10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2008

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: 001-33823

3PAR Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	77-0510671
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4209 Technology Drive Fremont, CA	94538
(Address of principal executive offices)	(Zip Code)

registrant’s telephone number, including area code: (510) 413-5999

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ            No  ¨

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.

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

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

The number of shares of the registrant’s Common Stock, $.001 par value, outstanding at October 31, 2008 was: 60,989,655

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2008 and March 31, 2008	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended September 30, 2008 and 2007	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2008 and 2007	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4T.	Controls and Procedures	36
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults upon Senior Securities	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 5.	Other Information	51
Item 6.	Exhibits	51

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

3PAR Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2008			March 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	48,376		$	97,585
Short-term investments		59,948			18,058
Accounts receivable, net		33,173			34,596
Inventory		26,081			18,057
Deferred cost		5,083			4,273
Prepaid and other current assets		2,051			2,077
Total current assets		174,712			174,646
Property and equipment, net		18,235			14,781
Deferred cost, non-current		—			251
Other non-current assets		131			156
Total assets	$	193,078		$	189,834
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	—		$	4,000
Accounts payable		12,324			12,527
Accrued compensation and benefits		10,995			11,651
Other accrued liabilities		4,909			5,020
Deferred revenue		30,588			26,051
Accrued warranty		3,453			3,371
Current portion of notes payable		—			883
Total current liabilities		62,269			63,503
Accrued warranty, non-current		2,840			2,813
Deferred revenue, non-current		5,915			5,945
Other long-term liabilities		1,143			1,173
Total liabilities		72,167			73,434
Commitments and contingencies (Note 11)
Stockhoders’ equity:
Preferred stock, $0.001 par value; 20,000,000 shares authorized at September 30, 2008 and March 31, 2008; No shares issued and outstanding at September 30, 2008 and March 31, 2008		—			—
Common stock, $0.001 par value; 300,000,000 shares authorized at September 30, 2008 and March 31, 2008; 60,985,227 and 60,539,612 shares issued and outstanding at September 30, 2008 and March 31, 2008, respectively		61			61
Additional paid-in capital		295,675			290,558
Stockholders’ notes receivable		—			(36	)
Deferred stock-based compensation		(66	)		(186	)
Accumulated other comprehensive loss		(264	)		(15	)
Accumulated deficit		(174,495	)		(173,982	)
Total stockholders’ equity		120,911			116,400
Total liabilities and stockholders’ equity	$	193,078		$	189,834

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

3

3PAR Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2008			2007			2008			2007
Revenue:
Product	$	41,427		$	26,775		$	81,351		$	49,898
Support		3,720			1,206			6,749			1,891
Total revenue		45,147			27,981			88,100			51,789
Cost of revenue:
Product		14,551			9,126			28,572			17,236
Support		1,157			239			2,163			455
Total cost of revenue (1)		15,708			9,365			30,735			17,691
Gross profit		29,439			18,616			57,365			34,098
Operating expenses:
Research and development (1)		12,034			8,909			22,191			16,716
Sales and marketing (1)		15,078			9,936			29,379			20,393
General and administrative (1)		3,747			2,212			7,120			4,266
Total operating expenses		30,859			21,057			58,690			41,375
Loss from operations		(1,420	)		(2,441	)		(1,325	)		(7,277	)
Other income (expense), net:
Interest income		718			390			1,496			838
Interest expense		(168	)		(320	)		(185	)		(617	)
Other, net		(425	)		46			(433	)		77
Total other income, net		125			116			878			298
Loss before income tax benefit (provision)		(1,295	)		(2,325	)		(447	)		(6,979	)
Income tax benefit (provision)		104			(38	)		(66	)		(68	)
Net loss	$	(1,191	)	$	(2,363	)	$	(513	)	$	(7,047	)
Other comprehensive loss:
Net loss	$	(1,191	)	$	(2,363	)	$	(513	)	$	(7,047	)
Unrealized gain (loss) on short-term investments, net		5			17			(249	)		—
Comprehensive loss	$	(1,186	)	$	(2,346	)	$	(762	)	$	(7,047	)
Net loss per common share, basic and diluted	$	(0.02	)	$	(0.13	)	$	(0.01	)	$	(0.38	)
Shares used to compute basic and diluted net loss per common share		60,608			18,534			60,421			18,431
(1)    Includes stock-based compensation as follows:
Cost of revenue	$	66		$	36		$	114		$	79
Research and development		551			155			1,004			410
Sales and marketing		722			266			1,277			412
General and administrative		372			182			603			278

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

4

3PAR Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(513	)	$	(7,047	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,721			1,449
Stock-based compensation expense		2,998			1,179
Non-cash interest expense		—			38
Accretion of purchase discounts on short-term investments, net		(25	)		(328	)
Provision for doubtful accounts		351			60
Writedown for excess and obsolete inventory		710			255
Changes in assets and liabilities:
Accounts receivable		1,072			(5,710	)
Inventory		(8,770	)		661
Deferred cost		(559	)		(641	)
Prepaid expenses and other current assets		26			(2,582	)
Other non-current assets		25			1
Accounts payable		821			(536	)
Accrued liabilities		(516	)		457
Deferred revenue		4,507			6,769
Accrued warranty		109			402
Other long-term liabilities		(30	)		133
Net cash provided by (used in) operating activities		2,927			(5,440	)
Cash flows from investing activities:
Proceeds from maturities of short-term investments		7,123			21,495
Proceeds from sales of short-term investments		800			—
Purchases of short-term investments		(50,037	)		(20,363	)
Purchase of property and equipment		(7,199	)		(2,731	)
Net cash used in investing activities		(49,313	)		(1,599	)
Cash flows from financing activities:
Proceeds from issuance of common stock		2,171			184
Repurchase of shares of unvested common stock		(111	)		(8	)
Proceeds from line of credit		—			6,500
Repayments on line of credit		(4,000	)		(2,500	)
Repayment of notes payable		(883	)		(798	)
Net cash provided by (used in) financing activities		(2,823	)		3,378
Net change in cash and cash equivalents		(49,209	)		(3,661	)
Cash and cash equivalents, beginning of period		97,585			16,722
Cash and cash equivalents, end of period	$	48,376		$	13,061

The accompanying notes are integral part of these condensed consolidated financial statements

5

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS

(unaudited)

1. The Company and its Significant Accounting Policies

The Company

3PAR Inc. (the “Company”) began operations in May 1999 and is a provider of utility storage solutions for large to medium enterprises, business-oriented service providers, consumer-oriented Internet/Web 2.0 companies and government entities. Its utility storage products offer simple, efficient and scalable tiered storage arrays designed to enhance the economics and performance of storage. The Company’s utility storage solution is designed to provision storage services rapidly and simply, reduce administrative cost, improve server and storage utilization, lower power requirements and scale efficiently to support the continuous growth of data.

Fiscal Year

The fiscal year ends on March 31. References to fiscal 2009, for example, refer to the fiscal year ending March 31, 2009.

Initial Public Offering

In November 2007, the Company completed an initial public offering (“IPO”) of its common stock in which it sold and issued 7,702,479 shares of common stock, including 202,479 shares issued in December 2007 in connection with the partial exercise of the underwriters’ over-allotment option, at an issue price of $14.00 per share. A total of $107.8 million in gross proceeds was raised from the IPO, or approximately $97.4 million in net proceeds after deducting underwriting discounts and commissions of $7.5 million and other offering costs of $2.9 million. Upon the closing of the offering, all shares of the Company’s then-outstanding convertible preferred stock automatically converted into 33,256,720 shares of common stock.

Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K (File No. 001-33823) for the year ended March 31, 2008 (“Form 10-K”).

The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s consolidated financial position at September 30, 2008, and the consolidated results of its operations for the three and six months ended September 30, 2008 and 2007, and the consolidated cash flows for the six months ended September 30, 2008 and 2007. The results of operations for the three and six months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at March 31, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP.

6

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The Company’s significant accounting policies are disclosed in the Company’s Form 10-K. With the exception of those discussed below, there have been no significant changes to these policies and no recent accounting pronouncements or changes in accounting pronouncements during the three and six months ended September 30, 2008 that are of significance or potential significance to the Company.

Revenue Recognition

The Company derives its revenue from sales of storage solutions that include hardware, software and related support. Because the embedded software of its storage solution is deemed to be more than incidental to the product as a whole, the Company accounts for revenue for the entire sale in accordance with the guidance provided by the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2 (“SOP 97-2”), Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.

The Company recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and, if applicable, upon satisfaction of evaluation criteria or expiration of the evaluation period, as the case may be. The Company’s fees are considered fixed or determinable at the execution of an agreement, which comprises the final terms of sale including the description, quantity and price of each product purchased. The Company’s sales arrangements with customers and resellers do not include rights of return or rebates and to date, product returns have been negligible. The Company assesses its ability to collect from its customers based on a number of factors, including creditworthiness of the customer and past transaction history.

Prior to March 2007, the Company provided only basic and premium hardware warranty and software warranty, which was limited to bug fixes for any non-conforming software products. The Company also offered an extended hardware and software warranty after the initial contract term. The Company recognized as product revenue all revenue associated with sales of its products at the time of shipment or installation, depending on the terms of the arrangement, provided that all other revenue recognition criteria were met. In accordance with Financial Accounting Standard Board’s (“FASB”) Technical Bulletin 90-1, (“FTB 90-1”), Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, the Company recognized revenue relating to its premium hardware warranty and extended hardware and software warranties ratably as support revenue over the warranty period, which was typically three years for premium warranty and one year from termination of the basic warranty for extended warranty.

In March 2007, in anticipation of evolving customer requirements for software support, the Company changed its product offering from a software warranty model to a software support model. Under the software support model, the customer receives, in addition to bug fixes, unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Commencing in March 2007, all systems are sold together with software support. This new software support is considered post-contract customer support (“PCS”) under SOP 97-2.

The Company’s sales are comprised of multiple elements, which include hardware, software and PCS. The Company allocates revenue to each delivered element of the sale using the residual method. Under the residual method, when PCS is the only undelivered element, the Company defers revenue from the sale equivalent to the vendor specific objective evidence (“VSOE”) of fair value of PCS, or the undelivered element, and applies any discounts to the hardware and software elements in accordance with the provisions of SOP 97-2, as amended by SOP 98-9. VSOE of fair value of PCS within a sale is based upon stated renewal rates included within the evidence of arrangement with the customer. In circumstances where the arrangement does not include stated renewal rates, VSOE of fair value of PCS is based on actual renewal rates for separate sales of PCS to other customers.

7

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

During the first quarter of fiscal 2008, the Company established VSOE of the fair value for software support based on stated renewal rates offered to customers within the arrangement. As a result, beginning in the first quarter of fiscal 2008, the Company applied the residual method, as allowed by SOP 98-9, to revenue recognition of the software support. The Company defers revenue recognition of the software support and recognizes it on a straight-line basis over the support period, which is primarily one year. The Company allocates the remainder of the revenue associated with the sale to product revenue using the residual method. Premium and extended hardware warranties continue to be recognized in accordance with FTB 90-1 and are classified as support revenue.

During the month of March 2007, the Company did not have VSOE of fair value for its new software support model. Accordingly, through March 31, 2008, the Company was recognizing all of the hardware and support revenue from transactions that included software support during the month of March 2007 as product revenue ratably over the support period of one to three years. During the first quarter of fiscal 2009, the Company established VSOE of fair value of PCS for these March 2007 transactions based on actual renewal rates for separate sales of PCS to other customers. Accordingly, in the first quarter of fiscal 2009 the Company applied the residual method to the remaining deferred revenue associated with the March 2007 transactions.

The Company typically recognizes product revenue upon installation for transactions sold directly to end users, provided that the remaining revenue recognition criteria discussed above are satisfied. In cases where the arrangement includes acceptance criteria, the Company recognizes revenue upon the earlier of receipt of customer acceptance or the lapse of the acceptance period. For sales through its resellers, the Company generally recognizes product revenue upon shipment, based on freight terms of FOB Shipping Point or FOB Destination, assuming all other criteria for revenue recognition discussed above have been satisfied.

Recent Accounting Pronouncements

In March 2008, Financial Accounting Standard Board (“FASB”) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“SFAS 161”), which expands the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company is required to adopt SFAS 161 effective April 1, 2009. SFAS 161 does not change the accounting treatment for derivative instruments and therefore, the Company does not expect the adoption of SFAS 161 to have a material effect on its financial position, results of operations, or cash flows.

In December 2007, FASB issued SFAS No. 141 (R), Business Combinations (“SFAS No.141(R)”), which becomes effective for fiscal periods beginning after December 15, 2008. SFAS No. 141 (R) requires all business combinations completed after the effective date to be accounted for by applying the acquisition method (previously referred to as the purchase method). Companies applying this method will have to identify the acquirer, determine the acquisition date and purchase price and recognize at the acquisition-date the fair values of the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree. In the case of a bargain purchase, the acquirer is required to reevaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on that date if an excess remains. The Company is required to adopt SFAS No 141(R) effective April 1, 2009. The Company does not expect the adoption of SFAS No. 141(R) to have a material effect on its financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51 (“SFAS 160”), which becomes effective for fiscal periods beginning after December 15, 2008. This statement amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.

8

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The Company is required to adopt SFAS 160 effective April 1, 2009. The Company does not expect the adoption of SFAS 160 to have a material effect on its financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. As a result of SFAS 157, there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”) and FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delayed the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2010. The measurement and disclosure requirements related to financial assets and financial liabilities became effective for the Company beginning in the first quarter of fiscal 2009. The adoption of SFAS No. 157 did not have a significant impact on the Company’s consolidated financial statements.

In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active (“FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Company’s September 30, 2008 financial statements. The application of the provisions of FSP 157-3 did not materially affect the Company’s financial position, results of operations, or cash flows.

2. Net Loss per Common Share

The Company applies the provisions of the Emerging Issues Task Force EITF Issue No. 03-6, Participating Securities and the Two—Class Method under FASB Statement 128 (“EITF No. 03-6”), which established standards regarding the computation of earnings per share by companies with participating securities or multiple classes of common stock. Prior to its conversion to common stock upon the closing of the IPO, the Company’s redeemable convertible preferred stock were participating securities due to their participation rights related to cash dividends declared by the Company.

EITF No. 03-6 requires net loss attributable to common stockholders for the period to be allocated to common stock and participating securities to the extent that the securities are required to share in the losses. The Company’s redeemable convertible preferred stock did not have a contractual obligation to share in losses of the Company. Basic net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding during the period that are not subject to vesting provisions. Diluted net loss per common share is calculated by giving effect to all potentially dilutive common shares, including options, common stock subject to repurchase, contingently issuable common stock, warrants and redeemable convertible preferred stock.

9

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The following table sets forth the computation of net loss per common share:

	Three Months Ended September 30,						Six Months Ended September 30,
	2008			2007			2008			2007
	(in thousands, except per share amounts)
Numerator:
Net loss	$	(1,191	)	$	(2,363	)	$	(513	)	$	(7,047	)
Denominator:
Weighted average number of shares outstanding		60,608			18,534			60,421			18,431
Basic and diluted net loss per share	$	(0.02	)	$	(0.13	)	$	(0.01	)	$	(0.38	)

The following potential shares of common stock (prior to application of treasury method) outstanding at September 30, 2008 and 2007 were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an antidilutive effect:

	September 30,
	2008	2007
	(in thousands)
Options to purchase common stock	7,693	5,740
Unvested restricted stock awards	350	—
Employee stock purchase plan	560	—
Common stock subject to repurchase	159	657
Warrants to purchase common stock	80	337
Redeemable convertible preferred stock (as converted basis)	—	33,257
	8,842	39,991

3. Balance Sheet Components

The following tables provide details of selected balance sheet accounts:

	September 30, 2008			March 31, 2008
	(in thousands)
Accounts Receivable, Net
Trade accounts receivable	$	33,742		$	34,823
Less: Allowance for doubtful accounts		(569	)		(227	)
Total	$	33,173		$	34,596
	September 30, 2008			March 31, 2008
	(in thousands)
Inventory
Raw materials	$	17,791		$	8,725
Work in process		4,737			5,696
Finished goods		3,553			3,636
Total	$	26,081		$	18,057

10

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

4. Short-term Investments

The following tables summarize the available-for-sale securities presented as short-term investments:

	September 30, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Short-term Investments
United States Government and agency securities	$	39,178	$	3	$	(162	)	$	39,019
Municipal bonds		6,154		1		(1	)		6,154
Commercial paper		9,189		—		(2	)		9,187
Corporate debt securities		5,691		—		(103	)		5,588
Total short-term investments	$	60,212	$	4	$	(268	)	$	59,948
	March 31, 2008
	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Short-term Investments
United States Government and agency securities	$	7,506	$	7	$	—		$	7,513
Municipal bonds		5,194		—		(23	)		5,171
Commercial paper		4,567		—		—			4,567
Corporate debt securities		806		1		—			807
Total short-term investments	$	18,073	$	8	$	(23	)	$	18,058

As of September 30, 2008, all of the Company’s short-term investments were classified as available-for-sale and certain investments had contractual maturities of greater than one year. However, management has the ability and intent, if necessary, to liquidate any of these investments in order to meet the Company’s liquidity needs within the next 12 months. Accordingly, all investments are classified as current assets on the consolidated balance sheets.

The cost basis and fair value of available-for-sale securities, by contractual maturity, are as follows:

	September 30, 2008
Due in	Cost Basis		Fair Value
	(in thousands)
Less than 1 year	$	42,404	$	42,315
1 to 2 years		2,617		2,545
2 to 5 years		15,191		15,088
Total short-term investments	$	60,212	$	59,948
	March 31, 2008
Due in	Cost Basis		Fair Value
	(in thousands)
Less than 1 year	$	10,470	$	10,469
1 to 2 years		2,602		2,586
2 to 5 years		5,001		5,003
Total short-term investments	$	18,073	$	18,058

11

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The Company invests in securities that are rated investment grade or better. The unrealized losses at September 30, 2008 on the Company’s investments are due to the current volatility in the credit markets. At September 30, 2008, none of these securities have been in a continuous unrealized loss position for more than 12 months. The Company has determined that these unrealized losses are temporary as the duration of the decline in value of investments has been short, the extent of the decline, in both dollars and as a percentage of costs, is not significant, and the Company has the ability to hold the investments until recovery, if necessary.

Unrealized gains and losses are recorded as a component of cumulative other comprehensive loss in stockholders’ equity. If these investments are sold at a loss or are considered to have other than temporarily declined in value, a charge to operations is recorded. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses reflected in other income (expense), net.

5. Fair Value Measurements

SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Fair Value Hierarchy

SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets consist of money market fund deposits, municipal bonds, commercial paper, United States government and agency securities, and corporate debt securities, that are traded in active markets with sufficient volume and frequency of transactions.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. As of September 30, the Company had no financial assets or liabilities for which fair value was determined using Level 2 inputs.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. As of September 30, 2008, the Company had no financial assets or liabilities for which fair value was determined using Level 3 inputs.

12

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The following table summarizes our financial assets measured at fair value on a recurring basis as of September 30, 2008 (in thousands):

	Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1)
Description
Cash equivalents:
Money market funds	$	5,348
United States Government and agency securities		3,980
Commercial paper		1,499
Short-term investments:
United States Government and agency securities		39,019
Municipal bonds		6,154
Commercial paper		9,187
Corporate debt securities		5,588
	$	70,775

6. Property and Equipment, Net

Property and equipment, net consists of the following:

	Estimated Useful Life	September 30, 2008			March 31, 2008
		(in thousands)
Property and Equipment, Net
Computer equipment	3 years	$	25,351		$	21,344
Computer software	5 years		2,797			2,211
Machinery and equipment	3-5 years		2,612			1,715
Furniture and fixtures	7 years		2,166			1,913
Leasehold improvements	Shorter of lease term or 5 years		8,174			7,804
			41,100			34,987
Less: accumulated amortization and depreciation			(22,865	)		(20,206	)
Total		$	18,235		$	14,781

13

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

7. Deferred Revenue

Deferred revenue consists of the following:

	September 30, 2008		March 31, 2008
	(in thousands)
Deferred Revenue
Product	$	19,726	$	15,810
Support		10,862		8,132
Ratable product and related support		—		2,109
Total deferred revenue, current		30,588		26,051
Support, non-current		5,915		4,894
Ratable product and related support, non-current		—		1,051
Total deferred revenue, non-current		5,915		5,945
Total deferred revenue	$	36,503	$	31,996

The Company recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and, if applicable, upon completion of installation and/or satisfaction of evaluation criteria or expiration of the evaluation period, as the case may be. Deferred product revenue relates to arrangements where all the above revenue recognition criteria have not been met.

Deferred support revenue primarily represents customer billings in excess of revenue recognized for PCS contracts, which the Company is legally entitled to invoice and collect. Revenue is recognized ratably over the support period, which typically ranges from one to three years.

The Company’s sales are comprised of multiple elements, which include hardware, software and PCS. Deferred ratable product and related support revenue consisted of March 2007 transactions where VSOE of fair value of PCS had not been established and the entire arrangement fee was being recognized ratably over the support period of one to three years. During the first quarter of fiscal 2009, the Company established VSOE of fair value of PCS for the March 2007 transactions that had been previously deferred based on renewal rates for separate sales of PCS to other customers. Accordingly, the Company applied the residual method to the remaining deferred revenue associated with the March 2007 transactions and recognized $2.8 million of revenue associated with the March 2007 transactions in the first quarter of fiscal 2009. At September 30, 2008, the deferred PCS revenue of $312,000 associated with these transactions is included in deferred support revenue and will be recognized ratably over the life of the remaining contract period.

