10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________ 

FORM 10-Q

_______________________________

(Mark One)

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

For the Quarterly Period Ended June 30, 2013

OR

¨ 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 or organization)	(I.R.S. Employer Identification No.)
1351 S. Sunset Street, Longmont, CO	80501
(Address of principal executive offices)	(Zip Code)

(303) 845-3200

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x  No  ¨

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

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

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

The registrant had 58,964,467 shares of common stock, $0.001 par value, outstanding as of July 31, 2013.

DOT HILL SYSTEMS CORP.

FORM 10-Q

For the Quarter Ended June 30, 2013

INDEX

Part I. Financial Information		3
Item 1.	Financial Statements	3
	Unaudited condensed consolidated balance sheets as of December 31, 2012 and June 30, 2013	3
	Unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2013	4
	Unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2013	5
	Notes to unaudited condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II. Other Information		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

2

Part I. Financial Information

Item 1. Financial Statements

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND JUNE 30, 2013

(In thousands, except par value data)

	December 31, 2012			June 30, 2013
ASSETS
Current Assets:
Cash and cash equivalents	$	40,315		$	40,402
Accounts receivable, net	25,025			29,072
Inventories	5,037			4,193
Prepaid expenses and other assets	5,810			6,047
Total current assets	76,187			79,714
Property and equipment, net	7,147			7,842
Other assets	603			559
Total assets	$	83,937		$	88,115
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	22,659		$	24,528
Accrued compensation	4,863			5,163
Accrued expenses	8,690			7,312
Deferred revenue	2,889			3,970
Credit facility borrowings	2,800			2,100
Total current liabilities	41,901			43,073
Other long-term liabilities	3,261			3,397
Total liabilities	45,162			46,470
Commitments and Contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $.001 par value, 10,000 shares authorized, zero shares issued and outstanding at December 31, 2012 and June 30, 2013	—			—
Common stock, $.001 par value, 100,000 shares authorized, 58,265 and 58,613 shares issued and outstanding at December 31, 2012 and June 30, 2013, respectively	58			58
Additional paid-in capital	326,575			328,145
Accumulated other comprehensive loss	(3,533		)	(3,329		)
Accumulated deficit	(284,325		)	(283,229		)
Total stockholders’ equity	38,775			41,645
Total liabilities and stockholders’ equity	$	83,937		$	88,115

See accompanying notes to unaudited condensed consolidated financial statements.

3

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDEDJUNE 30, 2012 AND 2013

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
NET REVENUE	$	47,708		$	50,683		$	102,306		$	95,163
COST OF GOODS SOLD	35,047			33,676			74,080			63,716
GROSS PROFIT	12,661			17,007			28,226			31,447
OPERATING EXPENSES:
Research and development	9,660			8,908			18,857			17,621
Sales and marketing	3,380			3,187			6,857			6,295
General and administrative	2,166			2,767			5,000			5,904
Total operating expenses	15,206			14,862			30,714			29,820
OPERATING INCOME (LOSS)	(2,545		)	2,145			(2,488		)	1,627
OTHER INCOME:
Interest income (expense), net	(7		)	(8		)	—			(15		)
Other income (expense), net	7			1			12			—
Total other income (expense), net	—			(7		)	12			(15		)
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS	(2,545		)	2,138			(2,476		)	1,612
INCOME TAX EXPENSE	400			49			309			83
INCOME (LOSS) FROM CONTINUING OPERATIONS	(2,945		)	2,089			(2,785		)	1,529
LOSS FROM DISCONTINUED OPERATIONS	(2,103		)	(12		)	(4,131		)	(433		)
NET INCOME (LOSS)	$	(5,048	)	$	2,077		$	(6,916	)	$	1,096
NET EARNINGS (LOSS) PER SHARE:
Continuing operations:
Basic and diluted income (loss) per share	$	(0.05	)	$	0.04		$	(0.05	)	$	0.03
Discontinued operations:
Basic and diluted loss per share	$	(0.04	)	$	—		$	(0.07	)	$	(0.01	)
Net income (loss):
Basic and diluted income (loss) per share*	(0.09		)	0.04			(0.12		)	0.02
WEIGHTED AVERAGE SHARES USED TO CALCULATE NET INCOME (LOSS) PER SHARE:
Basic	56,934			58,384			56,484			58,194
Diluted	56,934			58,797			56,484			58,616
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(5,048	)	$	2,077		$	(6,916	)	$	1,096
Foreign currency translation adjustment	(36		)	60			39			204
Comprehensive income (loss)	$	(5,084	)	$	2,137		$	(6,877	)	$	1,300

* Per share data may not always add to the total for the period because each figure is independently calculated.

See accompanying notes to unaudited condensed consolidated financial statements.

4

DOT HILL SYSTEMS CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2013

(In thousands)

	Six Months Ended
	June 30,
	2012			2013
Cash Flows From Operating Activities:
Net income (loss)	$	(6,916	)	$	1,096
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	1,959			1,463
Stock-based compensation expense	2,076			1,357
Provision for bad debt	25			(5		)
Write-off of intangible assets	1,647			—
Write-off of property and equipment	244			—
Changes in operating assets and liabilities:
Accounts receivable	4,582			(4,053		)
Inventories	595			839
Prepaid expenses and other assets	3,194			(240		)
Accounts payable	(9,162		)	2,123
Accrued compensation and other expenses	(3,341		)	(836		)
Deferred revenue	602			1,098
Other long-term liabilities	412			160
Net cash provided by (used in) operating activities	(4,083		)	3,002
Cash Flows From Investing Activities:
Purchases of property and equipment	(1,425		)	(2,327		)
Net cash used in investing activities	(1,425		)	(2,327		)
Cash Flows From Financing Activities:
Principal payment of note payable	(71		)	—
Payments on bank borrowings	—			(5,600		)
Proceeds from bank borrowings	—			4,900
Shares withheld for tax purposes	(533		)	(215		)
Proceeds from sale of stock to employees	448			428
Net cash used in financing activities	(156		)	(487		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(5		)	(101		)
Net (Decrease) Increase in Cash and Cash Equivalents	(5,669		)	87
Cash and Cash Equivalents, beginning of period	46,168			40,315
Cash and Cash Equivalents, end of period	$	40,499		$	40,402
Supplemental Disclosures of Non-Cash Investing Activities:
Property and equipment acquired but not yet paid	$	811		$	308
Supplemental Cash Flow Data:
Cash paid for income taxes	$	39		$	84

See accompanying notes to unaudited condensed consolidated financial statements.

5

DOT HILL SYSTEMS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements of Dot Hill Systems Corp. (referred to herein as Dot Hill, we, our or us) contained herein are unaudited and in the opinion of management contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and disclosures required by GAAP for complete financial statements. 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, 2012. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2013.

2012 amounts in our unaudited condensed consolidated financial statements have been retrospectively adjusted for discontinued operations. See Note 3.

Use of Accounting Estimates

The preparation of our unaudited condensed consolidated 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. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition, inventory valuation, recurring and specific issue warranty obligations, the valuation and recognition of stock-based compensation expense, and the valuation of long-lived assets, including intangible assets. In addition, we have other accounting policies that involve estimates such as the determination of useful lives of long-lived assets, accruals for restructuring, and income taxes, including the valuation allowance for deferred tax assets. Actual results may differ from these estimates and such differences could be material.

Revenue Recognition

We derive our revenue from sales of our hardware products, software and services.

Hardware

Hardware product revenue consists of revenue from sales of our AssuredSAN storage systems that is integrated with industry standard hardware which is essential to the functionality of the integrated system product. We recognize hardware product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recognized for hardware product sales upon transfer of title and risk of loss to the customer and in addition, upon installation for certain of our AssuredUVS appliance products. 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 pricing adjustments differ from past experience and our estimates, additional revenue reserves may be required.

Software

In accordance with the specific guidance for recognizing software revenue, where applicable, we recognize revenue from perpetual software licenses at the inception of the license term assuming all revenue recognition criteria have been met. We use the relative method to allocate revenue to software licenses at the inception of the license term when vendor-specific objective evidence, or VSOE, of fair value for all undelivered elements related to our products is available. We have established VSOE for the fair value of our support services as measured by the stated renewal prices paid by our customers when the services are sold separately on a standalone basis.

Specific long-term software contracts may contain multiple deliverables including software licenses, services, training and post-contract support for which we have not established VSOE for the fair value of any of the elements. Under specific guidance for recognizing software revenue, we begin recognizing revenue upon the delivery of all the elements except post-

6

contract support (PCS). We defer all the direct and incremental costs related to the deliverables in these contracts until delivery of all the elements except PCS. The deferred revenue and costs are amortized over the contractual PCS support periods.

During the preparation of the Company's consolidated financial statements for the year ended December 31, 2012 and the accounting analysis for the renewal of a long-term software contract, the Company determined that it had applied an inappropriate revenue recognition methodology to one of its long-term software contracts in 2010, 2011 and during the first three quarters of 2012. The Company recorded revenue as royalty payments were received on this contract and should have deferred all the revenue and direct and incremental costs until all the deliverables, except PCS, were delivered in 2012. This resulted in an understatement of$0.1 million and $2.2 millionof revenue and$0.3 million and $1.9 millionof costs for the three and six months endedJune 30, 2012, respectively, which was corrected in the fourth quarter of 2012.

Service

Our service revenue primarily includes out-of-warranty repairs and product maintenance contracts. Out-of warranty repairs primarily consist of product repair services performed by our contract manufacturers for those customers that allowed their original product warranty to expire without purchasing one of our higher level support service plans. Revenue from these out-of-warranty repairs, and the associated cost of sales, is recognized in the period these services are provided. Service revenue also consists of product maintenance contracts purchased by our customers as an extension of our standard warranty. Revenue from our product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. Net revenue derived from services was less than 10% of total revenue for all periods presented.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price, or TPE, and (iii) best estimate of the selling price, or ESP. VSOE generally exists only when we sell the deliverable separately and represents the actual price charged by us for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.

From time to time, we enter into arrangements with customers that include acceptance criteria. In such instances, we defer all revenue on the arrangement until customer acceptance is obtained or the acceptance clause lapses.

Revenue Recognition for Sales to Channel Partners

On sales to channel partners, we evaluate whether fees are considered fixed or determinable by considering a number of factors, including our ability to estimate returns, payment terms and our relationship and past history with the particular channel partner. If fees are not considered fixed or determinable at the time of sale to a channel partner, revenue recognition is deferred until there is persuasive evidence indicating the product has sold through to an end-user. Persuasive evidence of sell-through may include reports from channel partners documenting sell-through activity or data indicating an order has shipped to an end-user.

Deferred Revenue

We defer revenue on upfront nonrefundable payments from our customers and recognize it ratably over the term of the agreement, unless the payment is in exchange for products delivered that represent the culmination of a separate earnings process. When we provide consideration to a customer, we recognize the value of that consideration as a reduction in net revenue. We may be required to maintain inventory with certain of our largest OEM customers, which we refer to as hubbing arrangements. 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 has removed our product from the warehouse to incorporate into its end products.

Concentration of Customers and Suppliers

A majority of our net revenue is derived from a limited number of customers. We currently have two customers that account for more than 10% of our total net revenue: Hewlett Packard, or HP, and Tektronix, Inc., or Tektronix. Our agreements with our original equipment manufacturers, or 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.

Net revenue by major customer is as follows (as a percentage of total net revenue):

7

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
HP	72	%	52	%	66	%	57	%
Tektronix	7	%	21	%	13	%	16	%
Other customers less than 10%	21	%	27	%	21	%	27	%
Total	100	%	100	%	100	%	100	%

HP and Tektronix continue to account for a significant percentage of our sales. If our relationship with HP or Tektronix were disrupted or declined significantly, we would lose a substantial portion of our anticipated net revenue and our business could be materially harmed. We cannot guarantee that our relationship with HP, Tektronix or our other customers will expand or not otherwise be disrupted.

We expect that the sale of our products to a limited number of customers will continue to account for a high percentage of net revenue for the foreseeable future. Our Product Purchase Agreement with HP, as amended, terminates on October 30, 2016. HP also holds warrants to purchase 1,602,489 shares of our common stock at an exercise price of $2.40 per share, expiring on October 30, 2016.

We currently rely on a limited number of contract manufacturing partners to produce substantially all of our products. As a result, should any of our current manufacturing partners, such as Foxconn Technology Group, or parts suppliers not produce and deliver inventory for us to sell on a timely basis, operating results may be adversely impacted.

Cash and Cash Equivalents

We classify investments as cash equivalents if they are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of money market mutual funds issued or managed in the United States. As of December 31, 2012 and June 30, 2013, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

As of June 30, 2013, $3.1 million of the $40.4 million of cash and cash equivalents was held by our foreign subsidiaries.

Allowance for Doubtful Accounts

We establish an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. We determine the allowance for doubtful accounts based on the aging of our accounts receivable balances and an analysis of our historical experience of bad debt write-offs.

Balance sheet details are as follows, (in thousands):

	June 30, 2012		June 30, 2013
Balance, beginning of the year	$	203	$	240
Additions to allowance	25		3
Write-offs	—		(213		)
Recoveries	—		(8		)
Balance, quarter ended	$	228	$	22

Long-lived Asset Impairment

We periodically review the recoverability of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment in the carrying value of an asset group is recognized whenever anticipated future undiscounted cash flows from an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

In September 2011, our primary AssuredUVS customer informed us that the AssuredUVS software would no longer be a component of its business strategy, resulting in significant declines in revenues for the Company. Our long-lived assets consisted of the intangible assets associated with our acquisition of certain identified Cloverleaf Communications, Inc., or

8

Cloverleaf, assets acquired in January 2010. The impairment of these long-lived assets is now reported in discontinued operations (see Note 3) since we have ceased all ongoing operational activities as of September 30, 2012.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective will not have a material impact on our results of operations and financial position.

In February 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This update requires presentation of reclassifications from accumulated other comprehensive income by component to net income either on the face of the income statement or in a single footnote, but does not require any new information to be disclosed. This update is effective for the interim and annual periods beginning after December 15, 2012. The Company has adopted ASU 2013-2 as of the Company's interim period ending March 31, 2013. The adoption of this update has not had any impact on the Company's financial statements as the Company has not had any reclassifications from accumulated other comprehensive income to net income. Other comprehensive income in each period is comprised solely of foreign currency translation adjustments.

2. Earnings Per Share

Basic earnings per share, for both continuing and discontinued operations, is calculated by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share, for both continuing and discontinued operations, is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period and including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding warrants, stock options, share based compensation awards and other dilutive securities. No such items were included in the computation of diluted loss per share in the three and six months endedJune 30, 2012 because we incurred net losses in the periods and the effect of inclusion would have been anti-dilutive.

The following is a reconciliation of weighted-average shares outstanding used in the calculation of basic and diluted earnings from continuing operations per share for the three and six months endedJune 30, 2012 and 2013 (in thousands, except per share data):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
Income (loss) from continuing operations	$	(2,945	)	$	2,089	$	(2,785	)	$	1,529
Basic weighted-average common shares outstanding	56,934			58,384		56,484			58,194
Assumed exercise of dilutive stock options and restricted stock	—			413		—			422
Diluted weighted-average common shares outstanding	56,934			58,797		56,484			58,616
Income (loss) from continuing operations:
Basic earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03
Diluted earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03

Outstanding equity awards not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive were as follows:

9

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices
Stock options	9,298,263	$0.47 - $16.36		7,299,887	$1.26 - $16.36	9,298,263	$0.47 - $16.36		8,725,951	$1.06 - $16.36
Unvested stock awards	1,132,568	$	—	5,550	—	1,132,568	$	—	11,753	$	—
Warrants	1,602,489	$	2.40	1,602,489	2.40	1,602,489	$	2.40	1,602,489	$	2.40

Shares issued

During the six months endedJune 30, 2013, there were 31,000 shares issued from exercise of stock options, 30,000 restricted stock awards granted, and 458,000 shares purchased through our Employee Stock Purchase Plan. Additionally, during the six months endedJune 30, 2013, there were 147,000 shares repurchased for tax purposes and 23,000 restricted stock awards canceled. During the year ended December 31, 2012, there were 27,000 shares issued from exercise of stock options, 844,000 restricted stock awards granted, and 675,000 shares purchased through our Employee Stock Purchase Plan. Additionally, during the year ended December 31, 2012, there were 485,000 shares repurchased for tax purposes and 495,000 restricted stock awards canceled.

