In such an event that such refurbishment or replacement of Tooling is required, SUPPLIER will notify Dot Hill of such need, and request authorization to perform such action. In the event Dot Hill’s Tooling becomes lost or damaged while in SUPPLIER’s possession for any reason other than through normal and proper use, SUPPLIER agrees to replace or repair such property at SUPPLIER’s expense. Within [......], SUPPLIER will request Dot Hill to provide SUPPLIER with instructions for the disposition of all such Tooling, [......]. Such Tooling disposition instructions and potential impact on SUPPLIER’s warranty capabilities shall be mutually agreed upon.

4.7.3		In accordance with the provisions of Section 21.11, Dot Hill reserves the right to perform an audit at the SUPPLIER facilities to ensure compliance with this Section 4.7.

4.8		Change in Manufacturing Process. SUPPLIER shall notify Dot Hill immediately in writing of any proposed change in manufacturing process, raw materials, suppliers or other processes or circumstances which has the potential to impact the manufacturing process of the Products, testing of the Products or the Products themselves (“Changed Circumstance”). Dot Hill requires advance notice of and must approve any and all such Changed Circumstances. In Dot Hill’s discretion, Dot Hill may re-qualify the Products in light of the Changed Circumstance(s). If Dot Hill chooses to re-qualify the Products, SUPPLIER will, upon Dot Hill’s request: [......]*.

4.9		Left intentionally blank.



Manufacturing and Purchase Agreement	5	Dot Hill /SUPPLIER
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4.10		Country of Origin Certificate. Upon Dot Hill request, SUPPLIER will provide a Country of Origin Certificate for SUPPLIER-manufactured Products.

4.11		International Direct Ship Products. Unless otherwise agreed, for Direct Ship Products being shipped internationally, Dot Hill shall be (i) the exporter of record for any Products and/or Product documentation exported from the country of manufacture, and shall comply with all applicable country of manufacture export control statutes and regulations, and (ii) the importer of record for all Products exported from the country of manufacture and later imported and returned to Dot Hill or to SUPPLIER. The Parties shall cooperate with one another in obtaining any export or import licenses for the Products.

		Upon Dot Hill request, SUPPLIER will evaluate the Product to determine whether or not Product qualifies as originating goods within the North American Free Trade Agreement (NAFTA). SUPPLIER will provide a NAFTA Certificate of Origin for those goods that are found to be NAFTA eligible. Dot Hill will assist SUPPLIER by providing any information requested by SUPPLIER that is needed to evaluate the Product. Such information may include, but is not limited to: engineering support, technical information, Product literature, functionality of Product, end use of Product, manufacturer and country of manufacture for any components supplied or consigned by Dot Hill. [......]* Notwithstanding the above, SUPPLIER agrees to provide such service on a “best efforts” basis only, and provides no warranty or indemnity for any issues arising from incorrect Certificate of Origin designations.

		Dot Hill hereby certifies that it will not knowingly export, directly or indirectly, any U.S. origin technical data or software acquired from SUPPLIER or any direct product of that technical data or software, to any country for which the United States Government requires an export license or other approval, without obtaining such approval from the United States Government.

4.12		Environmental and Social Responsibilities.

4.12.1		SUPPLIER warrants that it is currently in compliance with and that it shall continue to comply with all applicable federal, state and local laws, rules, orders, and regulations relating to the protection of the environment and related matters. SUPPLIER acknowledges that any chemical, material or waste that may be used or generated in its processes, is solely its responsibility to properly handle, use, store, treat, and dispose of in accordance with the above mentioned applicable environmental laws and regulations. SUPPLIER shall notify Dot Hill immediately of any change or possible change in SUPPLIER’s compliance with this section.

4.12.2		SUPPLIER agrees to provide Dot Hill, promptly upon request, with any and all relevant information concerning its compliance with applicable environmental laws and regulations, including copies of required documentation. SUPPLIER also agrees, upon reasonable notice and during normal office hours, to permit Dot Hill to inspect its premises and audit its relevant records for the purpose of determining SUPPLIER’s compliance with all applicable environmental laws and regulations.

4.13		Labor Disputes. SUPPLIER shall immediately notify Dot Hill whenever any actual or potential labor dispute delays or threatens to delay the timely performance of this Agreement.

4.14		Social and Environmental Responsibility.

1.		Dot Hill, along with certain of its customers, is committed to ethical and responsible conduct in its business operations with respects to the rights of employees, the betterment of our worldwide community and the environment. At a minimum Dot Hill requires its suppliers of products, components and services to comply with the following standards and all applicable laws and standards relating to such matters. To that end, Supplier hereby agrees to comply with the following:

	1.1		United States Federal Acquisition Regulation (“FAR”) 52.219-8; FAR 52.222-26; FAR52.222-35; FAR 52.222-36; FAR 52.222-39; FAR 52.247-64; 52.244-6 and Executive Order 11246;

	1.2		all provisions of the Electronics Industry Code of Conduct (“EICC”);

	1.3		for those Suppliers that provide warehousing, hubbing or carrier services for Dot Hill products, components or material, the Suppliers must be TAPA certified and provide



Manufacturing and Purchase Agreement	6	Dot Hill /SUPPLIER
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			copies of TAPA certification to Dot Hill upon execution of this Agreement, with updates thereafter to show continuous certification during the Term of this Agreement;

	1.4		for those Suppliers that will ship product or components manufactured outside of the United States into the United States, the Suppliers must be C-TPAT certified and provide copies of C-TPAT certification to Dot Hill upon execution of this Agreement, with updates thereafter to show continuous certification during the Term of this Agreement; and

	1.5		all applicable laws and regulations governing the accessibility of information technology for people with disabilities.

		Supplier shall contact Dot Hill if it needs access to copies of the foregoing rules, regulations or codes.

3		Supplier hereby authorizes Dot Hill and its designated agents to verify compliance with the provisions of this clause and agrees to work with Dot Hill to ensure compliance. Such actions may include:

	a.		Dot Hill’s conducting on-site inspections and review of books and records upon reasonable prior written notice;

	b.		meetings or conference calls with Dot Hill as requested by Dot Hill to review Supplier’s compliance;

	c.		the provision of applicable certifications as requested by Dot Hill;

	d.		the issuance of reports with respect to Supplier’s compliance activities as requested by Dot Hill.

5		PRODUCT PRICING

5.1		Prices. Prices for the Products shall be mutually agreed upon by both parties in writing, signed by authorized signatories of each party.

5.2		Production Quote Model. SUPPLIER shall provide pricing quotation matrix per section 5.3 to Dot Hill on a [......]* basis for all Products, with stated cost reductions in accordance with Section 5.5 below. Additionally, SUPPLIER shall provide to Dot Hill costed Bills of Materials (BOMs) with each quotation. Dot Hill may, from time to time, request interim pricing quotations; such interim quotation shall be provided to Dot Hill within [......]* of Dot Hill’s request. Dot Hill’s issuance of a purchase order indicates Dot Hill’s acceptance of such quotation, subject to additional terms Dot Hill may state on such purchase order.

5.3		Pricing. SUPPLIER agrees to use and provide a Pricing matrix to include at least , material costs, labor costs, assembly costs, test costs, material burdens, inventory carrying costs, profit, SG&A, manufacturing overheads, warranty costs and any taxes in determining the prices SUPPLIER shall charge to Dot Hill for the Products.

5.4		Cost Reduction Requirements.

5.4.1		SUPPLIER understands that Dot Hill has established and negotiates on a regular basis, special volume price relationships with its component vendors. If, by virtue of these special relationships, Dot Hill has obtained a better price on certain components than has SUPPLIER, SUPPLIER agrees to purchase such components from said vendors at Dot Hill’s negotiated price.

5.4.2		The parties agree that the material, throughput and Transformation costs will be reviewed and adjusted on a [......]* basis, and product quotes (in the form set forth on Appendix 2) will be updated accordingly on a [......]* basis. SUPPLIER hereby agrees to work with Dot Hill to [......]* to reduce the material and Transformation cost of the Products by a targeted amount of [......]*.

5.5		SUPPLIER shall not incur any liability outside of forecasted demand for premium labor, material, packaging, or logistical fees without prior written approval from DH. Supplier shall submit any / all claims no later than [......]. All claims submitted shall be considered a final representation of [......]. There shall be no opportunity for [......]*.



Manufacturing and Purchase Agreement	7	Dot Hill /SUPPLIER
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6		FORECASTS, ORDERS, AND DELIVERY

6.1		Forecasts. On a [......]* basis, Dot Hill will provide a new forecast so as to maintain a minimum of [......]* rolling forecast of its projected orders for Products. This [......]* minimum shall be increased as needed to ensure forecasts are made through the current SUPPLIER quoted lead time of all components. Any quantities listed in any forecast or other forecasting correspondence between the parties are only estimates and do not constitute a commitment on Dot Hill’s part to purchase such quantity. Such forecasts are made as an accommodation for planning purposes and authorization for SUPPLIER’s purchase of long lead materials as identified in the costed BOMs which accompany SUPPLIER price quotation. Dot Hill’s liability for such long lead material is as stated in Section 6.9.

6.2		Burst Capacity. SUPPLIER shall plan and implement capacity and materials to accommodate approximately a [......]* increase over the then-current forecast for the given purchase period, for delivery within the standard lead times.