8. Debt Obligations and Line of Credit

Notes Payable

In June 2005 and under amendments through March 2008, the Company entered into a loan and security agreement with a financial institution for borrowings of up to $6.0 million (the “Notes Payable”). The borrowings were available through March 31, 2006. Borrowings under this agreement bore interest at the 3-year Treasury Note rate plus 5.97%, fixed at the time of each advance. The interest payable on these notes ranged from 9.66% to 10.28% per annum. The Company borrowed an aggregate of $4.0 million on three notes through March 31, 2006. Each note was repayable ratably over a 30-month-period from the date of the borrowing. The final payment on the notes was made in September 2008.

Line of Credit

In connection with the Notes Payable, the Company was granted an additional $6.0 million revolving line of credit which provided for borrowings of up to 80% of eligible domestic accounts receivable. In fiscal 2007, the Company was extended an additional $6.0 million under its revolving line of credit and the total borrowing capacity was increased to $12.0 million. The line of credit bore interest at a variable rate which was linked to the prime lending rate. Under the terms of the revolving line of credit the Company was required to maintain a minimum tangible net worth level of $1.5 million plus 50% of all issuances of new equity or subordinated debt after September 30, 2007. The Company was in compliance with this requirement at March 31, 2008 and through the expiration date of May 30, 2008.

14

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The revolving line of credit was repaid in full in April 2008. Prior to the expiration of the revolving line of credit on May 30, 2008, the Company entered into an amended and restated loan and security agreement, which provides for borrowings up to $15.0 million. The revolving line of credit agreement contains a financial covenant that requires the Company to maintain a minimum tangible net worth of $70.0 million, which is increased by 50% of any new net equity proceeds and/or 50% of quarterly profits. Tangible net worth is defined as the consolidated total assets minus any amounts attributable to goodwill and intangible assets, reserves not already deducted from assets and total liabilities including all subordinated debt. In addition, the Company is required to maintain a quick ratio of at least 1.25 to 1.0. The Company was in compliance with these financial covenants as of September 30, 2008. The revolving line of credit provides the Company two options for interest rate: (i) the lender’s variable prime rate or (ii) LIBOR plus 200 basis points for the applicable period in effect at the time of the borrowing. The revolving line of credit expires on May 29, 2009. To date there have been no borrowings under the revolving line of credit.

The revolving line of credit is collateralized by an interest in all of the Company’s assets, excluding intellectual property. The Company is not permitted to sell its intellectual property other than to issue a nonexclusive license in the ordinary course of business.

9. Income Taxes

The Company has incurred annual operating losses since inception. As a result of those continuing losses, management has determined that it is more likely than not that the Company will not realize the benefits of the deferred tax assets and therefore has recorded a valuation allowance to reduce the carrying value of the deferred tax assets to zero. The Company’s tax provision relates primarily to alternative minimum tax (“AMT”) in the United States (“U.S.”) and provisions for income tax related to the Company’s international subsidiaries.

During the three and six months ended September 30, 2008, the Company recorded a net income tax benefit of $104,000 and an income tax provision of $66,000, respectively. The net income tax benefit for the three months ended September 30, 2008 was primarily due to recognition of a benefit of $181,000 during the second quarter of fiscal 2009 for a U.S. federal refundable credit as provided by the Housing and Economic Recovery Act of 2008 (“Act”). This amount was offset in part by a provision of $77,000 for state income taxes. The Act, signed into law in July 2008, allows taxpayers to claim refundable AMT or research and development credit carryovers if they forego bonus depreciation on certain qualified fixed assets placed in service from the period between April and December 2008. The Company estimated and recognized the credit based on fixed assets placed into service through the six months ended September 30, 2008.

On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such suspension; adopts the federal 20-year net operating loss carryforward period; phases-in the federal two-year net operating loss carryback periods beginning in 2011 and limits the utilization of tax credits to 50% of a taxpayer's taxable income. The Company incorporated the impact of this new law to the income tax provision during the second quarter of fiscal 2009. As a result, only 50% of California tax liability was off-set by the available state research & development tax credit carryover, yielding $75,000 of tax liability for the second quarter of fiscal 2009.

On October 3, 2008, the United States enacted a law, “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008.” Under this act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The Company anticipates no impact to its effective tax rate or tax provision in the third quarter of fiscal 2009 as the result of this law change due to the Company’s valuation allowance.

15

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

The Company’s only material uncertain tax position is its research and development credits, none of which would affect its income tax expense if recognized to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months. The Company recognizes interest and penalties related to income tax matters as part of the provision for income taxes. To date, the Company has incurred no such charges.

The Company files annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in various foreign jurisdictions. The Company remains subject to tax authority review for all jurisdictions for all years.

10. Share Based Payments

Stock-Based Benefit Plans:

2007 Equity Incentive Plan: The Company adopted the Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) subsequent to stockholder approval at the Company’s annual stockholder meeting in September 2008. This plan was implemented to amend the Company’s 2007 Equity Incentive Plan, which was adopted in October 2007, to include limitations to the number of shares that may be granted on an annual basis through individual awards. Additionally, the 2007 Plan allows the inclusion in awards of specific performance objectives upon achievement of which certain awards will vest or be issued, which in turn will allow the Company to be eligible to receive income tax deductions under Section 162(m) of the Internal Revenue Code.

The maximum aggregate number of shares that may be issued under the 2007 Plan is 10,375,000 shares, plus an automatic increase on the first day of each fiscal year beginning with the 2009 fiscal year, in an amount equal to the lesser of (A) five million shares of the Company’s common stock, (B) five percent of the Company’s outstanding common stock on the last day of the immediately preceding fiscal year or (C) such number of shares of the Company’s common stock determined by the Company’s board of directors. In accordance with these provisions, on April 1, 2008 the number of shares available for issuance under the plan was increased by 3.0 million shares.

The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation, which may be granted to employees (including officers), directors, and service providers. The 2007 Plan provides that a participant may not receive options for more than 1,000,000 shares in any fiscal year, except in connection with his or her initial service with the Company, in which case he or she may be granted an option covering up to an additional 4,000,000 shares. Under the 2007 Plan, incentive options granted to an employee who owns more than 10% of the voting power of all classes of the Company’s stock shall have an exercise price no less than 110% of the fair market value per share on the date of the grant. Options generally vest at the rate of 25% on each anniversary of the date of service contingent upon employment with the Company and expire no later than ten years after the date of grant. As of September 30, 2008, there were 11.0 million shares available for future issuance under the 2007 Plan.

2007 Employee Stock Purchase Plan: In October 2007, the Company’s stockholders approved the 2007 Employee Stock Purchase Plan (the “ESPP Plan”) and the Company reserved 1,550,000 shares for future issuance plus an annual increase to be added on the first day of each fiscal year beginning with the 2009 fiscal year, equal to the lesser of (i) 1.5 million shares of common stock, (ii) two percent of the outstanding shares of common stock on such date or (iii) an amount determined by the administrator. In accordance with these provisions, on April 1, 2008 shares available for issuance under the plan was increased by 1.2 million shares.

16

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

Under the ESPP Plan, the Company grants stock purchase rights to all eligible employees during one-year overlapping offering periods with purchase dates at the end of each 6-month purchase period except for the first offering period, which commenced in November 2007 and had its first purchase date on August 1, 2008. Shares are purchased through employees’ payroll deductions, up to a maximum of 10% of an employee’s compensation for each purchase period at a purchase price equal to 85% of the lesser of the fair market value of the Company’s common stock on the first trading day of the applicable offering period or the purchase date. If the fair market value of the common stock on any purchase date in an offering period is lower than the fair market value of the common stock on the first trading day of the offering period, then all participants in the offering period will be automatically withdrawn from the offering period immediately after the stock has been purchased on the purchase date and automatically re-enrolled in the immediately following offering period. The number of shares that may be purchased by a participant during any purchase period is limited to 1,250 shares. The ESPP Plan is compensatory and results in compensation expense. Through September 30, 2008, the Company has issued 214,852 shares under the ESPP Plan. As of September 30, 2008, there were 2.5 million shares available for future issuance under the ESPP Plan.

During the three months ended September 30, 2008, the Company modified the terms of certain existing awards under its ESPP pursuant to the reset provisions of the plan. Consequently, the Company recognized $59,000 incremental stock-based compensation in the three months ended September 30, 2009 and will recognize $118,000 of additional stock-based compensation over the remaining vesting period of four months.

1999 Stock Plan and 2000 Management Stock Option Plan: The Company’s 1999 Stock Plan (the “1999 Plan”) and the 2000 Management Stock Option Plan (the “2000 Plan”) authorize the board of directors to grant incentive and nonstatutory stock options and stock purchase rights to employees, directors and consultants of the Company. Under the 1999 Plan and the 2000 Plan, incentive and nonstatutory stock options may be granted at prices not less than 100% of the estimated fair value of the stock at the date of grant, as determined by the board of directors. For options granted to an employee who owns more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair market value of the stock at the date of grant. Options generally vest over a four year period and expire no later than ten years after the date of grant. The Company’s board of directors concluded not to grant any additional options or other awards under the 1999 Plan and 2000 Plan following the IPO. However, the 1999 Plan and 2000 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under these plans.

Stock Option Activity:

Activity with respect to outstanding stock options for the first half of fiscal 2009 is as follows:

	Options Outstanding
	Number of Shares		Weighted Average Exercise Price per Share
Balance at March 31, 2008	6,417,924			5.69
Options granted	1,826,335			8.89
Options exercised	(238,251	)		6.57
Options cancelled	(312,993	)		7.80
Balance at September 30, 2008	7,693,015		$	6.34

17

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

Restricted Stock Unit Awards:

Restricted stock unit awards may be granted under the 2007 Plan on terms approved by the Board of Directors. Stock awards generally provide for the issuance of restricted stock which vests over a fixed period. Activity with respect to outstanding restricted stock units for the first half of fiscal 2009 is as follows:

	Number of Shares	Weighted Average Grant Date Fair Value
Balance as of March 31, 2008	—	$	—
Granted	350,000		7.50
Balance as of September 30, 2008	350,000	$	7.50

During the three months ended September 30, 2008, the Company awarded non-vested restricted stock units to its officers and certain senior-level employees under the 2007 Plan. The shares will be released to the recipients on July 21, 2009, the day the restricted stock units vest. If a participant terminates employment prior to the vesting date, the unvested restricted stock will be canceled and returned to the 2007 Plan.

Fair Value Disclosures:

The fair value of each option and employee stock purchase right was estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
Employee Stock Options
Risk-free interest rate	3.10	%	4.46	%	2.85	%	4.58	%
Expected life (years)	4.12		4.32		4.11		4.33
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%
Expected volatility	51.2	%	42.0	%	51.6	%	42.0	%
	Three Months Ended September 30, 2008		Six Months Ended September 30, 2008
Employee Stock Purchase Plan1
Risk-free interest rate	1.36	%	1.36	%
Expected life (years)	0.75		0.75
Dividend yield	0.00	%	0.00	%
Expected volatility	48.0	%	48.0	%

¹ The Employee Stock Purchase Plan was adopted during the third quarter of fiscal 2008. Subsequent to the adoption, rights to purchase shares are only granted during the second and fourth quarters of each fiscal year.

The risk-free interest rate for the expected term of the option is based on the yield available on United States Treasury Zero Coupon issues with an equivalent expected term. The expected term represents the period of time that share-based awards are expected to be outstanding, giving consideration to the contractual terms of the awards, vesting schedules and expectations of future employee behavior. Given the Company’s limited operating history, comparable companies from a representative peer group selected on industry data were used to determine the expected term. The computation of expected volatility was based on the historical volatility of the Company and comparable companies from a representative peer group selected based on industry data. As required by SFAS No. 123 (revised 2004), Share-Based Payment, management made an estimate of expected forfeitures and is recognizing stock-based compensation costs only for those equity awards that the Company expects to vest.

18

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

Shares Subject to Repurchase:

Certain stock options granted by the Company are exercisable at the date of grant, with unvested shares subject to repurchase by the Company in the event of voluntary or involuntary termination of employment of the stockholder. Such exercises are recorded as a liability on the balance sheet and reclassified into equity as the options vest. As of September 30, 2008 and March 31, 2008, a total of 158,781 shares and 410,275 shares of common stock, respectively, were subject to repurchase by the Company at the original exercise price of the related stock option. The corresponding exercise value of $107,000 and $329,000 as of September 30, 2008 and March 31, 2008, respectively, was recorded in accrued liabilities.

Activity with respect to non-vested shares subject to repurchase for the first half of fiscal 2009 is as follows:

	Number of Shares
Non-vested as of March 31, 2008	410,275
Vested	(225,445	)
Repurchased	(26,049	)
Non-vested as of September 30, 2008	158,781

Stock Repurchase Program

On July 31, 2008, the board of directors of the Company approved the investment of up to $10 million for the purchase of shares of the Company’s common stock in the open market under a stock repurchase program, subject to applicable securities laws, rules and regulations. The shares may be repurchased at the Company’s discretion from time to time in the open market. Such purchases will be made at times and in amounts as the Company deems appropriate, based on factors such as market conditions, legal requirements, and other corporate considerations. As of November 10, 2008, the Company has purchased 80,000 shares under this program at an average purchase price of $6.61 per share.

11. Commitments

Legal Matters

From time to time, third parties assert claims against the Company arising from the normal course of business activities. There are no claims as of September 30, 2008 that, in the opinion of management, might have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Lease Obligations

The Company leases equipment and office space under non-cancelable operating leases with various expiration dates through May 2014. In April 2005, the Company’s primary facilities lease was renegotiated with a new lease expiration date in May 2014, an option to cancel in May 2010 and two consecutive options to extend the lease, each for an additional five-year period. To the extent the Company elects to terminate the lease in 2010, it will be required to pay an early termination fee of approximately $1.0 million. The Company currently has no plans to exercise the early termination option.

19

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

Future minimum lease payments under non-cancelable operating leases, assuming no early termination, are as follows (in thousands):

For the years ending March 31,	Rent Commitment
2009 (remaining six months)	$	919
2010		1,818
2011		1,732
2012		1,527
2013		1,445
Thereafter		1,365
Total minimum lease payments	$	8,806

Warranties

The Company provides for future warranty costs upon product delivery. The specific terms and conditions of those warranties vary depending upon the product sold and country in which the Company does business. The warranties are generally for three years from the date of installation of equipment.

Factors that affect the Company’s warranty liability include the number of installed units, historical experience and management’s judgment regarding anticipated rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities each period and makes adjustments to the liability as necessary.

Changes in the warranty liability are as follows:

	Three Months Ended September 30,						Six Months Ended September 30,
	2008			2007			2008			2007
	(in thousands)
Beginning balance	$	6,086		$	5,688		$	6,184		$	5,548
Provision		1,251			1,055			2,121			1,897
Settlements made		(1,044	)		(793	)		(2,012	)		(1,495	)
Ending balance	$	6,293		$	5,950		$	6,293		$	5,950

Warranty liabilities are classified based on the assumption that the claims will be made ratably over the three-year term, which to date has been consistent with the Company’s actual warranty experience, as follows:

	September 30, 2008		March 30, 2008
	(in thousands)
Current	$	3,453	$	3,371
Non-current		2,840		2,813
Total	$	6,293	$	6,184

20

3PAR Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS—(Continued)

(unaudited)

Noncancelable Purchase Commitments

The Company outsources the production of its hardware to third-party contract manufacturers. In addition, the Company enters into various inventory related purchase commitments with these contract manufacturers and suppliers. The Company had $15.1 million and $13.6 million in noncancelable purchase commitments with these providers as of September 30, 2008 and March 31, 2008, respectively. The Company records a liability for firm, noncancelable purchase commitments with contract manufacturers and suppliers for quantities in excess of its future demand forecasts. As of September 30, 2008 and March 31, 2008, the liability for these purchase commitments was $258,000 and $295,000, respectively.

Guarantees and Indemnifications

The Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2008 and March 31, 2008.

In its sales agreements, the Company may agree to indemnify its indirect sales channels and end-user customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date the Company has not paid any amounts to settle claims or defend lawsuits. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2008 and March 31, 2008.

12. Segment Information and Significant Customers

FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, defines operating segments as components of an enterprise about which separate financial information is available and which is regularly evaluated by management, namely the chief operating decision maker of an organization, in order to make operating and resource allocation decisions. The Company has concluded that it operates in one business segment, the development, marketing and sale of information storage solutions. The Company’s headquarters and most of its operations are located in the U.S.; however, it conducts limited sales, marketing and customer service activities through small offices in Europe and Asia. Revenue is attributed by geographic location based on the ship-to location of the Company’s reseller or customer, as applicable. The Company’s assets are primarily located in the U.S .and not allocated to any specific region. Therefore, geographic information is presented for total revenue only.

The following presents total revenues by geographic region:

	Three Months Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
	(in thousands)
United States	$	37,871	$	23,634	$	77,252	$	44,726
International		7,276		4,347		10,848		7,063
Total	$	45,147	$	27,981	$	88,100	$	51,789

No customer represented 10% or more of total revenue in the three months ended September 30, 2008 and 2007. One customer represented 10% and 15% of total revenue in the six months ended September 30, 2008 and 2007, respectively. One customer accounted for 10% of accounts receivable, net at September 30, 2008, and one customer accounted for 11% of accounts receivable, net at March 31, 2008.

21

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

In addition to historical information, this report contains 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, which are subject to the “safe harbor” created by those sections. These statements include, among other things, statements concerning our expectations regarding:

• the growth and growth rate of our operations, business, revenues, operating margins, costs and expenses;

• fluctuations in our gross margins;

• the effect of recent accounting pronouncements on our financial position, results of operations, and cash flows;

• our future stock-based compensation charges;

• our foreign exchange risk and our practices related to hedging those risks;

• our future uncertain tax positions;

• the impact of our storage solution on the total lifetime cost of storage for our customers;

• the increase of research and development, sales and marketing and general and administrative expenses in the future;

• our future capital expenditures, including investments in our infrastructure and in test and development equipment to support our research and development efforts;

• the availability of individuals with the specific skills required for key positions, as well as our ability to attract, hire and retain required employees and key personnel;

• our future hiring of substantial additional personnel and the impact such hiring may have on our business, growth and competitive position;

• the future yield on our investment portfolio;

• the sufficiency of our existing cash balances to meet our future capital requirements;

• the materiality of our exposure related to contractual guarantees and indemnities;

• the materiality of the exposure of our cash equivalents to changes in value and the projected value of our investment portfolio;

• future changes in competitive practices and landscape in our industry;

• our future reliance on establishing relationships with resellers and authorized service providers to sell, service and support our products in select markets;

• our continued investments in international markets and our expansion strategies in those markets;

• the contribution of international sales as a percentage of our total revenue on an annual basis;

as well as other statements regarding our future operations, financial condition and prospects and business strategies. Forward-looking statements are based on our management’s beliefs and assumptions, and on information currently available to our management, as of the date of this filing. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended March 31, 2008.

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Overview

We are the leading global provider of utility storage for large to medium enterprises, business-oriented service providers, consumer-oriented Internet/Web 2.0 companies and government entities. Our utility storage products offer simple, efficient and scalable tiered-storage arrays enabling the delivery of computing as a utility service to organizations with significant data storage requirements. Our 3PAR InSpire Architecture delivers a modular, highly scalable storage solution that we believe can significantly reduce the total lifetime cost of storage for our customers.

Our company was founded by engineers with substantial experience in the high-end server and storage markets and began operations in 1999. From inception, our corporate and product development objectives have focused on finding ways to use physical storage resources more efficiently and effectively by reducing unused storage and power consumption and by providing our customers with systems that are simpler and less expensive to maintain and operate on an ongoing basis. Our utility storage solution is comprised of the 3PAR InServ Storage Servers and the 3PAR InForm Suite, which includes the 3PAR InForm OS and other software applications.

In November 2007, we completed an initial public offering, or IPO, of our common stock in which we sold and issued 7,702,479 shares of common stock, including 202,479 shares issued in December 2007 in connection with the partial exercise of the underwriters’ over-allotment option, at an issue price of $14.00 per share. A total of $107.8 million in gross proceeds was raised from the IPO, or approximately $97.4 million in net proceeds after deducting underwriting discounts and commissions of $7.5 million and other offering costs of $2.9 million. Upon the closing of the offering, all shares of our then-outstanding convertible preferred stock automatically converted into 33,256,720 shares of common stock.

We have sales offices in the United States, United Kingdom, Germany and Japan and research and development facilities in California and Northern Ireland. We expect to continue to add sales, engineering and customer services personnel in the United States and internationally.

The last day of our fiscal year is March 31. Our fiscal quarters end on June 30, September 30, December 31 and March 31. Our current fiscal year, which we refer to as fiscal 2009, will end on March 31, 2009.

Revenue, Cost of Revenue and Operating Expense

Revenue

We derive our revenue from sales of our InServ Storage Servers, licenses of our InForm Suite and other software applications and related support.