3. Discontinued Operations

During 2011, our primary AssuredUVS customer informed us that the AssuredUVS software would no longer be a component of its business strategy, which would result in a significant decline in revenues for the Company. In February 2012, our Board of Directors approved a plan to exit our AssuredUVS business and close down our Israel Technology Development Center. During the second quarter of 2012, we explored the potential sale of the AssuredUVS business, but were unsuccessful in locating a buyer and ended efforts to sell the business or its component assets as of June 30, 2012. Accordingly, we recognized an impairment of $0.2 million of property, plant and equipment and $1.6 million for the remaining value of acquired software as a component of cost of goods sold during the three months ended June 30, 2012. The AssuredUVS business is now recorded in discontinued operations since we ceased all significant ongoing operational activities as of September 30, 2012.

The following is a summary of the components of loss from discontinued operations for the three and six months endedJune 30, 2012 and 2013 (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Net revenue	$	60		$	2		$	206		$	22
Cost of goods sold	1,766			11			2,303			142
Gross loss	(1,706		)	(9		)	(2,097		)	(120		)
Operating expenses:
Research and development	17			—			762			—
Sales and marketing	—			—			56			—
General and administrative	308			3			486			323
Restructuring charge (recovery)	72			—			729			(10		)
Total operating expenses	397			3			2,033			313
Operating loss	(2,103		)	(12		)	(4,130		)	(433		)
Other expense, net	—			—			(1		)	—
Loss from discontinued operations	$	(2,103	)	$	(12	)	$	(4,131	)	$	(433	)

The activity in 2013 is limited to the continued support of certain maintenance contracts entered into prior to shutting down the Israel Technology Development Center, as well as expenses related to the resolution of a dispute with the former primary AssuredUVS customer.

4. Inventories

The components of inventories consist of the following (in thousands):

10

	December 31, 2012		June 30, 2013
Purchased parts and materials	$	3,051	$	2,139
Finished goods	1,986		2,054
Total inventory	$	5,037	$	4,193

Inventories are valued at the lower of cost (first-in, first-out method) or market value. The valuation of production inventory requires us to estimate excess or obsolete inventory. The determination of excess or obsolete inventory requires us to estimate the future demand for our products. Our markets are volatile, subject to technological risks and price changes and inventory reduction programs by our customers. In addition, we are required to make last time buys of certain components on occasion. These factors result in a risk that we will forecast incorrectly and purchase excess inventories of particular products or have commitments to purchase excess inventory components from our suppliers. As a result, actual demand will differ from forecasts, and such a difference has in the past and may in the future have a material effect on our financial statements. Any write downs to inventory due to the existence of excess quantities, physical obsolescence, changes in pricing, damage, or other causes establish a new cost basis for the inventory. When we sell or dispose of reserved inventory the new cost basis is charged to cost of sales. Service inventory is amortized ratably over the estimated life of the related product series.

5. Intangible Assets

Identifiable intangible assets are as follows (in thousands), as of December 31, 2012 and June 30, 2013:

	Estimated Useful  Life	Gross		Accumulated Amortization			Net
RaidCore technology	4 years	$	4,256	$	(4,256	)	$	—
Total intangible assets		$	4,256	$	(4,256	)	$	—

Amortization expense related to intangible assets totaled $0.3 million and $0.7 million for the three and six months endedJune 30, 2012, respectively, including $0.0 million and $0.2 million, respectively, included in discontinued operations. There was no amortization expense related to intangible assets during the three and six months endedJune 30, 2013.

6. Product Warranties

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 three years. 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 intended to be covered by corresponding supplier warranties. For warranty costs not covered by our suppliers, we provide for estimated warranty costs in the period the revenue is recognized. Estimated liabilities for product warranties are included in accrued expenses.

Our warranty accrual and cost activity is as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Balance, beginning of period	$	6,930		$	2,743		$	6,871		$	4,455
Charges to operations	106			372			474			490
Deductions for payments made	(2,199		)	(145		)	(2,508		)	(1,166		)
Changes in estimates	(58		)	(287		)	(58		)	(1,096		)
Balance, end of period	$	4,779		$	2,683		$	4,779		$	2,683

During the first quarter of 2013, we were able to negotiate more favorable rates with a third-party service provider. Accordingly, we adjusted our warranty accrual by $0.8 million to reflect this change.

7. Credit Facilities

We maintain a credit facility with Silicon Valley Bank for cash advances of up to an aggregate of $30 million based upon an advance rate dependent on certain concentration limits within eligible accounts receivable. These limits exclude certain eligible customer receivables if an individual customer account balance exceeds 25, 50 or 70 percentof the total eligible accounts receivable, depending on the customer, as defined by our Loan and Security Agreement with Silicon Valley Bank. Borrowings under the credit facility bear interest at the prime rate, which was 4% as of June 30, 2013 and are secured by

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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 that we maintain at all times a net worth, as defined in the agreement, of $50 million, increasing by 50% of net income, 50% of issuances of equity and 50% of the principal amount of any subordinated debt. 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. The maturity date of the credit facility is July 21, 2015. As ofJune 30, 2013, there was $2.1 million outstanding under the Silicon Valley Bank line of credit. There was $21.0 millionavailable for borrowing under the agreement as of June 30, 2013. We are currently in compliance with all covenant requirements.

8. Fair Value Measurements

The short-term nature of our financial instruments expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates. There were no transfers between Level I, II or III inputs for any of our assets measured at fair value during the reporting period.

Assets Measured at Fair Value on a Recurring Basis

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,315	$	40,315	$	—	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,402	$	40,402	$	—	$	—	$	—

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, and credit facility borrowings. The following disclosures relate to financial instruments for which the ending balances at December 31, 2012 and June 30, 2013, are not carried at fair value in their entirety on the Unaudited Condensed Consolidated Balance Sheets. These tables present the carrying value and fair value, by fair value hierarchy, of our financial instruments, excluding cash and cash equivalents at December 31, 2012 and June 30, 2013, respectively (in thousands).

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,800	$	—	$	2,800	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,100	$	—	$	2,100	$	—	$	—

The short-term nature of our financial instruments expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates.

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9. Commitments and Contingencies

We are involved in certain legal actions and claims from time to time arising in the ordinary course of business. Management believes that the outcome of such litigation and claims could have a material effect on our financial statements. Historically, the outcome of such litigation and claims has not had a material adverse effect on our financial condition or results of operations.

10. Segment Information

Operating segments, as defined in Accounting Standard Codification, or ASC, 280 Segment Reporting, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Chief Operating Decision Maker, or CODM, in deciding how to allocate resources and in assessing performance. ASC 280 also requires disclosures about products and services, geographic areas and significant customers.

Our CODM operates our business in one reportable operating segment that includes the design, manufacture and marketing of a range of software and hardware storage systems for the entry and midrange storage markets.

Geographic Revenues

Net revenue is recorded in the geographic area in which the sale originated. Information concerning principal geographic areas in which we operate is as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
Net revenue:
United States	$	47,346	$	50,518	$	101,433	$	94,682
Europe, Middle East and Africa	4		1		9		2
Asia	358		164		864		479
Total net revenue	$	47,708	$	50,683	$	102,306	$	95,163

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

Cautionary Statement for Forward-Looking Information

Certain statements contained in this quarterly report on Form 10-Q, including statements regarding the development, growth and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance and the products we expect to offer, and other statements regarding matters that are not historical facts, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the “safe harbor” created by these sections. Because such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found in Part II, Item 1A, “Risk Factors” and in our reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2012. 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 in the preceding pages 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, 2012.

Overview

We design, manufacture and market a range of software and hardware storage systems for the entry and midrange storage markets. We focus on selling through server-based original equipment manufacturers (OEMs), such as Hewlett-Packard, or HP, Dell Inc. or Dell, Lenovo Group Limited, or Lenovo, Advanced Micro Devices, Inc., or AMD, and Stratus Technologies, or Stratus; as well as into vertical markets, which primarily include media and entertainment, telecommunications, HPC, Digital

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Image Archive, Big Data and oil and gas. Our vertical market customers are OEMs who embed our products into their solutions, as well as resellers.

Typical customers for our storage systems products, which include our AssuredSAN^TM line of storage array products, include organizations requiring high reliability, high performance networked or direct attached 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 various protocol, performance, capacity or data protection schemes as needed. Our broad range of products, from small capacity direct attached to complete multi-hundred terabyte, or TB, storage area networks, or SANs, provide end users with a cost-effective means of addressing increasing storage demands at compelling price-performance points. Our current product family based on our AssuredSAN^TM architecture provides high performance and large disk array 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. In addition, our Assured family of data protection software products provides additional layers of data protection options to complement our line of storage disk arrays. Our current mainstream AssuredSAN^TM 2000 and 3000 series of entry-level storage products and Just a Bunch of Disks, or JBOD, arrays are targeted primarily at mainstream enterprise and small-to-medium business, or SMB, applications. Some of our AssuredSAN^TM 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. In February 2010, we launched the latest AssuredSAN^TM 3000 series of storage arrays that provide high speed interface options including 8 gigabyte, or GB, Fibre Channel, 1GB and 10GB iSCSI over Ethernet and 6GB SAS connectivity.

On August 22, 2012, we introduced AssuredSAN^TM Pro 5000 Series with RealStor^TM software that incorporates autonomic real-time data tiering via a virtualized back-end. With RealStor^TM, businesses gain the advantage of very high performance SSDs, using them to their maximum benefit, while storing less frequently accessed data on slower, but much less expensive hard disk drives. On the same day, we also introduced our AssuredSAN^TM 4000 Series next-generation, high performance storage solution designed to deliver best-in-class price performance, 99.999 percent availability, and exceptional streaming throughput. The Series 4000 shares the same hardware architecture as the Pro 5000 Series. Our Series 2000 and 3000 products are characterized by International Data Corporation (IDC) as Band 2 and Band 3 products. With the announcement of our Series 4000 and 5000 products, we now have products characterized within IDC Price Bands 4 and 5 products, which increases our total available market, as measured by end-user sales price, from $4.0 billion to $10.6 billion.

Our agreements with our customers do not contain any minimum purchase commitments and may be terminated at any time upon notice from the applicable customer. Our ability to achieve and maintain profitability will depend on, among other things, the level and mix of orders we receive from such customers, the amounts we spend on marketing support, the amounts we spend for inventory support and incremental internal investment, our ability to reduce product cost, our product lead time, our ability to meet delivery schedules required by our customers and the economic environment.

Our products and services are sold worldwide to facilitate server and SAN storage implementations, primarily through server-based OEMs, vertical markets partners that include embedded OEMs that integrate our products into their solutions, and value-added resellers, or VARs. Our storage system products' server-based OEM partners currently include, among others, HP, Lenovo and Stratus, who purchase our AssuredSAN^TM products, and Dell and AMD, who purchase our AssuredVRA products. Our vertical markets partners include Motorola, Inc., Tektronix, Samsung Electronics, Concurrent Computer Corporation, Autodesk Inc., Harris Broadcast Communications and Nokia Siemens Network, among others. Although our products and services are sold worldwide, the majority of our net revenue is derived from our U.S. operations.

We began shipping products to HP in the fourth quarter of 2007. In January 2008, we amended our agreement with HP to allow for sales of additional products to additional divisions within HP. HP launched the third generation product line based on our technology, called the MSA P2000, in February 2010. Sales to HP continued to increase with faster host interfaces across the HP P2000 product line. In May 2013, HP announced its fourth generation product based on our technology called the MSA 2040 which is now available to the HP customer base. In October 2011, we extended our supply agreement with HP by five years to expire in October 2016 and also extended the expiration of 1.6 million warrants granted to HP in March 2008 to expire concurrently with the supply agreement in October 2016. Net revenue from HP approximated 52% and 57% of our total net revenue for the three and six months endedJune 30, 2013, respectively. The agreement with HP does not contain any minimum purchase commitments; however, we expect sales to HP to continue to represent a substantial percentage of our total net revenue in 2013. We expect to generate additional revenue from our indirect channel as well as new and potential new OEM customers.

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

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• our ability to maintain and enhance relationships with our customers, in particular our OEM customers, as well as our ability to win new business;

• our ability to source critical components such as integrated circuits, hard disk drives, memory and other components on a timely basis;

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

• our ability to launch new products in accordance with OEM specifications, schedules and milestones;

• our ability to sell Dot Hill branded products through resellers;

• our ability to win new server-based OEM customers and OEMs who embed our products into their solutions;

• general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector, current general economic volatility and trends in the data storage markets in various geographic regions;

• the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory; and

• the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of products from us, particularly in the current global economic environment, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us.

For these and other reasons, our net revenue and results of operations for the three and six months endedJune 30, 2013 and prior periods may not necessarily be indicative of future net revenue and results of operations.

Our manufacturing strategy includes outsourcing substantially all of our manufacturing to third-party manufacturers in order to reduce sales cycle times and manufacturing infrastructure, enhance working capital and improve margins by taking advantage of the third parties’ manufacturing and procurement economies of scale. In September 2008, we entered into a manufacturing agreement with Foxconn Technology Group, or Foxconn. Under the terms of the agreement, Foxconn supplies 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. In November 2011, we amended our agreement with Foxconn to extend the manufacturing agreement for a period of three years. The majority of our products sold in 2012 and to date in 2013 were manufactured by Foxconn. We expect Foxconn to manufacture substantially all of our products throughout 2013.

We derive the majority of our net revenue from sales of our 3000 series products, which are included in our AssuredSAN^TM product line.

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

Research and development expenses consist primarily of project-related expenses, consulting charges and salaries for employees directly engaged in research and development.

Sales and marketing expenses consist primarily of salaries and commissions, marketing-related costs, channel programs, customer-related evaluation unit expenses, promotional costs and travel expenses.

General and administrative expenses consist primarily of compensation to officers and employees performing administrative functions, as well as expenditures for legal, accounting and other administrative services and fluctuations in currency.

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

In the first quarter of 2012, our management approved, committed to, and initiated a restructuring and cost reduction plan, or the 2012 Plan, that is associated with the closure of our Israel Technology Development Center. The 2012 Plan is designed to re-align our software investments to focus on accelerating the development of embedded software features, in order to launch a competitive set of mid-range storage array products in 2012, and to provide more differentiated entry-level products for both OEM and channel customers. Substantially all of our 2012 Plan workforce reductions were completed by July 31, 2012. The closure of our Israel Technology Development Center is now recorded in discontinued operations since we have ceased all ongoing operational activities as of September 30, 2012.

Critical Accounting Policies and Estimates

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the unaudited condensed consolidated financial statements. Except as noted below, management believes that there have been no significant changes during the three

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and six months ended June 30, 2013, to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Revenue Recognition

We derive our revenue from sales of our hardware products, software and services.

Hardware

Hardware product revenue consists of revenue from sales of our AssuredSAN storage systems that is integrated with industry standard hardware which is essential to the functionality of the integrated system product. We recognize hardware product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recognized for hardware product sales upon transfer of title and risk of loss to the customer and in addition, upon installation for certain of our AssuredUVS appliance products. 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 pricing adjustments differ from past experience and our estimates, additional revenue reserves may be required.

Software

In accordance with the specific guidance for recognizing software revenue, where applicable, we recognize revenue from perpetual software licenses at the inception of the license term assuming all revenue recognition criteria have been met. We use the relative method to allocate revenue to software licenses at the inception of the license term when vendor-specific objective evidence, or VSOE, of fair value for all undelivered elements related to our products is available. We have established VSOE for the fair value of our support services as measured by the stated renewal prices paid by our customers when the services are sold separately on a standalone basis.

Specific long-term software contracts may contain multiple deliverables including software licenses, services, training and post-contract support for which we have not established VSOE for the fair value of any of the elements. Under specific guidance for recognizing software revenue, we begin recognizing revenue upon the delivery of all the elements except post-contract support (PCS). We defer all the direct and incremental costs related to the deliverables in these contracts until delivery of all the elements except PCS. The deferred revenue and costs are amortized over the contractual PCS support periods.