6.3		Purchase Orders and Releases. SUPPLIER shall build Products to finished goods pursuant to the quantities and due dates stated on purchase orders issued by Dot Hill. Dot Hill shall use commercially reasonable efforts, on a [......]* basis, to issue releases against the purchase orders to SUPPLIER for individual orders of Products to be shipped within [......]* from the receipt of the order or in such time as specified on such purchase order release. If Dot Hill fails to provide releases by a mutually agreed time per assembly site, SUPPLIER shall contact Dot Hill to confirm that no releases are to be issued that day. Dot Hill may transmit purchase orders and releases in writing, by facsimile or other means of electronic transfer agreed to by the parties.

6.4		Payment Terms.

All payments will be made in US Dollars and will be due [...***...] after Dot Hill receives the invoice from Supplier. Supplier also agrees to grant Dot Hill a [...***...] grace period on invoices due. Supplier agrees not to place any Dot Hill orders on shipment hold for any invoices less than [...***...] past due. Supplier agrees to grant Dot Hill a [...***...] through [...***...] and a [...***...] starting on [...***...], reviewed [...***...] payment terms with a [...***...] grace period as business volumes increase. Supplier agrees not to reduce the [...***...] as long as Dot Hill does not file for bankruptcy or is insolvent.

Dot Hill reserves the right to review SUPPLIER’s purchase orders, invoices or other backup documentation to support SUPPLIER’s claim for the value of any invoice.

6.4.1

Returns

SUPPLIER will pay for transportation for SUPPLIER fault Product returns and credit DOT HILL for the Product. For returns that are not the fault of the SUPPLIER (customer damage, no fault found), Dot Hill will pay for transportation to be reconciled by SUPPLIER and invoiced quarterly.

6.5		Acceptance of Purchase Orders. All of purchase orders that are within forecast quantity, and stated lead times shall be accepted by SUPPLIER. SUPPLIER will use best efforts to accept any purchase orders within the burst capacity. For purchase orders that are outside of burst capacity or lead times, SUPPLIER shall provide written acknowledgement to Dot Hill of acceptance or rejection of such purchase order. In the event such purchase order is rejected, SUPPLIER shall provide the reasons for such rejection on the acknowledgement. Within [......]* business days of receipt of each PO, SUPPLIER shall provide written acknowledgement to Dot Hill of acceptance of such release.

6.6		Delivery. SUPPLIER shall deliver Products in accordance with the dates stated on the purchase order.. If Dot Hill requires delivery sooner than the date specified on the purchase order release, or if Dot Hill requires quantities in excess of the burst capacity or purchase order, SUPPLIER will use best efforts to comply with such requests. Any deviation from the stated delivery date must be coordinated in advance.

6.7		Delayed Delivery.

6.7.1

SUPPLIER shall use reasonable commercial efforts to immediately notify Dot Hill if delivery of any Products will be delayed and notify Dot Hill within [...***...] of the rescheduled delivery date. In the event of such delay, Dot Hill may, at any time prior to the rescheduled delivery date, cancel without penalty (for example but not limited to restocking fees, order



Manufacturing and Purchase Agreement	8	Dot Hill /SUPPLIER
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			cancellation fees) that portion of its purchase order covering such delayed Products. The notification may be communicated by facsimile, telephone, electronic mail, or any other method agreed to by the parties, provided that SUPPLIER shall use commercially reasonable efforts to obtain Dot Hill’s actual acknowledgement of the notice of anticipated delay. SUPPLIER and Dot Hill will jointly develop alternatives to resolve any late delivery of the Product, including but not limited to the use of premium routing. If SUPPLIER is unable to deliver the Product on the acknowledged delivery date, through no fault of Dot Hill, Dot Hill may require SUPPLIER to pay the difference between premium routing rates and standard routing rates.

	6.7.2		SUPPLIER further agrees that time and rate of delivery are of the essence of this Agreement. The “Delivery Dates” shall be those specified as the “need by” date or the “scheduled ship date” stated on each purchase order or Purchase Order Release issued under this Agreement. For Products shipped directly to customers, deliveries will be considered on time if they are released to the common carrier from [......]* before up to the Delivery Date stated on the purchase order or Purchase Order Release. For Products shipped to Dot Hill, deliveries will be considered on time if they are delivered to Dot Hill from [......]* before up to the Delivery Date stated on the purchase order or Purchase Order Release.

6.8

Order Rescheduling.

	6.8.1		Dot Hill may reschedule purchase orders, blanket purchase orders, and/or Purchase Order Releases. Rescheduling terms are subject to mutual agreement which shall not be unreasonably withheld by SUPPLIER.

	6.8.2		Dot Hill shall not pay any [......]*

6.9		Order Cancellation. Dot Hill may cancel any Product purchase order at any time subject to the terms set forth herein. Dot Hill is liable for [......]. Dot Hill is likewise liable for [......]. The extent of liability for open purchase orders or for other components previously authorized by Dot Hill through a forecast or other written directive for purchase by SUPPLIER is limited by the expectation that SUPPLIER shall follow Mitigation Efforts listed in Section 8.5

6.10		Packaging. SUPPLIER shall package and label each Product in accordance with Dot Hill’s Specifications. In the event such Specifications are not provided, SUPPLIER shall package each Product in accordance with SUPPLIER’s standard commercial practices for domestic or international shipment. SUPPLIER shall include with each shipment a list of contents, including serial numbers, to allow review of contents upon receipt. Product, Repairs and Spare parts must be labeled per the product requirement specification.

6.11		Shipment, Title and Risk of Loss. Product shall be shipped [......]*.

6.12		Designated Contract Manufacturers.

6.12.1		SUPPLIER agrees to allow Dot Hill’s designated Contract Manufacturers (“Designated CMs”) to assume the applicable rights and obligations of Dot Hill under this Agreement. A Designated CM shall mean a third party which is authorized by Dot Hill to purchase or license Products under this Agreement. Dot Hill will give SUPPLIER written notification of such authorization. Dot Hill may withdraw its authorization for a Designated CM by providing [......]* prior written notice to SUPPLIER, and upon expiration of such notice period, the applicable entity shall no longer be a “Designated CM.” Supplier may require that any Designated CM agree, in writing, to abide by the terms and conditions of this Agreement. Depending on the Designated CM’s financial status, Supplier may also require Designated CM to abide by certain restrictions on credit.

6.12.2		As provided above, a Designated CM may issue to SUPPLIER Orders of its own and Dot Hill shall not be responsible for payment or any other obligation with respect to such Orders. For purposes of volume pricing or other terms or conditions dependent on volume, all purchases and/or licenses of Products by Dot Hill and Designated CMs shall be aggregated for the benefit of Dot Hill. Dot Hill agrees to use commercially reasonable methods (i.e. phone calls, emails) to assist the SUPPLIER to recover any Designated CM payment obligations,



Manufacturing and Purchase Agreement	9	Dot Hill /SUPPLIER
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6.12.3		Dot Hill shall have the right to enforce a Designated CM’s rights under this Agreement or such other agreement entered into by Supplier and the Designated CM related to the subject matter hereunder.

7		WARRANTY AND DISCLAIMER.

7.1		Performance Warranties. SUPPLIER represents and warrants to Dot Hill that (a) it has the power to enter into and perform its obligations under this Agreement; (b) it has and will have full and sufficient right to assign or grant any rights and/or licenses granted pursuant to this Agreement; (c) its performance of this Agreement shall not infringe upon or violate the intellectual property rights of any third party; and (c) its performance of this Agreement and the Products will not violate any applicable laws, rules or regulations.

7.2		Product Warranty

7.2.1

For a period of [...***...], SUPPLIER warrants the Products will:

	7.2.1.1		Be free from defects in material to the limited extent such material is manufactured by SUPPLIER and otherwise caused by the SUPPLIER.

	7.2.1.2		Be free from defects in workmanship;

	7.2.1.3		Be manufactured in accordance with all requirements set forth herein;

	7.2.1.4		Conform to the Product Specifications, and;

	7.2.1.5		Successfully complete any mutually agreed upon Product Acceptance Tests.

	7.2.2		SUPPLIER shall use reasonable commercial efforts to assist Dot Hill to ensure the pass-thru nature of any warranties granted by AVL suppliers.

	7.2.3		For the sake of clarity, SUPPLIER does not warrant defects in Dot Hill design of any nature.

	7.2.4		SUPPLIER will, and without charge to Dot Hill, promptly (within [......]* of SUPPLIER’s receipt) repair, or replace as mutually agreed, any Product which does not conform to the warranties set forth herein and which is returned to SUPPLIER for warranty repair or replacement, provided the Product has not been subjected to misuse, subjected to accident, improperly altered, improperly repaired or improperly maintained by Dot Hill or third parties in a manner which SUPPLIER reasonably determines to have caused the non-conformance. SUPPLIER agrees that if a field replaceable unit (“FRU”) under warranty is returned by Dot Hill to SUPPLIER [......]* times for the same failure, or [......]* times for any non-cosmetic failure, SUPPLIER shall replace such FRU and SUPPLIER shall subsequently destroy such FRU. Details of SUPPLIER’s policies regarding the repair or replacement of warranty returns will be reviewed and negotiated in good faith by the parties hereto. SUPPLIER shall provide Dot Hill a quarterly report by serial number of the FRUs that have been returned to SUPPLIER [......]* times for the same failure and [......]* times for any non-cosmetic failure. Product may consist in part of used FRUs which are warranted as equivalent to new when used in the Product. Further, field-failed FRUs returned to SUPPLIER may not be incorporated into subsequently manufactured unit-level assemblies. Dot Hill will identify the FRUs as being FRUs that have failed in the field, and send same to SUPPLIER. Unless otherwise instructed by Dot Hill, SUPPLIER will repair and recertify such FRUs and return same to Dot Hill identified as recertified field-failed FRUs.