Prior to March 2007, we typically sold our products with a three-year basic hardware warranty and software warranty. The software warranty was limited to bug fixes for any non-conforming software products. We generally recognized as product revenue all revenue associated with sales of our products at the time of shipment or installation, depending on the terms of the arrangement, provided that all other revenue recognition criteria were met.

During this period, we also offered a premium hardware warranty and an extended hardware and software warranty beyond the initial contract term. Our premium hardware warranty offers faster service response time than our basic hardware warranty. We recognized as support revenue all revenue attributable to these premium and extended warranties on a ratable basis over the contract term, which was typically three years for premium warranty and one year from termination of the basic warranty for extended warranty.

In March 2007, in anticipation of evolving customer requirements for software support, we changed from a software warranty model to a software support model. Under the software support model, the customer receives, in addition to bug fixes, unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Commencing in March 2007, we sell all of our systems together with software support.

During the first quarter of fiscal 2008, we established VSOE of the fair value of our new software support based on the rates we offer to our customers for renewal in our arrangements with them, or stated renewal rates. Accordingly, commencing April 1, 2007, we recognize revenue attributable to our software support as support

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revenue on a straight-line basis over the software support period. We sell a significant portion of our software support with a one-year term. Support revenue continues to include our premium and extended hardware warranties. We generally recognize the balance of the sale as product revenue at the time of shipment or installation, depending on the terms of the arrangement, provided that all other revenue recognition criteria are met.

During the month of March 2007, the Company did not have VSOE of fair value for its new software support model. Accordingly, through March 31, 2008, the Company was recognizing all of the product and support revenue from transactions that included software support during the month of March 2007 as product revenue ratably over the support period of one to three years. During the first quarter of fiscal 2009, the Company established VSOE of fair value of PCS for these March 2007 transactions based on renewal rates for separate sales of PCS to other customers. Accordingly, in the first quarter of fiscal 2009 the Company applied the residual method to the remaining deferred revenue associated with the March 2007 transactions.

As a result of the implementation of our software support model in March 2007, our support revenue has increased significantly. Consequently comparing the elements of our revenue on a period-to-period basis may not be meaningful and should not be relied upon as an indication of our future performance.

Cost of Revenue

Cost of product revenue consists primarily of raw materials, manufacturing cost for our products, shipping and logistics cost, expenses for inventory obsolescence and warranty obligations. Cost of premium and extended warranty obligations are included in cost of support revenue. We utilize third parties to manufacture subcomponents of our products, which are then shipped to our Fremont, California operations facility for final assembly and testing prior to customer shipment. We outsource onsite support to third-party support vendors.

Prior to March 2007, we recognized all our hardware and software warranty costs as cost of product revenue at the time of revenue recognition based on our estimated time and material costs of providing hardware and software warranty support. In March 2007, during the implementation of our software support model, we deferred all hardware related costs associated with product sales bundled with software support for which we had not been able to establish VSOE of fair value at the outset of the arrangement. The hardware related costs associated with these sales were recognized ratably together with the product revenue until the first quarter of fiscal 2009 when we established VSOE of fair value of PCS for the March 2007 transactions and recognized the remaining product costs associated with the revenue recognized. We no longer incur software warranty cost beginning March 2007, as this was replaced by our new software support sold together with our systems. For periods subsequent to March 2007, we continue to recognize hardware warranty costs as cost of product revenue at the time of revenue recognition.

Cost of support revenue consists of personnel cost and outside vendor cost to support premium and extended warranty services for all periods presented. Beginning March 2007, cost of support revenue also includes costs associated with providing software support. As a result of the implementation of our software support model in March 2007, we expect cost of support revenue to increase significantly in future periods.

Gross Margin

Gross profit is the difference between revenue and cost of revenue, and gross margin is gross profit expressed as a percentage of revenue. Product mix and system configurations affect our gross margin because our software and support margins are higher than our hardware margins. Larger systems tend to have greater software and support components and thereby result in a higher margin. Our gross margin tends to be higher for direct sales than for indirect sales because we generally sell our products to resellers at a discount. Our gross margin has fluctuated significantly in the past, and we expect it will continue to fluctuate in the future primarily as a result of product mix and order size.

Operating Expense

Operating expense consists of research and development, sales and marketing, and general and administrative expense. The largest component of our operating expense in each case is personnel cost. Personnel cost consists of salaries, benefits and incentive compensation for our employees. We grew from 312 employees at March 31, 2007 to 451 employees at March 31, 2008 and to 533 employees at September 30, 2008. We expect to continue to hire a significant number of new employees to support our growth. The timing of these additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenue, in any particular period.

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Research and Development Expense

Research and development expense consists primarily of personnel cost, prototype expense, consulting services and facilities cost associated with personnel. Consulting services generally consist of contracted engineering consulting for specific projects. We expense research and development expense as incurred. We expect to continue to devote substantial resources to the development of our products. We believe that these investments are necessary to maintain and improve our competitive position. In particular, we anticipate that we will hire substantial additional engineering personnel in future periods.

Sales and Marketing Expense

Sales and marketing expense consists primarily of personnel cost, sales commission, marketing programs and facilities cost associated with sales and marketing and certain customer service and support activities not associated with cost of revenue. We plan to continue to invest heavily in sales and marketing by increasing the number of sales and marketing personnel we employ. Our sales personnel are not immediately productive and therefore the increase in sales and marketing expense we incur when we add new sales representatives is not immediately offset by increased revenue and may never result in increased revenue. The timing of our hiring of new sales personnel and the rate at which they generate incremental revenue could therefore affect our future period-to-period financial performance.

General and Administrative Expense

General and administrative expense consists primarily of personnel and facilities costs related to our executive, finance, human resources, information technology and legal organizations, as well as fees for professional services. Professional services consist of fees for outside legal, audit, compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and information technology consulting. We expect to continue to incur significant accounting and legal costs related to compliance with rules and regulations implemented by the SEC, as well as additional insurance, investor relations and other costs associated with being a public company.

Other Income (Expense), Net

Other income (expense), net includes interest income on cash balances and short-term investments, interest expense on our outstanding debt and borrowings under our revolving line of credit, and losses or gains on remeasurement of non-United States dollar transactions into United States dollars. If we are successful in growing our international sales we may be subject to increased currency conversion risks because a larger portion of our sales could be denominated in foreign currencies. We have historically invested our available cash balances in money market funds, short-term United States Government and agency obligations, municipal bonds, corporate debt securities and commercial paper.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that we make these estimates and judgments. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are revenue recognition, stock-based compensation, inventory valuation, warranty provision, allowances for doubtful accounts and income taxes.

With the exception of the discussion noted below a description of our critical accounting policies that involve significant management judgment appears in our 2008 Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

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Revenue Recognition

We derive our revenue from sales of storage solutions that include hardware, software and related support. Because the embedded software of our storage solution is deemed to be more than incidental to the product as a whole, we account for revenue for the entire sale in accordance with the guidance provided by American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.

We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and, if applicable, upon satisfaction of evaluation criteria or expiration of the evaluation period, as the case may be. Our fees are considered fixed or determinable at the execution of an agreement, which comprises the final terms of sale including the description, quantity and price of each product purchased. Our sales arrangements with customers and resellers do not include rights of return or rebates and to date, product returns have been negligible. We assess our ability to collect from our customers based on a number of factors, including creditworthiness of the customer and past transaction history.

Prior to March 2007, we typically sold our products with a three-year basic hardware warranty and software warranty. The software warranty was limited to bug fixes for any non-conforming software products. We generally recognized as product revenue all revenue associated with sales of our products at the time of shipment or installation, depending on the terms of the arrangement, provided that all other revenue recognition criteria were met. During this period, we also offered a premium hardware warranty and an extended hardware and software warranty after the initial contract term. Our premium hardware warranty offers faster response time than our basic hardware warranty. In accordance with Financial Accounting Standards Board, or FASB, Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, we recognized revenue relating to our premium hardware warranty and extended hardware and software warranties ratably as support revenue over the warranty period, which was typically three years for premium warranty and one year from termination of the basic warranty for extended warranty.

In March 2007, in anticipation of evolving customer requirements for software support, we changed from a software warranty model to a software support model. Under the software support model, the customer receives, in addition to bug fixes, unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Commencing in March 2007, we sell all of our systems together with software support. This new software support is considered post-contract customer support, or PCS, under SOP 97-2.

Our sales are comprised of multiple elements, which include hardware, software and PCS. We allocate revenue to the delivered elements of the sale, typically hardware and software, using the residual method. Under the residual method, we defer revenue from the sale equivalent to the VSOE of the fair value of the PCS and apply any discounts to the delivered elements in accordance with the provisions of SOP 97-2, as amended by SOP 98-9. VSOE of the fair value of PCS within a sale is based upon stated renewal rates included within the evidence of the arrangement with the customer. In circumstances where the arrangement does not include stated renewal rates, VSOE of fair value of PCS is based on actual renewal rates for separate sales of PCS to other customers.

During the first quarter of fiscal 2008, we established VSOE of the fair value of our new software support based on stated renewal rates offered to customers within the arrangement. As a result, beginning in the first quarter of fiscal 2008, we defer revenue recognition of the software support and recognize it as support revenue on a straight-line basis over the support period, which is primarily one year. We allocate the remainder of the revenue associated with the sale to product revenue using the residual method, as allowed by SOP 98-9. Support revenue also continues to include our premium and extended hardware warranties.

During the month of March 2007, the Company did not have VSOE of fair value for its new software support model. Accordingly, through March 31, 2008, the Company was recognizing all of the product and support revenue from transactions that included software support during the month of March 2007 as product revenue ratably over the support period of one to three years. During the first quarter of fiscal 2009, we established VSOE of fair value of PCS for these March 2007 transactions based on renewal rates for separate sales of PCS to other customers. Accordingly, in the first quarter of fiscal 2009 we applied the residual method to the remaining deferred revenue associated with the March 2007 transactions.

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We typically recognize product revenue upon installation for transactions sold directly to end users, provided that the remaining revenue recognition criteria discussed above are satisfied. In cases where the arrangement includes acceptance criteria, we recognize revenue upon the earlier of receipt of customer acceptance or the lapse of the acceptance period. For sales through our resellers, we generally recognize product revenue upon shipment, based on freight terms of FOB Shipping Point or FOB Destination, assuming all other criteria for revenue recognition discussed above have been satisfied.

Results of Operations for the Three and Six Months Ended September 30, 2008 and 2007

Revenue

The following tables present period over period comparisons of our revenue by revenue source for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
Types of Revenue:
Product	$	41,427		$	26,775		$	14,652	55	%	$	81,351		$	49,898		$	31,453	63	%
As % of total revenue		91.8	%		95.7	%						92.3	%		96.3	%
Support		3,720			1,206			2,514	208	%		6,749			1,891			4,858	257	%
As % of total revenue		8.2	%		4.3	%						7.7	%		3.7	%
Total revenue	$	45,147		$	27,981		$	17,166	61	%	$	88,100		$	51,789		$	36,311	70	%
	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
Revenue by geography:
United States	$	37,871		$	23,634		$	14,237	60	%	$	77,252		$	44,726		$	32,526	73	%
As % of total revenue		83.9	%		84.5	%						87.7	%		86.4	%
International		7,276			4,347			2,929	67	%		10,848			7,063			3,785	54	%
As % of total revenue		16.1	%		15.5	%						12.3	%		13.6	%
Total revenue	$	45,147		$	27,981		$	17,166	61	%	$	88,100		$	51,789		$	36,311	70	%

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Our total revenue increased by $17.2 million, or 61%, to $45.1 million in the three months ended September 30, 2008 from $28.0 million in the three months ended September 30, 2007, and by $36.3 million, or 70%, to $88.1 million in the six months ended September 30, 2008 from $51.8 million in the six months ended September 30, 2007. Product revenue increased by $14.7 million, or 55%, to $41.4 million in the three months ended September 30, 2008 from $26.8 million in the three months ended September 30, 2007, and by $31.5 million, or 63%, to $81.4 million in the six months ended September 30, 2008 from $49.9 million in the six months ended September 30, 2007. The increases in fiscal 2009 were principally due to an increase in repeat sales to existing customers and the expansion of our customer base. Revenue in the six months ended September 30, 2008 also benefited from the recognition of $2.8 million of deferred revenue associated with certain March 2007 transactions that we were previously recognizing on a ratable basis. Revenue from our existing customers represented 79% and 83% of total revenue in the three and six months ended September 30, 2008, respectively, as compared to 73% and 76% of total revenue in the three and six months ended September 30, 2007, respectively. We increased the number of our sales and marketing personnel to 178 at September 30, 2008, from 129 at September 30, 2007, which contributed to our ability to expand our customer base.

Support revenue increased by $2.5 million to $3.7 million in the three months ended September 30, 2008 from $1.2 million in the three months ended September 30, 2007, and by $4.9 million to $6.7 million in the six months ended September 30, 2008 from $1.9 million in the six months ended September 30, 2007. The increases in support revenue in the three and six months ended September 30, 2008 compared to the same periods in the prior year are primarily attributable to the growth in the installed base of our storage solutions, which resulted in a higher number of initial PCS, extended and premium warranty contracts and support renewals from existing customers.

In the three and six months ended September 30, 2008, we derived 73% and 79% of our total revenue from direct sales to customers, respectively, compared to 66% and 72% in the three and six months ended September 30, 2007. The increase in direct sales as a percentage of revenue in the fiscal 2009 periods compared to the fiscal 2008 periods reflects our increased focus on expanding our direct sales by hiring dedicated sales personnel for both domestic and international markets. We increased the number of our direct sales personnel to 162 at September 30, 2008 from 118 at September 30, 2007.

Cost of Revenue and Gross Margin

The following table presents period over period comparisons of our cost of revenue by cost of revenue source for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
Cost of product revenue	$	14,551		$	9,126		$	5,425	59	%	$	28,572		$	17,236		$	11,336	66	%
As % of product revenue		35	%		34	%						35	%		35	%
Cost of support revenue		1,157			239			918	384	%		2,163			455			1,708	375	%
As % of support revenue		31	%		20	%						32	%		24	%
Total cost of revenue		15,708			9,365			6,343	68	%		30,735			17,691			13,044	74	%
Gross profit	$	29,439		$	18,616		$	10,823	58	%	$	57,365		$	34,098		$	23,267	68	%
Gross margin		65.2	%		66.5	%						65.1	%		65.8	%

Cost of revenue increased by $6.3 million, or 68%, to $15.7 million in the three months ended September 30, 2008 from $9.4 million in the three months ended September 30, 2007 and by $13.0 million, or 74%, to $30.7 million in the six months ended September 30, 2008 from $17.7 million in the six months ended September 30, 2007 primarily due to increased product shipments.

Cost of product revenue increased by $5.4 million, or 59%, to $14.6 million in the three months ended September 30, 2008 from $9.1 million in the three months ended September 30, 2007, compared to a 55% increase in our product revenue during the same period. Cost of product revenue increased by $11.3 million, or

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66%, in the six months ended September 30, 2008 compared to a 63% increase in our product revenue during the same period. The decreases in our product margins in the three and six months ended September 30, 2008 are due primarily to inventory write-downs for excess and obsolescence of our S-Class platform inventory in anticipation of increased customer demand for our new T-Class InServ storage server.

Cost of support revenue increased by $918,000, or 384%, to $1.2 million in the three months ended September 30, 2008 from $239,000 in the three months ended September 30, 2007 and by $1.7 million, or 375%, to $2.2 million in the six months ended September 30, 2008 from $455,000 in the six months ended September 30, 2007 primarily due to increased personnel cost and outside vendor cost required to support the growth in our installed base as well as premium and extended warranties.

Research and Development

The following table presents period over period comparisons of our research and development expense for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
Research and development	$	12,034		$	8,909		$	3,125	35	%	$	22,191		$	16,716		$	5,475	33	%
As % of total revenue		27	%		32	%						25	%		32	%

Our research and development expense increased by $3.1 million, or 35%, to $12.0 million in the three months ended September 30, 2008 from $8.9 million in the three months ended September 30, 2007and by $5.5 million, or 33% to $22.2 million in the six months ended September 30, 2008 from $16.7 million in the six months ended September 30, 2007. The increases in these periods were primarily due to increases in research and development personnel to 189 employees at September 30, 2008 from 137 employees at September 30, 2007 resulting in an increase in employee compensation and related cost.

As a percentage of our total revenue, research and development expense decreased to 27% and 25% in the three and six months ended September 30, 2008, respectively, from 32% in the three and six months ended September 30, 2007. This percentage decrease is attributable principally to the significant increase in our total revenue, which grew at a higher rate than our research and development expenses in the six months ended September 30, 2008.

Of the $3.1 million increase in research and development expense in the three months ended September 30, 2008, employee compensation and related benefits and allocated facilities/IT expense accounted for $2.3 million and $655,000, respectively. The remainder of the increase in the three months ended September 30, 2008 related to higher stock-based compensation and depreciation of research and development equipment partially offset by lower engineering equipment and prototype expenses. Of the $5.5 million increase in the six months ended September 30, 2008, employee compensation and related benefits, allocated facilities/IT expense and stock-based compensation accounted for $4.1 million, $1.2 million and $594,000, respectively. These higher expenses were partially offset by lower engineering equipment and prototype expenses.

We expect research and development expense to increase on an absolute dollar basis for the foreseeable future as we continue to increase the number of our engineering personnel and devote substantial resources to the development of our products.

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Sales and Marketing

The following table presents period over period comparisons of our sales and marketing expense for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
Sales and marketing	$	15,078		$	9,936		$	5,142	52	%	$	29,379		$	20,393		$	8,986	44	%
As % of total revenue		33	%		36	%						33	%		39	%

Our sales and marketing expense increased by $5.1 million, or 52%, to $15.1 million in the three months ended September 30, 2008 from $9.9 million in the three months ended September 30, 2007 and by $9.0 million, or 44%, to $29.4 million in the six months ended September 30, 2008 from $20.4 million in the six months ended September 30, 2007. This increase reflects in part the increase in sales and marketing personnel to 178 employees at September 30, 2008 from 129 employees at September 30, 2007.

As a percentage of our total revenue, sales and marketing revenue decreased to 33% in both the three and six months ended September 30, 2008, from 36% and 39% in the three and six months ended September 30, 2007, respectively, principally due to the significant increase in our total revenue, which grew at a higher rate than our sales and marketing expense in the six months ended September 30, 2008.

Of the $5.1 million increase in sales and marketing expense in the three months ended September 30, 2008, salaries, bonus and employee-related benefits, commission, advertising and allocated facilities/IT expense accounted for $1.3 million, $1.7 million, $502,000 and, $648,000, respectively. The remainder of the increase in the three months ended September 30, 2008 related to higher travel, recruiting and stock-based compensation. Of the $9.0 million increase in the six months ended September 30, 2008, employee compensation and related benefits, commission, travel, allocated facilities/IT expense and stock-based compensation accounted for $3.3 million, $2.0 million, $1.2 million, $1.2 million and $896,000, respectively.

General and Administrative

The following table presents period over period comparisons of general and administrative expense for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended September 30,						Change in				Six Months Ended September 30,						Change in
	2008			2007			$		%		2008			2007			$		%
General and administrative	$	3,747		$	2,212		$	1,535	69	%	$	7,120		$	4,266		$	2,854	67	%
As % of total revenue		8	%		8	%						8	%		8	%

Our general and administrative expense increased by $1.5 million, or 69%, to $3.7 million in the three months ended September 30, 2008 from $2.2 million in the three months ended September 30, 2007 and by $2.9 million, or 67%, to $7.1 million in the six months ended September 30, 2008 from $4.3 million in the six months ended September 30, 2007. This increase reflects in part the increase in general and administrative personnel to 62 employees at September 30, 2008 from 38 employees at September 30, 2007. The remainder of the increase relates primarily to higher professional fees and allocated infrastructure costs.

As a percentage of our total revenue, general and administrative expenses remained constant at 8% in all periods presented.

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Other Income, Net

The following table presents period over period comparisons of our other income, net for the periods presented (dollars in thousands):

	Three Months Ended September 30,						Change in					Six Months Ended September 30,						Change in
	2008			2007			$			%		2008			2007			$			%
Other income (expense), net:
Interest income	$	718		$	390		$	328		84	%	$	1,496		$	838		$	658		79	%
Interest expense		(168	)		(320	)		152		(48	)%		(185	)		(617	)		432		(70	)%
Other, net		(425	)		46			(471	)	(1,024	)%		(433	)		77			(510	)	(662	)%
Total other income (expense), net:	$	125		$	116		$	9		8	%	$	878		$	298		$	580		195	%

Other income, net increased by $9,000, or 8%, to $125,000 in the three months ended September 30, 2008 from $116,000 in the three months ended September 30, 2007 and by $580,000, or 195% to $878,000 in the six months ended September 30, 2008 from $298,000 in the six months ended September 30, 2007. The increase in other income, net in the three and six months ended September 30, 2008 compared to the same periods in the prior year relate to higher interest income due to higher average cash and investment balances during fiscal 2009 compared to the same periods in the prior year. Additionally, interest expense decreased due to lower debt balances in the fiscal 2009 periods compared to the prior year. The increases in other income, net were partially offset by foreign currency losses of $425,000 and $5,000 in the three and six months ended September 30, 2008, respectively, primarily related to our British Pound denominated accounts receivable.