During the preparation of the Company's consolidated financial statements for the year ended December 31, 2012 and the accounting analysis for the renewal of a long-term software contract, the Company determined that it had applied an inappropriate revenue recognition methodology to one of its long-term software contracts in 2010, 2011 and during the first three quarters of 2012. The Company recorded revenue as royalty payments were received on this contract and should have deferred all the revenue and direct and incremental costs until all the deliverables, except PCS, were delivered in 2012. This resulted in an understatement of$0.1 million and $2.2 millionof revenue and$0.3 million and $1.9 millionof costs for the three and six months endedJune 30, 2012, respectively, which was corrected in the fourth quarter of 2012.

Service

Our service revenue primarily includes out-of-warranty repairs and product maintenance contracts. Out-of warranty repairs primarily consist of product repair services performed by our contract manufacturers for those customers that allowed their original product warranty to expire without purchasing one of our higher level support service plans. Revenue from these out-of-warranty repairs, and the associated cost of sales, is recognized in the period these services are provided. Service revenue also consists of product maintenance contracts purchased by our customers as an extension of our standard warranty. Revenue from our product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. Net revenue derived from services was less than 10% of total revenue for all periods presented.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price, or TPE, and (iii) best estimate of the selling price, or ESP. VSOE generally exists only when we sell the deliverable separately and represents the actual price charged by us for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.

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From time to time, we enter into arrangements with customers that include acceptance criteria. In such instances, we defer all revenue on the arrangement until customer acceptance is obtained or the acceptance clause lapses.

Revenue Recognition for Sales to Channel Partners

On sales to channel partners, we evaluate whether fees are considered fixed or determinable by considering a number of factors, including our ability to estimate returns, payment terms and our relationship and past history with the particular channel partner. If fees are not considered fixed or determinable at the time of sale to a channel partner, revenue recognition is deferred until there is persuasive evidence indicating the product has sold through to an end-user. Persuasive evidence of sell-through may include reports from channel partners documenting sell-through activity or data indicating an order has shipped to an end-user.

Deferred Revenue

We defer revenue on upfront nonrefundable payments from our customers and recognize it ratably over the term of the agreement, unless the payment is in exchange for products delivered that represent the culmination of a separate earnings process. When we provide consideration to a customer, we recognize the value of that consideration as a reduction in net revenue. We may be required to maintain inventory with certain of our largest OEM customers, which we refer to as hubbing arrangements. 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 has removed our product from the warehouse to incorporate into its end products.

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 (percentages may not aggregate due to rounding):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
NET REVENUE	100.0	%	100.0	%	100.0	%	100.0	%
COST OF GOODS SOLD	73.5		66.4		72.4		67.0
GROSS PROFIT	26.5		33.6		27.6		33.0
OPERATING EXPENSES:
Research and development	20.2		17.6		18.4		18.5
Sales and marketing	7.1		6.3		6.7		6.6
General and administrative	4.5		5.5		4.9		6.2
Total operating expenses	31.8		29.4		30.0		31.3
OPERATING INCOME (LOSS)	(5.3	)	4.2		(2.4	)	1.7
Other income (expense), net	—		—		—		—
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS	(5.3	)	4.2		(2.4	)	1.7
INCOME TAX EXPENSE	0.8		0.1		0.3		0.1
INCOME (LOSS) FROM CONTINUING OPERATIONS	(6.1	)	4.1		(2.7	)	1.6
LOSS FROM DISCONTINUED OPERATIONS	(4.4	)	—		(4.0	)	(0.5	)
NET INCOME (LOSS)	(10.5	)%	4.1	%	(6.7	)%	1.1	%

Three and Six Months EndedJune 30, 2012 Compared to the Three and Six Months EndedJune 30, 2013

Net Revenue

	Three Months Ended June 30,				Increase		% Change
	2012		2013
	(in thousands, except percentages)
Net Revenue	$	47,708	$	50,683	$	2,975	6.2	%

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	Six Months Ended June 30,				Decrease			% Change
	2012		2013
	(in thousands, except percentages)
Net Revenue	$	102,306	$	95,163	$	(7,143	)	(7.0	)%

Net revenue increased approximately $3.0 million from $47.7 million for the three months endedJune 30, 2012 to $50.7 million for the three months endedJune 30, 2013. The increase in net revenue was primarily due to an increase in sales to Tektronix of $7.3 million, from $3.2 million for the three months endedJune 30, 2012 to $10.5 million for the three months endedJune 30, 2013, along with an increase of $3.8 million in sales to various other OEM and channel customers. The increase in net revenue was partially offset by a $8.1 million decrease in revenue from HP from $34.3 million for the three months endedJune 30, 2012 to $26.2 million for the three months endedJune 30, 2013.

Net revenue decreased approximately $7.1 million from $102.3 million for the six months endedJune 30, 2012 to $95.2 million for the six months endedJune 30, 2013. The decrease in net revenue was primarily due to a $13.4 million decrease in revenue from HP from $67.5 million for the six months endedJune 30, 2012 to $54.1 million for the six months endedJune 30, 2013. The decrease in net revenue was partially offset by a $2.1 million increase in sales from Tektronix, from $13.6 million for the six months endedJune 30, 2012 to $15.7 million for the six months endedJune 30, 2013, along with an increase of $4.2 million in sales to various other OEM and channel customers. We expect sales to HP and Tektronix to continue to represent a substantial portion of our net revenue during 2013. Sales to HP approximated 66% of our net revenue for the six months endedJune 30, 2012 compared to 57% of our net revenue for the six months endedJune 30, 2013. Sales to Tektronix approximated 13% of our net revenue for the six months endedJune 30, 2012 compared to 16% of our net revenue for the six months endedJune 30, 2013.

In May 2013, HP announced its fourth generation product based on our technology called the MSA 2040 which is now available to the HP customer base.

Cost of Goods Sold and Gross Profit

	Three Months Ended June 30, 2012				Three Months Ended June 30, 2013				Increase/(Decrease)			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Cost of Goods Sold	$	35,047	73.5	%	$	33,676	66.4	%	$	(1,371	)	(3.9	)%
Gross Profit	$	12,661	26.5	%	$	17,007	33.6	%	$	4,346		34.3	%

	Six Months Ended June 30, 2012				Six Months Ended June 30, 2013				Increase/(Decrease)			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Cost of Goods Sold	$	74,080	72.4	%	$	63,716	67.0	%	$	(10,364	)	(14.0	)%
Gross Profit	$	28,226	27.6	%	$	31,447	33.0	%	$	3,221		11.4	%

Cost of goods sold decreased for the three months endedJune 30, 2013 compared to the three months endedJune 30, 2012 primarily as a result of a more favorable product and customer mix, and component cost reductions.

Gross profit margin increased from 26.5% for the three months endedJune 30, 2012 to 33.6% for the three months endedJune 30, 2013. Gross profit margin benefited from a more favorable product and customer mix, manufacturing cost reductions, and component cost reductions.

Cost of goods sold decreased for the six months endedJune 30, 2013 compared to the six months endedJune 30, 2012 primarily as a result of the decrease in sales revenue.

Gross profit margin increased from 27.6% for the six months endedJune 30, 2012 to 33.0% for the six months endedJune 30, 2013. Gross profit margin benefited from a more favorable product and customer mix, manufacturing cost reductions, component cost reductions, and decreased warranty related costs. During the first quarter of 2013, we were able to negotiate more favorable rates with a third-party service provider. Accordingly, we adjusted our warranty accrual by $0.8 million to reflect this change.

Research and Development Expenses

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	Three Months Ended June 30, 2012				Three Months Ended June 30, 2013				Decrease			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Research and Development Expenses	$	9,660	20.2	%	$	8,908	17.6	%	$	(752	)	(7.8	)%

	Six Months Ended June 30, 2012				Six Months Ended June 30, 2013				Decrease			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Research and Development Expenses	$	18,857	18.4	%	$	17,621	18.5	%	$	(1,236	)	(6.6	)%

Research and development expenses decreased $0.8 million to $8.9 million for the three months endedJune 30, 2013 compared to $9.7 million for the three months endedJune 30, 2012. The decrease was primarily due to a $0.5 million decrease in project materials and tooling expenses, and a $0.2 million decrease in stock compensation expense. The decrease in project materials and tooling expenses is due to the scheduling and timing of new product development. The decrease in stock compensation expense is due to an overall decline in value of the unvested options and awards pool, driven by lower share price on grant date and increased use of options versus unvested stock awards.

Research and development expenses decreased $1.2 million to $17.6 million for the six months endedJune 30, 2013 compared to $18.9 million for the six months endedJune 30, 2012. The decrease was primarily due to salaries and other costs incurred related to a software contract of $0.4 million during 2013 and are therefore classified as costs of sales. During 2012, these salaries and other costs were recorded as research and development expenses. Additionally, there was a $0.3 million decrease in stock compensation expense and a $0.6 million decrease in project materials and tooling expenses. The decrease in stock compensation expense is due to an overall decline in value of the unvested options and awards pool, driven by lower share price on grant date and increased use of options versus unvested stock awards. The decrease in project materials and tooling expenses resulted from the scheduling and timing of new product development.

We expect that the timing of our engineering material purchases and additional headcount requirements to support new product releases will affect the amount of research and development expenses in future periods.

Sales and Marketing Expenses

	Three Months Ended June 30, 2012				Three Months Ended June 30, 2013				Decrease			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Sales and Marketing Expenses	$	3,380	7.1	%	$	3,187	6.3	%	$	(193	)	(5.7	)%

	Six Months Ended June 30, 2012				Six Months Ended June 30, 2013				Decrease			% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
Sales and Marketing Expenses	$	6,857	6.7	%	$	6,295	6.6	%	$	(562	)	(8.2	)%

Sales and marketing expense decreased approximately $0.2 million to $3.2 million for the three months endedJune 30, 2013 compared to $3.4 million for the three months endedJune 30, 2012. This decrease was primarily due to a decrease in evaluation unit expenses of $0.1 million, and a decrease in meeting expenses of $0.1 million.

Sales and marketing expense decreased approximately $0.6 million to $6.3 million for the six months endedJune 30, 2013 compared to $6.9 million for the six months endedJune 30, 2012. This decrease was primarily due to a decrease in bank credit card charges of $0.2 million associated with sales to a customer, a decrease in salaries and payroll related expenses of $0.2 million, and a decrease in evaluation unit expenses of $0.2 million. The decrease in salaries and payroll related expenses is due to a decrease in sales commissions from lower sales levels during the period. The decrease in evaluation unit expenses is due to additional expense in 2012 caused by the introduction of a new product.

General and Administrative Expenses

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	Three Months Ended June 30, 2012				Three Months Ended June 30, 2013				Increase		% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
General and Administrative Expenses	$	2,166	4.5	%	$	2,767	5.5	%	$	601	27.7	%

	Six Months Ended June 30, 2012				Six Months Ended June 30, 2013				Increase		% Change
	Amount		% of Net Revenue		Amount		% of Net Revenue
	(in thousands, except percentages)
General and Administrative Expenses	$	5,000	4.9	%	$	5,904	6.2	%	$	904	18.1	%

General and administrative expenses increased approximately $0.6 million to $2.8 million for the three months endedJune 30, 2013 compared to $2.2 million for the three months endedJune 30, 2012. The increase was primarily due to a $0.3 million increase in salaries and payroll related expenses, caused by an increase in performance-based bonus expense as compared to the second quarter of 2012, as well as the hiring of key administrative personnel. Various other expenses increased from quarter to quarter, including a $0.1 million increase each in expenses related to investor outreach, credit card processing charges and unrealized currency gain/loss.

General and administrative expenses increased approximately $0.9 million to $5.9 million for the six months endedJune 30, 2013 compared to $5.0 million for the six months endedJune 30, 2012. The increase was primarily due to a $0.6 million increase in salaries and payroll related expenses, caused by an increase in performance-based bonus expense as compared to the first two quarters of 2012, as well as the hiring of key administrative personnel. Additionally, credit card processing charges increased $0.2 million, and investor relations expenses and unrealized currency gain/loss increased $0.1 million each.

Other Income (Expense), net

Other income (expense), net consists of interest income on our cash and cash equivalents, interest expense related to our note payable and other miscellaneous items.

Income Taxes

We recorded income tax expense of $0.4 million and $0.3 million for the three and six months endedJune 30, 2012, respectively, as compared to minimal expense and $0.1 million for the three and six months endedJune 30, 2013, respectively. Our 2013 provision primarily includes estimated liabilities relating to tax expense in certain states and foreign jurisdictions in which we operate, offset partially by the release of a liability related to the statute of limitations expiring on certain tax positions involving our foreign subsidiaries. The decrease from prior year is due to a non-recurring charge recorded during the second quarter of 2012 related to certain tax positions involving our foreign subsidiaries.

Loss From Discontinued Operations

	Three Months Ended June 30, 2012					Three Months Ended June 30, 2013					Decrease		% Change
	Amount			% of Net Revenue		Amount			% of Net Revenue
	(in thousands, except percentages)
Loss From Discontinued Operations	$	(2,103	)	(4.4	)%	$	(12	)	—	%	$	2,091	99.4	%

	Six Months Ended June 30, 2012					Six Months Ended June 30, 2013					Decrease		% Change
	Amount			% of Net Revenue		Amount			% of Net Revenue
	(in thousands, except percentages)
Loss From Discontinued Operations	$	(4,131	)	(4.0	)%	$	(433	)	(0.5	)%	$	3,698	(89.5	)%

Loss from discontinued operations decreased $2.1 million from the three months endedJune 30, 2012 as compared to the three months endedJune 30, 2013. Loss from discontinued operations decreased $3.7 million to $0.4 million for the six months endedJune 30, 2013 compared to $4.1 million for the six months endedJune 30, 2012. The decline in losses was

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primarily driven by the Company's decision in the first quarter of 2012 to close down our Israel Technology Center and exit out of our AssuredUVS business. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for more details regarding our discontinued operations.

Liquidity and Capital Resources

The primary drivers affecting cash and liquidity are net income (loss), working capital requirements and capital expenditures. 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 credit quality and payment terms ranging between net 30 and net 45 days. If our net revenue increases, it is likely that our accounts receivable balance will also increase. Conversely, if our net revenue decreases, it is likely that our accounts receivable will also decrease. Our accounts receivable could increase if customers, such as large OEM customers, delay their payments or if we grant them extended payment terms. Our accounts payable also increase or decrease in connection with changes in volumes as well as our cash conservation strategies.

As of June 30, 2013, we had $40.4 million of cash and cash equivalents and $36.6 million of working capital compared to $40.3 million of cash and cash equivalents and $34.3 million of working capital as of December 31, 2012. The changes in cash and cash equivalents are further described below.

Cash equivalents include highly liquid investments purchased with original maturities of 90 days or less and consist principally of money market funds. As of June 30, 2013, $3.1 million of the $40.4 million of cash and cash equivalents was held by our foreign subsidiaries.

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2013 was $3.0 million compared to net cash used in operating activities of $4.1 million for the six months ended June 30, 2012. The operating activities that affected cash consisted primarily of net income, which totaled $1.1 million for the six months ended June 30, 2013 compared to a net loss of $6.9 million for the six months ended June 30, 2012. The decrease in our net loss for the six months ended June 30, 2013 was primarily attributable to our exit from our AssuredUVS business, including the closing of our Israel Technology Center during 2012, combined with an increase in sales and improved margins due to changes in product mix.

The adjustments to reconcile net income to net cash provided by operating activities for the six months ended June 30, 2013 for items that did not affect cash consisted of depreciation of $1.5 million and stock-based compensation expense of $1.4 million.

Cash flows from operations reflects the positive impact of $2.1 million related to an increase in accounts payable at June 30, 2013, due to an increase in inventory purchases driven by increased sales, which is also reflected in our days payable outstanding which increased from 62 days at the end of the fourth quarter of 2012 to 66 days at the end of the second quarter of 2013. Deferred revenue had a $1.1 million positive impact to cash from operations due to an increase in prepaid maintenance agreements sold through our Channel partners, and the deferral of revenue for a certain software contract, to be recognized over the contract term. The decrease in inventory had a $0.8 million positive impact on operating cash flows. The decrease in inventory was due to increased sales during the second quarter of 2013 as compared to the fourth quarter of 2012.