	7.2.5		In the instance of a breach of a Product Warranty by SUPPLIER and SUPPLIER cannot perform per paragraph 7.2.4, Dot Hill shall have, in addition to and without limitation of any other right or remedy available to Dot Hill as set forth in this Agreement, at law or in equity, the right, in Dot Hill’s discretion and at SUPPLIER’s expense, to take any and all actions reasonably necessary to mitigate Dot Hill’s damages and or any damages to Dot Hill’s customers arising from such breach, including, but not limited to [......]*.

	7.2.5		THE WARRANTIES AS SET FORTH HEREIN ARE THE ONLY WARRANTIES GIVEN BY SUPPLIER. SUPPLIER MAKES, AND DOT HILL RECEIVES, NO OTHER WARRANTY EITHER EXPRESSED OR IMPLIED. ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE ARE EXPRESSLY DISCLAIMED AND EXCLUDED HEREFROM.



Manufacturing and Purchase Agreement	10	Dot Hill /SUPPLIER
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7.3

Epidemic Failure Warranty.

	7.3.1		In addition to the warranties specified above, SUPPLIER warrants all Products against Epidemic Failure (as defined below) found to exist in the Products during the warranty period. (Epidemic Failure Period).

	7.3.2		An Epidemic Failure shall mean a Product’s failure to conform to the warranties herein during the Epidemic Failure Period that has: (i) a defect rate of [......]*

	7.3.3		In the event of a suspected Epidemic Failure, Dot Hill shall promptly notify Supplier, and shall provide, if known and as may then exist: a description of the defect, and the suspected lot numbers, serial numbers or other identifiers, and delivery dates of the defective Products. Dot Hill shall also deliver or make available to Supplier, at Supplier’s request, any available samples of the defective Products for testing and analysis.

	7.3.4		Within [......]* business days of receipt of notice from Dot Hill of a suspected Epidemic Failure, Supplier shall provide its preliminary findings regarding the potential cause of the failures and, thereafter, promptly provide the results of its on-going root cause corrective analysis. Within [......]* business days of receipt of notice from Dot Hill, Supplier shall provide its proposed plan for the identification of and the repair and/or replacement of the affected Products, and other reasonable and appropriate information

	7.3.5		In the event of an Epidemic Failure, Dot Hill has the option of having SUPPLIER, at SUPPLIER’s expense: (i) sort, screen, repair and/or replace Dot Hill’s Product, including installed Products, Products pending installation, and Spares which are subject to such Epidemic Failure; and (ii) implement a Corrective Action Program, as defined, below. The parties will mutually agree on the time required to complete servicing/correcting such Products.

	7.3.6		If Dot Hill chooses to implement a Corrective Action Program, the parties shall cooperate and work together to expeditiously devise and implement a mutually acceptable corrective action program which minimizes disruption to the end users and Dot Hill’s direct and indirect distribution channels (the “Corrective Action Program”). The Corrective Action Program shall identify all costs related to the Epidemic Failure including, without limitation: material costs, labor costs (and associated housing and travel costs), freight costs, equipment costs and screen costs. The parties agree to negotiate in good faith any revisions to the Corrective Action Plan to address additional reasonable costs. Supplier shall be responsible for all reasonable costs incurred by either party, or any third party, in carrying out the Corrective Action Plan

8		INVENTORY RISK MANAGEMENT

8.1		Lead Time. SUPPLIER shall work with all vendors to reduce material lead-times and report to Dot Hill on a [......]* basis all parts that exceed [......]*.

8.2		Vendor Managed Inventory Program. Dot Hill 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. SUPPLIER agrees to comply with such requests unless SUPPLIER has good faith, commercially-reasonable grounds to deny the request. Use of an SMI process, whether with Hubs or otherwise, may require additional or different terms and conditions (including product cost and inventory requirements) and is subject to SUPPLIER’s approval, not to be unreasonably withheld, conditioned or delayed.

8.3		Non-cancelable Non-returnable (NCNR) Rules for Components. Non-cancelable non-returnable (NCNR) is hereby defined as any component that is unique to Dot Hill’s Products and/or cannot be returned to the supplier or utilized by SUPPLIER on other customer programs. SUPPLIER agrees to notify Dot Hill in writing of any components that are considered to be NCNR and for which SUPPLIER intends to hold Dot Hill liable for payment to SUPPLIER

8.4		Inventory Risk Limitation for Excess and Obsolete Inventory

8.4.1

The extent of liability for open purchase orders and for other materials previously authorized by Dot Hill through a forecast or other written directive for purchase by SUPPLIER is limited by the



Manufacturing and Purchase Agreement	11	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

			expectation that SUPPLIER shall procure material with supplier standard lead-times ,manufacturing conversion times and the flexibility requirements of this document. Material lead-times and conversion intervals shall be presented quarterly to Dot Hill and the SUPPLIER agrees to work with Dot Hill and the supply base to generate actions to reduce the intervals.

	8.4.2		Obsolete material shall be presented to Dot Hill [......]. Obsolete material shall additionally be documented with the SUPPLIER’s Mitigation Efforts in section 8.5 for all material line items valued over [......] before a PO is released to purchase the material. Dot Hill shall issue a PO purchasing all Obsolete material showing effective mitigation [......]* business days after receipt of documentation listed in Section 8.5.6. [......]*

	8.4.3		Excess material shall be presented to Dot Hill [......]. Dot Hill and SUPPLIER agree to generate and track material reduction plans for all excess material line items valued greater than [......].

8.5

Mitigation Efforts In the event of a cancellation of a purchase order, stop production notice, engineering change notice, AVL change, End-of-Life notice, forecast reduction or any other action that will generate an obsolete material charge, the SUPPLIER shall take the actions specified in sections 8.5.1 through 8.5.x

	8.5.1		Supplier shall use best commercial efforts to immediately cancel or reduce outstanding purchase orders for the affected materials. Supplier shall notify Dot Hill of Cancellation or other fees and Dot Hill will direct Supplier as to whether it wishes to pay the expense and have Supplier continue with that particular form of mitigation.

	8.5.2		Supplier shall use best commercial efforts to return components to the supplier at the same price purchased. Supplier shall notify Dot Hill of Return or Restocking fees and Dot Hill will direct Supplier as to whether it wishes to pay the expense and have Supplier continue with that particular form of mitigation.

	8.5.3		Supplier shall use commercially reasonable efforts to sell or transfer the components to a third party. Supplier shall notify Dot Hill of differences in price or any transformation costs necessary to make the parts sellable and Dot Hill will direct Supplier as to whether it wishes to pay the expense and have Supplier continue with that particular form of mitigation. If sales price exceeds SUPPLIER’s component purchase price, the excess shall be first applied to offset any obligation of Dot Hill for all parts under Mitigation Efforts and any excess shall be retained by Supplier.

	8.5.4		Rework supplier inventory at Dot Hill’s request, at a mutually agreed upon price and schedule.

	8.5.5		Perform a physical inventory of the remaining inventory within [......]* after completion of sections 8.5.1 through 8.5.4

	8.5.6		Provide Dot Hill documentation reasonably satisfactory to Dot Hill indicating the quantities and part numbers of the inventory the SUPPLIER has not resold, reused, redirected to other use, or is not able to resell or otherwise use. Such documentation shall include mitigation activities undertaken by Supplier.

9		RISK MANAGEMENT

9.1		Disaster Recovery. Within [......]* days after the Effective Date of this Agreement, SUPPLIER agrees to provide Dot Hill a formal disaster recovery plan in writing. Such plan shall delineate SUPPLIER’s ability to continue process development, Product manufacture and shipment, and to preserve contracted commitments in the event of a disaster (e.g., fire, flood, loss of database or engineering documentation, etc.). The plan shall be designed to encompass all aspects of SUPPLIER’s commitments and shall be periodically reviewed upon change and delivered on an annual basis.

The disaster recovery plan shall address, at a minimum:

	a)		alternate facilities to accommodate parts procurement, assembly, test, storage and warehousing activities

	b)		alternate transportation methods to Dot Hill’s specified customers

	c)		SUPPLIER’s database protection plan to include off-site storage

	d)		replacement of tooling needed for the Products

	e)		actions which would be taken in the event of a strike by SUPPLIER employees, outside suppliers, and outside groups vital to the operation of SUPPLIER’s business

	f)		estimated recovery time in the event that a disaster occurred affecting the area listed above and any other potential disaster



Manufacturing and Purchase Agreement	12	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

	g)		SUPPLIER’s work-in-process (WIP) and raw stock position

	h)		plan for single and sole source components

	i)		archiving all design and manufacturing documentation in a secured facility not located at or near SUPPLIER’s facility.

9.2		SUPPLIER Disaster Recovery Plan. SUPPLIER shall use commercially reasonable efforts to ensure that each of its strategic sole source suppliers supplying components for the Products has a disaster recovery strategy in place similar to the requirements stated in this section.

10		PROGRAM MANAGEMENT

10.1		Quarterly Reviews. SUPPLIER and Dot Hill shall participate in reviews, at a minimum on a quarterly basis, to discuss all aspects of their relationship. Topics shall include but not be limited to Delivery Performance, Quality Performance, Cost reduction target attainment, and Business relationship issues. The companies shall jointly develop and track opportunities to improve performance in all areas.