In light of the current turmoil in the financial markets, we moved the majority of our corporate cash assets into very short-term and liquid investments during the second quarter of fiscal 2009. As a result, we expect that the yield on our investment portfolio will decrease in the near term.

Income Tax Benefit (Provision)

We recorded an income tax benefit of $104,000 and an income tax provision of $66,000, respectively, for the three and six months ended September 30, 2008 and a provision of $38,000 and $68,000, respectively, for the three and six months ended September 30, 2007. The income tax benefit for the three and six months ended September 30, 2008 was primarily due to recognition of a benefit of $181,000 during the three months ended September 30, 2008 for a U.S. federal refundable credit as provided by the Housing and Economic Recovery Act of 2008 (or Act). This amount was offset in part by a provision of $77,000 for state income taxes. The Act, signed into law in July 2008, allows taxpayers to claim refundable alternative minimum tax or research and development credit carryovers if they forego bonus depreciation on certain qualified fixed assets placed in service in the period between April and December 2008. We estimated and recognized the credit based on fixed assets placed into service through the six months ended September 30, 2008. The provision for the three and six months ended September 28, 2007 was primarily for our international operations.

On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such suspension; adopts the federal 20-year net operating loss carryforward period; phases-in the federal two-year net operating loss carryback periods beginning in 2011 and limits the utilization of tax credits to 50% of a taxpayer's taxable income. We incorporated the impact of this new law to the income tax provision during the second quarter of fiscal 2009. As a result, only 50% of California tax liability was offset by the available state research & development tax credit carryover yielding $75,000 of tax liability for the second quarter of fiscal 2009.

On October 3, 2008, the United States enacted a law, “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008.” Under this act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. We anticipate no impact to our effective tax rate or tax provision in the third quarter of fiscal 2009 as the result of this law change due to our valuation allowance.

We file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in various foreign jurisdictions. We remain subject to tax authority review for all jurisdictions for all years.

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Liquidity and Capital Resources

The following table summarizes our cash, cash equivalents and short-term investments at September 30, 2008 and March 31, 2008 (dollars in thousands):

	September 30, 2008		March 31, 2008		Increase/ (Decrease)
Cash and cash equivalents	$	48,376	$	97,585	$	(49,209	)
Short-term investments		59,948		18,058		41,890
Total	$	108,324	$	115,643	$	(7,319	)

Our cash equivalents and short-term investments are invested primarily in money market funds, short-term United States Government and agency obligations, municipal bonds and commercial paper.

Since our inception in 1999 through our IPO in November 2007, we funded our operations primarily with proceeds from the issuance of convertible preferred stock, customer payments for our products and services, proceeds from the issuance of notes payable and borrowings under our revolving line of credit facility. In November 2007, we completed our IPO which provided us with approximately $97.4 million in net proceeds after deducting underwriting discounts and commissions of approximately $7.5 million and other offering costs of $2.9 million.

On July 31, 2008, our board of directors approved the investment of up to $10 million for the purchase of shares of our common stock in the open market under a stock repurchase program. Subject to applicable securities laws, rules and regulations, the shares may be repurchased at our discretion from time to time in the open market. Such purchases will be made at times and in amounts as we deem appropriate, based on factors such as market conditions, legal requirements, and other corporate considerations. As of November 10, 2008, we have purchased 80,000 shares under this program at an average purchase price of $6.61 per share.

We had a term loan agreement with a venture lending firm under which borrowings were available through March 31, 2006 and which was repaid in full during September 2008. On May 30, 2008, we entered into a loan and security agreement with a commercial bank, which provides for a revolving line of credit, under which the aggregate amount available for borrowing is $15.0 million. The borrowings are collaterized by all of our assets with the exception of intellectual property. Our revolving line of credit agreement expires on May 29, 2009 and it contains a financial covenant that requires us to maintain a minimum tangible net worth of $70.0 million, which is increased by 50% of any new net equity proceeds and/or 50% of quarterly profits. Tangible net worth is defined as the consolidated total assets minus any amounts attributable to goodwill and intangible assets, reserves not already deducted from assets and total liabilities including all subordinated debt. In addition, we are required to maintain a quick ratio of at least 1.25 to 1.0. We were in compliance with these financial covenants as of September 30, 2008. The interest rate on the line of credit equals, at our election, either the lender’s variable prime rate, or LIBOR, plus 200 basis points for the applicable period in effect at the time of the borrowing. There have been no borrowings under the revolving line of credit.

The following table summarizes our cash flows from operating, investing and financing activities for the periods presented (dollars in thousands):

	Six Months Ended September 30,
	2008			2007
Net cash provided by (used in) operating activities	$	2,927		$	(5,440	)
Net cash used in investing activities		(49,313	)		(1,599	)
Net cash provided by (used in) financing activities		(2,823	)		3,378

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Cash Flows from Operating Activities

Our cash flows from operating activities continue to be significantly influenced by our cash investments to support the growth of our business in areas such as research and development, sales and marketing and corporate administration. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, accounts payable and other current assets and liabilities. Certain metrics such as inventory and accounts receivable turns historically have been impacted by our product mix and the timing of orders from our customer base.

During the first six months of fiscal 2009, operating activities provided $2.9 million of cash compared to $5.4 million of cash used in operating activities during the first six months of fiscal 2008. Cash provided by operating activities is due primarily to a decrease in accounts receivable and increases in deferred revenue and accounts payable, as well as non-cash items such as stock-based compensation and depreciation. Cash provided by operating activities was offset in part by our net loss, and increases in inventory and deferred cost, as well as a decrease in accrued liabilities. During the six months ended September 30, 2008, we increased our raw materials inventory in anticipation of increased customer demand for our new T-Class InServ storage server products.

Cash Flows from Investing Activities

Cash flows from investing activities primarily relate to investments of our available cash and cash equivalent balances and capital expenditures to support our growth. Net cash used in investing activities was $49.3 million and $1.6 million in the first six months of fiscal 2009 and 2008, respectively.

The increase in net cash used in investing activities in the first six months of fiscal 2009 is attributable to a an increase in purchases of short-term investments of $30.0 million and a $4.5 million increase in capital expenditures offset by a decrease in the sale and maturities of short-term investments of $13.6 million. The purchases of property and equipment in the first six months of fiscal 2009 were due to acquisition of test equipment to support our product development and purchases related to the continual build out of our infrastructure to support our growth.

We expect that in the remainder of fiscal 2009 we will continue to invest in our infrastructure and in test and development equipment to support our research and development efforts.

Cash Flows from Financing Activities

Prior to our IPO in November 2007, we financed our operations primarily with net proceeds from private sales of convertible preferred stock totaling $183 million and borrowings under various debt arrangements with aggregate proceeds of $14.7 million.

Net cash used in financing activities in the first six months of fiscal 2009 was $2.8 million as compared to net cash provided by financing activities of $3.4 million for the same period of fiscal 2008. Cash used in the first six months of 2009 was primarily due to a $4.0 million repayment of our line of credit.

We believe that our existing cash balances will be sufficient to meet our anticipated capital requirements for the next 12 months. However, we may need to raise additional capital or incur additional indebtedness to continue to fund our operations in the future. Our future capital requirements will depend on many factors, including our rate of revenue growth, if any, the expansion of our sales and marketing and research and development activities, the timing and extent of our expansion into new geographic territories, the timing of introductions of new products and enhancements to existing products and the continuing market acceptance of our products. Although we currently are not a party to any agreement or letter of intent with respect to potential material investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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Contractual Obligations

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

	Payments due by period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease obligations	$	8,806	$	919	$	3,550	$	2,972	$	1,365
Non-cancellable inventory purchase commitments		15,127		15,127		—		—		—
Total	$	23,933	$	16,046	$	3,550	$	2,972	$	1,365

Guarantees

In the ordinary course of business, we have entered into agreements with, among others, customers, resellers, system integrators and distributors that include guarantees or indemnity provisions. Based on our historical experience and information known to us as of September 30, 2008, we believe that our exposure related to these guarantees and indemnities as of September 30, 2008 was not material. In the ordinary course of business, we also enter into indemnification agreements with our officers and directors and our certificate of incorporation and bylaws include similar indemnification obligations to our officers and directors. It is not possible to determine the amount of our liability related to these indemnification agreements and obligations to our officers and directors due to the lack of prior indemnification claims and the unique facts and circumstances involved in each particular potential case.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 1 of “Notes to Condensed Consolidated Financial Statements” for recent accounting pronouncements that could have an effect on us.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

Most of our sales contracts are denominated in United States dollars. As we expand our international sales, we expect that an increasing portion of our revenue could be denominated in foreign currencies. As a result, our cash and cash equivalents and operating results could be increasingly affected by changes in exchange rates. Our international sales and marketing operations incur expenses that are denominated in foreign currencies. These expenses could be materially affected by currency fluctuations. Our exposures are to fluctuations in exchange rates for the United States Dollar versus the British Pound, the Euro, the Swiss Franc and, to a lesser extent, the Japanese Yen, the Korean Won and the Chinese Yuan.

Changes in currency exchange rates could adversely affect our consolidated operating results or financial position. Additionally, our international sales and marketing operations maintain cash balances denominated in foreign currencies. In order to decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we have not maintained excess cash balances in foreign currencies. We have not hedged our exposure to changes in foreign currency exchange rates in the past. However, since the recent fluctuations in the foreign currency exchange rates, in particular the British Pound and the Euro against the United States dollar, had a negative impact on our cash flows and operating results in the three months ended September 30, 2008, we are exploring foreign currency hedging options and may decide to start hedging our foreign currency denominated accounts receivable in the future.

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Interest Rate Sensitivity

We had cash equivalents totaling $10.8 million at September 30, 2008. These amounts were invested primarily in money market funds and commercial paper. We believe that our cash equivalents do not have a material exposure to changes in the fair value as a result of changes in interest rates due to the short term nature of our cash equivalents. Declines in interest rates, however, would reduce future interest income. Based on our cash equivalents at September 30, 2008, a hypothetical 100 basis points decline in interest rates would reduce our interest income by approximately $108,000 over a one year period.

Short-term investments consist of United States Government and agency obligations, municipal bonds, corporate debt securities and commercial paper. We do not enter into investments for trading or speculative purposes. If we sell our investments prior to their maturity, we may incur a charge to operations in the period the sale takes place.

The following tables present the hypothetical changes in fair values in the securities, excluding cash equivalents, held at September 30, 2008 that are sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS) and 100 BPS over six and twelve-month time horizons.

The following table estimates the fair value of the portfolio at a twelve-month time horizon (in thousands):

	Valuation of Securities Given an Interest Rate Decrease of X Basis Points				Current Fair Market Value		Valuation of Securities Given an Interest Rate Increase of X Basis Points
	100 BPS		50 BPS				100 BPS		50 BPS
United States Government and agency securities	$	39,516	$	39,267	$	39,019	$	38,521	$	38,770
Municipal bonds		6,181		6,168		6,154		6,129		6,142
Commercial paper		9,208		9,198		9,187		9,166		9,177
Corporate debt securities		5,634		5,611		5,588		5,541		5,564
Total short-term investments	$	60,539	$	60,244	$	59,948	$	59,357	$	59,653

The following table estimates the fair value of the portfolio at a six-month time horizon (in thousands):

	Valuation of Securities Given an Interest Rate Decrease of X Basis Points				Current Fair Market Value		Valuation of Securities Given an Interest Rate Increase of X Basis Points
	100 BPS		50 BPS				100 BPS		50 BPS
United States Government and agency securities	$	40,013	$	39,516	$	39,019	$	38,024	$	38,521
Municipal bonds		6,206		6,181		6,154		6,104		6,129
Commercial paper		9,229		9,208		9,187		9,145		9,166
Corporate debt securities		5,681		5,634		5,588		5,494		5,541
Total short-term investments	$	61,129	$	60,539	$	59,948	$	58,767	$	59,357

At September 30, 2008, we had no interest rate exposure to our existing obligations since we had no outstanding principal under our subordinated term loan agreement and have not made any borrowings under our revolving line of credit. However, we could be exposed to interest rate risk if we make borrowings under our revolving line of credit.

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Item 4T. Controls and Procedures

(a) Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting.

There were no changes in our internal control over financial reporting 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material litigation, and we are not aware of any pending or threatened litigation against us that we believe would adversely affect our business, operating results, financial condition or cash flows. The software and storage infrastructure industries are characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, in the future, we may be involved in various legal proceedings from time to time.

Item 1A. Risk Factors

Risks Related to Our Business and Industry

We have a history of annual losses.

Since our formation, we have recorded a net loss in all of our annual fiscal periods. In fiscal 2008, our net loss was $10.1 million and we experienced net losses of $1.2 million and $513,000 for the three and six months ended September 30, 2008, respectively. As of September 30, 2008, our accumulated deficit was $174.5 million. During fiscal 2009, we expect to significantly increase expenditures in connection with the expansion of our business, including the hiring of additional direct sales and engineering personnel. In addition, as a public company, we anticipate that we will incur additional legal, auditing, accounting and other expenses resulting from regulatory requirements that did not apply to us as a private company. As a result of these increased expenditures, we will be required to increase our revenue substantially in order to achieve consistent profitability.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict. If our operating results fall below expectations, the price of our common stock could decline.

Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. We typically receive a substantial portion of our orders in the last two weeks of each fiscal quarter, which makes forecasting our future operating results difficult. In addition, many of the orders we receive may include conditions, such as customer acceptance provisions, or may not ship or be installed during the quarter in which they are received, in which case we cannot recognize revenue for those orders. Many of our orders are conditioned upon successful testing of our products, and orders placed with our resellers by governmental entities may generally be terminated unilaterally or may be subject to additional conditions. As a result, predicting when orders will translate to revenue, and consequently predicting our future operating results, is extremely difficult.

In any quarter, our revenue may be largely attributable to a single customer’s orders. While in the second quarter of fiscal 2009 no customer represented 10% or more of our total revenue, in the first quarter of fiscal 2009, 20% of our revenue was attributable to sales to one customer. In addition, our quarterly and annual expenses as a percentage of our revenue may be significantly different from our historical or projected rates, and our operating results in future quarters may fall below expectations. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

In addition to other risk factors listed in this “Risk Factors” section, factors that may affect or result in period-to-period variability in our operating results include:

• reductions in customers’ budgets for information technology purchases and delays in their budgeting and purchasing cycles, especially given current economic conditions, could have an adverse effect on our business and operating results because the purchase of our products requires our customers to make strategic and capital investment decisions about their storage requirements and IT infrastructures;

• the length of time between our receipt of orders and the recognition of revenue from those orders, which can be several quarters because many of our orders contain terms that do not permit us to recognize revenue until certain conditions have been satisfied;

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• reductions in the size of our individual sale transactions, because smaller transactions tend to have a smaller software component and, therefore, could decrease our gross margins;

• our ability to develop, introduce and ship, in a timely manner, new products and product enhancements that meet customer requirements; and

• the timing of product releases or upgrades by us or by our competitors, which could have an adverse effect on our revenue if customers delay orders pending the new release or upgrade.

We face significant competition from a number of established companies, which may offer substantial pricing discounts and pursue other aggressive competitive tactics in order to attract and maintain customers.

We face intense competition from a number of established companies that seek to provide storage solutions similar to our utility storage solution. Currently, these competitors include EMC Corporation, Hitachi Data Systems Corporation, IBM, NetApp, Inc., Hewlett-Packard Company, Sun Microsystems, Inc. and Dell Inc. All of these competitors, as well as other potential competitors, have longer operating histories, significantly greater resources, more employees, better name recognition, a larger base of customers and more established customer relations than we have. Consequently, some of these companies have substantial control and influence regarding acceptance of a particular industry standard or competing technology. These companies may also be able to devote greater resources to the development, promotion and sale of products and may be able to deliver competitive products or technologies at a lower price than our products. In addition, they may be able to adopt more aggressive pricing policies than we can adopt. For example, our competitors may offer their products at significant discounts in response to our efforts to market the technological merits and overall cost benefits of our products.

Some of our competitors may also have the ability to manufacture competitive products at lower costs. Our current or potential competitors may also offer bundled arrangements that include IT solutions, such as document management or security, that we do not currently offer and that are unrelated to storage, but that may be desirable and beneficial features for our current and prospective customers. We also face competition from current and prospective customers that continually evaluate our capabilities against the merits of manufacturing storage products internally. Competition may also arise due to the development of cooperative relationships among our current and potential competitors or third parties, some of which already exist, 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.

We also have many competitors that have developed competing technologies. For example, some of our competitors have recently released or announced plans to release a storage technology that will directly compete with our utility storage solution, including our 3PAR Thin Provisioning software application. We expect our competitors to continue to improve the performance of their current products, reduce their prices and introduce new services and technologies that may offer greater performance and improved pricing compared to our products, any of which could harm our business. In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our services or technologies obsolete or uncompetitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors.

Many of our established competitors have long-standing relationships with key decision makers at many of our current and prospective customers. As a result, we may not be able to compete effectively and maintain or increase our market share.

Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to discourage customers from purchasing our products. In particular, when competing against us, we expect our competitors to emphasize the importance of data storage retention, the high cost of data storage failure and the perceived risks of relying on products from a company

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with a shorter operating history and less predictable operating results. These factors may cause our current or prospective customers to be unwilling to purchase our products and instead to purchase the products of our better-known and more established competitors. In the event that we are unable to successfully sell our products to new customers, persuade customers of our competitors to purchase our products instead, or prevent our competitors from persuading our customers to purchase our competitors’ products, we may not be able to maintain or increase our market share. This would have a negative impact on our future operating results.

Our ability to increase our revenue will depend substantially on our ability to attract and retain key sales and engineering personnel, and any failure to attract and retain these employees could harm our future revenues, business, operating results and financial condition.

Our ability to increase our revenue will depend substantially on our ability to attract and retain qualified sales personnel, and our ability to offer competitive products will require that we attract and retain additional qualified engineers. In particular, we anticipate hiring a significant number of direct sales and engineering personnel in fiscal 2009, and our operating plan assumes that we will be able to attract and retain required employees. These positions require candidates with specific sales and engineering backgrounds in the storage industry, and competition for employees with this required expertise is intense. In addition, we believe that there are only a limited number of individuals with the specific skills required for many of our key positions in these areas. We face substantial competition in our hiring efforts and also in our retention efforts as our personnel are frequently recruited by other companies, including our competitors. As a result, we may be unable to locate, hire, and retain sufficient numbers of qualified individuals, which could have a material adverse effect on our future revenues, business, operating results, and financial condition.

To the extent that we are successful in hiring new employees to fill these positions, we need a significant amount of time to train the new employees before they can become effective and efficient in performing their jobs. As a result of the difficulty in finding and training qualified candidates, it is critical for us to retain the individuals who currently fill these positions. In particular, because competition for highly skilled sales and engineering employees is intense in our industry, recruitment practices can be aggressive. Substantial groups of our employees in key functional areas such as sales and systems engineers have recently been targets of aggressive recruiting efforts, which could continue and which could result in a loss of additional employees. Many of the employers with whom we compete for talent, or who may target our employee base, are larger with substantially greater resources than we have and may be able to offer compensation packages or other benefits that we do not provide or that are substantially more lucrative than our operating budgets permit. Any loss of our existing or future key sales, system engineers, or management personnel could harm our business, operating results and financial condition.

Our future success depends on the continued service of our key management personnel. All of the members of our management and other employees can terminate their employment at any time, and the loss of the services of any of our executive officers or other key employees could harm our business. Our future success is also dependent upon our ability to attract additional personnel for all other areas of our organization, including our customer services and finance department. Competition for qualified personnel is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. If we are unable to attract and retain the necessary technical, sales and other personnel on a cost-effective basis, we may be unable to grow our business and increase our revenue.

Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate.

Our sales efforts involve substantial education of our current and prospective customers about the use and benefits of our products, including their technical merits and capabilities and potential cost savings to the organization as compared to the incumbent storage solutions or other storage solutions that our customers or prospective customers may be considering. This education process can be extremely time consuming and typically involves a significant product evaluation process. Historically, our sales cycle averages three to four months, but has, in some cases, exceeded 12 months. Despite the substantial time and money that we invest in

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our sales efforts, we cannot assure you that these efforts will produce any sales. In addition, product purchases by our current and prospective customers are frequently subject to their budget constraints, approval processes, and a variety of unpredictable administrative, processing and other delays. A substantial number of our purchase orders do not include a shipment date, and shipments to customers may be delayed for substantial periods based on the customer’s specific needs. Our sales cycle may prevent us from recognizing revenue in a particular quarter, is relatively long and costly and may not produce any sales, which may cause our operating results to fluctuate and harm our business.

We purchase our disk drives, power supplies and certain components for our processor nodes from a limited number of qualified suppliers. If these or any of our other suppliers are not able to meet our requirements, it could harm our business.

We purchase sophisticated components from a limited number of qualified suppliers. We purchase our disk drives from Xyratex Technology Limited or Hitachi Global Storage Technologies, our power supplies from Power-One Inc., and application-specific integrated circuits, or ASICs, for our processor nodes from Renesas Technology Corp. Initially, suppliers of our disk drives, power supplies and ASICs require up to several months to qualify through a lengthy testing process, and a substantial amount of work to enable interoperability with our products. In the event that it became necessary for us to find another supplier of these or any of the other components of our products, the time required to transition to the new supplier could take up to 12 months, due to the lengthy qualification and technology development process.