Cash flows from operations reflect a negative impact of $4.1 million related to an increase in accounts receivable, which was primarily due to an increase in sales in the second quarter of 2013 as compared to the fourth quarter of 2012. The change in accrued compensation and other expenses negatively impacted the cash from operations by $0.8 million due to payments on a settlement with a material customer related to failed power supply units.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2013 was $2.3 million compared to $1.4 million for the six months ended June 30, 2012. Cash used in investing activities for the six months ended June 30, 2013 was due to purchases of test and other equipment used at our contract manufacturing partners in the production of our products. Additionally, our accounting and operating system was upgraded, and equipment was purchased and laboratory space improvements were made at our Longmont, Colorado facilities during the six months endedJune 30, 2013.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2013 was approximately $0.5 million compared to $0.2 million of cash used in financing activities for the six months ended June 30, 2012. Cash used in financing activities for the six months ended June 30, 2013 was primarily due to a net pay down of our borrowings on our credit facility of $0.7

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million, in addition to the sale of stock to employees under our employee stock plans of approximately $0.4 million, partially offset by tax liability payments of $0.2 million made by Dot Hill associated with employee equity awards.

Based on current macro-economic conditions and conditions in the state of the data storage systems markets, our own organizational structure and our current outlook, we presently expect our cash and cash equivalents will be sufficient to fund our operations, working capital and capital requirements for at least the next 12 months. However, our capital resources could be negatively impacted by unforeseen future events.

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 three years. 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 intended to be covered by corresponding supplier warranties. For warranty costs not covered by our suppliers, we provide for estimated warranty costs in the period the revenue is recognized. Estimated liabilities for product warranties are included in accrued expenses.

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 timing and extent of net revenue and expenditures from our core business and strategic investments, the overall level of net profits or losses, our ability to manage our relationships with our contract manufacturers, the potential growth or decline in inventory to support our customers, costs associated with product quality issues and the recovery, if any, of such costs from a supplier, the status of our relationships with key customers, partners and suppliers, the timing and extent of the introduction of new products and services, growth in operations and the economic environment. In addition, the actual amount and timing of working capital will depend on our ability to maintain payment terms with our suppliers consistent with the credit terms of our customers. For example, if Foxconn, our major contract manufacturing partner, were to shorten our payment terms with them, or if HP were to lengthen their payment terms with us, our financial condition could be negatively impacted.

We maintain a credit facility with Silicon Valley Bank for cash advances of up to an aggregate of $30 million based upon an advance rate dependent on certain concentration limits within eligible accounts receivable. These limits exclude certain eligible customer receivables if an individual customer account balance exceeds 25, 50 or 70 percentof the total eligible accounts receivable, depending on the customer, as defined by our Loan and Security Agreement with Silicon Valley Bank. Borrowings under the credit facility bear interest at the prime rate, which was 4% as of June 30, 2013 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 that we maintain at all times a net worth, as defined in the agreement, of $50 million, increasing by 50% of net income, 50% of issuances of equity and 50% of the principal amount of any subordinated debt. 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. The maturity date of the credit facility is July 21, 2015. As ofJune 30, 2013, there was $2.1 million outstanding under the Silicon Valley Bank line of credit. There was $21.0 millionavailable for borrowing under the agreement as of June 30, 2013. We are currently in compliance with all covenant requirements.

At June 30, 2013, our long-term commitments had not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Off-Balance Sheet Arrangements

At June 30, 2013, 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.

We enter into indemnification agreements with third parties in the ordinary course of business that generally require us to reimburse losses suffered by the third party due to various events, such as lawsuits arising from patent or copyright infringement. These indemnification obligations are considered off-balance sheet arrangements under accounting guidance. It is not possible to determine the maximum potential amount under these indemnification agreements due to the unique facts and

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circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.

Recent Accounting Pronouncements

Please see Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We place our cash equivalents with high-credit-quality financial institutions, investing primarily in money market accounts. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. Our investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being invested in our business. Our interest income is sensitive to changes in the general level of interest rates. In this regard, changes in interest rates can affect the interest earned on our cash equivalents. A 10% unfavorable change in the interest rate would not materially impact our June 30, 2013 financial statements.

We have a line of credit agreement, which accrues interest on any outstanding balances at the prime rate. As of June 30, 2013, there was $2.1 million outstanding under this line. As we make borrowings under this line, we are exposed to interest rate risk on such debt.

Indicated changes in interest rates are based on hypothetical movements and are not necessarily indicative of the actual results that may occur. Future earnings and losses will be affected by actual fluctuations in interest rates.

Foreign Currency Exchange Rate Risk

We conduct a portion of our business in currencies other than the U.S. dollar, the currency in which our unaudited condensed consolidated financial statements are reported. The most significant foreign currencies that subjected us to foreign currency exchange rate risk for the six months June 30, 2013 were the Euro, British Pound and the Japanese Yen. Correspondingly, our operating results could be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. Additionally, if we liquidate any of our foreign subsidiaries, our cumulative translation adjustment recorded in Other Comprehensive Income could be required to be reclassified into earnings. Although we continue to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, we will likely continue to recognize gains or losses from international transactions and foreign currency changes. Although foreign currency transaction gains and losses have not historically been material, we incurred $0.4 million in foreign currency transaction losses during the six months ended June 30, 2013. Future changes in foreign currency rates could adversely impact our financial statements. A 10% unfavorable change in exchange rates would result in foreign currency losses of approximately $1.3 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on management’s evaluation (with the participation of our chief executive officer and chief financial officer), as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.Legal Proceedings

We are involved in certain legal actions and claims from time to time arising in the ordinary course of business. Management believes the outcome of such litigation and claims could have a material effect on our financial statements. Historically, the outcome of such litigation and claims has not had a material adverse effect on our financial condition or results of operations.

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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 ended December 31, 2012. 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 customers. For example, sales to HP and Tektronix accounted for 68% and 10%, respectively, of our net revenue for the year ended December 31, 2012 and 57% and 16% of our net revenue for the six months ended June 30, 2013, respectively. We expect HP will represent much greater than 10% and Tektronix will represent at least 10% of our net revenue for the year ending December 31, 2013. If our relationships with HP, Tektronix or certain of our other customers were disrupted or declined significantly, we would lose a substantial portion of our anticipated net revenue and our business could be materially harmed. We cannot guarantee that our relationship with HP, Tektronix or our other customers will expand or not otherwise be disrupted.

Going forward, we expect to generate additional revenue from our vertical markets partners and from potential new server-based OEM customers. However, if we are unable to generate sufficient revenue and gross profit from these sources, our financial results could be harmed.

Factors that could influence our relationship with our significant customers and other potential new customers include:

• our ability to maintain our products at prices that are competitive with those of our competitors;

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

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

• our ability to continue to develop and launch new products that our 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 customers; and

• the ability of our customers to effectively deliver, market and increase sales of their own solutions based on our products.

Product recalls, epidemic failures, post-manufacture repairs of our products, liability claims 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 products may contain undetected errors, or failures that become epidemic failures, which may be discovered after shipment, resulting in a loss of net revenue, an increase in costs to rework or replace failed products, product liability claims, a tarnished reputation, a loss of customers, or a loss or delay in market acceptance of our products, any of which could harm or disrupt our business. Product failures or recalls could be the result of components purchased from our suppliers not meeting the required specifications or containing undetected quality errors and manufacturing defects or from our own design deficiencies.

Even if the errors are detected before shipment, such errors still could result in the halting of production, delay of shipments, recovery costs, loss of goodwill, tarnishment of reputation and/or a substantial decrease in net 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 approximately three years. 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 intended to be covered by corresponding supplier warranties. There can be no assurance that our suppliers will continue to provide such warranties to us in the future or that our warranty obligations to our customers will be covered by corresponding warranties from our suppliers, which could have a material adverse effect on our operating results and financial condition. Significant warranty costs could decrease our gross margin and negatively impact our business, financial condition and results of operations. In addition, defects in our products could result in our customers claiming property damages, consequential damages, or bodily injury, which could also result in loss of customers and goodwill. Our customers may 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. Significant claims exceeding our expected warranty provisions could distract management’s

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attention from operating our business and, if successful, result in material claims against us that might not be covered by our insurance.

Potential future acquisitions may not be successfully integrated or produce the results we anticipate.

As part of our strategy, we are continuously evaluating opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets, or enhance our technical capabilities. The acquisition and ongoing integration of new businesses into our business may adversely affect our operations or profitability.

In January 2010, we acquired Cloverleaf Communications, Inc., a privately held software company based primarily in Israel. In February 2012, our Board of Directors approved a plan to exit our AssuredUVS business and close down our Israel Technology Development Center. During the second quarter of 2012, we explored the potential sale of the AssuredUVS business, but were unsuccessful in locating a buyer and ended efforts to sell the business or its component assets as of June 30, 2012. The closure of our Israel Technology Development Center is now recorded in discontinued operations since we have ceased all ongoing operational activities as of September 30, 2012.

Our inability to grow and manage our indirect sales channel may significantly impact our ability to increase net revenue, gross margin and operating income.

We have recently expanded our indirect sales model to access end-user markets primarily through our distributors and VARs and are investing significant monetary and human resources in order to grow this indirect sales channel. If we cannot successfully identify, manage, develop, and generate sufficient net revenue through our indirect sales channel, our business could be harmed. In addition, even if we are able to grow our indirect sales channel, managing the interaction of our OEMs’, distributors’ and VARs’ efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each channel method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our net revenue and gross margin and our profitability.

Turmoil in the global economy, credit markets and the financial services industry may negatively impact our net revenue, access to capital, our customers’ access to capital and ability to pay for their purchases in a timely manner, and our suppliers’ access to capital and ability to provide us with goods and timely delivery, or willingness to provide credit terms to us.

The global economic condition could continue to affect the demand for our products and negatively impact our net revenue and operating profit. We are unable to predict changes in general macroeconomic conditions and when, or if, global IT spending rates will be affected and to what degree they will be impacted. 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 net revenue, operating results and financial condition may be adversely affected. In addition, the global economic condition could also adversely impact our customers’, and/or their customers’, ability to finance the purchase of storage systems from us, or our suppliers’ ability to provide us with product, any of which may negatively impact our business, financial condition and results of operations.

Our smaller customers may not be as well capitalized as, nor do they have the financial resources of, our larger customers. In addition, 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.

Our third-party manufacturers rely on other third parties to supply key components of our storage products. Some of these components are available only from one or limited sources in the quantities and quality we require. Should any of the component suppliers cease to operate due to current economic conditions or otherwise, we would have to qualify and locate alternative suppliers. 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.

Our manufacturing suppliers provide us with credit terms that have in some cases been negotiated and documented in our manufacturing agreements. The credit terms we receive from these suppliers vary amongst our manufacturing partners but they all provide for adequate credit limits and credit terms. Should any of our manufacturing partners reduce our credit limits or shorten payment terms, due to their inability to purchase credit insurance or due to uncertainty regarding our financial position, our cash resources and working capital could be significantly impacted.

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

None of our contracts with our existing customers, including HP, contain minimum purchase commitments and while our contracts typically contain a specified term, our customers may cancel purchase orders at any time, cease making purchases or elect not to renew the applicable contract upon the expiration of the current term. 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 purchase commitments. Changes in the timing or volume of purchases by our major customers could result in lower net revenue. For example, we cannot be certain that our sales to any of our customers will continue at historical levels or will reach expected levels. In addition, our existing contracts do not require our customers to purchase our products exclusively or on a preferential basis over the products of any of our competitors. Consequently, to the extent they are not sole sourced, our customers may sell the products of our competitors. The decision by any of our customers to cancel purchase orders, cease making purchases or terminate their respective contracts could cause our net revenue to decline substantially, and our business, financial condition and results of operations could be significantly harmed.

We sell on a purchase order basis, making us subject to uncertainties and variability in demand by our customers, and our component suppliers may make obsolete certain components we incorporate into our products, either of which could decrease net revenue and adversely affect our operating results.

We sell to our customers on a purchase order basis rather than pursuant to long-term contracts or contracts with minimum purchase requirements. Consequently, our sales are subject to demand variability by our customers. The level and timing of orders placed by our customers vary for a variety of reasons, including seasonal buying by end-users, the introduction of new technologies and general economic conditions.

Customers submitting a purchase order may cancel, reduce or delay their orders. If we are unable to anticipate and respond to the demands of our customers, we may lose customers because we have an inadequate supply of products, or we may have excess inventory which may have to be sold in the open market at a substantial discount, if at all possible, either of which may harm our business, financial position and operating results.

In addition, there are occasions when some of our component suppliers make obsolete certain components that we incorporate into our products. In these situations we may be required to purchase such components on a “last time buy” basis, based on our forecasts of customer demand. If we incorrectly forecast customer demand or if our customers over- or under-forecast demand, we may have an inadequate supply of products, or we may have excess inventory which may have to be sold in the open market at a substantial discount, if at all possible, either of which may harm our business, financial position and operating results.

Furthermore, we are contractually obligated to purchase excess and obsolete material and finished goods from our contract manufacturer if not consumed within 90 days of our contract manufacturer’s purchase, which could have a material adverse effect on our financial results.

Our sales cycle varies substantially from customer to customer and future net revenue in any period may be lower than our historical net revenue 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 fall into two categories: OEM sales and Dot Hill branded sales through the channel. For the OEM business, the length of time between initial contact with a potential customer and the sale of our product may last from 6 to 36 months. This is particularly true during times of economic slowdown and when selling products that require complex installations. For the branded sales business through the channel, sales cycles can range from 30 days to three months or more for individual deals. With Dot Hill's new products in the midrange segment, sales cycles are expected to increase to a range of 60 days to six months. This can increase the time for product decisions in both the OEM and Channel business for customers taking our new products.

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;

• our ability to meet unique customer specifications and requirements;

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

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• the ability of our customers to ramp sales of our products including the desire of customer's to purchase legacy products.

Our net revenue is difficult for us to predict since it is directly affected by the timing of large orders. We may ship products representing a significant portion of our net revenue 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.

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 and if we fail to develop and market new software and hardware products that meet customer requirements, our business will be harmed.

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, or new entrants into the open systems storage market, 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.

We believe that to remain competitive, we will need to continue to develop new hardware and software products, which will require a significant investment in new product development. Our competitors and new market participants may be 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.

We may not be able to reduce expenses timely in response to any shortfalls in net revenue or gross margin.

We primarily sell to HP and thus do not need to make substantial incremental investments in sales and marketing to generate demand for our products to our largest customer. Additionally, we outsource substantially all of our manufacturing to very large contract manufacturing partners in Asia. Hence, there is little incremental cost required to increase our production capacity. Furthermore, we have an adopted modular architecture to our storage system products and consequently if our customers do not require substantial customization, we are able to launch products based on existing product platforms for new OEMs or channel partners at modest incremental expenditures.

In the past, we have taken and may have to take further measures to reduce expenses if net revenue or gross margins decline and we experience greater operating losses. A number of factors could preclude us from successfully bringing variable costs and expenses in line with our net revenue, such as the fact that our variable expense levels are based in part on our expectations as to future sales. This limits our ability to reduce expenses quickly in response to any shortfalls in net revenue or gross margin. Consequently, if net revenue does not generate enough gross margin to cover operating expenses, our operating results may be negatively affected.

The market for storage products is intensely competitive and subject to substantial pricing pressure that may harm our net revenue, gross margin and operating results.

The storage market is intensely competitive and is characterized by rapidly changing technology. For our AssuredSAN storage hardware products, we compete primarily against independent storage system suppliers, including EMC Corp., or EMC, Hitachi Data Systems Corp., or Hitachi, Infortrend, Promise Technology, Inc., or Promise, NEC and NetApp. We also compete with traditional suppliers of computer systems, including IBM, Oracle, Dell and HP, which market storage systems as well as other computer products.

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 we do. In addition, some of our competitors have much lower labor costs than we do. As a result, they may have more advanced technology, larger distribution channels, stronger brand names, better customer service, more financial leverage 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.

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Additionally, a number of public and privately held companies are currently attempting to enter the storage market, some of which may become significant competitors in the future. In the future, it is conceivable that we could compete with some of the original design manufacturers, one of whom is currently our manufacturing partner, as they develop expertise in chassis design and power and cooling technologies.

We could also lose current or future business to certain of our suppliers or manufacturers, some of which directly and indirectly compete with us. Currently, we leverage our supply and manufacturing relationships to provide substantially all 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; 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 cost effectively develop and market products to compete with the products of competitors, our business will be materially and adversely affected. In addition, if major customers who are also competitors cease purchasing our products in order to concentrate on sales of their own products, our business will be harmed.