10.2		New Product Introduction Program Coordination. SUPPLIER agrees to assume the program management for new product introduction (NPI) for Dot Hill Products at SUPPLIER. SUPPLIER’s NPI Program Manager shall manage all aspects of NPI, including without limitation (i) quality planning expectations as further defined in the SUPPLIER Contract Quality Requirements, Appendix 4 attached hereto, including without limitation, subcontract supplier selection and qualification; receiving inspection; in-process inspection points and criteria; closed loop corrective action (“CLCA”); (ii) prototype, alpha and pre-production build support expectations; qualification builds, reports and results; (iii) DFx analysis support (Manufacturability); and (iv) a Process Failure Mode Effects Analysis. SUPPLIER shall develop a project plan including a process verification test plan for each NPI encompassing all such aspects of NPI as set forth above (“New Product Project Plan”), including without limitation, defining the point at which SUPPLIER shall warrant to Dot Hill the Manufacturability of any such new Product.

10.3		Local Space for Dot Hill Employees

		SUPPLIER shall provide appropriate facilities for Dot Hill associates as needed to support the production and launch of Dot Hill products, including but not limited to adequate and ergonomically acceptable work space, equipment, lighting, access to phone and other facilities as necessary. Such facilities will be provided at a mutually agreeable cost. Dot Hill agrees to abide by all local policies in place at such facilities.

11		CONFIDENTIAL INFORMATION AND NON-DISCLOSURE

11.1		Confidential Information.

	11.1.1		Each party acknowledges that it may have access to certain Confidential Information of the other party. As used herein, “Confidential Information” means any and all technical or business or financial information, including third party information, furnished or disclosed, in whatever form or medium (regardless of whether tangible, intangible, visual or oral), by one party to the other, including but not limited to information regarding patents and patent applications, trade secrets, works of authorship, software programs, software source documents, software architecture, algorithms, formulae, ideas, techniques, know-how, processes, inventions, apparatuses, equipment, models, information related to current, future and proposed products and services, research, experimental work, development, design details, specifications and engineering information, procurement, purchasing and manufacturing requirements, costs, pricing, potential and actual customer lists, investors, employees, business and contractual relationships, business forecasts, sales and merchandising information, marketing plans; information regarding third parties; and any physical manifestations of Confidential Information (such as notes, reports, memoranda, etc.). Confidential Information includes without limitation all information that is clearly identified at the time of disclosure as confidential or that, under the circumstances of its disclosure, ought in good faith be treated as confidential.

	11.1.2		The Recipient shall hold such Confidential Information in the strictest confidence, and release such information only to those employees requiring such information during the course of business between the Parties. Each employee is subject to the Recipient’s confidentiality policy to protect disclosed Confidential Information. Disclosure of such information to persons other than Recipient’s employees requires the Disclosing Party’s prior written consent. All such Confidential Information disclosed to Recipient shall be and remain the property of the Disclosing



Manufacturing and Purchase Agreement	13	Dot Hill /SUPPLIER

			Party. Upon the Disclosing Party’s request, Recipient agrees to return all such Confidential Information and any copies thereof and/or data which contains the Confidential Information.

	11.1.3		SUPPLIER acknowledges that Dot Hill’s and Dot Hill’s customers’ customer lists and ship to addresses are the Confidential Information of Dot Hill, and agrees to take all reasonable precautions to protect the confidentiality of such.

11.2		Exceptions. Information will not be deemed Confidential Information hereunder if the receiving party can demonstrate that such information: (a) is already known to the receiving party prior to disclosure from lawful sources; (b) is independently developed by the receiving party without the use of the disclosing party’s Confidential Information; (c) is or becomes publicly available through no fault of the receiving party; or (d) is lawfully disclosed to the receiving party by a third party without restriction on disclosure and without breach of a nondisclosure obligation. A party may disclose Confidential Information pursuant to the requirements of a governmental agency or by operation of law, provided that such party gives the other party reasonable prior written notice sufficient to allow the other party time to contest such disclosure.

11.3		Non-Disclosure Obligation. Each party agrees that until one of the exceptions set forth in Section 11.2 apply, it (a) will not use, directly or indirectly, or reproduce the Confidential Information of the other party for any purpose except in accordance with the terms of the Agreement; (b) will not disclose the Confidential Information of the other party to any third parties except as expressly permitted in this Agreement; and (c) will use reasonable care, but in all events at least the same degree of care that it uses to protect its own information of similar importance, to protect and maintain the confidentiality of all Confidential Information of the other party in its possession or control. Each party agrees not to disclose Confidential Information to its employees or agents unless (1) such employees or agents have a “need to know” such Confidential Information and (2) have agreed in writing to be bound by non-disclosure obligations at least as restrictive as those set forth herein. Each party further agrees to take commercially reasonably steps to ensure that the other party’s Confidential Information is not disclosed or distributed by its employees or agents in violation of this Section 11.

11.4		Effect of Termination. Upon the termination or expiration of this Agreement, or upon any request of a party, all Confidential Information, together with any copies of same as may be authorized herein, will (at the election of the disclosing party) either be returned to the disclosing party or certified destroyed by the receiving party. Notwithstanding the termination or expiration of this Agreement, each party agrees the requirements regarding use, confidentiality and non-disclosure set forth herein will survive the termination or expiration of this Agreement.

11.5		Injunctive Relief. In the event of any breach of this Section 11, the parties agree that the non-breaching party may suffer irreparable harm for which monetary damages would be an inadequate remedy. Accordingly, the parties hereby agree that the non-breaching party shall be entitled to seek injunctive relief, in addition to any other available remedies at law or in equity.

12		INDEMNIFICATION AND INSURANCE

12.1		By Supplier. Subject to any applicable limitations set forth herein, SUPPLIER agrees, at its expense, to defend, indemnify and hold harmless Dot Hill and its officers, directors ,employees, and each of their respective affiliates from and against all third party claims, suits and proceedings (i) arising in connection with product liability claims for the Products resulting from SUPPLIER’s manufacturing process, or due to SUPPLIER’s negligence or willful misconduct; (ii) relating to any breach of a representation or warranty by SUPPLIER hereunder; and/or (iii) based on any third party claim that SUPPLIER’s manufacturing process of the Products infringes any third party’s intellectual property right and will pay all final judgments awarded or settlements entered into on such claim, proceeding or suit; (iv) relating to liabilities based upon any violation of any environmental or other applicable laws or regulations, including, without limitation, RoHS and WEEE with respect to the manufacture of Products by SUPPLIER, but excluding any violation arising thereof based on any Dot Hill consigned parts, Dot Hill specified components, or materials provided by Dot Hill to SUPPLIER for use in Products.

12.2		By Either Party. Subject to any applicable limitations set forth herein, each party shall defend, indemnify and hold the other party, its officers, directors and employees from and against any and all claims, including personal injury and death, losses, expenses (including reasonable attorneys’



Manufacturing and Purchase Agreement	14	Dot Hill /SUPPLIER

		fees), demand, or judgments (“Claims”) which result from or arise out of the negligent acts, errors, or omissions of the indemnifying party or its Personnel.

12.3		Indemnification Procedures. The indemnifying party’s indemnification obligations are conditioned upon the indemnified party: (i) giving prompt notice of the claim or action to the indemnifying party; (ii) granting control of the defense or settlement of the claim or action to the indemnifying party (except that the indemnified party’s prior written approval will be required for any settlement that reasonably can be expected to require a material affirmative obligation of, result in any ongoing material liability to or materially prejudice or detrimentally impact the indemnified party in any way); and (iii) providing reasonable cooperation and, at the indemnifying party’s request and expense (except for the value of the time of the indemnified party’s employees), assistance to the indemnifying party in the defense or settlement of the claim or action.

12.4		Insurance. SUPPLIER agrees to maintain appropriate worker’s compensation insurance for its employees as well as commercial general liability insurance. SUPPLIER agrees to maintain insurance in the following minimum amounts: [......]* General Liability, Property and Business Interruption insurance which shall be satisfied via an umbrella policy evidencing the coverage above; Upon Dot Hill’s written request pursuant to the execution of this Agreement, SUPPLIER will provide Dot Hill with proof of such coverage in the form of a Certificate of Insurance. SUPPLIER further agrees to notify Dot Hill in advance of any changes in such insurance coverage.

13		LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMIATION CONSEQUENTIAL DAMAGES FOR LOSS OF PROFITS, REVENUE, DATA, RECORDS, OR USE, INCURRED BY EITHER PARTY OR ANY THIRD PARTY, WHETHER ARISING UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABLITY OR OTHERWISE, EVEN IF THE OTHER PARTY OR ANY OTHER PERSON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. CLAIMS (I) FOR DAMAGES FOR BODILY INJURY OR DEATH OR DAMAGE TO PERSONAL PROPERTY; (II) TO THE LIMITED EXTENT INDEMNIFICATION DAMAGES ARE CONSIDERED CONSEQUENTIAL DAMAGES; OR (IV) FOR BREACH OF CONFIDENTIALITY ARE EXCLUDED FROM THE FOREGOING LIMITATION. THE PARTIES AGREE THAT NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY DAMAGES (INCLUDING DIRECT AND INDIRECT) EXCEEDING [...***...]. THE PARTIES AGREE THAT, BUT FOR SUCH LIABILITY LIMITATION, SUPPLIER WOULD NOT HAVE ENTERED INTO THIS AGREEMENT.

14		TERM AND TERMINATION

14.1		Term. The term of this Agreement shall be for Three (3) years from the Effective Date, and unless terminated pursuant to the termination provisions of this Agreement, will automatically renew for one (1) year terms.