We have in the past and may in the future experience quality control issues and delivery delays with our suppliers due to factors such as high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. We do not have a long-term contract with any of our current suppliers, and we purchase all components from our suppliers on a purchase order basis. If any of our suppliers were to cancel or materially change their commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased revenue, which would harm our business, operating results and financial condition.

Additionally, we periodically transition our product line to incorporate new technologies developed by us or our suppliers. For example, from time to time our suppliers may discontinue production of underlying components and products due to new technologies that have been incorporated into such components and products. Such discontinuance often occurs unexpectedly and our suppliers may require a significant amount of time to qualify the new technologies to ensure that they are compatible with our products.

We rely principally on two contract manufacturers to assemble portions of our products, and our failure to accurately forecast demand for our products or successfully manage our relationships with our contract manufacturers could negatively impact our ability to sell our products.

We rely principally on two contract manufacturers to assemble the disk chassis and processor nodes for each of our InServ Storage Server products, manage our supply chain and, alone or together with us, negotiate component costs. Specifically, we rely on Flash Electronics, Inc., or Flash, to assemble our processor nodes and on Flash and Xyratex Technology Limited to assemble our disk chassis. Our reliance on our contract manufacturers for these disk chassis and processor nodes reduces our control over the assembly process, quality assurance, production costs and product supply. If we fail to manage our relationship with our contract manufacturers or if either of our contract manufacturers experiences delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If we or our contract manufacturers are unable to negotiate with suppliers for reduced component costs, our operating results could be harmed.

The recent worldwide financial and credit crisis may adversely impact the financial condition and manufacturing capacity of our contract manufacturers, which could impair their ability to perform under our agreements. In addition, our contract manufacturers may terminate our agreements with them upon prior notice to us or for reasons such as if we become insolvent, or if we fail to perform a material obligation under our agreements with them. If we are required to change contract manufacturers or assume internal manufacturing operations for any reason, (including financial problems of our contract manufacturers, reduction of

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manufacturing output made available to us, or the termination of one of our contracts), we may lose revenue, incur increased costs and damage our customer relationships. Qualifying a new contract manufacturer and commencing volume production are expensive and time-consuming. We are required to provide forecasts to our contract manufacturers regarding product demand and production levels. We maintain with our contract manufacturers a rolling 90-day firm order for products they manufacture for us, and these orders may only be rescheduled or cancelled under certain limited conditions. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory or incur cancellation charges or penalties, which could adversely impact our operating results.

We intend to introduce new products and product enhancements, which could require us to achieve volume production rapidly by coordinating with our contract manufacturers and component suppliers. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand. If our contract manufacturers are unable to provide us with adequate supplies of high-quality products, or if we or either of our contract manufacturers are unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment, in which case our business, operating results and financial condition could be adversely affected.

Because of a change to our business model in March 2007, our past results may not be meaningful as compared to our current and future results, and you should not rely on them as an indication of our future performance.

Beginning in March 2007, in connection with sales of our products, we began offering our customers post-contract customer support, which we refer to as PCS, that includes obligations to provide unspecified software upgrades and enhancements to our customers on a when-and-if-available basis. Thus, beginning with the first quarter of fiscal 2008, we began recognizing software support revenue ratably over the term of our software support contract, rather than recognizing the entire arrangement at the time of shipment or installation as we had done previously, provided that the remaining revenue recognition criteria were satisfied. As a result of this change to our business model, and because revenue in the first half of fiscal 2009 benefited from recognition of an incremental $2.2 million of deferred revenue associated with the establishment of vendor specific objective evidence, or VSOE, of fair value on March 2007 transactions that we were previously recognizing on a ratable basis, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results, particularly the growth in our revenue in absolute dollars on a year-over-year basis, as an indication of our future performance. In addition, if for whatever reason we are unable to maintain VSOE of fair value of our software support, decide to discontinue offering PCS or otherwise change our business model, it could further complicate period-to-period comparisons of our operating results.

Our ability to sell our products is highly dependent on the quality of our support and service offerings, and any failure to offer high-quality support and services would harm our business, operating results and financial condition.

Once our products are deployed within our customers’ networks, our customers depend on our support organization to resolve any issues relating to our products. Our products provide mission-critical services to our customers and a high level of post-sale support is necessary to maintain our customer relationships. We rely on authorized service providers in certain locations in the United States to deliver our initial level of customer support. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of our support and service offerings. Our ability to provide effective support and service offerings is largely dependent on our ability to attract, train and retain qualified service personnel. As we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. In addition, our sales process is highly dependent on strong word-of-mouth recommendations from our existing customers. We believe that communication among our customers is both rapid and frequent. Any failure to maintain high-quality support and services, or a market perception that we do not maintain high-quality support and services, could harm our reputation, adversely affect our ability to sell our products to existing and prospective customers, and could harm our business, operating results and financial condition.

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We rely on resellers and authorized service providers to sell, service and support our products in markets where we do not have a direct sales force or support and service personnel. Any disruptions to, or failure to develop and manage, our relationships with resellers and authorized service providers could have an adverse effect on our existing customer relationships and on our ability to increase revenue.

Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of resellers and authorized service providers in markets where we do not have a direct sales force or service and support personnel. We currently have a direct sales force in the United States, the United Kingdom, Germany and Japan. In other markets, we rely and expect to continue to rely on establishing relationships with resellers and authorized service providers. Our ability to maintain or grow our revenue will depend, in part, on our ability to manage and expand our relationships with our existing resellers and authorized service providers and to establish relationships with new resellers and authorized service providers. In addition to their sales activities, our resellers also, in certain instances, provide post-sale service and support on our behalf in their local markets. We also have agreements with authorized service providers that, although they do not sell our products, provide delivery and installation of our products as well as post-sale service and support on our behalf in their local markets. In markets where we rely on resellers and authorized service providers, we have less contact with our end customers and less control over the sales process and the quality and responsiveness of our resellers and authorized service partners. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of our service and support offerings. Any failure on our part to train our resellers and authorized service providers and to manage their sales, service and support activities could harm our business, operating results and financial condition. For example, many of our customers are large, multinational organizations that may from time to time purchase products intended for deployment in markets where we do not have operations, which would require us to qualify and retain reliable service and support offerings in those markets. If our resellers or authorized service providers, as the case may be, fail to provide high-quality service and support in those local markets, it could harm our relationships with key customers in our principal markets.

Recruiting and retaining qualified resellers and authorized service providers and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our relationships with our resellers and authorized service providers, we must continue to scale and improve our processes and procedures that support our resellers and authorized service providers, including investments in systems and training. Those processes and procedures may become increasingly complex, difficult and expensive to manage, particularly as the geographic scope of our customer base expands.

We typically enter into non-exclusive, written distribution and service agreements with our resellers and authorized service providers. These agreements generally have a one-year, self-renewing term, have no minimum sales commitment and do not prohibit our resellers and authorized service providers from offering products and services that compete with ours. Accordingly, our resellers and authorized service providers may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services. Our competitors may provide incentives to our existing and potential resellers and authorized service providers to use or purchase their products and services or to prevent or reduce sales of our products and services. The occurrence of any of these events could harm our business, operating results and financial condition.

If we fail to manage future growth effectively, our business would be harmed.

In recent years, we have experienced substantial growth in the size and scope of our business, and if that growth continues, it will place significant demands on our management, infrastructure and other resources. In fiscal 2008, our number of employees increased from 312 to 451 and in the six months ended September 30, 2008, we increased our number of employees to 533.We currently anticipate hiring additional employees in future periods. We have also expanded the geographic scope of our business during that period, including the recent establishment of research and development operations in Northern Ireland. We expect to continue to expand internationally through direct sales efforts and by establishing indirect sales and support relationships with vendors in select international markets. Continued growth in the size and scope, including the geographic scope, of our business operations will require substantial management attention with respect to recruiting, hiring, integrating and retaining highly skilled and motivated individuals; managing increasingly dispersed geographic locations and facilities; establishing an integrated information technology infrastructure; and

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establishing company-wide processes and procedures to address human resource, financial reporting and financial management matters that are consistent across our organization but that address both U.S. and international regulatory and legal requirements. If we are not successful in effectively managing any future growth, it could harm our business, operating results and financial condition.

Our international sales and operations introduce risks that can harm our business, operating results and financial condition.

In fiscal 2008, we derived 17% of our revenue from end customers outside the United States and in the three and six months ended September 30, 2008, we derived 16% and 12% of our revenue from end customers outside the United States, respectively. We expect that our international sales will contribute in the mid-teens percentage of our total revenue on an annual basis. We have direct sales personnel in the United States, the United Kingdom, Germany and Japan, and agreements with third-party resellers in Poland, Japan, the United Kingdom, Korea, Italy, the Netherlands, Australia and South Africa. In addition, we currently have international subsidiaries in the United Kingdom, Germany and Japan. We expect to continue to hire additional personnel and enter into agreements with third-party resellers in additional countries, and as a result may need to establish additional international subsidiaries and offices. Our international operations subject us to a variety of risks, including:

• our inability to attract, hire and retain qualified management and other personnel;

• the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

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

• the need to localize our products and licensing programs for international customers;

• tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

• increased exposure to foreign currency exchange rate risk; and

• reduced protection for intellectual property rights in some countries.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, which in turn could adversely affect our business, operating results and financial condition.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in foreign markets.

Because we incorporate encryption technology into our products, our products are subject to United States export controls and may be exported outside the United States only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to introduce products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or an inability to export or sell our products to, existing or prospective customers with international operations and harm our business.

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We are subject to laws and regulations governing the environment and may incur substantial environmental regulation costs, which could harm our operating results.

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. These laws and regulations have been enacted in several jurisdictions in which we sell our products, including various European Union, or EU, member countries. For example, the EU has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment, or WEEE, directives. RoHS prohibits the use of certain substances, including lead, in certain products, including hard drives, sold after July 1, 2006. The WEEE directive obligates parties that sell electrical and electronic equipment in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment and provide a mechanism to take back and properly dispose of the equipment. There is still some uncertainty in certain EU countries as to which party involved in the manufacture, distribution and sale of electronic equipment will be ultimately responsible for registration, reporting and disposal. Similar legislation may be enacted in other locations where we sell our products. We will need to ensure that we comply with these laws and regulations as they are enacted, and that our component suppliers also comply with these laws and regulations. If we or our component suppliers fail to comply with the legislation, our customers may refuse or be unable to purchase our products, which could harm our business, operating results and financial condition.

In connection with our compliance with these environmental laws and regulations, we could incur substantial costs and be subject to disruptions to our operations and logistics. In addition, if we were found to be in violation of these laws, we could be subject to governmental fines and liability to our customers. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenses in connection with a violation of these laws, our business, operating results and financial condition could suffer.

As we seek to increase our sales to the public sector, we may face difficulties and risks unique to government contracts that may have a detrimental impact on our business, operating results and financial condition.

Historically, we have sold products to United States government agencies through third-party resellers. We recently established a wholly owned subsidiary through which we intend to sell directly to more entities and agencies within the United States government and state and local governments. Developing new business in the public sector often requires companies to develop relationships with different agencies or entities, as well as with other government contractors. If we are unable to develop or sustain such relationships, we may be unable to procure new contracts within the timeframes we expect, and our business, operating results and financial condition may be adversely affected. Contracting with the United States government often requires businesses to participate in a highly competitive bidding process to obtain new contracts. We may be unable to bid competitively if our products or services are improperly priced, or if we are incapable of providing our products and services at a competitive price. The bidding process is an expensive and time-consuming endeavor that may result in a financial loss for us if we fail to win a contract on which we submitted a bid. Further, some agencies within the United States government may also require some or all of our personnel to obtain a security clearance or may require us to add features or functionality to our products that could require a significant amount of time and prevent our employees from working on other critical projects. If our key personnel are unable to obtain or retain this clearance or if we cannot or do not provide required features or functionality, we may be unsuccessful in our bid for some government contracts.

Contracts with governmental entities also frequently include provisions not found in private sector contracts and are often governed by laws and regulations that do not affect private sector contracts. These unique provisions may permit public sector customers to take actions not available to customers in the private sector. These actions may include termination of contracts for convenience or due to a default. The United States government can also suspend operations if Congress does not allocate sufficient funds to a particular agency or organization, and the United States government may allow our competitors to protest our successful bids. The occurrence of any of these events may negatively affect our business, operating results and financial condition.

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In order to maintain contracts we may obtain with government entities, we must also comply with many rules and regulations that may affect our relationships with other customers. For example, the United States government could terminate its contracts with us if we come under foreign government control or influence, may require that we disclose our pricing data during the course of negotiations, and may require us to prevent access to classified data. If the United States government requires us to meet any of these demands, it could increase our costs or prevent us from taking advantage of certain opportunities that may present themselves in the future. United States government agencies routinely investigate and audit government contractors’ administrative processes. They may audit our performance and our pricing, and review our compliance with rules and regulations. If they find that we have improperly allocated costs, they may require us to refund those costs or may refuse to pay us for outstanding balances related to the improper allocation. An unfavorable audit could reduce our revenue, and may result in civil or criminal liability if the audit uncovers improper or illegal activities. This could harm our business, operating results and financial condition.

If we are unable to protect our intellectual property rights, our competitive position could be harmed and we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, particularly outside of the United States. Further, with respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented or invalidated over the course of our business. Moreover, the rights granted under any of our issued patents or patents that may be issued in the future may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting against the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others that we infringe their proprietary rights could harm our business.

Third parties could claim that our products or technology infringe their proprietary rights. In addition, we have in the past and may in the future be contacted by third parties suggesting that we seek a license to certain of their intellectual property rights that they may believe we are infringing. We expect that infringement claims against us may increase as the number of products and competitors in our market increases and overlaps occur. In addition, to the extent that we gain greater visibility, we believe that we will face a higher risk of being the subject of intellectual property infringement claims. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment against us could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms, or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events could seriously harm our business. Third parties may also assert infringement claims against our customers, resellers and authorized service providers. Because we generally indemnify our customers, resellers and authorized service providers if our products infringe the proprietary rights of third parties, any such claims would require us to initiate or defend protracted and costly litigation on their behalf, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, resellers and authorized service providers.

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We may not generate positive returns on our research and development investments.

Developing our products is expensive. In fiscal 2008, our research and development expenses were $34.1 million, or 29% of our total revenue, and in the three and six months ended September 30, 2008, our research and development expenses were $12.0 million, or 27% of our total revenue, and $22.2 million, or 25% of our total revenue, respectively. Our future plans include significant investments in research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, our ability to generate positive returns on these investments may take several years, if we are able to do so at all.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, our business, operating results and financial condition could be adversely affected.

We compete in a market characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. We cannot assure you that we will be able to anticipate future market needs or be able to develop new products or product enhancements to meet those needs in a timely manner, or at all. For example, our failure to develop additional features that our competitors are able to provide could adversely affect our business. In addition, although we invest a considerable amount of money into our research and development efforts, any new products or product enhancements that we develop may not achieve widespread market acceptance. As competition increases in the storage industry and the IT industry in general, it may become even more difficult for us to stay abreast of technological changes or develop new technologies or introduce new products as quickly as our competitors, many of which have substantially greater financial and engineering resources than we do. Additionally, risks associated with the introduction of new products or product enhancements include difficulty in predicting customer needs or preferences, transitioning existing products to incorporate new technologies, the capability of our suppliers to deliver high-quality components required by such new products or product enhancements in a timely fashion, and unknown defects in such new products or product enhancements. If we are unable to keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies, it could harm our business, operating results and financial condition.

Our products are highly technical and may contain undetected software or hardware errors or failures, which could cause harm to our financial condition and our reputation and adversely affect our business.

Our products are highly technical and complex and are critical to the operation of storage networks. We test our products prior to commercial release and during such testing have discovered and may in the future discover errors and defects that need to be resolved prior to release. Resolving these errors and defects can take a significant amount of time and prevent our technical personnel from working on other important tasks. In addition, our products have contained and may in the future contain one or more errors, defects or security vulnerabilities that were not detected prior to commercial release to our customers. Some errors in our products may only be discovered after a product has been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release, as well as any computer virus or human error on the part of our customer support personnel or authorized service providers that result in a customer’s data unavailability, loss or corruption, could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including in relation to changes to our products made by our resellers or authorized service providers. Our contracts with our customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be harmed.

If flaws in the design, production, assembly or testing of our products or our suppliers components were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of material and manufacturing quality and costs and product testing are critical factors in our future

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growth. We cannot assure you that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could harm our business, operating results and financial condition.

Adverse economic conditions and reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology, and in particular for storage infrastructure, and on the economic health of our current and prospective customers. In addition, the purchase of our products is often discretionary and may require our customers to make significant initial commitments of capital and other resources. The recent worldwide financial and credit crisis has dramatically reduced business spending on technology infrastructure. The shortage of liquidity and credit combined with recent substantial losses in equity markets could lead to an extended economic recession, which could adversely impact the economic health of our current and prospective customers and further reduce their spending on technology infrastructure. Continued or increased weakness in economic conditions, or a further reduction in information technology spending even if economic conditions improve, could adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services and reduced unit sales.

Changes in financial accounting standards or business practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.

A change in accounting standards or business practices can have a significant impact on our operating results and may affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of existing pronouncements have occurred and may occur in the future. Changes to existing accounting rules or our business or accounting practices, such as our change to a software support model in March 2007, may adversely affect our reported financial results.

We may seek to engage in future acquisitions, all or many of which could be viewed negatively, lead to integration problems, disrupt our business, increase our expenses, reduce our cash, cause dilution to our stockholders and harm our financial condition and operating results.

In the future, we may seek to acquire companies or assets that we believe may enhance our market position. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we cannot assure you that they will not be viewed negatively by customers, financial markets or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business, operating results and financial condition.

We are incurring significantly increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and NYSE Arca have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel are required to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and made some activities more time-consuming and costly. For example, these new rules and regulations made it more expensive for us to obtain director and officer liability insurance. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

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In addition, Sarbanes-Oxley requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for our fiscal year ending on March 31, 2009, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of Sarbanes-Oxley. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial expenses and expend significant management time on compliance-related issues.

In order to respond to additional regulations applicable to public companies, such as Section 404, we have recently added a number of finance and accounting personnel. We are also currently using independent contractors to fill certain positions and provide certain accounting functions. We intend to hire additional full-time accounting employees in fiscal 2009 to fill these and other related finance and accounting positions. Some of these positions require candidates with public company experience, and we may be unable to locate and hire such individuals as quickly as needed, if at all. In addition, new employees will require time and training to learn our business and operating processes and procedures. If our finance and accounting organization is unable for any reason to respond adequately to the increased demands that result from being a public company, the quality and timeliness of our financial reporting may suffer, which could result in identification of internal control weaknesses. Any consequences resulting from inaccuracies or delays in our reported financial statements could have an adverse effect on the trading price of our common stock as well as an adverse effect on our business, operating results, and financial condition.

Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC, NYSE Arca or other regulatory authorities, which would require additional financial and management resources.

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

We may require additional capital from equity or debt financing in the future to fund our operations, or respond to competitive pressures or strategic opportunities. We may not be able to secure additional financing on favorable terms, or at all. The terms of additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences or privileges senior to those of existing or future holders of our common stock. If we are unable to obtain necessary financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

Interruption or failure of our information technology and communications systems or services provided by our suppliers and manufacturers could impair our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any damage to or failure of our systems could result in interruptions in our service, which could reduce our revenue. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power losses, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. In addition, our corporate headquarters, inventory storage facilities and product assembly centers, as well as the facilities of many of our suppliers and manufacturers, are located in areas with a high risk of major earthquakes. Some of our manufacturers also have facilities located in Asia, which could be adversely impacted by political or economic stability, inadequacy of local infrastructure to support our needs and difficulty in maintaining sufficient quality control over manufactured components and products. The occurrence of a natural disaster or other unanticipated problems at one or more of these locations could result in delays or cancellations of customer orders or the deployment of our products, and lengthy interruptions in our service, any of which could adversely affect our business, operating results and financial condition.

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Risks Related to Ownership of Our Common Stock

The trading price of our common stock is likely to be volatile.

The trading prices of the securities of technology companies have been highly volatile, and our common stock has limited trading history. Factors that could affect the trading price of our common stock include:

• market conditions in our industry, the industries of our customers and the economy as a whole;

• variations in our operating results;

• announcements of technological innovations, new or enhanced services, strategic alliances or significant agreements by us or by our competitors;

• gain or loss of significant customers;

• recruitment or departure of our key personnel;

• the volume of shares of our common stock available for public sale including for sale by affiliates and other stockholders that own substantial amounts of our common stock;

• changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock; and

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

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

Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our stock price and trading volume.

Securities research analysts establish and publish their own quarterly projections regarding us and our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet securities research analysts’ projections. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly our stock price or trading volume could decline.

In addition, if securities or industry analysts cease coverage of our company, the trading price for our stock and the trading volume could decline.

Insiders have substantial control over us and are able to influence corporate matters.