Additional 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 could also result when we cannot pass increased material costs to our customers. For example, a significant increase in fuel prices could result in higher steel and freight costs which we may not be able to pass onto our customers.

Pricing pressures also exist from our significant customers that may attempt to change the terms, including pricing, payment terms and post sales obligations with us. As our 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, and have to reduce the pricing of our products, our gross margin may be negatively impacted which could have a material adverse effect on our business, financial condition and results of operations.

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

Our gross margin is determined in large part based on our contract manufacturing costs, our component costs, the timing and magnitude of product cost reductions, and our ability to include RAID controllers and value added features into our products, such as DMS and RealStor, as well as the prices at which we sell our products. The amount of revenue recognized from software and service sales and the relative mix of such sales in comparison to sales of our other products will also impact our gross margin, as the gross margin on sales of software and services is higher than that of our other products. If we are unable to lower production costs to be consistent with our projections or if we experience any decline in selling prices, such as with certain customers with whom we have negotiated periodic price reductions based on specific criteria, our gross margin and results of operations may suffer. Some of the new products we are currently shipping or expect to begin shipping are in the early stages of their life cycle. Our historical experience indicates that gross margin on new products are low initially and increase over time as a result of maturing manufacturing processes, component cost reductions and re-engineering the products to reduce costs. If we fail to achieve these improvements, our gross margin will be negatively impacted and our business, financial condition and results of operations could be significantly harmed.

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. Such 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

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suppliers, we may order materials in advance of customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs due to expected orders that fail to materialize.

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;

• increases in material or labor costs;

• excess inventory, inventory shrinkages and losses and inventory holding charges;

• the timing of purchase price 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 products, or our software products and our services;

• 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 manufacturers or finished goods to some of our customers and their hub locations.

Our 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 relationships.

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 relationships 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 net revenue and gross margin as well as increased operating expenses which could have an impact on our business, financial condition and results of operations.

Manufacturing and supplier disruptions could harm our business.

We primarily rely on Foxconn to manufacture our products. If our agreement with Foxconn is 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. If our agreement with Foxconn terminates, we cannot be certain that we will be able to identify a suitable alternative manufacturing partner that meets the requirements of our customers and 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 also 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 newly introduced products, or if our contract manufacturer experiences other disruptions in the manufacturing process, such as may be caused by the move of manufacturing facilities from Longhua, China, to Tianjin, China, which could result in delays in delivery of these products to our customers and adversely affect our results of operations. 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 net 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 business, financial condition and results of operations.

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.

From time to time there is significant market demand for disk drives, semiconductors, memory and other components, and we may experience component shortages, selective supply allocations and increased prices of such components. In such

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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 on competitive terms. Even if alternative sources of supply for critical components such as disk drives and memory become available, incorporating substitute components into our products could delay our ability to deliver our products 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.

We may continue to experience losses in the future, and may have difficulty forecasting future operating results, which could result in revenue and earnings volatility, which could cause our stock price to decline.

For the years ended December 31, 2012 and 2011 we incurred net losses from continuing operations of $10.4 million and $8.5 million, respectively. We expect our business to remain volatile as we are often unable to reliably predict net revenue from HP and our other customers. Net revenue from our 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 continue to affect our financial results for 2013. Consequently, we cannot assure you that we will be profitable in any future period.

Our future operating results and profitability will depend on, and could vary substantially as a result of many factors, including:

• our ability to maintain and enhance relationships with our customers, in particular our OEM customers, as well as our ability to win new business;

• our ability to implement and achieve targeted gross margin and cost reduction objectives;

• our ability to contain operating expenses and manufacturing variances;

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

• the extent to which we invest in new initiatives such as channel sales and software development;

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

• the success of our manufacturing strategy and relationships with our contract manufacturing partners;

• the success of our sales and marketing efforts;

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

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

• changes in economic, regulatory or competitive conditions;

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

• costs of litigating and defending law suits; and

• our ability to capitalize on new customer opportunities resulting from industry consolidation.

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.

Furthermore, 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. In addition, we enter into indemnification agreements with third parties in the ordinary course of business that generally require us to reimburse losses suffered by the third party due to various events, such as lawsuits arising from patent or copyright infringement.

We expect that providers of storage products will increasingly be subject to infringement claims as the number of products and competitors increase. 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.

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Consequently, we could be prohibited from selling and 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.

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, and Hanif Jamal, our Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. If either of these individuals were to terminate his employment with us, we would be required to locate and hire a suitable replacement. In addition, if any of our additional key engineering, sales and general and administrative employees were to terminate their employment with us, our business could be harmed. Competition for attracting talented employees in the technology industry can be intense. We may be unable to identify suitable replacements for any employees that we lose. In addition, even if we are successful in locating suitable replacements, the time and cost involved in recruiting, hiring, training and integrating new employees, particularly key employees responsible for significant portions of our operations, could harm our business by delaying our production schedule, our research and development efforts, our ability to execute on our business strategy and our client development and marketing efforts.

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

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 tax laws or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.

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. However, there can be no assurance that the outcomes from these examinations will not have a material adverse effect on our business, financial condition and results of operations.

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

We have a large number of outstanding stock options and warrants. Dilution of the per share value of our common stock could result from the exercise of outstanding stock options and warrants. When the exercise price of outstanding stock options and warrants is less than the trading price of our common stock, the exercise of such stock options and warrants would have a dilutive effect on our stockholders. The possibility of the issuance of shares of our common stock upon exercise of stock options and warrants could cause the trading price of our common stock to decline.

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

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Our stock price may be highly volatile and could decline substantially and unexpectedly, which can and has in some cases 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;

• mergers and acquisitions in the data storage marketplace;

• 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 us or 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. 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.

A significant portion of our common stock is owned by a few 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.

Our system of internal controls may be inadequate.

We maintain a system of internal controls in order to ensure we are able to collect, process, summarize, and disclose the information required by the Securities and Exchange Commission within the time periods specified. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Due to these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Additionally, public companies in the United States are required to review their internal controls under the Sarbanes-Oxley Act of 2002. If the internal controls put in place by us are not adequate or fail to perform as anticipated, errors could occur that would not be detected, which could require us to restate our consolidated financial statements, receive an adverse audit opinion on the effectiveness of our internal controls, and/or take other actions that will divert significant financial and managerial resources, as well as be subject to fines and/or other government enforcement actions. Furthermore, the price of our stock could be adversely affected.

Environmental compliance costs could adversely affect our results of operations.

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 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 be 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 be 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 net revenue, increased obsolete or excess inventories and harm to our business and customer relationships. 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.

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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. 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.

Environmental and other related laws and regulations subject us to a number of risks and could result in significant liabilities and costs.

Some of our products are subject to state, federal and international laws governing protection of the environment, proper handling and disposal of materials used to manufacture our products and human health and safety and regulating the use of certain chemical substances and disclosure of the use of certain “conflict minerals.” We endeavor to comply with these environmental and other laws, yet compliance with such laws could increase our product design, development, procurement, manufacturing and administration costs, limit our ability to manage excess and obsolete non-compliant inventory, change our sales activities, damage our reputation if we are required to disclose the use of certain "conflict minerals," or otherwise impact future financial results of our business. Any violation of these laws can subject us to significant liability, including fines, penalties and possible prohibition of sales of our products into one or more states or countries and result in a material adverse effect on our financial condition or results of operations.

Due to the global nature of our business, risks inherent in our international operations could have a material adverse effect on our business.

Although a substantial portion of our business is located and conducted in the United States, a portion of our operations are located outside of the United States. A substantial portion of our products are manufactured outside of the United States, and we have research and development and service centers overseas. Accordingly, our business and our future operating results could be adversely affected by a variety of factors affecting our international operations, some of which are beyond our control, including regulatory, political, or economic conditions in a specific country or region, trade protection measures and other regulatory requirements, government spending patterns, and acts of terrorism and international conflicts. In addition, we may not be able to maintain or increase international market demand for our products.

We face exposure to adverse movements in foreign currency exchange rates as a result of our international operations. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Our international sales are denominated in U.S. dollars and in foreign currencies. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore, potentially less competitive in foreign markets. Conversely, lowering our price in local currency may result in lower U.S.-based revenues. A decrease in the value of the U.S. dollar relative to foreign currencies could increase operating expenses in foreign markets. Prices for our products are substantially U.S. dollar denominated, even when sold to customers that are located outside the United States. Therefore, since a substantial portion of our sales are from countries outside the United States, fluctuations in currency exchange rates, most notably the strengthening of the U.S. dollar against other foreign currencies, contribute to variations in sales of products in impacted jurisdictions and could adversely impact demand and revenue growth. In addition, currency variations can adversely affect margins on sales of our products in countries outside the United States.

Additional risks inherent in our international business activities generally include, among others, difficulties in managing international operations and compliance with complex tax regulations in each tax jurisdiction.

In addition, due to the global nature of our business, we are subject to complex legal, tax and regulatory requirements in the United States and the foreign jurisdictions in which we operate and sell our products, including antitrust and anti-competition laws, rules and regulations, and regulations related to data privacy. We are also subject to the potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rights than U.S. laws. Such factors could have an adverse impact on our business, operating results and financial position.

Moreover, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by our internal policies and procedures, or U.S. laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. There can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, will comply with these policies, procedures, laws and/or regulations. Any such violation could subject us to fines and other penalties, which could have a material adverse effect on our business, financial condition or results of operations.

Our business could be materially and adversely affected as a result of a natural disaster, terrorist acts or other catastrophic events.

We depend on the ability of our personnel, raw materials, equipment and products to move reasonably unimpeded around the world. Any political, military, terrorism, global trade, world health or other issue that hinders this movement or restricts the

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import or export of materials could lead to significant business disruptions. Furthermore, any strike, economic failure or other material disruption caused by fire, floods, hurricanes, earthquakes, volcanoes, power loss, power shortages, environmental disasters, telecommunications or business information systems failures, break-ins and similar events, could also adversely affect our ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on information technology, or directly impact our marketing, manufacturing, financial and logistics functions, or impair our ability to meet our customer demands, our results of operations and financial condition could be materially adversely affected.

Our business is subject to increasingly complex corporate governance, public disclosure, and accounting and tax requirements that have increased both our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC, and NASDAQ have implemented requirements and regulations and continue developing additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

On July 21, 2010, the President signed into law the Dodd-Frank Act. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, as we continue to implement changes in response to this new law and its associated regulations, we expect to incur additional operating costs that could have a material adverse effect on our financial condition and results of operations.

A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, such as the changes to revenue recognition standards, the increased use of fair value measures, additional proposed changes to revenue recognition, lease accounting, financial instruments and other accounting standards, and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (IFRS), could have a significant effect on our reported financial results or the way we conduct our business. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue, which may affect our results of operations.

Because new and modified laws, regulations, and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

We are subject to risks related to the provision of employee health care benefits and recent health care reform legislation.

In March 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) was passed and signed into law. Among other things, the health care reform legislation includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and significant taxes on health insurers and health care benefits. Provisions of the health care reform legislation become effective at various dates over the next several years. The Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and guidance with respect to the health care reform legislation.

Due to the breadth and complexity of the health care reform legislation, the lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the health care reform legislation on our business over the coming years. Our results of operations, financial position and cash flows could be materially adversely affected due to this health care reform legislation.

If we are unable to establish fair value for any undelivered element of a sales arrangement, all or a portion of the revenues relating to the arrangement could be deferred to future periods.

In the course of our sales efforts, we may enter into multiple element arrangements that include software and hardware related elements and maintenance. If we are required to change the pricing of our software-related elements through discounting, or otherwise introduce variability in the pricing of such elements, we may be unable to establish or maintain Vendor Specific Objective Evidence of fair value of the undelivered elements of the arrangement, and would therefore be required to delay the recognition of all or a portion of the arrangement. A delay in the recognition of revenues may cause

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fluctuations in our financial results and may adversely affect our operating margins. To date, these types of transactions have not been significant, but may become more significant in the future as we expand our product offerings.

We are exposed to the credit and non-payment risk of our customers, resellers, and distributors, especially during times of economic uncertainty and tight credit markets, which could result in material losses.

Most of our sales to customers are on an open credit basis, with typical payment terms between net 30 and net 45 days. While we monitor individual customer payment capability in granting such open credit arrangements, and seek to limit such open credit to amounts we believe are reasonable, we may experience losses due to a customer’s inability to pay.

In the past, there have been bankruptcies by our customers to whom we had extended open credit, causing us to incur bad debt charges. We may be subject to similar losses in future periods. Any future losses could harm our business and have a material adverse effect on our operating results and financial condition. Additionally, to the extent that the recent turmoil in the credit markets makes it more difficult for customers to obtain open credit or financing, those customers’ ability to purchase our products could be adversely impacted, which in turn could have a material adverse impact on our financial condition and operating results.

We make significant investments in research and development to improve our technology and develop new technologies, and unsuccessful investments could materially adversely affect our business, financial condition and results of operations.

Over the past several years, our business strategy has been to derive a competitive advantage by moving from being a follower of new technologies to being a leader in the innovation and development of new technologies. This strategy requires us to make significant investments in research and development and, in attempting to remain competitive, we may increase our capital expenditures and expenses above our historical run-rate model. There can be no assurance that these investments will result in viable technologies or products, or if these investments do result in viable technologies or products, that they will be profitable or accepted by the market. Significant investments in unsuccessful research and development efforts could materially adversely affect our business, financial condition and results of operations. In addition, increased investments in technology could cause our cost structure to fall out of alignment with demand for our products, which would have a negative impact on our financial results.

Violation of applicable laws, including labor or environmental laws, and certain other practices by our suppliers could harm our business.

We expect our suppliers to operate in compliance with applicable laws and regulations, including labor and environmental laws, and to otherwise meet our required supplier standards of conduct. While our internal operating guidelines promote ethical business practices, we do not control our suppliers or their labor or environmental practices. The violation of labor, environmental or other laws by any of our suppliers, or divergence of a supplier’s business practices from those generally accepted as ethical in the United States, could harm our business by:

• interrupting or otherwise disrupting the shipment of our product components;

• damaging our reputation;

• forcing us to find alternate component sources;

• reducing demand for our products (for example, through a consumer boycott); or

• exposing us to potential liability for our supplier’s wrongdoings.

We are vulnerable to system failures or attacks, which could harm our business.

We are heavily dependent on our technology infrastructure, among other functions, to operate our factories, sell our products, fulfill orders, manage inventory and bill, collect and make payments. Our systems are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks and other events. Our business is also subject to break-ins, sabotage and intentional acts of vandalism by third parties as well as employees. Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our business, which could harm our reputation and financial condition.

Cybersecurity breaches could expose us to liability, damage our reputation, compromise our ability to conduct business, require us to incur significant costs or otherwise adversely affect our financial results.

We retain sensitive data in our secure data centers and on our networks, including intellectual property, proprietary business information and personally identifiable information. We face a number of threats to our data centers and networks from unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our, our customers’, our business partners’ or our

35

employees’ intellectual property, proprietary business information or personally identifiable information. In addition, we have outsourced a number of our business functions to third party contractors, and any breach of their security systems could adversely affect us.

It is critical to our business strategy that our infrastructure remains secure and is perceived by customers and partners to be secure. A cybersecurity breach could negatively affect our reputation as a trusted provider of information infrastructure by adversely affecting the market’s perception of the security or reliability of our products or services. In addition, a cyber attack could result in other negative consequences, including remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues or litigation.

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

2.1	Agreement and Plan of Merger and Reorganization dated as of January 4, 2010, among Dot Hill Systems Corp., Telluride Acquisition Sub, Inc., Cloverleaf Communications Inc., Cloverleaf Communications (Israel) Ltd., Cloverleaf Communications Corporation (BVI) and E. Shalev Management 2000 (1999) Ltd. (1)
3.1	Certificate of Incorporation of Dot Hill Systems Corp. (2)
3.2	Amended and Restated Bylaws of Dot Hill Systems Corp. (3)
4.1	Form of Common Stock Certificate. (4)
4.2	Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on May 19, 2003. (5)
4.3	Form of Rights Certificate. (5)
4.4	Warrant to Purchase Shares of Common Stock dated January 4, 2008. (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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 5, 2010 and incorporated herein by reference.

(2) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 19, 2001 and incorporated herein by reference.

(3) 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.

(4) 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.

(5) 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.

(6) 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.

Dot Hill’s Current Reports on Form 8-K have a Commission File Number of 001-13317.