14.2		Termination for Material Breach. In addition to any other rights or remedies that may be available at law or in equity, a party may terminate this Agreement if the other party is in material breach of this Agreement and has not cured the breach within thirty (30) days of written notice specifying the breach. If the breach is not cured within the thirty (30) day period, termination will become effective on the thirtieth (30^th) day following the written notice. Consent to extend the cure period for breaches other than nonpayment of fees shall not be unreasonably withheld, so long as the breaching party has commenced cure during the thirty (30) day notice period and pursues cure of the breach in good faith.

14.3		Termination for Insolvency. Either party may immediately terminate this Agreement by written notice to the other upon the occurrence of any of the following events: (i) either party becomes insolvent; (ii) a receiver is appointed for either party or its property; (iii) either party makes, or attempts to make, an assignment for the benefit of its creditors; (iv) any proceedings are commenced by or for either party under any bankruptcy, insolvency, or debtor’s relief law and such proceedings are not set aside within thirty days following their filing; and/or (v) either party liquidates or dissolves or makes a good faith attempt to liquidate or dissolve voluntarily or otherwise. If Supplier becomes insolvent as per this section, Dot Hill may, in Dot Hill’s discretion, continue to exercise its license rights granted hereunder, may exercise its Default License Rights, and may reserve all rights in the Technology and related materials to protect Dot Hill’s interests therein pursuant to Section 365(n) (and any amendment thereto)



Manufacturing and Purchase Agreement	15	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

		of the U.S. Bankruptcy Code, or equivalent legislation in other applicable jurisdictions. The parties acknowledge that the Product and Dot Hill IP is “intellectual property” for purposes of Section 365(n) of the U.S. Bankruptcy Code and that Dot Hill will have the right to exercise all rights provided by Section 365(n) with respect to the Technology.

14.4		Termination for Convenience. Either party may terminate this Agreement at any time by providing the other party with no less than Confidential Treatment Requested prior written notice

14.5		Inventory Indemnification. Upon expiration or termination of this Agreement for any reason other than SUPPLIER’s uncured breach or insolvency under Section 14.3, Dot Hill will be responsible for all deliverable finished Products covered by purchase orders accepted by SUPPLIER prior to the effective date of such termination or expiration, with delivery to be completed pursuant to mutually agreed upon purchase order Delivery Dates. Dot Hill’s responsibility shall also extend to all components, subassemblies, and other material purchased by SUPPLIER under a Dot Hill purchase order or has been authorized to be purchased by Dot Hill and, with respect to all such items deemed NCNR and purchased to fulfill the then-current forecast. SUPPLIER will use commercially reasonable Mitigation Efforts (as defined in Section 8.5) to minimize Dot Hill’s liability under this section.

14.6		Effect of Termination. All provisions herein that by their nature are meant to survive termination or expiration of the Agreement shall so survive. In the event of termination or expiration of this Agreement, SUPPLIER agrees to provide Dot Hill with all of the data and records required in Appendix 4 (SUPPLIER Contract Quality Requirements). The parties agree that for a period of six (6) months following termination or expiration of this Agreement, the terms of this Agreement shall apply to any purchase orders issued by Dot Hill and subsequently accepted by SUPPLIER, provided SUPPLIER may retain the Tooling required for the testing and manufacturing of the Products.

14.7		Return of Materials. Upon the termination of this Agreement, each party shall promptly deliver to the other party any of the other party’s proprietary information in its possession, including, but not limited to, Confidential Information and/or developments, and all notes, records, engineering notebooks, Tooling, and other documents relating thereto. Each party shall continue thereafter to promptly return to the other party any of the above mentioned materials and all copies thereof that come into its possession.

14.8		Arbitration. To resolve a dispute or claim with respect to or stemming from this Agreement, the Parties agree to use the Commercial Arbitration Rules-Expedited Procedures of the American Arbitration Association. If the Parties mutually agree upon one arbitrator to hear the case, one arbitrator will be used. If the Parties cannot agree upon one arbitrator within ten (10) days, then each Party will chose one arbitrator and the third arbitrator shall be selected by the other two arbitrators. If a Party does not choose an arbitrator within ten (10) days, the other Party may make the selection of the second arbitrator. The period allowed for the arbitrator(s)’ discovery shall not exceed thirty (30) calendar days. Arbitration shall be limited to fifteen (15) days following discovery completion, and the judgment of the arbitrator(s) shall be final and binding upon the Parties. Any arbitration pursuant to this Agreement shall be held in Confidential Treatment Requested. Each party shall bear its own expenses and shall share equally the administrative expenses of the hearing, including, without limitation, arbitration fees and the expenses of a court reporter.

15		Intentionally Blank

16		MARKETING OR PUBLICITY. Neither party shall use the name, trademark, or service mark of the other party in any advertising, promotional material, or publicity releases without first obtaining the other party’s prior written consent. SUPPLIER acknowledges that Dot Hill may need to file this Agreement with the Securities and Exchange Commission (SEC), and that Dot Hill will seek confidential treatment of pricing terms and as otherwise allowed by the SEC.

17		EXPORT ADMINISTRATION. Each party agrees to comply with the U.S. Foreign Corrupt Practices Act and all relevant export laws and regulations of the United States and the country or territory in which the Products are provided (“Export Laws”) to assure that neither any deliverable, if any, nor any direct product thereof is (i) exported, directly or indirectly, in violation of Export Laws or (ii) intended to be used for any purposes prohibited by the Export Laws, including without limitation nuclear, chemical, or biological weapons proliferation.



Manufacturing and Purchase Agreement	16	Dot Hill /SUPPLIER

18		TECHNICAL SUPPORT

18.1		General. SUPPLIER understands that Dot Hill has an obligation to provide 24x7 technical support for its own products to its customers. SUPPLIER agrees to provide high-level technical support to Dot Hill with respect to the Products, to help trouble shoot issues that Dot Hill is not capable of handling without the help of SUPPLIER. SUPPLIER shall have qualified personnel available to respond to facsimile, e-mail and/or telephone requests from Dot Hill to resolve any issues encountered by Dot Hill with respect to the Products twenty four hours a day, seven days a week, everyday of the year (“24x7x365”), and will provide such support around the clock until the issue is resolved to Dot Hill’s reasonable satisfaction. If required to resolve an issue, SUPPLIER will provide field service support arising from SUPPLIER warranties to Dot Hill, at SUPPLIER’s expense. SUPPLIER shall provide Dot Hill with such technical support for not less than [......]* after the last delivery date of Product unit. This obligation shall survive termination or expiration of the Agreement.

18.2		RMA and Root Cause Analysis. Upon Dot Hill’s request and at mutually agreed upon pricing, SUPPLIER shall perform root cause and failure analysis on any defective Product unit and provide initial report findings within [......]* business days and a more detailed report within [......]* business days after receiving the defective Product unit from Dot Hill in the form of a return materials authorization (“RMA”). No Fault Found and Customer Induced Damage returns will be charged out to Dot Hill at agreed upon pricing. Defective units that fail due to SUPPLIER issues will be tested and replaced or repaired without charge. Thereafter, SUPPLIER shall continue to perform analysis until findings are made to the satisfaction of both parties. Root Cause Analysis reports shall contain that information, and be in a form, as Dot Hill reasonably requests. Requests for root cause failure analysis shall be identified using the RMA number given to Dot Hill by SUPPLIER.

18.3		Bug or Error Information. SUPPLIER shall permit Dot Hill, free of charge, to have access to SUPPLIER’s records and information that are relevant to root cause analysis or other aspects of the technical support of the Products. SUPPLIER shall provide any bug or error reports to Dot Hill on a monthly basis, provided that Dot Hill will treat such reports as SUPPLIER’s “Confidential Information” (as defined below). Access to the reports shall be limited to Dot Hill’s employees, agents, customers and subcontractors with a need to know. However, SUPPLIER grants to Dot Hill the right to use, copy and distribute such data for purposes of resolving customer support issues with respect to the Products.

18.4		Records. SUPPLIER shall keep and maintain accurate records for a period of at least [......]* after termination or expiration of this Agreement with respect to errors and error correction, setting forth in reasonable detail technical support calls received, response time and implementation of corrections. SUPPLIER shall provide such records to Dot Hill on a quarterly basis and, in addition, SUPPLIER shall make them available to Dot Hill upon Dot Hill’s request. Such records shall constitute Supplier’s “Confidential Information.”

19.		PRODUCT AVAILABILITY, DISCONTINUANCE OR DISRUPTION

19.1		End of Life Notice for Products. SUPPLIER may end of life the manufacture and sale of a particular Product to Dot Hill upon [......]* following the End of Life notification from Dot Hill. The “End of Life Notice Period” means the period starting on the date of such notice until the termination of the manufacture and sale of such Product. Dot Hill may purchase an unlimited number of Product during any End of Life Notice Period.

19.2		End-of-life Notice for Components of Product. SUPPLIER will forward to Dot Hill notice received from its suppliers as components of the Products reach end-of-life. SUPPLIER and Dot Hill will jointly be responsible for locating and qualifying a reasonable alternative to replace the end-of-life parts and/or components. If mutually agreed, SUPPLIER will execute an end-of-life buy of such end-of-life parts or components on Dot Hill’s behalf.