At September 30, 2008, our directors and executive officers and their affiliates beneficially own, in the aggregate, approximately 56% of our outstanding common stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership limits our stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

• authorize our board of directors to issue, without further action by the stockholders, up to 20,000,000 shares of undesignated preferred stock;

• require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

• specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board, the chief executive officer or the president;

• establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

• establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;

• provide that our directors may be removed only for cause;

• provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

• specify that no stockholder is permitted to cumulate votes at any election of directors; and

• require a super-majority of votes to amend certain of the above-mentioned provisions.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

	Total Number of Shares Purchased(1)	Average Price Paid per Share		Shares Purchased as Part of Publicly Announced Plans or Programs	Maxium Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31, 2008	1,392	$	11.20	—	—
August 1 - August 31, 2008	—		—	—	—
September 1 - September 30, 2008	—		—	—	—
Total	1,392	$	11.20	—	—

(1) Represents unvested shares of common stock repurchased by us upon the termination of employment pursuant to the provisions of our 1999 Stock Plan and 2000 Management Stock Option Plan.

50

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Our 2008 Annual Meeting of Stockholders was held on September 10, 2008. The proposals submitted to a vote and the results of the voting are as follows:

1. To elect three Class I directors to hold office until the 2011 annual meeting of stockholders.

Name	For	Withhold
Kevin Fong	48,862,477	803,596
Jeffrey A. Price	49,617,168	48,905
Mark A. Siegel	48,862,477	803,596

2. To ratify the selection by the audit committee of the board of directors of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for its fiscal year ending March 31, 2009.

For	Against	Abstain
49,660,133	5,510	430

3. To approve the 2007 Equity Incentive Plan, as amended and restated.

For	Against	Abstain	Non-Vote
41,286,945	2,015,945	21,080	6,342,103

Item 5. Other Information

None

Item 6. Exhibits

Exhibit No.	Description
10.04	Amended and Restated 2007 Equity Incentive Plan of registrant.
10.23	Amended and Restated Standard NNN Lease by and between registrant and Brandin Court Partners, LLC dated October 15, 2008.
31.1	Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

51

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

Dated: November 12, 2008

3PAR Inc.
By:	/s/ ADRIEL G. LARES
	Adriel G. Lares
	Vice President of Finance, Chief Financial Officer

52

EXHIBIT INDEX

Exhibit No.	Description
10.04	Amended and Restated 2007 Equity Incentive Plan of registrant.
10.23	Amended and Restated Standard NNN Lease by and between registrant and Brandin Court Partners, LLC dated October 15, 2008.
31.1	Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

53

EX-10.04

Exhibit 10.04

AMENDED AND RESTATED 2007 EQUITY INCENTIVE PLAN

3PAR INC.

2007 EQUITY INCENTIVE PLAN

(Amended and Restated July 21, 2008)

1. Purposes of the Plan. The purposes of this Plan are:

• to attract and retain the best available personnel for positions of substantial responsibility,

• to provide additional incentive to Employees, Directors and Consultants, and

• to promote the success of the Company’s business.

The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units and Performance Shares.

2. Definitions. As used herein, the following definitions will apply:

(a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.

(b) “Affiliate” means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company.

(c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

(d) “Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares.

(e) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.

(f) “Award Transfer Program” means any program instituted by the Committee which would permit Participants the opportunity to transfer any outstanding Awards to a financial institution or other person or entity approved by the Committee.

(g) “Board” means the Board of Directors of the Company.

(h) “Change in Control” means the occurrence of any of the following events:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities;

(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets;

(iii) A change in the composition of the Board occurring within a two (2)-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

(iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

(i) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.

(j) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board in accordance with Section 4 hereof.

(k) “Common Stock” means the common stock of the Company.

(l) “Company” means 3PAR Inc., a Delaware corporation, or any successor thereto.

(m) “Consultant” means any person, including an advisor, engaged by the Company or any of its Affiliates to render services to such entity.

(n) “Determination Date” means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as “performance-based compensation” under Section 162(m) of the Code.

(o) “Director” means a member of the Board.

(p) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.

(q) “Employee” means any person, including Officers and Directors, employed by the Company or any of its Affiliates. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.

(r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(s) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have lower exercise prices and different terms), Awards of a different type, and/or cash, and/or (ii) the exercise price of an outstanding Award is reduced or increased. The Administrator will determine the terms and conditions of any Exchange Program in its sole discretion.

(t) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) For purposes of any Awards granted on the Registration Date, the Fair Market Value will be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company’s Common Stock; or

(iv) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.

(u) “Fiscal Year” means the fiscal year of the Company.

(v) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(w) “Inside Director” means a Director who is an Employee.

(x) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

(y) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(z) “Option” means a stock option granted pursuant to the Plan.

(aa) “Outside Director” means a Director who is not an Employee.

(bb) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(cc) “Participant” means the holder of an outstanding Award.

(dd) “Performance Goals” will have the meaning set forth in Section 12 of the Plan.

(ee) “Performance Period” means any Fiscal Year or such other period as determined by the Administrator in its sole discretion.

(ff) “Performance Share” means an Award denominated in Shares which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine pursuant to Section 10.

(gg) “Performance Unit” means an Award which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing pursuant to Section 10.

(hh) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance or Performance Goals, or the occurrence of other events as determined by the Administrator.

(ii) “Plan” means this 2007 Equity Incentive Plan.

(jj) “Registration Date” means the effective date of the first registration statement that is filed by the Company and declared effective pursuant to Section 12(g) of the Exchange Act, with respect to any class of the Company’s securities.

(kk) “Restricted Stock” means Shares issued pursuant to a Restricted Stock award under Section 7 of the Plan, or issued pursuant to the early exercise of an Option.

(ll) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 8. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.

(mm) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(nn) “Section 16(b)” means Section 16(b) of the Exchange Act.

(oo) “Service Provider” means an Employee, Director or Consultant.

(pp) “Share” means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.

(qq) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that pursuant to Section 9 is designated as a Stock Appreciation Right.

(rr) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan.

(a) Stock Subject to the Plan. Subject to the provisions of Section 15, of the Plan, the maximum aggregate number of Shares that may be issued under the Plan is ten million three hundred seventy-five thousand (10,375,000) Shares, plus an automatic increase on the first day of each Fiscal Year beginning with the 2009 Fiscal Year, in an amount equal to the least of (A) five million (5,000,000) Shares, (B) five percent (5%) of the outstanding Shares on the last day of the immediately preceding Fiscal Year or (C) such number of Shares determined by the Board.

(b) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an Exchange Program, or, with respect to Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares, is forfeited to or repurchased by the Company due to failure to vest, the unpurchased Shares (or for Awards other than Options or Stock Appreciation Rights the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to Stock Appreciation Rights, only Shares actually issued pursuant to a Stock Appreciation Right will cease to be available under the Plan; all remaining Shares under Stock Appreciation Rights will remain available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become available for future distribution under the Plan; provided, however, that if Shares issued pursuant to Awards of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant under the Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding anything in the Plan, or any Award Agreement to the contrary, Shares actually issued pursuant to Awards transferred under any Award Transfer Program will not be again available for grant under the Plan. Notwithstanding the foregoing and, subject to adjustment as provided in Section 15, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable under Section 422 of the Code and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under the Plan pursuant to this Section 3(b).

(c) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan.

4. Administration of the Plan.

(a) Procedure.

(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.

(ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two (2) or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.

(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:

(i) to determine the Fair Market Value;

(ii) to select the Service Providers to whom Awards may be granted hereunder;

(iii) to determine the number of Shares to be covered by each Award granted hereunder;

(iv) to approve forms of Award Agreements for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised or vest (which may be based on performance criteria or Performance Goals), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;

(vi) to determine the terms and conditions of any, and to institute any Exchange Program;

(vii) to determine the terms and conditions of any, and to institute any, Award Transfer Program;

(viii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;

(ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;

(x) to modify or amend each Award (subject to Section 20(c) of the Plan), including but not limited to the discretionary authority to extend the post-termination exercisability period of Awards and to extend the maximum term of an Option (subject to Section 6(b) regarding Incentive Stock Options);

(xi) to allow Participants to satisfy tax withholding obligations in such manner as prescribed in Section 16;

(xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

(xiii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award pursuant to such procedures as the Administrator may determine; and

(xiv) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.

5. Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees of the Company or any Parent or Subsidiary of the Company.

6. Stock Options.

(a) Limitations.

(i) Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.

(ii) The Administrator will have complete discretion to determine the number of Options granted to any Service Provider, provided that during any Fiscal Year, no Service Provider will be granted Options to purchase more than an aggregate of 1,000,000 Shares. Notwithstanding the foregoing limitation, in connection with his or her initial service, a Service Provider may be granted Options to purchase an aggregate of up to an additional 4,000,000 Shares.

(b) Term of Option. The term of each Option will be stated in the Award Agreement. In the case of an Incentive Stock Option, the term will be ten (10) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.

(c) Option Exercise Price and Consideration.

(i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, subject to the following:

(1) In the case of an Incentive Stock Option

a) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.

b) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(2) In the case of a Nonstatutory Stock Option, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(3) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.

(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.

(iii) Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note, (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised and provided that accepting such Shares, in the sole discretion of the Administrator, shall not result in any adverse accounting consequences to the Company; (5) consideration received by the Company under a broker-assisted (or other) cashless exercise program implemented by the Company in connection with the Plan; (6) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (7) any combination of the foregoing methods of payment.

(d) Exercise of Option.

(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.

An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable tax withholding). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan.

Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s termination as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

(v) Other Termination. A Participant’s Award Agreement may also provide that if the exercise of the Option following the termination of Participant’s status as a Service Provider (other than upon the Participant’s death or Disability) would result in liability under Section 16(b), then the Option will terminate on the earlier of (A) the expiration of the term of the Option set forth in the Award Agreement, or (B) the 10th day after the last date on which such exercise would result in such liability under Section 16(b). Finally, a Participant’s Award Agreement may also provide that if the exercise of the Option following the termination of the Participant’s status as a Service Provider (other than upon the Participant’s death or disability) would be prohibited at any time solely because the issuance of Shares would violate the registration requirements under the Securities Act, then the Option will terminate on the earlier of (A) the expiration of the term of the Option, or (B) the expiration of a period of three (3) months after the termination of the Participant’s status as a Service Provider during which the exercise of the Option would not be in violation of such registration requirements.

7. Restricted Stock.

(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine, provided that during any Fiscal Year no Service Provider will be granted more than an aggregate of 500,000 Shares of Restricted Stock. Notwithstanding the foregoing limitation, in connection with his or her initial service, a Service Provider may be granted an aggregate of up to an additional 2,000,000 Shares of Restricted Stock.

(b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, the Company as escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares have lapsed.

(c) Transferability. Except as provided in this Section 7, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

(d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.

(e) Removal of Restrictions. Except as otherwise provided in this Section 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction or at such other time as the Administrator may determine. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.

(f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.

(g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares, unless the Administrator provides otherwise. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.

(h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.

(i) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The

Performance Goals will be set by the Administrator on or before the Determination Date. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).

8. Restricted Stock Units.

(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. After the Administrator determines that it will grant Restricted Stock Units under the Plan, it will advise the Participant in an Award Agreement of the terms, conditions, and restrictions related to the grant, including the number of Restricted Stock Units. The Administrator will have complete discretion to determine the number of Restricted Stock Units granted to any Service Provider, provided that during any Fiscal Year, no Service Provider will be granted more than an aggregate of 500,000 Restricted Stock Units. Notwithstanding the foregoing limitation, in connection with his or her initial service, a Service Provider may be granted an aggregate of up to an additional 2,000,000 Restricted Stock Units.

(b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the Administrator in its discretion.

(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Administrator. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.

(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) determined by the Administrator and set forth in the Award Agreement. The Administrator, in its sole discretion, may only settle earned Restricted Stock Units in cash, Shares, or a combination of both.

(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.

(f) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock Units as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Restricted Stock Units which are intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).

9. Stock Appreciation Rights.

(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.

(b) Number of Shares. The Administrator will have complete discretion to determine the number of Stock Appreciation Rights granted to any Service Provider, provided that during any Fiscal Year, no Service Provider will be granted Stock Appreciation Rights covering more than an aggregate of 500,000 Shares. Notwithstanding the foregoing limitation, in connection with his or her initial service, a Service Provider may be granted Stock Appreciation Rights covering up to an aggregate of an additional 2,000,000 Shares.

(c) Exercise Price and Other Terms. The per share exercise price for the Shares to be issued pursuant to exercise of a Stock Appreciation Right will be determined by the Administrator and will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. Otherwise, the Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under the Plan.

(d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.

(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(b) and Section 6(d) also will apply to Stock Appreciation Rights.

(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:

(i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times

(ii) The number of Shares with respect to which the Stock Appreciation Right is exercised.

At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.

10. Performance Units and Performance Shares.

(a) Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion to determine the number of Performance Units and Performance Shares granted to each Participant, provided that during any Fiscal Year, (i) no Service Provider will be granted Performance Units having an initial value in the aggregate greater than $1,000,000, and (ii) no Service Provider will be granted in the aggregate more than 500,000 Performance Shares. Notwithstanding the foregoing limitation, in connection with his or her initial service, a Service Provider may be granted in the aggregate up to an additional 2,000,000 Performance Shares and Performance Units having an initial value in the aggregate up to an additional $1,000,000.

(b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.

(c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Service Providers. The time period during which the performance objectives or other vesting provisions must be met will be called the “Performance Period.” Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine. The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.

(d) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.

(e) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.

(f) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under the Plan.

(g) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Units/Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).

11. Formula Awards to Outside Directors.

(a) General. Outside Directors will be entitled to receive all types of Awards (except Incentive Stock Options) under this Plan, including discretionary Awards not covered under this Section 11. All grants of Awards to Outside Directors pursuant to this Section 11 will be automatic and nondiscretionary, except as otherwise provided herein, and will be made in accordance with the following provisions:

(b) Type of Option. If Options are granted pursuant to this Section 11 they will be Nonstatutory Stock Options and, except as otherwise provided herein, will be subject to the other terms and conditions of the Plan.

(c) No Discretion. No person will have any discretion to select which Outside Directors will be granted Awards under this Section or to determine the number of Shares to be covered by such Awards (except as provided in Sections 11(i) and 15).

(d) Initial Award. Each person who first becomes an Outside Director following the Registration Date will be automatically granted an Option to purchase thirty-five thousand (35,000) Shares (the “Initial Award”) on the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director, but who remains a Director, will not receive an Initial Award.

(e) Annual Award. Each Outside Director will be automatically granted an Option to purchase eleven thousand two hundred fifty (11,250) Shares (the “Annual Award”) on each date of the annual meeting of the stockholders of the Company beginning in 2008, if as of such date, he or she will have served on the Board for at least the preceding six (6) months.

(f) Chairman Initial Award. Each Outside Director who first becomes a chairman of a committee of the Board (“Chairman”) following the Registration Date will be automatically granted an Option to purchase sixteen thousand (16,000) Shares (the “Initial Chairman Award”) on the date on which such person first becomes a Chairman.

(g) Chairman Annual Award. Each Chairman will be automatically granted an Option to purchase four thousand (4,000) Shares (the “Annual Chairman Award”) on each date of the annual meeting of the stockholders of the Company beginning in 2008, if as of such date, he or she will have served as a Chairman for at least the preceding six (6) months.

(h) Terms. The terms of each Award granted pursuant to this Section 11 will be as follows:

(i) The term of the Award will be ten (10) years.

(ii) The exercise price for Shares subject to Awards will be one hundred percent (100%) of the Fair Market Value on the grant date.

(iii) Subject to Section 15, the Initial Award and Initial Chairman Award will vest and become exercisable as to 1/48^th of the Shares subject to such Award on each monthly anniversary of the grant date (and if there is no corresponding day, on the last day of the month), provided that the Participant continues to serve as a Director or Chairman, as applicable, through such dates.

(iv) Subject to Section 15, the Annual Award and Annual Chairman Award will vest and become exercisable as to 1/12^th of the Shares subject to such Award on the thirty-seventh (37^th) monthly anniversary of the grant date, and 1/12^th of the Shares subject to such Award will vest each month thereafter on the same day of the month as the grant date (and if there is no corresponding day, on the last day of the month), provided that the Participant continues to serve as a Director or Chairman, as applicable, through such dates.

(v) To the extent not in conflict with the terms of this Section 11, the terms of Sections 6(c)(iii) and 6(d) shall apply to Initial Awards, Initial Chairman Awards, Annual Awards and Annual Chairman Awards.

(i) Adjustments. The Administrator in its discretion may change and otherwise revise the terms of Awards granted under this Section 11, including, without limitation, the types of Awards granted, the number of Shares and exercise prices thereof, for Awards granted on or after the date the Administrator determines to make any such change or revision.

12. Performance-Based Compensation Under Section 162(m) of the Code.

(a) General. If the Administrator, in its discretion, decides to grant an Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the provisions of this Section 12 will control over any contrary provision in the Plan; provided, however, that the Administrator may in its discretion grant Awards that are not intended to qualify as “performance-based compensation” under Section 162(m) of the Code to such Participants that are based on Performance Goals or other specific criteria or goals but that do not satisfy the requirements of this Section 12.

(b) Performance Goals. The granting and/or vesting of Awards under the Plan may be made subject to the attainment of Performance Goals relating to one or more business criteria within the meaning of Section 162(m) of the Code and may provide for a targeted level or levels of achievement including: (i) annual revenue, (ii) business divestitures and acquisitions, (iii) cash flow, (iv) cash position, (v) customer satisfaction (vi) earnings, (vii) earnings before interest and taxes, (viii) earnings before interest, taxes, depreciation and amortization, (ix) earnings per Share, (x) employee satisfaction (xi) expenses, (xii) gross margin, (xiii) gross profit dollars, (xiv) market share, (xv) net cash provided by operations, (xvi) net income, (xvii) net profit, (xviii) net sales, (xix) new product development, (xx) number of customers, (xxi) operating cash flow, (xxii) operating expenses, (xxiii) operating income, (xxiv) operating margin, (xxv) productivity, (xxvi) profit after taxes, (xxvii) profit before taxes, (xxviii) ratio of debt to equity, (xxix) ratio of operating earnings to capital spending, (xxx) return on assets, (xxxi) return on equity, (xxxii) return on gross fixed assets, (xxxiii) return on net assets, (xxxiv) return on sales, (xxxv) return on stockholder equity, (xxxvi) return to stockholders, (xxxvii) revenue, (xxxiii) revenue growth, (xxxiv) sales, (xxxx) sales growth, (xxxxi) time to market, and (xxxxii) working capital. Any Performance Goals may be used to measure the performance of the Company as a whole or a business unit of the Company and may be measured relative to a peer group or index. The Performance Goals may differ from Participant to Participant and from Award to Award. Any criteria used may be measured, as applicable (i) in absolute terms, (ii) against another company or companies, (iii) against the performance of the Company as a whole or a segment of the Company, (iv) on a per-share basis, and/or (v) on a pre-tax or post-tax basis (if applicable). Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participant.

(c) Procedures. To the extent necessary to comply with the performance-based compensation provisions of Section 162(m) of the Code, with respect to any Award granted subject to Performance Goals, within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the commencement of any Performance Period (or such other time as may be required or permitted by Section 162(m) of the Code), the Administrator will, in writing: (i) designate one or more Participants to whom an Award will be made, (ii) select the Performance Goals applicable to the Performance Period, (iii) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (iv) specify the relationship between Performance Goals and the amounts of such Awards, as applicable, to be earned by each Participant for such Performance Period. Following the completion of each Performance Period, the Administrator will certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Administrator will have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant will be eligible to receive payment pursuant to an Award for a Performance Period only if the Performance Goals for such period are achieved.

(d) Additional Limitations. Notwithstanding any other provision of the Plan, any Award which is granted to a Participant and is intended to constitute qualified “performance-based compensation” under Section 162(m) of the Code will be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m)) or any regulations and ruling issued thereunder that are requirements for qualification as qualified “performance-based compensation” as described in Section 162(m) of the Code, and the Plan will be deemed amended to the extent necessary to conform to such requirements.

13. Leaves of Absence/Transfer Between Locations. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Service Provider will not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between or among the Company and any of its Affiliates. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the ninety-first (91^st) day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.

14. Limited Transferability of Awards.

(a) General. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the Administrator deems appropriate.

(b) Award Transfer Program. Notwithstanding any contrary provision of the Plan, the Administrator shall have all discretion and authority to determine and implement the terms and conditions of any Award Transfer Program instituted pursuant to this Section 14(b) and shall have the authority to amend the terms of any Award participating, or otherwise eligible to participate in, the Award Transfer Program, including (but not limited to) the authority to (i) amend (including to extend) the expiration date, post-termination exercise period and/or forfeiture conditions of any such Award, (ii) amend or remove any provisions of the Award relating to the Award holder’s continued service to the Company, (iii) amend the permissible payment methods with respect to the exercise or purchase of any such Award, (iv) amend the adjustments to be implemented in the event of changes in the capitalization and other similar events with respect to such Award, and (v) make such other changes to the terms of such Award as the Administrator deems necessary or appropriate in its sole discretion.

15. Adjustments; Dissolution or Liquidation; Merger or Change in Control.

(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award, the numerical Share limits in Section 3 of the Plan, the number of Shares issuable pursuant to Awards to be granted under Section 11, and the numerical limits of Sections 6(a)(ii), 7(a), 8(a), 9(b), and 10(a) of the Plan.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

(c) Change in Control. In the event of a merger or Change in Control, each outstanding Award will be treated as the Administrator determines, including, without limitation, that each Award be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. The Administrator will not be required to treat all Awards similarly in the transaction.