37

SIGNATURES

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

	Dot Hill Systems Corp.
Date: August 8, 2013
	By:	/s/ DANA W. KAMMERSGARD
		Dana W. Kammersgard
		Chief Executive Officer, President and Director
		(Principal Executive Officer)
Date: August 8, 2013
	By:	/s/ HANIF I. JAMAL
		Hanif I. Jamal
		Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
		(Principal Financial and Accounting Officer)

38

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dana W. Kammersgard, Chief Executive Officer, President and Director, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dot Hill Systems Corporation;

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 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 officer 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.

/s/ DANA W. KAMMERSGARD

Dana W. Kammersgard

Chief Executive Officer, President and Director

(Principal Executive Officer)

Date: August 8, 2013

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Hanif I. Jamal, Chief Financial Officer and Treasurer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dot Hill Systems Corporation;

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 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 officer 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.

/s/ HANIF I. JAMAL

Hanif I. Jamal

Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary

(Principal Financial and Accounting Officer)

Date: August 8, 2013

EX-32.1

Exhibit 32.1

The following certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and pursuant to SEC Release No. 33-8238 are being “furnished” to the SEC rather than “filed” either as part of the Report or as a separate disclosure statement, and are not to be incorporated by reference into the Report or any other filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. The foregoing certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of Section 18 or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended.

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Dot Hill Systems Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DANA W. KAMMERSGARD

Dana W. Kammersgard

Chief Executive Officer

Date: August 8, 2013

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Dot Hill Systems Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ HANIF I. JAMAL

Hanif I. Jamal

Chief Financial Officer

Date: August 8, 2013

XML

Summary Of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Net revenue by major customer

Net revenue by major customer is as follows (as a percentage of total net revenue):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
HP	72	%	52	%	66	%	57	%
Tektronix	7	%	21	%	13	%	16	%
Other customers less than 10%	21	%	27	%	21	%	27	%
Total	100	%	100	%	100	%	100	%

Allowance for doubtful accounts

Balance sheet details are as follows, (in thousands):

	June 30, 2012		June 30, 2013
Balance, beginning of the year	$	203	$	240
Additions to allowance	25		3
Write-offs	—		(213		)
Recoveries	—		(8		)
Balance, quarter ended	$	228	$	22

XML

Condensed Consolidated Statements Of Comprehensive Loss (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
NET REVENUE	$ 50,683	$ 47,708	$ 95,163	$ 102,306
COST OF GOODS SOLD	33,676	35,047	63,716	74,080
GROSS PROFIT	17,007	12,661	31,447	28,226
OPERATING EXPENSES:
Research and development	8,908	9,660	17,621	18,857
Sales and marketing	3,187	3,380	6,295	6,857
General and administrative	2,767	2,166	5,904	5,000
Total operating expenses	14,862	15,206	29,820	30,714
OPERATING INCOME (LOSS)	2,145	(2,545)	1,627	(2,488)
OTHER INCOME:
Interest income (expense), net	(8)	(7)	(15)	0
Other Income, net	1	7	0	12
Total other income (expense), net	(7)	0	(15)	12
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS	2,138	(2,545)	1,612	(2,476)
INCOME TAX EXPENSE	49	400	83	309
INCOME (LOSS) FROM CONTINUING OPERATIONS	2,089	(2,945)	1,529	(2,785)
LOSS FROM DISCONTINUED OPERATIONS	(12)	(2,103)	(433)	(4,131)
NET INCOME (LOSS)	2,077	(5,048)	1,096	(6,916)
NET EARNINGS (LOSS) PER SHARE:
Basic and diluted earnings (loss) per share from continuing operations	$ 0.04	$ (0.05)	$ 0.03	$ (0.05)
Loss per share from discontinued operations	$ 0.00	$ (0.04)	$ (0.01)	$ (0.07)
Basic and diluted (in usd per share)	$ 0.04	$ (0.09)	$ 0.02	$ (0.12)
WEIGHTED AVERAGE SHARES USED TO CALCULATE NET INCOME (LOSS) PER SHARE:
Weighted Average Number of Shares Outstanding, Basic	58,384	56,934	58,194	56,484
Weighted Average Number of Shares Outstanding, Diluted	58,797	56,934	58,616	56,484
COMPREHENSIVE LOSS:
NET INCOME (LOSS)	2,077	(5,048)	1,096	(6,916)
Foreign currency translation adjustment	60	(36)	204	39
Comprehensive loss	$ 2,137	$ (5,084)	$ 1,300	$ (6,877)

XML

Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

Intangible Assets

Identifiable intangible assets are as follows (in thousands), as of December 31, 2012 and June 30, 2013:

	Estimated Useful  Life	Gross		Accumulated Amortization			Net
RaidCore technology	4 years	$	4,256	$	(4,256	)	$	—
Total intangible assets		$	4,256	$	(4,256	)	$	—

Amortization expense related to intangible assets totaled $0.3 million and $0.7 million for the three and six months endedJune 30, 2012, respectively, including $0.0 million and $0.2 million, respectively, included in discontinued operations. There was no amortization expense related to intangible assets during the three and six months endedJune 30, 2013.

XML

Segment Information (Tables)

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Net revenue by geographic area

Net revenue is recorded in the geographic area in which the sale originated. Information concerning principal geographic areas in which we operate is as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
Net revenue:
United States	$	47,346	$	50,518	$	101,433	$	94,682
Europe, Middle East and Africa	4		1		9		2
Asia	358		164		864		479
Total net revenue	$	47,708	$	50,683	$	102,306	$	95,163

XML

Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share, Diluted, by Common Class, Including Two Class Method [Line Items]

Schedule of Weighted Average Number of Shares [Table Text Block]

The following is a reconciliation of weighted-average shares outstanding used in the calculation of basic and diluted earnings from continuing operations per share for the three and six months endedJune 30, 2012 and 2013 (in thousands, except per share data):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
Income (loss) from continuing operations	$	(2,945	)	$	2,089	$	(2,785	)	$	1,529
Basic weighted-average common shares outstanding	56,934			58,384		56,484			58,194
Assumed exercise of dilutive stock options and restricted stock	—			413		—			422
Diluted weighted-average common shares outstanding	56,934			58,797		56,484			58,616
Income (loss) from continuing operations:
Basic earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03
Diluted earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03

Outstanding equity awards not included in calculation of diluted net loss per share

Outstanding equity awards not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices
Stock options	9,298,263	$0.47 - $16.36		7,299,887	$1.26 - $16.36	9,298,263	$0.47 - $16.36		8,725,951	$1.06 - $16.36
Unvested stock awards	1,132,568	$	—	5,550	—	1,132,568	$	—	11,753	$	—
Warrants	1,602,489	$	2.40	1,602,489	2.40	1,602,489	$	2.40	1,602,489	$	2.40

XML

Summary Of Significant Accounting Policies (Revenue Recognition) (Details) (USD $)						6 Months Ended				3 Months Ended	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2013 Foreign Subsidiaries [Member]	Jun. 30, 2013 Minimum [Member]	Jun. 30, 2013 Maximum [Member]	Jun. 30, 2013 Net Revenue Derived From Services [Member]	Jun. 30, 2012 Net Revenue Derived From Services [Member]	Jun. 30, 2012 Revenue Recognition, Software [Member]	Jun. 30, 2012 Revenue Recognition, Software [Member]
Deferred Revenue Arrangement [Line Items]
Overstatement of revenue										$ 100,000	$ 2,200,000
Overstatement of costs										300,000	1,900,000
Product maintenance contract term						12 months	36 months
Maximum percentage of total revenue								10.00%	10.00%
Cash and cash equivalents	$ 40,402,000	$ 40,315,000	$ 40,499,000	$ 46,168,000	$ 3,100,000

XML

Summary Of Significant Accounting Policies (Allowance for Doubtful Accounts) (Details) (USD $)
In Thousands, unless otherwise specified

6 Months Ended

Jun. 30, 2013

Jun. 30, 2012

Accounting Policies [Abstract]

Allowance for doubtful accounts [Table Text Block]

Balance sheet details are as follows, (in thousands):

	June 30, 2012		June 30, 2013
Balance, beginning of the year	$	203	$	240
Additions to allowance	25		3
Write-offs	—		(213		)
Recoveries	—		(8		)
Balance, quarter ended	$	228	$	22

Allowance for Doubtful Accounts Receivable [Roll Forward]

Balance, beginning of the year

$ 240

$ 203

Provision for Doubtful Accounts

3

25

Allowance for Doubtful Accounts Receivable, Charge-offs

(213)

0

Valuation Allowances and Reserves, Recoveries

8

0

Balance, quarter ended

$ 22

$ 228

XML

Product Warranties (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Product Liability Contingency [Line Items]
Maximum product warranty term				3 years
Warranty accrual	$ 2,683	$ 2,743	$ 4,779	$ 2,683	$ 4,779
Movement in Standard Product Warranty Accrual [Roll Forward]
Balance, beginning of period	2,743	4,455	6,930	4,455	6,871
Charges to operations	372		106	490	474
Deductions for costs incurred	(145)		(2,199)	(1,166)	(2,508)
Changes in estimates	(287)	(809)	(58)	(1,096)	(58)
Balance, end of period	$ 2,683	$ 2,743	$ 4,779	$ 2,683	$ 4,779

XML

Discontinued Operations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Discontinued Operations [Line Items]
Tangible Asset Impairment Charges		$ 200	$ 0	$ 244
Loss from discontinued operations
Net revenue			22	206
Cost of goods sold			142	2,303
Gross profit			(120)	(2,097)
Operating expenses:
Research and development			0	762
Sales and marketing			0	56
General and administrative			323	486
Restructuring charge			(10)	729
Total operating expenses			313	2,033
Operating loss			(433)	(4,130)
Other income (expense), net			0	1
Loss from discontinued operations	(12)	(2,103)	(433)	(4,131)
Impairment of Intangible Assets (Excluding Goodwill)		1,600	0	1,647
AssuredUVS [Member]
Loss from discontinued operations
Net revenue	2	60
Cost of goods sold	11	1,766
Gross profit	(9)	(1,706)
Operating expenses:
Research and development	0	17
Sales and marketing	0	0
General and administrative	3	308
Restructuring charge	0	72
Total operating expenses	3	397
Operating loss	(12)	(2,103)
Other income (expense), net	0	0
Loss from discontinued operations	$ (12)	$ (2,103)

XML

Summary Of Significant Accounting Policies (Concentration of Customers and Suppliers) (Details)

3 Months Ended

6 Months Ended

Jun. 30, 2013

customer

Jun. 30, 2012

Jun. 30, 2013

customer

Jun. 30, 2012

Major customers

Allowance for doubtful accounts [Table Text Block]

Balance sheet details are as follows, (in thousands):

	June 30, 2012		June 30, 2013
Balance, beginning of the year	$	203	$	240
Additions to allowance	25		3
Write-offs	—		(213		)
Recoveries	—		(8		)
Balance, quarter ended	$	228	$	22

Number of major customers

2

2

Concentration risk, percentage of total net revenues

100.00%

100.00%

100.00%

100.00%

Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | HP

Major customers

Concentration risk, percentage of total net revenues

52.00%

72.00%

57.00%

66.00%

Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | Tektronix

Major customers

Concentration risk, percentage of total net revenues

21.00%

7.00%

16.00%

13.00%

Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | Other customers less than 10%

Major customers

Concentration risk, percentage of total net revenues

27.00%

21.00%

27.00%

21.00%

Common Stock [Member] | HP

Major customers

Warrants to purchase shares of our common stock

1,602,489

1,602,489

Warrants, exercise price

2.40

2.40

XML

Summary Of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation

The financial statements of Dot Hill Systems Corp. (referred to herein as Dot Hill, we, our or us) contained herein are unaudited and in the opinion of management contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and disclosures required by GAAP for complete financial statements. 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, 2012. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2013.

2012 amounts in our unaudited condensed consolidated financial statements have been retrospectively adjusted for discontinued operations. See Note 3.

Use of Accounting Estimates

The preparation of our unaudited condensed consolidated 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. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition, inventory valuation, recurring and specific issue warranty obligations, the valuation and recognition of stock-based compensation expense, and the valuation of long-lived assets, including intangible assets. In addition, we have other accounting policies that involve estimates such as the determination of useful lives of long-lived assets, accruals for restructuring, and income taxes, including the valuation allowance for deferred tax assets. Actual results may differ from these estimates and such differences could be material.

Revenue Recognition

We derive our revenue from sales of our hardware products, software and services.

Hardware

Hardware product revenue consists of revenue from sales of our AssuredSAN storage systems that is integrated with industry standard hardware which is essential to the functionality of the integrated system product. We recognize hardware product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recognized for hardware product sales upon transfer of title and risk of loss to the customer and in addition, upon installation for certain of our AssuredUVS appliance products. 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 pricing adjustments differ from past experience and our estimates, additional revenue reserves may be required.

Software

In accordance with the specific guidance for recognizing software revenue, where applicable, we recognize revenue from perpetual software licenses at the inception of the license term assuming all revenue recognition criteria have been met. We use the relative method to allocate revenue to software licenses at the inception of the license term when vendor-specific objective evidence, or VSOE, of fair value for all undelivered elements related to our products is available. We have established VSOE for the fair value of our support services as measured by the stated renewal prices paid by our customers when the services are sold separately on a standalone basis.

Specific long-term software contracts may contain multiple deliverables including software licenses, services, training and post-contract support for which we have not established VSOE for the fair value of any of the elements. Under specific guidance for recognizing software revenue, we begin recognizing revenue upon the delivery of all the elements except post-contract support (PCS). We defer all the direct and incremental costs related to the deliverables in these contracts until delivery of all the elements except PCS. The deferred revenue and costs are amortized over the contractual PCS support periods.

During the preparation of the Company's consolidated financial statements for the year ended December 31, 2012 and the accounting analysis for the renewal of a long-term software contract, the Company determined that it had applied an inappropriate revenue recognition methodology to one of its long-term software contracts in 2010, 2011 and during the first three quarters of 2012. The Company recorded revenue as royalty payments were received on this contract and should have deferred all the revenue and direct and incremental costs until all the deliverables, except PCS, were delivered in 2012. This resulted in an understatement of$0.1 million and $2.2 millionof revenue and$0.3 million and $1.9 millionof costs for the three and six months endedJune 30, 2012, respectively, which was corrected in the fourth quarter of 2012.

Service

Our service revenue primarily includes out-of-warranty repairs and product maintenance contracts. Out-of warranty repairs primarily consist of product repair services performed by our contract manufacturers for those customers that allowed their original product warranty to expire without purchasing one of our higher level support service plans. Revenue from these out-of-warranty repairs, and the associated cost of sales, is recognized in the period these services are provided. Service revenue also consists of product maintenance contracts purchased by our customers as an extension of our standard warranty. Revenue from our product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. Net revenue derived from services was less than 10% of total revenue for all periods presented.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price, or TPE, and (iii) best estimate of the selling price, or ESP. VSOE generally exists only when we sell the deliverable separately and represents the actual price charged by us for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.

From time to time, we enter into arrangements with customers that include acceptance criteria. In such instances, we defer all revenue on the arrangement until customer acceptance is obtained or the acceptance clause lapses.

Revenue Recognition for Sales to Channel Partners

On sales to channel partners, we evaluate whether fees are considered fixed or determinable by considering a number of factors, including our ability to estimate returns, payment terms and our relationship and past history with the particular channel partner. If fees are not considered fixed or determinable at the time of sale to a channel partner, revenue recognition is deferred until there is persuasive evidence indicating the product has sold through to an end-user. Persuasive evidence of sell-through may include reports from channel partners documenting sell-through activity or data indicating an order has shipped to an end-user.

Deferred Revenue

We defer revenue on upfront nonrefundable payments from our customers and recognize it ratably over the term of the agreement, unless the payment is in exchange for products delivered that represent the culmination of a separate earnings process. When we provide consideration to a customer, we recognize the value of that consideration as a reduction in net revenue. We may be required to maintain inventory with certain of our largest OEM customers, which we refer to as hubbing arrangements. 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 has removed our product from the warehouse to incorporate into its end products.

Concentration of Customers and Suppliers

A majority of our net revenue is derived from a limited number of customers. We currently have two customers that account for more than 10% of our total net revenue: Hewlett Packard, or HP, and Tektronix, Inc., or Tektronix. Our agreements with our original equipment manufacturers, or 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.