19.3		Allocation. SUPPLIER will notify Dot Hill promptly whenever SUPPLIER identifies a reasonable likelihood that there is or will be a materials or capacity constraint that could negatively affect SUPPLIER’s ability to meet Dot Hill’s existing or forecasted needs for Product(s) (“Supply Constraint”). During any period of Supply Constraint, SUPPLIER agrees, at a minimum, to allocate materials and capacity to Dot Hill on an equitable basis considering the volume of work performed by SUPPLIER for Dot Hill.

20.		INTELLECTUAL PROPERTY OWNERSHIP



Manufacturing and Purchase Agreement	17	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

20.1

Definitions

	20.1.1		“SUPPLIER Background IP” shall mean any Intellectual Property that SUPPLIER owns or has the right to license which pre-exists work performed by SUPPLIER under this Agreement.

	20.1.2		“SUPPLIER Foreground IP” shall mean any Intellectual Property which is developed, conceived or reduced to practice by the employees or contractors of SUPPLIER as a result of the performance of any development activities under the AGREEMENT or otherwise, but which was not funded by Dot Hill.

	20.1.3		“Dot Hill IP” shall mean any Intellectual Property which Dot Hill supplies to SUPPLIER, or that is developed, conceived or reduced to practice by the employees or contractors of SUPPLIER through the funding of Dot Hill.

	20.1.4		“Intellectual Property” or “IP” shall mean all rights worldwide in Patents, copyrights, trade secrets, Confidential Information or any other Intellectual Property rights, but excluding rights in trademarks, service marks, trade names, service names and Internet domain names and other similar designations.

	20.1.5		“Patents” shall mean patents, patent applications, design patents and registrations and utility models, along with any reissues, re-examinations, continuations, continuations-in-part, divisions and renewals thereof.

	20.1.6		“Jointly Owned IP” may include a New Idea (as defined below). Jointly Owned IP shall not include any underlying or accompanying Background IP or Foreground IP of either party. With respect to Jointly Owned IP, neither party will have a duty to account to the other party, or to pay any share of any revenue or compensation earned or received, with respect to its use or exploitation; provided however, if either party wishes to use Jointly Owned IP but cannot do so without the IP owned by the other party, then such party must obtain the appropriate rights from owning party to permit such use or exploitation of the Jointly Owned IP.

20.2		IP Owned By SUPPLIER. SUPPLIER and its licensors shall retain title to and all ownership rights and interests in and to the SUPPLIER Background IP and SUPPLIER Foreground IP.

20.3		IP Owned by Dot Hill. Dot Hill and its licensors shall retain title to and all ownership rights and interests in and to the Dot Hill IP.

20.4		New Ideas. If Dot Hill would like to share with SUPPLIER a New Idea for purposes of having SUPPLIER include the New Idea in the Product, Dot Hill shall inform SUPPLIER of such desire. If upon disclosing the New Idea to SUPPLIER, SUPPLIER had already conceived of the New Idea, SUPPLIER will indicate such pre-conception immediately, and will supply some form of proof of such pre-conception to Dot Hill within [......]* business days. In such event, any reduction to practice of the New Idea shall be Jointly Owned IP. If, upon disclosing the New Idea to SUPPLIER, SUPPLIER had not pre-conceived of the idea, such New Idea shall be Dot Hill IP. If SUPPLIER wishes to reduce the New Idea to practice by incorporating it into the Product, then the parties will mutually agree upon terms and conditions of such reduction to practice.

21.		GENERAL PROVISIONS.

21.1 Relationship of Parties. Dot Hill and SUPPLIER are independent contractors. Nothing in this Agreement shall be construed to create a partnership, joint venture, or agency relationship between the parties. Neither party is granted the right or authority to assume or create any obligation or responsibility, express or implied, on behalf of, or in the name of the other party, or to bind such other party in any manner to anything whatsoever. It is expressly agreed that under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. Each party shall be solely responsible for payment of all compensation and benefits payable to its employees, as well as all employment related taxes.

21.2 Notices. All notices required hereunder shall be in writing, and shall be deemed given when transmitted by facsimile (provided such facsimile is subsequently confirmed in writing within five (5) days of the facsimile date) or deposited with an express delivery services with guaranteed third day delivery, prepaid, addressed as follows:



Manufacturing and Purchase Agreement	18	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

To .
8801 Fallbrook Dr.
Houston, TX 77065
Attention David Parish Sales Manager


CC:		Foxconn Corporation, 8801 Fallbrook Dr. Houston, TX 77064 Attn: Corporate Counsel

To Dot Hill:
Dot Hill Corporation
2200 Faraday Avenue
Carlsbad, CA 92008
Attention: Hanif Jamal, CFO

21.3 Force Majeure. Neither party shall be liable for any failure or delay in its performance under this Agreement due to causes which are beyond its reasonable control, including, but not limited to, acts of God, acts of civil or military authority, fires, epidemics, floods, earthquakes, riots, wars, sabotage, and governmental actions; provided that (a) the delayed party: (i) gives the other party written notice of such cause promptly, and in any event within fifteen (15) days of discovery thereof, and (ii) uses commercially reasonable efforts to correct such failure or delay in its performance, and (b) the delayed party’s time for performance or cure under this Agreement shall be extended for a period equal to the duration of the cause or sixty (60) days, whichever is less. The party against whom this section is invoked shall have the right to terminate the affected installments under any purchase order.

21.4 Amendment. No provision of this Agreement will be deemed amended or modified by either party, unless such amendment or modification is made in writing and signed by authorized representatives of both parties.

21.5 Non — Assignment; No Third-Party Rights. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other party’s prior written consent which shall not be unreasonably withheld or delayed. In the event of such an assignment, the assignor must provide written notice of its intent to assign and the assignee must agree in writing to be bound by the terms and conditions of this Agreement. Any assignment in violation of the foregoing restrictions shall be null and void. This Agreement shall bind and inure to the benefit of the successors and permitted assigns of the parties hereto. This Agreement is for the sole and exclusive benefit of the parties hereto and not for the benefit of any third parties, and nothing in this Agreement shall be construed as giving any rights to any person not a party hereto.

21.6 Severability. If any provision of this Agreement is held to be invalid or unenforceable by a proper authority having jurisdiction over this Agreement, such provision shall be deemed null and void and the remaining provisions of this Agreement shall remain in full force and effect. The parties shall substitute for the affected provision an enforceable provision that approximates the intent and economic effect of the affected provision.

21.7 Further Assurances. The parties agree to execute, acknowledge and deliver such further instruments, and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

21.8 Attorney’s Fees. If any litigation arises between the parties in connection with this Agreement, the prevailing party will be entitled to recover reasonable attorneys’ fees, costs and expenses from the other party.

21.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of [...***...] excluding its choice of law provisions. The United Nations Convention on Contracts for the International Sale of Goods (CISG) is specifically excluded and shall not be applicable to any transaction contemplated herein.

21.10 Entire Agreement. This Agreement, together with any applicable appendices, constitutes the entire Agreement between Dot Hill and SUPPLIER relating to the subject matter of this Agreement. This



Manufacturing and Purchase Agreement	19	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

Agreement takes precedence over any pre-printed terms and conditions on invoices, purchase orders, acknowledgements, or other forms used by the parties in carrying out the terms and conditions of this Agreement.

21.11 Right to Audit. Dot Hill reserves the right to have access to such SUPPLIER records for Dot Hill [...***...] supporting Dot Hill product and any other applicable documentation of cost and expenses incurred by SUPPLIER in performance of this Agreement, for purpose of audit and verification. Such audits may be performed by Dot Hill or by an independent auditor selected by Dot Hill, and agreed by SUPPLIER, such consent not to be unreasonably withheld, during normal business hours and upon reasonable notice, for so long as such records are required to be retained. Supplier will pay for the cost of the audit if the audit finds recoverable costs in excess of [...***...]. SUPPLIER will retain such records for [...***...] or as required by law. Further, Dot Hill reserves the right to audit SUPPLIER and/or SUPPLIER’s facilities at any time upon reasonable notice, to ensure SUPPLIER’s compliance with this Agreement. Dot Hill shall ensure that any auditor performing audit duties, whether Dot Hill personnel or an independent auditor selected by Dot Hill, shall first have entered into SUPPLIER’s confidentiality agreement Audits of other SUPPLIER’s relevant financial records will require the use of a mutually agreed upon 3^rd party Big Four CPA accounting firm. The agreed upon firm will keep all information except for the final results confidential, and will limit such final results to any discrepancies discovered, or any improvement recommendations. The parties shall each receive a copy of the final report.

21.12 Counterparts. This Agreement may be signed in counterparts by Dot Hill and SUPPLIER, each of which when taken together will be considered an original, but all of which will constitute the same instrument.

21.13 Waiver. No waiver of any right or remedy on one occasion by either party shall be deemed a waiver of such right or remedy on any other occasion.

22 Electronic Commerce. SUPPLIER and Dot Hill shall use all reasonable and customary efforts to automate the exchange of necessary product, manufacturing and financial information using Industry Standard methods, protocols and definitions for each specific requirement. Dot Hill, at its sole discretion, may require implementation of new information exchanges or transactions as dictated by appropriate Dot Hill representatives based on mutual, written agreement, which shall not be unreasonably withheld.



Manufacturing and Purchase Agreement	20	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

Appendix 1

*EAU refers to Estimated Annual Usage. Dot Hill does not intend for the EAU to be a forecast or a binding commitment to order or purchase the estimated quantities. The EUA is provided solely for reference.


Dot Hill Part #		Description		Revision		EAU



Manufacturing and Purchase Agreement	21	Dot Hill /SUPPLIER

Appendix 2

Pricing

[...***...]