In the event that the successor corporation does not assume or substitute for the Award, the Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all Performance Goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.

For the purposes of this subsection (c), an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance Unit or Performance Share, for each Share subject to such Award (or in the case of an Award settled in cash, the number of implied shares determined by dividing the value of the Award by the per share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.

Notwithstanding anything in this Section 15(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more Performance Goals or other performance criteria will not be considered assumed if the Company or its successor modifies any of such Performance Goals or performance criteria without the Participant’s consent; provided, however, a modification to such Performance Goals or performance criteria only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.

(d) Outside Director Awards. Notwithstanding anything herein to the contrary, with respect to Awards granted to an Outside Director, upon a Change in Control the Participant will fully vest in and have the right to exercise Options and/or Stock Appreciation Rights as to all of the Shares

underlying such Award, including those Shares which would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Performance Units and Performance Shares, all Performance Goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met.

16. Tax Withholding.

(a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).

(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (a) paying cash, (b) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, (c) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, or (d) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the minimum statutory amount required to be withheld. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.

17. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.

18. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.

19. Term of Plan. Subject to Section 23 of the Plan, the Plan will become effective upon its adoption by the Board. It will continue in effect for a term of ten (10) years from the date adopted by the Board, unless terminated earlier under Section 20 of the Plan.

20. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

21. Conditions Upon Issuance of Shares.

(a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

22. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.

23. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted by the Board. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.

EX-10.23

Exhibit 10.23

BRANDIN COURT PARTNERS, LLC

AMENDED AND RESTATED STANDARD NNN LEASE

WITNESSETH

This Amended and Restated Standard NNN Lease (the “Lease”) is entered into by and between Brandin Court Partners, LLC, a California Limited Liability Company (“Landlord”), and 3PAR Inc., a Delaware Corporation (“Tenant”).

RECITALS

WHEREAS, Landlord and Tenant previously entered into that certain, Standard NNN Lease, dated as of August 17, 2007 (the “Original Lease”), regarding the lease by Tenant from Landlord of the property commonly known as 5070 Brandin Court, Fremont, California (the “5070 Premises”);

WHEREAS, Landlord is also the owner of that certain property commonly known as 5020 Brandin Court, Fremont, California (the “5020 Premises”), which property is located immediately adjacent to the 5070 Premises;

WHEREAS, First International Computer of American, Inc., a California corporation (“FICA”), is the current tenant of the 5020 Premises under a lease with Landlord (the “FICA Lease”) that will expire on or about July 6, 2009;

WHEREAS, FICA and Landlord desire to terminate early the FICA Lease pursuant to a separate agreement between Landlord and FICA to be entered into concurrent with this Lease; and

WHEREAS, Landlord and Tenant desire to amend and restate the Original Lease to provide for the inclusion of the 5020 Premises and to provide for such additional terms and conditions related to Tenant’s lease of the 5020 Premises from Landlord.

NOW, THEREFORE, in consideration of the payment of rents and the performance of covenants herein set forth by Tenant, Landlord does hereby lease to Tenant and Tenant accepts the Premises described below subject to the agreements herein contained.

1. BASIC LEASE TERMS.

1.1	EFFECTIVE DATE:	October 16, 2008
1.2	TENANT:	3PAR Inc., a Delaware Corporation
	Address (of the Premises):	5020 and 5070 Brandin Court
		Fremont, California 94538
		Tel: _________________
		Fax: _________________
	Address (for Notices):	4209 Technology Drive, Fremont Ca 94538

1.3	LANDLORD:	Brandin Court Partners, LLC
	Address (for Notices):	11828 La Grange Avenue
		Los Angeles, California 90025 Attn: Keith M. Wolff
		Tel: 310-625-8184
		Fax: 603-720-8057
		Email: kwolff@wolffurban.com
1.4	TENANT’S USE:	Office, manufacturing, and warehouse of electronic, computer or medical equipment, products, devices or software and related uses.
1.5	BUILDING:	76,599 Rentable Square Feet in the building located at 5020 Brandin Court (the “5020 Building”) and 56,257 Rentable Square Feet in the building located at 5070 Brandin Court (the “5070 Building”)
1.6	PREMISES AREA:	The 5020 Building, the 5070 Building, and related parking areas
1.7	BUSINESS PARK:	132,856 Rentable Square Feet
1.8	INSURING PARTY:	Landlord is the “Insuring Party” unless otherwise stated herein.
1.9	TERM (inclusive):	Commencement Date for the 5020 Premises: the later of (i) the date on which Landlord delivers possession of the 5020 Premises in the condition required hereunder and (ii) January 1, 2009 (the “5020 Commencement Date”)
		Commencement Date for the 5070 Premises: August 1, 2007 (the “5070 Commencement Date”)
		Expiration Date: December 31, 2012
		Number of Months Remaining as of the Effective Date: approximately [50]

2

1.10	% OF BUSINESS PARK:	From the 5070 Commencement Date until the 5020 Commencement Date: 42.3% (56,257 sq. ft. / 132,856 sq. ft.); From the 5020 Commencement Date until the Expiration Date: 100% (132,856 sq. ft. / 132,856 sq. ft.)
1.11	PARKING SPACES:	All spaces in the Business Park.
1.12	BASE RENT ADJUSTMENT:
	The step adjustment provisions of ¶4.2 apply for the periods shown below:
	Periods (inclusive)	Monthly Base Rent
	03/01/08 - 12/31/08	$17,439.67 per month ($0.00 per sq. ft. in the 5020 Building and $0.31 per sq. ft. in the 5070 Building)
	01/01/09 - 06/30/09	$19,689.95 per month ($0.00 per sq. ft. in the 5020 Building and $0.35 per sq. ft. in the 5070 Building)
	07/01/09 - 12/31/09	$56,457.47 per month ($0.48 per sq. ft. in the 5020 Building and $0.35 per sq. ft. in the 5070 Building)
	01/01/10 - 12/31/10	$61,927.44 per month ($0.50 per sq. ft. in the 5020 Building and $0.42 per sq. ft. in the 5070 Building)
	01/01/11 - 12/31/11	$65,709.70 per month ($0.52 per sq. ft. in the 5020 Building and $0.46 per sq. ft. in the 5070 Building)
	01/01/12 - 12/31/12	$69,491.96 per month ($0.54 per sq. ft. in the 5020 Building and $0.50 per sq. ft. in the 5070 Building)
1.13	SECURITY DEPOSIT:	$123,498.68 ($41,362.78 for the 5020 Premises and $82,135/22 for the 5070 Premises).
1.14	GUARANTORS:	None
1.15	BROKER(S):	CB Richard Ellis represents the Landlord. The Landlord shall pay CB Richard Ellis a lease commission per separate agreement.
1.16	EXHIBITS:	Exhibits lettered “A” through “D” are attached hereto and made a part hereof.

2. PREMISES, PARKING AND COMMON AREAS.

2.1 Premises. The 5020 Premises and the 5070 Premises are collectively referred to herein as the “Premises”. The Premises, the 5020 Building, the 5070 Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the “Business Park” as described in ¶1 and Exhibit A. Landlord hereby leases to Tenant and Tenant leases from

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Landlord for the Term (as defined below), at the rental, and upon all of the conditions set forth herein, the Premises, including rights to the Common Areas as hereinafter specified. Subject to any additional work Landlord has agreed therein to do, Tenant hereby accepts the 5020 Premises in their condition existing as of the date of the execution hereof, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the 5020 Premises, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Tenant acknowledges that Tenant accepted the 5070 Premises in the condition existing as of the date of the mutual execution of the Original Lease, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the 5070 Premises, and accepted the Original Lease subject thereto and to all matters disclosed thereby and by any exhibits attached thereto. Notwithstanding the foregoing, Landlord warrants that: (i) the 5070 Premises was in good and clean operating condition and repair as of the 5070 Commencement Date; (ii) the lights, doors, electrical, mechanical, HVAC, plumbing, sewer, elevator and other systems serving the 5070 Premises and the 5070 Building were in good operating condition and repair as of the 5070 Commencement Date; (iii) the roof of the 5070 Building was in good condition and water tight as of the 5070 Commencement Date; and (iv) to Landlord’s knowledge (without duty of investigation or inquiry), the 5070 Building complies with all applicable laws, rules, regulations, codes, ordinances, underwriter’s requirements, covenants, conditions and restrictions (collectively, “Laws”) as of the 5070 Commencement Date; provided, however, that Landlord make no representation or warranty herein regarding the condition of any of the foregoing as they may apply to the 5070 Premises for the period following the 5070 Commencement Date. Further notwithstanding the foregoing, Landlord warrants that (a) the 5020 Premises will be in good and clean operating condition and repair as of the 5020 Commencement Date; (b) the lights, the doors, electrical, mechanical, HVAC, plumbing, sewer, elevator and other systems serving the 5020 Premises and the 5020 Building will be in good operating condition and repair as of the 5020 Commencement Date; (c) the roof of the 5020 Building will be in good condition and water tight as of the 5020 Commencement Date; and (d) to Landlord’s knowledge (without duty of investigation or inquiry) the 5020 Premises and 5020 Building comply with all applicable Laws as of the 5020 Commencement Date. The foregoing warranties do not apply to the use to which Tenant has or will put the Premises, modifications which may be required by the ADA or similar laws as a result of Tenant’s use, or to any Alterations made or to be made by Tenant. Landlord shall, promptly after receipt of notice from Tenant, remedy any non-compliance with the foregoing warranty at Landlord’s sole cost and expense; provided, however, if Tenant does not give Landlord written notice of a non-compliance with said warranty within 180 days after the 5020 Commencement Date, correction of that non-compliance shall be the obligation of Tenant at Tenant’s sole cost and expense. Tenant agrees with the square footage specified for the Premises in ¶1 and will not hereafter challenge such determination and agreement. The rental payable by Tenant pursuant to this Lease is not subject to revision in the event of any discrepancy in the rentable square footage for the Premises.

2.2 Vehicle Parking. So long as Tenant is not in default (after applicable notice and cure periods, if any), and subject to the Rules and Regulations attached hereto as Exhibit B, and as reasonably established by Landlord from time to time, Tenant shall be entitled to use the number of parking spaces set forth in ¶1. If Tenant commits, permits or allows any of the prohibited activities described in the Lease or the Rules and Regulations then in effect (after applicable notice and cure periods, if any), then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord.

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2.3 Common Areas - Definition. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Business Park that are provided and designated by the Landlord from time to time for the general non-exclusive use of Landlord, Tenant and of other tenants of the Business Park and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls.

2.4 Common Areas - Rules and Regulations. Tenant agrees to abide by and conform to the Rules and Regulations attached hereto as Exhibit B with respect to the Business Park and Common Areas, and to cause its employees, suppliers, shippers, customers and invitees to so abide and conform. Landlord or such other person as Landlord may appoint, shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to reasonably modify, amend and enforce said rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance with said rules and regulations by other tenants, their agents, employees and invitees. Landlord shall, however, enforce all rules and regulations non-discriminatorily.

2.5 Building and Common Areas - Changes. Landlord shall have the right, in Landlord’s reasonable discretion, from time to time:

2.5.1 To make changes to the Common Areas, including, without limitation, changes in the location, size, shape, number and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways so long as Tenant’s use and occupancy is not unreasonably impaired thereby;

2.5.2 To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available;

2.5.3 To designate other land and improvements outside the boundaries of the Business Park to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Business Park;

2.5.4 To add additional buildings and improvements to the Common Areas;

2.5.5 To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Business Park or any portion thereof; and

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2.5.6 To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Business Park as Landlord may, in the exercise of sound business judgment deem to be appropriate so long as Tenant’s use and occupancy, access, and parking is not unreasonably impaired thereby. In exercising all such rights, Landlord shall use reasonable efforts to minimize any disruption to Tenant and shall use reasonable efforts to comply with Tenant’s reasonable security measures and operating procedures.

2.6 Acceptance; Quiet Enjoyment. Landlord represents that it is the fee simple owner of the Business Park and has full right and authority to make this Lease. Landlord hereby leases the Premises to Tenant and Tenant hereby accepts the same from Landlord, in accordance with the provisions of this Lease. Landlord covenants that Tenant shall have peaceful and quiet enjoyment of the Premises during the Term (as defined below) of this Lease. Tenant covenants that it will not interfere with other tenants’ quiet enjoyment of their premises.

3. TERM. The term (“Term”) of this Lease shall be as follows: (i) with respect to the 5070 Premises, the period that commenced at 12:01 a.m. on the 5070 Commencement Date and expires at 11:59 p.m. on the Expiration Date; and (ii) with respect to the 5020 Premises, the period that commences at 12:01 a.m. on the 5020 Commencement Date and expires at 11:59 p.m. on the Expiration Date. The parties acknowledge that Landlord has delivered possession of the 5070 Premises to Tenant and Tenant has accepted such delivery.

4. RENT.

4.1 Base Rent. Tenant shall pay Landlord in lawful money of the United States, without notice, demand, offset or deduction (except as otherwise expressly provided herein), rent in the amount(s) set forth in ¶1 which shall be payable in advance on the first day of each and every calendar month (“Base Rent”). Unless otherwise specified in writing by Landlord, all installments of Base Rent shall be payable to Brandin Court Partners LLC (11828 La Grange Ave, Los Angeles, CA 90025). Base Rent for any partial month at the beginning or end of this Lease will be prorated in accordance with the number of days in the subject month.

For purposes of Section 467 of the Internal Revenue Code, the parties to this Lease hereby agree to allocate the stated Base Rent provided herein to the periods which correspond to the actual Base Rent payments as provided under the terms and conditions of this Agreement.

4.2 Step Increase. The Base Rent shall be increased periodically to the amounts and at the times set forth in ¶1.

4.3 Rent Without Offset and Late Charge. All Rent shall be paid without prior demand or notice and without any deduction or offset whatsoever (except as otherwise expressly provided in this Lease). All Rent shall be paid in lawful currency of the United States of America. Tenant acknowledges that late payment by Tenant to Landlord of any Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such cost being extremely difficult and impracticable to ascertain. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrance or note secured by the Premises. Therefore, if any Rent is not received by Landlord within five (5) days of its due date, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue payment; provided, however, Landlord shall not impose a late charge unless Tenant has been past due on such payment of Rent more than

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once in any 12 month period. Landlord and Tenant hereby agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any such late payment and that the late charge is in addition to any and all remedies available to the Landlord and that the assessment and/or collection of the late charge shall not be deemed a waiver of any other default. Additionally, all such delinquent Rent or other sums shall bear interest from the due date thereof at the lesser of ten percent (10%) per annum or the maximum legal interest rate permitted by law. Any payments of any kind returned for insufficient funds will be subject to an additional handling charge of $25.00, and after the third such returned payment for the remainder of the Term hereof, Landlord may require Tenant to pay all future payments of Rent or other sums due by cashier’s check.

4.4 Intentionally Deleted.

4.5 Rent. The term “Rent” as used in this Lease shall refer to Base Rent, Real Property Taxes, Operating Expenses, Security Deposit(s), Insurance Costs, repairs and maintenance costs, utilities, late charges and other similar charges payable by Tenant pursuant to this Lease to Landlord.

5. OPERATING EXPENSES.

5.1 Payment by Tenant. Except as otherwise set forth in this Lease, from the 5070 Commencement Date until the 5020 Commencement Date, Tenant shall pay to Landlord, as additional Rent, on a monthly basis the greater of: (a) the Operating Expenses for the 5070 Premises, and (b) the sum of $12,939.11 ($.23 per square foot) per month (the “Initial Operating Expense Floor Amount”). Except as otherwise set forth in this Lease, from the 5020 Commencement Date until the Expiration Date, Tenant shall pay to Landlord, as additional Rent, on a monthly basis the greater of: (a) the Operating Expenses for the Business Park, and (b) the sum of $30,556.88 ($.23 per square foot) per month (the “Operating Expense Floor Amount”).

5.2 Operating Expenses. The term “Operating Expenses” shall mean all reasonable expenses, costs and disbursements (not specifically excluded from the definition of Operating Expenses below) of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership, maintenance, repair and operation of the Business Park or any portion thereof (including all buildings and Common Areas of the Business Park). Operating Expenses shall include, but not be limited to, the following:

5.2.1 Wages and salaries of all employees of Landlord below the level of property manager engaged in the operation, maintenance and security of the Business Park, including taxes, insurance and benefits relating thereto, and the reasonable rental cost and overhead reasonably allocated to any office and storage space used to provide such services to the Business Park and other properties owned by Landlord or any of its affiliates within the general vicinity of the Business Park.

5.2.2 All supplies and materials used in the operation, repair or maintenance of the Business Park.

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5.2.3 Cost of all utilities, including surcharges, for the Business Park, including the cost of water, power and lighting which are not separately billed to and paid for by Tenant or any other party.

5.2.4 Cost of all maintenance and service agreements for the Business Park and the equipment thereon, including but not limited to, security services, exterior window cleaning, janitorial service, engineers, gardeners and trash removal services.

5.2.5 All Insurance Costs, as such term is defined in ¶16.

5.2.6 Cost of all repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties).

5.2.7 An industry standard management fee for the property management of the Business Park (not to exceed four percent (4%) of gross revenue from the Business Park, excluding revenue for reimbursement of Real Property Taxes and Insurance Costs).

5.2.8 The costs of any additional services not provided to the Business Park at the Commencement Date but thereafter provided by Landlord in its management of the Business Park.

5.2.9 The cost of any capital Improvements to the Business Park or any part thereof which are made during the Term hereof with such cost to be amortized over the useful life of the improvement as reasonably determined by Landlord.

5.2.10 Real Property Taxes, as that term is defined in ¶11.

5.3 Operating Expenses shall not include:

5.3.1 Costs paid for directly by Tenant or other tenants;

5.3.2 Costs incurred in connection with the financing, sale or acquisition of the Business Park or any portion thereof;

5.3.3 Costs incurred in leasing or procuring tenants (including without limitation, lease commissions, advertising expenses, attorneys’ fees and expenses of renovating space for tenants);

5.3.4 Salaries and overhead of off-site personnel employed by Landlord except for the charge (or pro rata share) of employees below of the property manager of the Business Park;

5.3.5 Subject to the provisions of ¶5.2.9 above, depreciation on the Building or other improvements on the Business Park;

5.3.6 Legal expenses for disputes with tenants and any other professional fees of attorneys, auditors or consultants not incurred in connection with the normal maintenance and operation of the Business Park;

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5.3.7 Expenses which relate to the preparation of rental space for tenants, including without limitation building permit, license and inspection costs incurred with respect to the installation or improvements made for occupants of the Business Park or incurred in renovating or otherwise improving, decorating, painting or decorating vacant tenant space for the Business Park or other occupants of the Business Park;

5.3.8 Costs incurred that are reimbursed by tenants of the Business Park, including Tenant, or third parties, including insurers;

5.3.9 Expenses for repair or replacement covered by warranties, and any costs due to casualty that are covered by insurance carried by Landlord or that would have been covered by insurance that Landlord is required to carry under this Lease or condemnation;

5.3.10 Rentals and other payments by Landlord under any ground lease or other lease underlying the Lease, and interest, principal, points and other fees on debt or amortization of any debt secured in whole or part by all or any portion of the Business Park;

5.3.11 Repairs or replacements caused by Landlord’s gross negligence or the gross negligence of Landlord’s employees or agents;

5.3.12 Net Income, franchise, capital stock, estate or inheritance taxes or taxes which are the personal obligation of Landlord or another tenant of the Business Park;

5.3.13 Landlord’s charitable or political contributions;

5.3.14 Payments to subsidiaries and affiliates of Landlord for services to the Business Park for supplies or other materials to the extent that the cost of such services, supplies or materials exceed the cost which would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis (provided, however, any fee for management services paid to an affiliate of Landlord shall be in the amount set forth in ¶5.2.7);

5.3.15 Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord:

5.3.16 Advertising and promotional expenditures:

5.3.17 Costs of repairs and other work occasioned by fire, windstorm or other casualty of an insurable nature to the extent covered by insurance or that would have been covered by insurance that Landlord is required to carry under this Lease or deductibles exceeding $10,000 under such insurance (excluding however, earthquake, flood and terrorism insurance); or

5.3.18 Costs for sculpture, paintings or other objects of art other than for normal and customary lobby furnishings (nor insurance thereon or extraordinary security in connection therewith);

5.3.19 Costs for the repair, maintenance, replacement, or restoration of any portion of the Building or the Business Park not made available for Tenant’s use;

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5.3.20 Costs incurred in connection with the presence of any Hazardous Materials that (a) existed on the 5070 Premises as of the 5070 Commencement Date, and exist on the 5020 Premises as of the 5020 Commencement Date, (b) result from underground migration from property outside of the Business Park, or (c) have been released at the Business Park by other tenants of the Business Park;

5.3.21 Costs to repair, maintain, replace, or restore the structural portions of the Building or any other improvements in the Business Park and which are properly capitalized under generally accepted accounting principles, except to the extent amortized over the useful life of the capital item in question; and

5.3.22 Expense reserves.

Notwithstanding the foregoing, in the event Landlord obtains earthquake, flood and/or terrorism insurance, then Operating Expenses shall include the commercially reasonable cost of the premiums available in the market for such insurance; provided, however, if Landlord elects not to obtain one or more of the foregoing insurance or the deductible for such insurance exceeds $10,000 and the Building suffers a casualty due to a risk that otherwise would be covered under the insurance so not obtained, then Tenant shall not be responsible for the cost to repair such uninsured or underinsured casualty (including any deductible) as part of Operating Expenses, and the same shall be Landlord’s responsibility but only to the extent Landlord is obligated to repair and restore the Building under the first sentence of Section 17.5 below.