Net revenue by major customer is as follows (as a percentage of total net revenue):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
HP	72	%	52	%	66	%	57	%
Tektronix	7	%	21	%	13	%	16	%
Other customers less than 10%	21	%	27	%	21	%	27	%
Total	100	%	100	%	100	%	100	%

HP and Tektronix continue to account for a significant percentage of our sales. If our relationship with HP or Tektronix were disrupted or declined significantly, we would lose a substantial portion of our anticipated net revenue and our business could be materially harmed. We cannot guarantee that our relationship with HP, Tektronix or our other customers will expand or not otherwise be disrupted.

We expect that the sale of our products to a limited number of customers will continue to account for a high percentage of net revenue for the foreseeable future. Our Product Purchase Agreement with HP, as amended, terminates on October 30, 2016. HP also holds warrants to purchase 1,602,489 shares of our common stock at an exercise price of $2.40 per share, expiring on October 30, 2016.

We currently rely on a limited number of contract manufacturing partners to produce substantially all of our products. As a result, should any of our current manufacturing partners, such as Foxconn Technology Group, or parts suppliers not produce and deliver inventory for us to sell on a timely basis, operating results may be adversely impacted.

Cash and Cash Equivalents

We classify investments as cash equivalents if they are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of money market mutual funds issued or managed in the United States. As of December 31, 2012 and June 30, 2013, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

As of June 30, 2013, $3.1 million of the $40.4 million of cash and cash equivalents was held by our foreign subsidiaries.

Allowance for Doubtful Accounts

We establish an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. We determine the allowance for doubtful accounts based on the aging of our accounts receivable balances and an analysis of our historical experience of bad debt write-offs.

Balance sheet details are as follows, (in thousands):

	June 30, 2012		June 30, 2013
Balance, beginning of the year	$	203	$	240
Additions to allowance	25		3
Write-offs	—		(213		)
Recoveries	—		(8		)
Balance, quarter ended	$	228	$	22

Long-lived Asset Impairment

We periodically review the recoverability of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment in the carrying value of an asset group is recognized whenever anticipated future undiscounted cash flows from an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

In September 2011, our primary AssuredUVS customer informed us that the AssuredUVS software would no longer be a component of its business strategy, resulting in significant declines in revenues for the Company. Our long-lived assets consisted of the intangible assets associated with our acquisition of certain identified Cloverleaf Communications, Inc., or Cloverleaf, assets acquired in January 2010. The impairment of these long-lived assets is now reported in discontinued operations (see Note 3) since we have ceased all ongoing operational activities as of September 30, 2012.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective will not have a material impact on our results of operations and financial position.

In February 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This update requires presentation of reclassifications from accumulated other comprehensive income by component to net income either on the face of the income statement or in a single footnote, but does not require any new information to be disclosed. This update is effective for the interim and annual periods beginning after December 15, 2012. The Company has adopted ASU 2013-2 as of the Company's interim period ending March 31, 2013. The adoption of this update has not had any impact on the Company's financial statements as the Company has not had any reclassifications from accumulated other comprehensive income to net income. Other comprehensive income in each period is comprised solely of foreign currency translation adjustments.

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Discontinued Operations

6 Months Ended

Jun. 30, 2013

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

During 2011, our primary AssuredUVS customer informed us that the AssuredUVS software would no longer be a component of its business strategy, which would result in a significant decline in revenues for the Company. In February 2012, our Board of Directors approved a plan to exit our AssuredUVS business and close down our Israel Technology Development Center. During the second quarter of 2012, we explored the potential sale of the AssuredUVS business, but were unsuccessful in locating a buyer and ended efforts to sell the business or its component assets as of June 30, 2012. Accordingly, we recognized an impairment of $0.2 million of property, plant and equipment and $1.6 million for the remaining value of acquired software as a component of cost of goods sold during the three months ended June 30, 2012. The AssuredUVS business is now recorded in discontinued operations since we ceased all significant ongoing operational activities as of September 30, 2012.

The following is a summary of the components of loss from discontinued operations for the three and six months endedJune 30, 2012 and 2013 (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Net revenue	$	60		$	2		$	206		$	22
Cost of goods sold	1,766			11			2,303			142
Gross loss	(1,706		)	(9		)	(2,097		)	(120		)
Operating expenses:
Research and development	17			—			762			—
Sales and marketing	—			—			56			—
General and administrative	308			3			486			323
Restructuring charge (recovery)	72			—			729			(10		)
Total operating expenses	397			3			2,033			313
Operating loss	(2,103		)	(12		)	(4,130		)	(433		)
Other expense, net	—			—			(1		)	—
Loss from discontinued operations	$	(2,103	)	$	(12	)	$	(4,131	)	$	(433	)

The activity in 2013 is limited to the continued support of certain maintenance contracts entered into prior to shutting down the Israel Technology Development Center, as well as expenses related to the resolution of a dispute with the former primary AssuredUVS customer.

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Product Warranties

6 Months Ended

Jun. 30, 2013

Product Warranties Disclosures [Abstract]

Product Warranties

Product Warranties

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 three years. 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 intended to be covered by corresponding supplier warranties. For warranty costs not covered by our suppliers, we provide for estimated warranty costs in the period the revenue is recognized. Estimated liabilities for product warranties are included in accrued expenses.

Our warranty accrual and cost activity is as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Balance, beginning of period	$	6,930		$	2,743		$	6,871		$	4,455
Charges to operations	106			372			474			490
Deductions for payments made	(2,199		)	(145		)	(2,508		)	(1,166		)
Changes in estimates	(58		)	(287		)	(58		)	(1,096		)
Balance, end of period	$	4,779		$	2,683		$	4,779		$	2,683

During the first quarter of 2013, we were able to negotiate more favorable rates with a third-party service provider. Accordingly, we adjusted our warranty accrual by $0.8 million to reflect this change.

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Inventories

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Inventories

Inventories

The components of inventories consist of the following (in thousands):

	December 31, 2012		June 30, 2013
Purchased parts and materials	$	3,051	$	2,139
Finished goods	1,986		2,054
Total inventory	$	5,037	$	4,193

Inventories are valued at the lower of cost (first-in, first-out method) or market value. The valuation of production inventory requires us to estimate excess or obsolete inventory. The determination of excess or obsolete inventory requires us to estimate the future demand for our products. Our markets are volatile, subject to technological risks and price changes and inventory reduction programs by our customers. In addition, we are required to make last time buys of certain components on occasion. These factors result in a risk that we will forecast incorrectly and purchase excess inventories of particular products or have commitments to purchase excess inventory components from our suppliers. As a result, actual demand will differ from forecasts, and such a difference has in the past and may in the future have a material effect on our financial statements. Any write downs to inventory due to the existence of excess quantities, physical obsolescence, changes in pricing, damage, or other causes establish a new cost basis for the inventory. When we sell or dispose of reserved inventory the new cost basis is charged to cost of sales. Service inventory is amortized ratably over the estimated life of the related product series.

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Summary Of Significant Accounting Policies Cash and cash equivalents (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Cash and Cash Equivalents, at Carrying Value	$ 40,402	$ 40,315	$ 40,499	$ 46,168
Foreign Subsidiaries [Member]
Cash and Cash Equivalents, at Carrying Value	$ 3,100

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Inventory Disclosure [Abstract]
Inventory, Raw Materials, Net of Reserves	$ 2,139	$ 3,051
Inventory, Finished Goods, Net of Reserves	2,054	1,986
Total inventory	$ 4,193	$ 5,037

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 segment	Jun. 30, 2012
Segment Reporting Information [Line Items]
Number of reportable segments			1
Net revenue	$ 50,683	$ 47,708	$ 95,163	$ 102,306
United States
Segment Reporting Information [Line Items]
Net revenue	50,518	47,346	94,682	101,433
Europe
Segment Reporting Information [Line Items]
Net revenue	1	4	2	9
Asia
Segment Reporting Information [Line Items]
Net revenue	$ 164	$ 358	$ 479	$ 864

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	58,613,000	58,265,000
Common stock, shares outstanding	58,613,000	58,265,000

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Commitments And Contingencies

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments And Contingencies

Commitments and Contingencies

We are involved in certain legal actions and claims from time to time arising in the ordinary course of business. Management believes that the outcome of such litigation and claims could have a material effect on our financial statements. Historically, the outcome of such litigation and claims has not had a material adverse effect on our financial condition or results of operations.

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Condensed Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash Flows From Operating Activities:
NET INCOME (LOSS)	$ 1,096	$ (6,916)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	1,463	1,959
Stock-based compensation expense	1,357	2,076
Provision for doubtful accounts, net of recoveries	(5)	25
Impairment of Intangible Assets (Excluding Goodwill)	0	1,647
Tangible Asset Impairment Charges	0	244
Changes in operating assets and liabilities:
Accounts receivable	(4,053)	4,582
Inventories	839	595
Prepaid expenses and other assets	(240)	3,194
Accounts payable	2,123	(9,162)
Accrued compensation and other expenses	(836)	(3,341)
Deferred revenue	1,098	602
Other long-term liabilities	160	412
Net cash provided by (used in) operating activities	3,002	(4,083)
Cash Flows From Investing Activities:
Purchases of property and equipment	(2,327)	(1,425)
Net cash used in investing activities	(2,327)	(1,425)
Cash Flows From Financing Activities:
Principal payment of note payable	0	(71)
Payments on bank borrowings	(5,600)	0
Proceeds from bank borrowings	4,900	0
Adjustments Related to Tax Withholding for Share-based Compensation	(215)	(533)
Proceeds from sale of stock to employees	428	448
Net cash used in financing activities	(487)	(156)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	(101)	(5)
Net (Decrease) Increase in Cash and Cash Equivalents	87	(5,669)
Cash and Cash Equivalents, beginning of period	40,315	46,168
Cash and Cash Equivalents, end of period	40,402	40,499
Supplemental Disclosures of Non-Cash Investing Activities:
Property and equipment acquired but not yet paid	308	811
Supplemental Cash Flow Data:
Cash paid for income taxes	$ 84	$ 39

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
ASSETS
Cash and cash equivalents	$ 40,402	$ 40,315
Accounts receivable, net	29,072	25,025
Inventories	4,193	5,037
Prepaid expenses and other assets	6,047	5,810
Total current assets	79,714	76,187
Property and equipment, net	7,842	7,147
Other assets	559	603
Total assets	88,115	83,937
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	24,528	22,659
Accrued compensation	5,163	4,863
Accrued expenses	7,312	8,690
Deferred revenue	3,970	2,889
Credit facility borrowings	2,100	2,800
Total current liabilities	43,073	41,901
Other long-term liabilities	3,397	3,261
Total liabilities	46,470	45,162
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000 shares authorized, zero shares issued and outstanding at December 31, 2012 and June 30, 2013	0	0
Common stock, $.001 par value, 100,000 shares authorized, 58,265 and 58,613 shares issued and outstanding at December 31, 2012 and June 30, 2013, respectively	58	58
Additional paid-in capital	328,145	326,575
Accumulated other comprehensive loss	(3,329)	(3,533)
Accumulated deficit	(283,229)	(284,325)
Total stockholders' equity	41,645	38,775
Total liabilities and stockholders' equity	$ 88,115	$ 83,937

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Earnings Per Share (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Outstanding equity awards not included in the calculation of diluted net loss per share:
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			(31,000)		(27,000)
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount				0
Shares Paid for Tax Withholding for Share Based Compensation			(147,000)		(485,000)
Stock options
Outstanding equity awards not included in the calculation of diluted net loss per share:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	7,299,887	9,298,263	8,725,951	9,298,263
Range of exercise prices, lower limit	$ 1.26	$ 0.47	$ 1.06	$ 0.47
Range of exercise prices, upper limit	$ 16.36	$ 16.36	$ 16.36	$ 16.36
Unvested restricted stock awards
Outstanding equity awards not included in the calculation of diluted net loss per share:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	5,550	1,132,568	11,753	1,132,568
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period			(23,000)		(495,000)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			30,000		844,000
Warrant [Member]
Outstanding equity awards not included in the calculation of diluted net loss per share:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	1,602,489	1,602,489	1,602,489	1,602,489
Warrants, exercise price	2.40	2.40	2.40	2.40
2000ESPP [Member]
Outstanding equity awards not included in the calculation of diluted net loss per share:
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period			458,000		675,000

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Assets Measured at Fair Value on a Recurring Basis

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,800	$	—	$	2,800	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,100	$	—	$	2,100	$	—	$	—

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,315	$	40,315	$	—	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,402	$	40,402	$	—	$	—	$	—

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Credit Facilities (Details) (USD $)	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Credit Facility [Line Items]
Letters of credit outstanding	$ 2,100,000	$ 2,800,000
Line of Credit Facility, Covenant Compliance	. We are currently in compliance with all covenant requirements.
Line of Credit Facility, Interest Rate Description	prime rate, which was 4% as of June 30, 2013
Line of Credit Facility, Collateral	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
Silicon Valley Bank
Credit Facility [Line Items]
Line of Credit Facility, Remaining Borrowing Capacity	21,000,000
Credit facility | Silicon Valley Bank
Credit Facility [Line Items]
Borrowing capacity	30,000,000
Minimum net worth requirement	50,000,000
Line of Credit Facility, Covenant Terms, Borrowing Base, Possible Increase	20,000,000
Period for borrowing base requirement	90 days
Cash and cash equivalents, net of amount outstanding under credit agreement	20,000,000
Variable rate basis	prime
Interest rate over prime	1.00%
Letters of credit | Silicon Valley Bank
Credit Facility [Line Items]
Letters of credit outstanding	2,100,000
Threshold One [Member]
Credit Facility [Line Items]
Customer accounts receivable concentration limit	25.00%
Threshold Two [Member]
Credit Facility [Line Items]
Customer accounts receivable concentration limit	50.00%
Threshold Three [Member]
Credit Facility [Line Items]
Customer accounts receivable concentration limit	70.00%
Required Borrowing Base Immediately Preceeding 90 Days [Member] | Credit facility | Silicon Valley Bank
Credit Facility [Line Items]
Borrowing base requirement	$ 40,000,000

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Fair Value Measurements (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring Basis
Letters of credit outstanding	$ 2,100,000	$ 2,800,000
Liabilities, Fair Value Adjustment	0	0
Total
Fair Value, Assets and Liabilities Measured on Recurring Basis
Cash and cash equivalents	40,402,000	40,315,000
Level 1
Fair Value, Assets and Liabilities Measured on Recurring Basis
Line of Credit Facility, Fair Value of Amount Outstanding	0	0
Level 2
Fair Value, Assets and Liabilities Measured on Recurring Basis
Line of Credit Facility, Fair Value of Amount Outstanding	2,100,000	2,800,000
Level 3
Fair Value, Assets and Liabilities Measured on Recurring Basis
Line of Credit Facility, Fair Value of Amount Outstanding	0	0
Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring Basis
Assets, Fair Value Adjustment	0	0
Fair Value, Measurements, Recurring [Member] | Level 1
Fair Value, Assets and Liabilities Measured on Recurring Basis
Cash and cash equivalents	40,402,000	40,315,000
Fair Value, Measurements, Recurring [Member] | Level 2
Fair Value, Assets and Liabilities Measured on Recurring Basis
Cash and cash equivalents	0	0
Fair Value, Measurements, Recurring [Member] | Level 3
Fair Value, Assets and Liabilities Measured on Recurring Basis
Cash and cash equivalents	$ 0	$ 0

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Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The short-term nature of our financial instruments expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates. There were no transfers between Level I, II or III inputs for any of our assets measured at fair value during the reporting period.

Assets Measured at Fair Value on a Recurring Basis

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,315	$	40,315	$	—	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
	(in thousands)
Cash and cash equivalents	$	40,402	$	40,402	$	—	$	—	$	—

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, and credit facility borrowings. The following disclosures relate to financial instruments for which the ending balances at December 31, 2012 and June 30, 2013, are not carried at fair value in their entirety on the Unaudited Condensed Consolidated Balance Sheets. These tables present the carrying value and fair value, by fair value hierarchy, of our financial instruments, excluding cash and cash equivalents at December 31, 2012 and June 30, 2013, respectively (in thousands).