Manufacturing and Purchase Agreement	22	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

Appendix 3

SUPPLIER Contract Quality Requirements

1. QUALITY SYSTEM

	a.		SUPPLIER shall maintain a certified quality system meeting, at a minimum, the requirements of ISO9001:2000 and ISO 14001

	b.		SUPPLIER is subject to assessment to verify conformance to the requirements of this document. This could be accomplished by any or all of the following methods upon reasonable notice to SUPPLIER:

	i.		SUPPLIER may be requested to complete a Dot Hill self-assessment form with supporting evidence for the responses given

	ii.		Dot Hill Supplier Quality Engineers may conduct an on-site assessment of SUPPLIER’s quality system.

	iii.		Dot Hill may perform Source, Receiving, or In-process inspection of SUPPLIER supplied materials to determine conformance to requirements.

	iv.		Dot Hill may request documents and records to verify compliance to system requirements.

	v.		Dot Hill requires process change notification from the Supplier and their critical component manufacturers.

2. QUALITY REQUIREMENTS

	a.		System Test First Pass Yield [......]*. Specific goals for PWAs and systems will be based on specific end customer requirements/contracts as applicable and will be provided by Dot Hill.

	b.		OBA (Out-of-Box Audit) Average Outgoing Quality Level [......]*

	c.		ORT (Ongoing Reliability Test) = meets system level MTBF at [......]*

	d.		DOA (Dead On Arrival) [......]*

	e.		Critical CLCA TAT (Turn-around Time) = [......]*.

•

Critical CLCAs are associated with any OBA failure, ORT failure, or critical customer escalation

	f.		Problem resolution will follow the 8D format. Template will be agreed upon by Dot Hill and the Supplier

	g.		Quality Reporting requirements will be defined by Dot Hill Supplier Quality Engineering

	h.		The Products must have backward component traceability (lot code/date code) as well as parent to child serial number traceability from the finished product supplied by the supplier to Dot Hill A corrective action request (“CAR/SCAR”) issued to the supplier must be fully addressed and returned to Dot Hill by due date indicated in the CAR. Depending on the situation, if either party finds any difficulty in such target lead-time, The supplier and Dot Hill may discuss in good faith a mutually agreeable alternative schedule on a case-by-case basis

3. QUALITY AND DELIVERY PERFORMANCE

	a.		Dot Hill expects 100% defect free and on-time delivery.

	b.		Dot Hill will monitor SUPPLIER’s delivered quality performance. Defective Product delivered to Dot Hill will not only be considered a quality defect, but will also not be considered an on-time delivery. Upon notification by Dot Hill that Product is defective, SUPPLIER will provide replacement Product to Dot Hill

	c.		Dot Hill may perform Source Inspection at its discretion. SUPPLIER will be given notice that source inspection will be required. SUPPLIER is responsible to allow for the time of source inspection when scheduling Product for process and delivery.

	i.		SUPPLIER shall provide appropriate facilities for Source Inspection, including but not limited to adequate and ergonomically acceptable work space, equipment, lighting, access to phone and other facilities as necessary.

	ii.		Source inspection does not constitute acceptance, and does not preclude Dot Hill’s rejection of such Product subsequent to Source Inspection.

ASSEMBLY QUALITY

SUPPLIER shall complete a readiness review prior to production build for any new Products. The readiness review shall meet the requirements of a mutually agreed upon format, and shall be confirmed by Dot Hill Supplier Quality Engineering prior to the commencement of production build.



Manufacturing and Purchase Agreement	23	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

	b.		Dot Hill and SUPPLIER shall mutually agree on a plan for First Article Inspection (“First Article Inspection Plan”).

	c.		SUPPLIER shall perform First Article Inspection of all SUPPLIER-built Dot Hill assemblies in accordance with the First Article Inspection Plan, and shall submit reports of the results of such inspection to Dot Hill Supplier Quality Engineering for review. Such first article inspection report shall include without limitation verification that established processes and Products built to those processes meet specified requirements. Dot Hill Supplier Quality Engineering may choose to perform a duplicate first article inspection. Dot Hill Supplier Quality Engineering will approve the first article inspections prior to additional assembly in excess of the First Article Inspection Plan. SUPPLIER will investigate root cause and take corrective action for any first article rejections.

	d.		SUPPLIER shall submit a Quality Plan for each program built at SUPPLIER, per a mutually agreed upon format.

	e.		SUPPLIER shall provide a process map, which may be included in the Quality Plan, for all Dot Hill Product build, showing data collection points and Work Instructions which describe the work performed at each step. Copies of the documents used and data collected at each step shall be provided to Dot Hill as reference. An updated process map and associated documents shall be submitted upon any change.

Used electronic components (components which have been previously soldered to and removed from an assembly or subassembly) may not be reused even if such components are known to be functionally acceptable unless mutually agreed to in writing by the parties.

OUTGOING QUALITY CONTROLS

Out of Box Audit: SUPPLIER shall develop, implement and perform an Outgoing Inspection Audit of Product that will be based on a statistically valid continuous sampling plan. The sampling plan to be used will be agreed upon by Dot Hill and SUPPLIER. The outgoing inspection audit will be performed prior to delivery of Product to Dot Hill Source Inspection and/or shipment to Dot Hill or any Dot Hill customers. The outgoing inspection will verify at a minimum the presence of and conformance to all Specifications including:

	i.		all visual/cosmetic requirements

	ii.		workmanship

	iii.		configuration

	iv.		labeling requirements

	v.		accessory kit if applicable

	vi.		test completion/confirmation

6.		RELIABILITY TESTING.

		SUPPLIER shall perform, if applicable, HASS, burn, and Ongoing Reliability Testing Reliability Demonstration (ORT/Rel demo) reliability tests as specified by Dot Hill, in accordance with procedures described in SUPPLIER’s Quality Plan for each Product. HASS and burn tests may be performed as a normal part of the production process. ORT/Rel demo tests shall be performed by SUPPLIER on a sample of finished Product as a Product and process validation. Product is available for shipment upon successful completion of such testing.

7.		FAILURE ANALYSIS, ROOT CAUSE AND CLOSED LOOP CORRECTIVE ACTION

Level 1 Failures:

	i.		Level 1 Failures are failures during (a) the last [......]* of Burn Cycle; (b) Out of Box Audit Failures; (c) ORT and Reliability Demonstration Failures; (d) Customer Returns and Issues; or (e) a High Process Fallout/ Trend (defined as [......]* failures for the same fault in any [......]* period).

	ii.		Any process in which yield has decreased [......]* in a [......]* reporting period, or in which a yield decrease has been reported for [......]* in a row, shall be treated as a Level 1 Failure.

	iii.		SUPPLIER shall identify a process owner responsible for the analysis and closure of Level 1 Failures.

	iv.		SUPPLIER shall monitor process failures to identify Level 1 Failures. Upon identification of a Level 1 Failure, SUPPLIER shall immediately notify Dot Hill Supplier Quality Engineering in a special alert to Dot Hill.

	v.		SUPPLIER shall identify and implement a containment plan for Level 1 Failures within [......]* of identification, and shall convey that plan to Dot Hill Supplier Quality Engineering for review.



Manufacturing and Purchase Agreement	24	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

	vi.		Failure analysis to the component level shall occur within [......]* calendar days of the receipt of the failure (or identification of the failure if from within SUPPLIER).

	vii.		Failure Analysis to Root Cause shall be completed within [......]* business days of component identification.

	viii.		Status reports for Analysis of Level 1 Failures shall be weekly at a minimum and may be required daily until closure.

Level 2 Failures:

	i.		Level 2 Failures are failures at (a) SUPPLIER Final Test or Inspection; (b) Dot Hill Source or Receiving Inspection; (c) or in-process at Dot Hill.

	ii.		SUPPLIER shall identify and implement a containment plan for Level 2 Failures within [......]* of identification and return to SUPPLIER if failed at Dot Hill.

	iii.		Failure analysis to the component level shall be completed within [......]* calendar days of the receipt of the failure (or identification of the failure if from within SUPPLIER).

	iv.		Failure Analysis to Root Cause shall be completed within [......]* business days of component identification.

Level 3 Failures

	i.		Level 3 Failures are routine in-process failures that do not qualify as Level 1 or 2 Failures.

	ii.		Failure analysis to the component level shall be completed within [......]* calendar days

	iii.		Dot Hill reserves the right to require Failure Analysis by SUPPLIER to the Root Cause to be completed within [......]* calendar days of component identification.

	iv.		Replaced component parts shall be identified and retained by SUPPLIER for no less than [......]* calendar days after such replacement.

SUPPLIER shall immediately implement corrective action for all Level 1 and 2 Failure causes related to SUPPLIER processes.

	i.		Upon request of Dot Hill Supplier Quality Engineering, all affected items shall be identified.

	ii.		A containment plan shall be established, presented to Dot Hill Supplier Quality Engineering for approval, and implemented immediately.

	iii.		A long-term corrective action plan shall be developed and presented to Dot Hill Supplier Quality Engineering for approval. The corrective action status will be tracked and reported weekly until implementation is completed and effectiveness is verified.

QUALITY REPORTING AND DATA. Commencing on the Effective Date:

	a.		SUPPLIER shall provide weekly reports of process quality performance, including yield, defect pareto, root cause, and corrective actions. Process steps to be included in the reports are to be mutually agreed upon by Dot Hill and SUPPLIER. Level 2 and 3 Failures are included in these weekly reports.

	b.		SUPPLIER shall provide proof that delivered Product meets all requirements including the successful completion of all inspections and tests.

	c.		SUPPLIER shall report Failure Analysis queue levels on a weekly basis, including quantity in each troubleshoot location and aging of the items in each location.

COMMUNICATION

	a.		SUPPLIER will endeavor to provide acknowledgement by e-mail, phone, fax or other method of communication, of all requests for information or action, within [......]* of the request being made by Dot Hill. SUPPLIER personnel will use all commercially reasonable efforts to respond to Dot Hill’s requests within [......], with at a minimum, a plan for when the issue will be closed. Quality Issues should be closed with root cause and corrective action analysis within [......] days depending on the nature of the problem.

	b.		Dot Hill has the right to reject any items submitted by SUPPLIER for review, and to ask for changes or corrections.

10.

TRAINING

SUPPLIER shall establish a personnel training and certification program for all assembly, test and inspection processes for Dot Hill Product. SUPPLIER shall permit Dot Hill



Manufacturing and Purchase Agreement	25	Dot Hill /SUPPLIER
		***Confidential Treatment Requested

Supplier Quality Engineering to audit the effectiveness of SUPPLIER’s training programs, and if requested, SUPPLIER shall submit training plans to Dot Hill Supplier Quality Engineering for review and approval. SUPPLIER training records shall be made available for audit by Dot Hill upon request to verify that all personnel engaged in the manufacture, test or inspection of Dot Hill Product, have been certified capable of properly performing their work.



Manufacturing and Purchase Agreement	26	Dot Hill /SUPPLIER

EX-10.2 4 a50174exv10w2.htm EX-10.2 exv10w2

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 EIGHT
TO PRODUCT PURCHASE AGREEMENT NO. PRO02542-060507

This Amendment Eight to the Product Purchase Agreement No. PRO02542-060507 dated September 10, 2007, (the “Amendment Eight”) dated September 26, 2008, (the “Amendment Eight Effective Date”) is between DOT HILL SYSTEMS CORP. (“DOT HILL”), a Delaware corporation, with offices at 2200 Faraday Avenue, Suite 100, Carlsbad, CA 92008, 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 dated as of September 10, 2007 including all exhibits and amendments thereto, (collectively, the “Agreement”), whereby DOT HILL authorized HP 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 herein;

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

	1.		§4.6 Material Cost Reductions. Section 4.6 is hereby deleted in its entirety. In its place, the following shall be inserted.

			4.6 Material Cost Reductions.

			4.6.1. Price Decreases during [......]. Price reductions will first be passed to HP at the start of the [......]. For the period from [......], Supplier has provided an automatic, [......], which price decrease is already reflected in the pricing tables set forth at Exhibit E-7 (“Pricing Tables”). (The Pricing Tables also include [......].) For the period from [......], Supplier has automatically provided [......], which is already reflected in the Pricing Tables. These pricing decreases shall take effect on the aforementioned dates, and shall not be delayed based on [......] by Supplier. Such price reductions for [......]*.

			4.6.2. Price Decreases [......]. From [......], HP shall enjoy the benefit of [......]* irrespective of when during the [......]* period the cost



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				***Confidential Treatment Requested




		HP CONFIDENTIAL
		FOR DOT HILL ONLY

			reduction was implemented. The determination of which [......]* shall be made every [......]* and performed as follows: [......]. A price decrease based on the [......] shall be applied to the pricing for the following [......], but shall take effect [......] into the following [......]. The [......] period has been granted to allow Supplier time to properly calculate the cost reduction achieved. Such price reductions for [......]*.

			4.6.3. Example of Calculating [......]. For example, the first [......] calculation shall be made at the beginning of [......], shall compare the [......], and shall be applied to pricing for the period of [......]* if the calculation yields a price decrease [......]*.

			4.6.4. Dot Hill’s Retention of Cost Reduction Benefits and Efforts to Achieve Cost Reduction Benefits. Other than the two automatic rounds of price decreases described in Section 4.6.1 [......]. Effective [......], all achieved cost reduction benefits will be [......]* described in Sections 4.6.2 and 4.6.3. The parties will periodically engage in additional Joint Cost Reduction Efforts, from time to time, upon mutual agreement.

			4.6.5. Approval for Cost Reduction Actions. To the extent that any cost reduction action requires HP’s approval as per Exhibit F (Engineering Process Or Design Changes), such approval shall be secured by Supplier prior to implementation of the cost reduction action.

	2.		Exhibit (E) (Pricing) attached to the Agreement shall be amended by inclusion at the end of the current Exhibit (E) Exhibit (E-8) attached hereto.

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.



		Page 2 of 5		DOT HILL/ OEM-IN/AMENDMENT//11/04/08
				***Confidential Treatment Requested




		HP CONFIDENTIAL
		FOR DOT HILL ONLY

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/ Hanif Jamal	By:	/s/ Robin Hensley


Name:	Hanif Jamal	Name:	Robin Hensley


Title:	CFO	Title:	VP & General Manager,

			Entry Storage Division


Date:	September 30, 2008	Date:	September 30, 2008



		Page 3 of 5		DOT HILL/ OEM-IN/AMENDMENT//11/04/08




		HP CONFIDENTIAL
		FOR DOT HILL ONLY

EXHIBIT (E-8)

1.0 Product Pricing. Subject to the provisions of Section 4.6 of the Agreement, prices for certain Products are set forth in the pricing table attached to this Exhibit (the “Pricing Tables”). If a Product’s price is listed on the Pricing Tables, such pricing supersedes any previous pricing for that Product. However, if a Product is not listed on the Pricing Tables [...***...], this Exhibit does not supersede previous pricing, and the pricing shall be as last agreed to by the parties, in writing.

2.0

Agreements Regarding [...***...] Pricing [...***...] Supply Chain Issues.

	2.1		Lump Sum Payments to Supplier. Per the agreement between Supplier and HP effective January 4, 2008, among other things Supplier agreed to provide HP with a product price reduction effective July 1, 2008. Supplier agrees to adhere to the terms in the agreement and offer HP their price reduction. [......], at HP’s sole discretion. In order to partially compensate Supplier, HP will pay Supplier a maximum of $1.7 million for the third calendar quarter of 2008 and a maximum of $1.3 million for the fourth calendar quarter of 2008 to reimburse Supplier for the price reductions provided to HP, effective July 1, 2008. If the actual amount of the total price reduction, as calculated by the number of units shipped during the third calendar quarter multiplied by the price of the units shipped multiplied by the total price reduction percentage, [......]. If the actual amount of the total price reduction, as calculated by the number of units shipped during the fourth calendar quarter multiplied by the price of the units shipped multiplied by the total price reduction percentage[...***...].

	2.2		[......] Payments Made by HP. Prior to July 1, 2008, shipping charges were included in the Product pricing supplied to HP. There are instances where [......]. For [......]* incurred by HP prior to July 1, 2008, HP hereby [......]. Pricing supplied to HP and effective July 1, 2008 and beyond (including the Pricing Tables) [......] unless otherwise agreed to by the parties in writing. To the extent that HP paid (or in the future pays) [......]* made after July 1, 2008 or, conversely, HP was not charged [......]* made after July 1, 2008 [......]*.

	2.3		PPV and [......]. Prior to the Amendment Eight Effective Date, Supplier [......] and Supplier’s [......]. Supplier hereby [......] experienced prior to the Amendment Eight Effective Date.



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				***Confidential Treatment Requested




		HP CONFIDENTIAL
		FOR DOT HILL ONLY

	2.4		Future Supplier Requests Regarding [......]. The [......] payments described in Section 2.1, [......]* described in Section 2.2, and other provisions in this Amendment Eight have been agreed upon by HP [......]* with respect to past shipments of Products and future Products that are purchased and shipped using the pricing set forth on the Pricing Tables. Supplier will not request any further action from HP to [......]* for past shipments of Products or future shipments purchased using pricing set forth on the Pricing Tables through the end of calendar year 2010.

	2.5		Reconciliation of Pricing Effective July 1, 2008. The parties agree that the Pricing Tables set forth in this Exhibit E-8 shall apply [......]* to shipments of Products as of July 1, 2008. However, for a period of time during the third calendar quarter 2008, such pricing [......]. Promptly after the Effective Date of this Amendment Eight, the parties agree [......], whichever is appropriate.

3.0

Further Explanation of the Pricing Tables

	3.1		Supplier hereby states that the Pricing Tables for the period of Q4 2008 reflect an additional [......]*.

	3.2		Supplier hereby states that the Pricing Tables do not include any premium or additional amounts [......]. Therefore, the price of [......] is the same as the December 2007 Pricing, except that charges for [......]* have been removed.

	3.3		Supplier hereby states that the Pricing Tables already include and reflect the two, automatic, [......]* in pricing, discussed in Section 4.6 of the Agreement, one of which takes effect [......]* and one of which takes effect [......]. Such automatic decreases shall take effect on the days noted, above and shall not be delayed due to any [......] made by Supplier.



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EX-31.1 5 a50174exv31w1.htm EX-31.1 exv31w1

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: November 10, 2008



	/s/ DANA W. KAMMERSGARD
	Dana W. Kammersgard
	Chief Executive Officer and President

EX-31.2 6 a50174exv31w2.htm EX-31.2 exv31w2

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.;

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: November 10, 2008



	/s/ HANIF I. JAMAL
	Hanif I. Jamal
	Chief Financial Officer and Treasurer

EX-32.1 7 a50174exv32w1.htm EX-32.1 exv32w1

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 September 30, 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 10th day of November, 2008.

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.

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