			Fair Value Measurements Using
Description	December 31, 2012		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,800	$	—	$	2,800	$	—	$	—

			Fair Value Measurements Using
Description	June 30, 2013		Quoted Prices for Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total (Losses)
Credit facility borrowings	$	2,100	$	—	$	2,100	$	—	$	—

The short-term nature of our financial instruments expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates.

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Earnings Per Share (Calculation of basic and diluted EPS) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Earnings Per Share [Abstract]
Income (Loss) from Continuing Operations Attributable to Parent	$ 2,089	$ (2,945)	$ 1,529	$ (2,785)
Weighted Average Number of Shares Outstanding, Basic	58,384	56,934	58,194	56,484
Incremental Common Shares Attributable to Share-based Payment Arrangements	413	0	422	0
Weighted Average Number of Shares Outstanding, Diluted	58,797	56,934	58,616	56,484
Earnings Per Share, Basic	$ 0.04	$ (0.05)	$ 0.03	$ (0.05)
Earnings Per Share, Diluted	$ 0.04	$ (0.05)	$ 0.03	$ (0.05)

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Summary Of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The financial statements of Dot Hill Systems Corp. (referred to herein as Dot Hill, we, our or us) contained herein are unaudited and in the opinion of management contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and disclosures required by GAAP for complete financial statements. 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, 2012. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2013.

2012 amounts in our unaudited condensed consolidated financial statements have been retrospectively adjusted for discontinued operations.

Use of Accounting Estimates

Use of Accounting Estimates

The preparation of our unaudited condensed consolidated 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. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition, inventory valuation, recurring and specific issue warranty obligations, the valuation and recognition of stock-based compensation expense, and the valuation of long-lived assets, including intangible assets. In addition, we have other accounting policies that involve estimates such as the determination of useful lives of long-lived assets, accruals for restructuring, and income taxes, including the valuation allowance for deferred tax assets. Actual results may differ from these estimates and such differences could be material.

Revenue Recognition

Revenue Recognition

We derive our revenue from sales of our hardware products, software and services.

Hardware

Hardware product revenue consists of revenue from sales of our AssuredSAN storage systems that is integrated with industry standard hardware which is essential to the functionality of the integrated system product. We recognize hardware product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recognized for hardware product sales upon transfer of title and risk of loss to the customer and in addition, upon installation for certain of our AssuredUVS appliance products. 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 pricing adjustments differ from past experience and our estimates, additional revenue reserves may be required.

Software

In accordance with the specific guidance for recognizing software revenue, where applicable, we recognize revenue from perpetual software licenses at the inception of the license term assuming all revenue recognition criteria have been met. We use the relative method to allocate revenue to software licenses at the inception of the license term when vendor-specific objective evidence, or VSOE, of fair value for all undelivered elements related to our products is available. We have established VSOE for the fair value of our support services as measured by the stated renewal prices paid by our customers when the services are sold separately on a standalone basis.

Specific long-term software contracts may contain multiple deliverables including software licenses, services, training and post-contract support for which we have not established VSOE for the fair value of any of the elements. Under specific guidance for recognizing software revenue, we begin recognizing revenue upon the delivery of all the elements except post-contract support (PCS). We defer all the direct and incremental costs related to the deliverables in these contracts until delivery of all the elements except PCS. The deferred revenue and costs are amortized over the contractual PCS support periods.

During the preparation of the Company's consolidated financial statements for the year ended December 31, 2012 and the accounting analysis for the renewal of a long-term software contract, the Company determined that it had applied an inappropriate revenue recognition methodology to one of its long-term software contracts in 2010, 2011 and during the first three quarters of 2012. The Company recorded revenue as royalty payments were received on this contract and should have deferred all the revenue and direct and incremental costs until all the deliverables, except PCS, were delivered in 2012. This resulted in an understatement of$0.1 million and $2.2 millionof revenue and$0.3 million and $1.9 millionof costs for the three and six months endedJune 30, 2012, respectively, which was corrected in the fourth quarter of 2012.

Service

Our service revenue primarily includes out-of-warranty repairs and product maintenance contracts. Out-of warranty repairs primarily consist of product repair services performed by our contract manufacturers for those customers that allowed their original product warranty to expire without purchasing one of our higher level support service plans. Revenue from these out-of-warranty repairs, and the associated cost of sales, is recognized in the period these services are provided. Service revenue also consists of product maintenance contracts purchased by our customers as an extension of our standard warranty. Revenue from our product maintenance contracts is deferred and recognized ratably over the contract term, generally 12 to 36 months. Net revenue derived from services was less than 10% of total revenue for all periods presented.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price, or TPE, and (iii) best estimate of the selling price, or ESP. VSOE generally exists only when we sell the deliverable separately and represents the actual price charged by us for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.

From time to time, we enter into arrangements with customers that include acceptance criteria. In such instances, we defer all revenue on the arrangement until customer acceptance is obtained or the acceptance clause lapses.

Revenue Recognition for Sales to Channel Partners

On sales to channel partners, we evaluate whether fees are considered fixed or determinable by considering a number of factors, including our ability to estimate returns, payment terms and our relationship and past history with the particular channel partner. If fees are not considered fixed or determinable at the time of sale to a channel partner, revenue recognition is deferred until there is persuasive evidence indicating the product has sold through to an end-user. Persuasive evidence of sell-through may include reports from channel partners documenting sell-through activity or data indicating an order has shipped to an end-user.

Deferred Revenue

We defer revenue on upfront nonrefundable payments from our customers and recognize it ratably over the term of the agreement, unless the payment is in exchange for products delivered that represent the culmination of a separate earnings process. When we provide consideration to a customer, we recognize the value of that consideration as a reduction in net revenue. We may be required to maintain inventory with certain of our largest OEM customers, which we refer to as hubbing arrangements. 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 has removed our product from the warehouse to incorporate into its end products.

Concentration of Customers and Suppliers

Concentration of Customers and Suppliers

A majority of our net revenue is derived from a limited number of customers. We currently have two customers that account for more than 10% of our total net revenue: Hewlett Packard, or HP, and Tektronix, Inc., or Tektronix. Our agreements with our original equipment manufacturers, or 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.

Net revenue by major customer is as follows (as a percentage of total net revenue):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
HP	72	%	52	%	66	%	57	%
Tektronix	7	%	21	%	13	%	16	%
Other customers less than 10%	21	%	27	%	21	%	27	%
Total	100	%	100	%	100	%	100	%

HP and Tektronix continue to account for a significant percentage of our sales. If our relationship with HP or Tektronix were disrupted or declined significantly, we would lose a substantial portion of our anticipated net revenue and our business could be materially harmed. We cannot guarantee that our relationship with HP, Tektronix or our other customers will expand or not otherwise be disrupted.

We expect that the sale of our products to a limited number of customers will continue to account for a high percentage of net revenue for the foreseeable future. Our Product Purchase Agreement with HP, as amended, terminates on October 30, 2016. HP also holds warrants to purchase 1,602,489 shares of our common stock at an exercise price of $2.40 per share, expiring on October 30, 2016.

We currently rely on a limited number of contract manufacturing partners to produce substantially all of our products. As a result, should any of our current manufacturing partners, such as Foxconn Technology Group, or parts suppliers not produce and deliver inventory for us to sell on a timely basis, operating results may be adversely impacted.

Cash and Cash Equivalents

Cash and Cash Equivalents

We classify investments as cash equivalents if they are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of money market mutual funds issued or managed in the United States. As of December 31, 2012 and June 30, 2013, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

As of June 30, 2013, $3.1 million of the $40.4 million of cash and cash equivalents was held by our foreign subsidiaries.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

We establish an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. We determine the allowance for doubtful accounts based on the aging of our accounts receivable balances and an analysis of our historical experience of bad debt write-offs.

Long-lived Asset Impairment

Long-lived Asset Impairment

We periodically review the recoverability of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment in the carrying value of an asset group is recognized whenever anticipated future undiscounted cash flows from an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

In September 2011, our primary AssuredUVS customer informed us that the AssuredUVS software would no longer be a component of its business strategy, resulting in significant declines in revenues for the Company. Our long-lived assets consisted of the intangible assets associated with our acquisition of certain identified Cloverleaf Communications, Inc., or Cloverleaf, assets acquired in January 2010. The impairment of these long-lived assets is now reported in discontinued operations (see Note 3) since we have ceased all ongoing operational activities as of September 30, 2012.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective will not have a material impact on our results of operations and financial position.

In February 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This update requires presentation of reclassifications from accumulated other comprehensive income by component to net income either on the face of the income statement or in a single footnote, but does not require any new information to be disclosed. This update is effective for the interim and annual periods beginning after December 15, 2012. The Company has adopted ASU 2013-2 as of the Company's interim period ending March 31, 2013. The adoption of this update has not had any impact on the Company's financial statements as the Company has not had any reclassifications from accumulated other comprehensive income to net income. Other comprehensive income in each period is comprised solely of foreign currency translation adjustments.

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Credit Facilities

6 Months Ended

Jun. 30, 2013

Line of Credit Facility [Abstract]

Credit Facilities

Credit Facilities

We maintain a credit facility with Silicon Valley Bank for cash advances of up to an aggregate of $30 million based upon an advance rate dependent on certain concentration limits within eligible accounts receivable. These limits exclude certain eligible customer receivables if an individual customer account balance exceeds 25, 50 or 70 percentof the total eligible accounts receivable, depending on the customer, as defined by our Loan and Security Agreement with Silicon Valley Bank. Borrowings under the credit facility bear interest at the prime rate, which was 4% as of June 30, 2013 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 that we maintain at all times a net worth, as defined in the agreement, of $50 million, increasing by 50% of net income, 50% of issuances of equity and 50% of the principal amount of any subordinated debt. 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. The maturity date of the credit facility is July 21, 2015. As ofJune 30, 2013, there was $2.1 million outstanding under the Silicon Valley Bank line of credit. There was $21.0 millionavailable for borrowing under the agreement as of June 30, 2013. We are currently in compliance with all covenant requirements.

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Earnings Per Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

Basic earnings per share, for both continuing and discontinued operations, is calculated by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share, for both continuing and discontinued operations, is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period and including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding warrants, stock options, share based compensation awards and other dilutive securities. No such items were included in the computation of diluted loss per share in the three and six months endedJune 30, 2012 because we incurred net losses in the periods and the effect of inclusion would have been anti-dilutive.

The following is a reconciliation of weighted-average shares outstanding used in the calculation of basic and diluted earnings from continuing operations per share for the three and six months endedJune 30, 2012 and 2013 (in thousands, except per share data):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
Income (loss) from continuing operations	$	(2,945	)	$	2,089	$	(2,785	)	$	1,529
Basic weighted-average common shares outstanding	56,934			58,384		56,484			58,194
Assumed exercise of dilutive stock options and restricted stock	—			413		—			422
Diluted weighted-average common shares outstanding	56,934			58,797		56,484			58,616
Income (loss) from continuing operations:
Basic earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03
Diluted earnings (loss) per share	$	(0.05	)	$	0.04	$	(0.05	)	$	0.03

Outstanding equity awards not included in the calculation of diluted net income (loss) per share because their effect was anti-dilutive were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices	Number of Potential Shares	Range of Exercise Prices		Number of Potential Shares	Range of Exercise Prices
Stock options	9,298,263	$0.47 - $16.36		7,299,887	$1.26 - $16.36	9,298,263	$0.47 - $16.36		8,725,951	$1.06 - $16.36
Unvested stock awards	1,132,568	$	—	5,550	—	1,132,568	$	—	11,753	$	—
Warrants	1,602,489	$	2.40	1,602,489	2.40	1,602,489	$	2.40	1,602,489	$	2.40

Shares issued

During the six months endedJune 30, 2013, there were 31,000 shares issued from exercise of stock options, 30,000 restricted stock awards granted, and 458,000 shares purchased through our Employee Stock Purchase Plan. Additionally, during the six months endedJune 30, 2013, there were 147,000 shares repurchased for tax purposes and 23,000 restricted stock awards canceled. During the year ended December 31, 2012, there were 27,000 shares issued from exercise of stock options, 844,000 restricted stock awards granted, and 675,000 shares purchased through our Employee Stock Purchase Plan. Additionally, during the year ended December 31, 2012, there were 485,000 shares repurchased for tax purposes and 495,000 restricted stock awards canceled.

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Intangible Assets (Details) (USD $)	3 Months Ended		6 Months Ended		3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2012	Dec. 31, 2012	Jun. 30, 2012 Discontinued Pperations [Member]	Jun. 30, 2012 Discontinued Pperations [Member]	Dec. 31, 2012 RaidCore Technology [Member]	Jun. 30, 2013 RaidCore Technology [Member]
Finite-Lived Intangible Assets
Estimated Useful Life							4 years	4 years
Gross	$ 4,256,000			$ 4,256,000			$ 4,256,000	$ 4,256,000
Accumulated Amortization	(4,256,000)			(4,256,000)			(4,256,000)	(4,256,000)
Net	0			0			0	0
Amortization of intangible assets	$ 0	$ 300,000	$ 700,000		$ 0	$ 200,000

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Discontinued Operations (Tables)

6 Months Ended

Jun. 30, 2013

Discontinued Operations and Disposal Groups [Abstract]

Summary of the components of loss from discontinued operations

The following is a summary of the components of loss from discontinued operations for the three and six months endedJune 30, 2012 and 2013 (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Net revenue	$	60		$	2		$	206		$	22
Cost of goods sold	1,766			11			2,303			142
Gross loss	(1,706		)	(9		)	(2,097		)	(120		)
Operating expenses:
Research and development	17			—			762			—
Sales and marketing	—			—			56			—
General and administrative	308			3			486			323
Restructuring charge (recovery)	72			—			729			(10		)
Total operating expenses	397			3			2,033			313
Operating loss	(2,103		)	(12		)	(4,130		)	(433		)
Other expense, net	—			—			(1		)	—
Loss from discontinued operations	$	(2,103	)	$	(12	)	$	(4,131	)	$	(433	)

The activity in 2013 is limited to the continued support of certain maintenance contracts entered into prior to shutting down the Israel Technology Development Center, as well as expenses related to the resolution of a dispute with the former primary AssuredUVS customer.

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Segment Information

6 Months Ended

Jun. 30, 2013

Segment Reporting [Abstract]

Segment Information

Segment Information

Operating segments, as defined in Accounting Standard Codification, or ASC, 280 Segment Reporting, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Chief Operating Decision Maker, or CODM, in deciding how to allocate resources and in assessing performance. ASC 280 also requires disclosures about products and services, geographic areas and significant customers.

Our CODM operates our business in one reportable operating segment that includes the design, manufacture and marketing of a range of software and hardware storage systems for the entry and midrange storage markets.

Geographic Revenues

Net revenue is recorded in the geographic area in which the sale originated. Information concerning principal geographic areas in which we operate is as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
Net revenue:
United States	$	47,346	$	50,518	$	101,433	$	94,682
Europe, Middle East and Africa	4		1		9		2
Asia	358		164		864		479
Total net revenue	$	47,708	$	50,683	$	102,306	$	95,163

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Product Warranties (Tables)

6 Months Ended

Jun. 30, 2013

Product Warranties Disclosures [Abstract]

Warranty Accrual and Cost Activity

Our warranty accrual and cost activity is as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Balance, beginning of period	$	6,930		$	2,743		$	6,871		$	4,455
Charges to operations	106			372			474			490
Deductions for payments made	(2,199		)	(145		)	(2,508		)	(1,166		)
Changes in estimates	(58		)	(287		)	(58		)	(1,096		)
Balance, end of period	$	4,779		$	2,683		$	4,779		$	2,683

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Inventories (Tables)

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Components of inventory

The components of inventories consist of the following (in thousands):

	December 31, 2012		June 30, 2013
Purchased parts and materials	$	3,051	$	2,139
Finished goods	1,986		2,054
Total inventory	$	5,037	$	4,193

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 31, 2013
Document And Entity Information [Abstract]
Entity Registrant Name	DOT HILL SYSTEMS CORP
Entity Central Index Key	0001042783
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		58,964,467

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Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of identifiable intangible assets

Identifiable intangible assets are as follows (in thousands), as of December 31, 2012 and June 30, 2013:

	Estimated Useful  Life	Gross		Accumulated Amortization			Net
RaidCore technology	4 years	$	4,256	$	(4,256	)	$	—
Total intangible assets		$	4,256	$	(4,256	)	$	—