5.4 Extraordinary Services. Tenant shall pay within thirty (30) days of receipt of an invoice from Landlord the cost of additional or extraordinary services provided to Tenant at Tenant’s request and not paid or payable by Tenant pursuant to other provisions of this Lease.

5.5 Impound. Landlord reserves the right, at Landlord’s option from time to time during the calendar year to estimate the annual cost of Operating Expenses incurred by Landlord (“Projected Operating Expenses”) and to require Tenant to pay Tenant’s Share thereof in advance. Except as provided below in this ¶5.5, Tenant shall pay to Landlord, monthly in advance as additional Rent, one-twelfth (1/12) of Tenant’s Share of the Projected Operating Expenses. The failure of Landlord to timely furnish to Tenant a schedule of the Projected Operating Expenses for any Calendar Year shall not preclude Landlord from enforcing its rights to collect any Projected Operating Expenses under this ¶5.

When Landlord provides Tenant with a revised Projected Operating Expense Budget during any calendar year, the following payment adjustments will be due Landlord: (1) Effective the first of the month following notification of the new Projected Operating Expense Budget, Tenant shall pay monthly in advance, one-twelfth (1/12) of Tenant’s Share of the new Projected Operating Expenses, and (2) if the revised Projected Operating Expense Budget exceeds the prior Budget, Landlord shall invoice to Tenant a retroactive billing and Tenant shall pay said billing within thirty (30) days of receipt of same. The retroactive billing will reflect the additional amount payable by the Tenant for Tenant’s Share of the new Operating Expense Budget for the calendar year to date. For example, assume an annual existing Operating Expense Budget of $144,000 for a tenant with a tenant’s share of 50% and where such tenant was initially making $6,000 a month of estimated payments. If the revised Operating Expense Budget increases by $12,000 to $156,000 and the tenant is notified in June, then the amounts due per 1) & 2) above are computed as follows:

5.5.1 New Monthly Payment (Effective July 1):

Revised Annual Operating Expense Budget	$	156 000
Tenant’s Share @ 50%	$	78 000
New Payment @ 1/12 Monthly	$	6,500

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5.5.2 Retroactive Billing:

Revised Annual Operating Expense Budget	$	156,000
Tenant’s Share @ 50% for 6 (of 12) months	$	39,000
Less payments, to date (6 @ $6,000)		(36,000	)
Retroactive Balance Due	$	3,000

As an alternative to a retroactive billing, Landlord may, at Landlord’s option, spread the increase over the remaining months in the current calendar year in equal monthly payments.

5.6 Adjustment.

5.6.1 Accounting. Within one hundred eighty (180) days (or as soon thereafter as possible) after the close of each calendar year or portion thereof of occupancy, Landlord shall provide Tenant a statement of such year’s actual Operating Expenses compared to the Projected Operating Expenses. If the actual Operating Expenses are more than the Projected Operating Expenses then Tenant shall pay Landlord, within thirty (30) days of receipt of a bill therefore, the difference. If the actual Operating Expenses are less than the Projected Operating Expenses but greater than Operating Expense Floor Amount, then Tenant shall receive a credit against future Operating Expenses payments equal to the amount in excess of the actual Operating Expenses; provided, that in the case of an overpayment for the final lease year of the Term, Landlord shall credit the difference against any sums due from Tenant to Landlord in accordance with the terms of this Lease; and if no sums are due and unpaid, shall promptly refund the net amount to Tenant.

5.6.2 Tenant’s Right to Audit. Within ninety (90) days after receipt of Landlord’s statement setting forth actual Operating Expenses (the “Statement”), Tenant shall have the right to audit at Landlord’s local offices, at Tenant’s expense, Landlord’s accounts and records relating to Operating Expenses. Such audit shall be conducted by a certified public accountant. If such audit reveals that Landlord has overcharged Tenant, the amount overcharged shall be paid to Tenant within thirty (30) days after the audit is concluded. If such audit reveals that Landlord has undercharged Tenant, the amount of undercharge shall be paid by Tenant to Landlord within 30 days after the audit is concluded. In addition, if the Statement exceeds the Operating Expenses which should have been charged to Tenant by more than five percent (5%), the cost of the audit shall be paid by Landlord. Tenant may not withhold any payment due as set forth in this Lease pending completion of the audit.

5.6.3 Proration. Tenant’s liability to pay Operating Expenses shall be prorated on the basis of a 365 (or 366, as the case may be) day year to account for any fractional portion of a year included at the commencement or expiration of the Term of this Lease.

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5.6.4 Survival. Landlord and Tenant’s obligations to pay for or credit any increase or decrease in payments pursuant to this ¶5 shall survive this Lease.

5.7 Failure to Pay. Failure of Tenant to pay any of the charges required to be paid under this ¶5 (after applicable notice and cure periods, if any) shall constitute a material default and breach of this Lease and Landlord’s remedies shall be as specified in ¶21.

6. SECURITY DEPOSIT. Landlord acknowledges that Tenant delivered to Landlord concurrently with Tenant’s execution of the Original Lease a security deposit in the amount of $82,135.22 and that Landlord currently holds such amount from Tenant. Upon execution of this Lease, Tenant shall deliver to Landlord additional immediately available funds in an amount equal to $41,363.46. Such amount, when combined with the aforementioned funds currently held by Landlord collectively form the security deposit (the “Security Deposit”) required under this Lease. If Tenant is in default beyond applicable notice and cure periods, Landlord can (but without any requirement to do so) use the Security Deposit or any portion of it to cure the default or to compensate Landlord for any damages sustained by Landlord resulting from Tenant’s default. Upon demand, Tenant shall immediately pay to Landlord a sum equal to the portion of the Security Deposit expended or applied by Landlord to restore the Security Deposit to its full amount. In no event will Tenant have the right to apply any part of the Security Deposit to any Rent due under this Lease. Landlord’s obligations with respect to the Security Deposit are those of a debtor and not a trustee, and Landlord can commingle the Security Deposit with Landlord’s general funds. Landlord shall not be required to pay Tenant interest on the Security Deposit. Tenant hereby waives the provisions of California Civil Code Section 1950.7, and all other provisions of law now in force or which may become in force after the date of execution of this Lease that provide that Landlord may claim from its security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damages caused by the tenant, or to clean the premises or otherwise limit the application of a security deposit. With respect to the Security Deposit, Landlord and Tenant agree that Landlord may claim and employ the Security Deposit in connection with any and all sums reasonably necessary to compensate Landlord for any loss or damage caused by or resulting from any default by Tenant pursuant to this Lease as well as any loss or damage resulting from any act or omission by Tenant or Tenant’s officers, agents, employees, independent contractors, or invitees. If Tenant is not in default at the expiration or termination of this Lease and has fully complied with the provisions of ¶9, ¶14 and ¶26, Landlord shall return the Security Deposit to Tenant.

7. USE OF PREMISES.

7.1 Tenant’s Use. Tenant shall use the Premises solely for the purposes stated in ¶1 and for no other purposes without obtaining the prior written consent of Landlord. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or with respect to the suitability of the Premises to the conduct of Tenant’s business, nor has Landlord agreed to undertake any modification, alteration or improvement to the Premises, except as provided in writing in this Lease. Tenant shall promptly comply with all laws, statutes, ordinances, orders and governmental regulations now or hereafter existing affecting the Premises, unless Landlord has otherwise expressly agreed to do the same pursuant to the terms of this Lease. Tenant shall not do or permit anything to be done in or about the Premises or bring or keep anything in the Premises that will in any way increase

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the premiums paid by Landlord on its insurance related to the Premises. Tenant will not perform any act or carry on any practices that may injure the Premises. Tenant shall not use the Premises for sleeping, washing clothes, or the preparation, manufacture or mixing of anything that emits any objectionable odor, noises, vibrations or lights onto such other tenants. If, in Landlord’s reasonable judgment, sound insulation is required to muffle noise produced by Tenant on the Premises, Tenant at its own cost shall provide all necessary insulation. Tenant shall not do anything on the Premises which will overload any existing parking or service to the Premises. Pets and/or animals of any type (other than Seeing Eye dogs) shall not be kept on or about the Premises. Tenant covenants that it will not interfere with other tenants’ quiet enjoyment of their premises.

7.2 Rules and Regulations. Tenant shall comply with and use the Premises in accordance with the Rules and Regulations attached hereto as Exhibit B and to any reasonable, non-discriminatory modifications to such Rules and Regulations as Landlord may adopt from time to time, provided however that if any rule or regulation is in conflict with any term, covenant or condition of this Lease, this Lease shall prevail. In addition, no such rule or regulation, or any subsequent amendment thereto adopted by Landlord, shall in any material way alter, reduce or adversely affect any of Tenant’s rights or materially enlarge Tenant’s obligations under this Lease.

8. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE.

8.1 Emissions. Tenant shall not:

8.1.1 Knowingly permit any vehicle on the Premises or in the Commons Areas to emit Hazardous Materials (defined below) which is in violation of any governmental law, rule, regulation or requirement;

8.1.2 Discharge, emit or permit to be discharged or emitted, any liquid, solid or gaseous Hazardous Material, or any combination thereof, into the atmosphere or on, into or under the Premises, any building or other improvements of which the Premises are a part, or the ground or any body of water which Hazardous Material, if discharged or emitted into the atmosphere, the ground or any body of water would be in violation of law or regulation and does or may (a) pollute or contaminate the same, or (b) adversely affect the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property, whether on the Premises or anywhere else, or (iii) the Premises or any of the improvements thereto including buildings, foundations, pipes, utility lines, landscaping or parking areas;

8.1.3 Produce, or permit to be produced, any intense glare, light or heat in violation of law or regulations;

8.1.4 Create, or permit to be created, any sound pressure level which will create a nuisance or violate any governmental law, rule, regulation or requirement;

8.1.5 Create, or permit to be created, any vibration that is discernible outside the Premises; or

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8.1.6 Transmit, receive or permit to be transmitted or received from or to the Premises, any electromagnetic, microwave or other radiation which is or may be harmful or hazardous to any person or property in, or about the Premises, or anywhere else.

8.2 Storage and Use.

8.2.1 Storage. Subject to the uses permitted and prohibited to Tenant under this Lease, Tenant shall store in appropriate leak proof containers all solid, liquid or gaseous Hazardous Materials, or any combination thereof, which Hazardous Materials, if discharged or emitted into the atmosphere, the ground or any body of water would be in violation of law or regulation and does or may (a) pollute or contaminate the same, or (b) adversely affect the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property, whether on the Premises or anywhere else, or (ii) Premises.

8.2.2 Use. In addition, without Landlord’s prior written consent, Tenant shall not use, store or permit to remain on or about the Premises any solid, liquid or gaseous Hazardous Materials which is, or may become dangerously radioactive. If Landlord does give its consent, Tenant shall store the materials in such a manner that no radioactivity will be detectable outside a designated storage area and Tenant shall use the materials in such a manner that (a) no real or personal property outside the designated storage area shall become contaminated thereby and (b) there are and shall be no adverse effects on the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property thereon or therein, or (iii) Premises or any of the improvements thereto or thereon.

8.2.3 Hazardous Materials. Subject to the uses permitted and prohibited to Tenant under this Lease, Tenant shall store, use, employ, transport and otherwise deal with all Hazardous Materials (as defined below) employed on or about the Premises in accordance with all federal, state, or local law, ordinances, rules or regulations applicable to Hazardous Materials in connection with or respect to the Premises.

8.3 Disposal of Waste.

8.3.1 Refuse Disposal. Tenant shall not keep any trash, garbage, waste or other refuse on the Premises except in sanitary containers and shall regularly and frequently remove same from the Premises. Tenant shall keep all incinerators, containers or other equipment used for storage or disposal of such materials in a clean and sanitary condition.

8.3.2 Sewage Disposal. Tenant shall properly dispose of all sanitary sewage and shall not use the sewage disposal system (a) for the disposal of anything except sanitary sewage or (b) amounts in excess of the lesser of: (i) that reasonably contemplated by the uses permitted under this Lease or (ii) that permitted by any governmental entity. Tenant shall keep the sewage disposal system free of all obstructions and in good operating condition.

8.3.3 Disposal of Other Waste. Tenant shall properly dispose of all other waste or other matter delivered to, stored upon, located upon or within, used on, or removed from, the Premises in such a manner that it does not, and will not, violate any law or regulation and

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adversely affect the (a) health or safety of persons, wherever located, whether on the Premises or elsewhere, (b) condition, use or enjoyment of the Premises or any other real or personal property, wherever located, whether on the Premises or anywhere else, or (c) Premises or any of the improvements thereto or thereon including buildings, foundations, pipes, utility lines, landscaping or parking areas.

8.4 Information. Tenant shall provide Landlord with reasonable information regarding Hazardous Materials used by Tenant in the Premises, including copies of all filings and reports to governmental entities at the time they are originated, and any other information reasonably requested by Landlord. In the event of any accident, spill or other incident involving Hazardous Materials, Tenant shall immediately report the same to Landlord and supply Landlord with all information and reports with respect to the same. All information described herein shall be provided to Landlord regardless of any claim by Tenant that it is confidential.

8.5 Intentionally Omitted.

8.6 Indemnity. Tenant hereby agrees to indemnify, defend and hold Landlord, its agents, employees, lenders, shareholders, directors, representatives, successors and assigns harmless from and against any and all actions, causes of action, losses, damages, costs, claims, expenses, penalties, obligations or liabilities of any kind whatsoever (including but not limited to reasonable attorneys’ fees) arising out of or relating to any Hazardous Materials employed, used, transported across, or otherwise dealt with by Tenant (or invitees, or persons or entities under the control of Tenant) in connection with or with respect to the Premises and the Business Park. Notwithstanding any of the provisions of this Lease, the indemnity obligation of Tenant pursuant to this ¶8.6 shall survive the termination of this Lease and shall relate to any occurrence as described in this ¶8.6 occurring in connection with this Lease. Landlord hereby agrees to indemnify, defend and hold Tenant, its agents, employees, lenders, shareholders, directors, representatives, successors and assigns harmless from and against any and all actions, causes of action, losses, damages, costs, claims, expenses, penalties, obligations or liabilities of any kind whatsoever (including reasonable attorneys’ fees) arising out of or relating to (i) Hazardous Materials employed, used, transported to the Premises, or the Business Park of which the Premises are a part thereof, by Landlord, its agents or employees or invitees or persons or entities under the control of Landlord or (ii) Hazardous Materials existing on, in or under the Business Park as of the 5070 Commencement Date with respect to the 5070 Premises and of the 5020 Commencement Date with respect to the 5020 Premises. For purposes of this Lease the term “Hazardous Materials” shall mean any hazardous, toxic or dangerous waste, substance or material, pollutant or contaminant, as defined for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Sections 9601 et seq.), as amended, or the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.), as amended, or any other federal, state, or local law, ordinance, rule or regulation applicable to the Premises or the environment, or any substance which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous, or any substance which contains gasoline, diesel fuel or other petroleum hydrocarbons, polychlorinated biphenyls (PCB’s), or radon gas, urea formaldehyde, asbestos or lead.

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8.7 Landlord Representations. Except as otherwise disclosed to Tenant in writing prior to the mutual execution of this Lease, to knowledge actual knowledge of Landlord (without any duty of inquiry or investigation), (a) no Hazardous Material is present in the Premises, the Building, or at the Business Park or the soil, surface water or groundwater thereof in violation of environmental laws, (b) no underground storage tanks are present on the Business Park, and (c) no action, proceeding or claim is pending or threatened in writing regarding the Building or the Business Park concerning any Hazardous Material or pursuant to any environmental Law.

9. SIGNS AND COMMUNICATIONS ANTENNAE. Tenant shall not place any sign or communications antennae upon or adjacent to the Premises, except that Tenant may, with Landlord’s reasonable prior written consent, install (but not on the roof) such signs as are reasonably required to indicate Tenant’s company name or logo provided such signs are in compliance with Landlord’s reasonable sign criteria or install communications antennae used exclusively by Tenant and provided such signs and/or communications antennae are in compliance with all applicable governmental requirements. The installation of any sign or communications antennae on or adjacent to the Premises by or for Tenant shall be subject to the provisions of ¶13 (Repairs and Maintenance). Tenant shall remove any sign or communications antennae placed on or adjacent to the Premises by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises caused thereby, all at Tenant’s expense. If any signs or communications antennae are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs or communications antennae and repair any damage or injury to the Premises at Tenant’s sole cost and expense. Notwithstanding any other provision of this Lease to the contrary, Landlord reserves all rights to the use of the roof and the right to install and receive all revenues from the installation of such other signs or communications antennae on the Premises as do not unreasonably interfere with the conduct of Tenant’s business within the Premises.

10. PERSONAL PROPERTY TAXES. Tenant shall pay at least ten (10) days prior to delinquency all taxes assessed against and levied upon Tenant owned leasehold improvements, trade fixtures, furnishings, equipment and all personal property of Tenant contained in the Premises or elsewhere. When possible, Tenant shall cause its leasehold improvements, trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant’s said personal property shall be assessed with Landlord’s real property, Tenant shall pay Landlord the taxes attributable to Tenant within thirty (30) days after receipt of a written statement setting forth the taxes applicable to Tenant’s property, but in no event more than thirty (30) days prior to delinquency.

11. REAL PROPERTY TAXES.

11.1 Payment of Taxes. Landlord shall pay the Building’s and the Business Park’s Real Property Taxes, as defined in ¶11.3, during the Term of this Lease. Subject to ¶11.2, Tenant shall promptly reimburse Landlord according to ¶5 for Tenant’s Share of Business Park of such Real Property Taxes paid by Landlord.

11.2 Advance Payment. In order to ensure payment when due and before delinquency of any or all Real Property Taxes, Landlord shall estimate the current Real Property Taxes applicable to the 5070 Premises prior to the 5020 Commencement Date and the entire Premises on and after the 5020 Commencement Date, and require Tenant to pay monthly in advance with the payment of the Base Rent an amount which, over the number of months remaining before the

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month in which the applicable tax installment would become delinquent, would provide a fund large enough to fully discharge before delinquency the estimated installment of Real Property Taxes to be paid. When the actual amount of the applicable tax bill is known, Landlord may, but is not required to, adjust the amount of such equal monthly advance payment so as to provide the funds needed to pay the applicable Real Property Taxes before delinquency. If the amounts paid to Landlord by Tenant under the provisions of this ¶11 are insufficient to discharge the obligations of Tenant to pay such Real Property Taxes before delinquency, Tenant shall pay to Landlord, upon Landlord’s demand, such additional sums as are necessary to pay such obligations. All moneys paid to Landlord under this ¶11 may be intermingled with other moneys of Landlord and shall not bear interest.

11.3 Definition of “Real Property Taxes”. As used herein, the term “Real Property Taxes” shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any commercial rental tax, improvement bond or bonds, levy or tax or other fee, charge, or excise which may be imposed as a substitute for any of the foregoing (other than inheritance, personal income or estate taxes) imposed upon the Business Park by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Landlord in the Business Park or Landlord’s right to rent. The term “Real Property Taxes” shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the Term of this Lease, including but not limited to a change in the ownership of the Business Park or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the parties hereto. Notwithstanding the foregoing, Real Property Taxes shall not include and Tenant shall not be required to pay any tax or assessment expense or any increase therein (i) levied on Landlord’s rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (ii) in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term; (iii) imposed on land and improvements other than the Business Park; or (iv) attributable to Landlord’s net income, inheritance, gift, or estate taxes.

12. UTILITIES. Tenant shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the 5070 Premises prior to the 5020 Commencement Date and the entire Premises on and after the 5020 Commencement Date, together with any taxes thereon. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion, to be determined by Landlord, of all charges jointly metered with other premises.

13. REPAIRS AND MAINTENANCE.

13.1 Landlord’s Obligations. As an Operating Expense to the Business Park (to the extent included within the definition of Operating Expenses under Section 5), Landlord shall be responsible to keep the Business Park, including the foundation, exterior walls, roof, and common area of the Business Park, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair subject to reimbursement by Tenant in accordance with ¶5. There shall be no abatement of Rent or liability to Tenant on

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account of any injury or interference with Tenant’s business with respect to any Improvements, alterations or repairs made by Landlord to the Business Park or any part thereof; provided, however, that Landlord shall use reasonable efforts in performing all Improvements, alterations and repairs to minimize any disruption of Tenant’s use of the Premises.

13.2 Tenant’s Obligations.

13.2.1 General. Tenant shall, at Tenant’s sole cost and expense and at all times, contract for janitorial services and supplies, keep the Premises in good order, condition and repair, including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as HVAC, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fixtures, interior walls, ceilings, floors, windows, window frames, interior and exterior doors and door frames, plate glass and skylights. Tenant shall not cause or permit any Hazardous Material to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Tenant’s expense, take all investigatory and/or remedial action required by law for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused by Tenant, pertaining to or involving any Hazardous Materials and/or storage tank brought onto the Premises by or for Tenant or under its control. Tenant, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Tenant’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair, except to the extent the same is Landlord’s obligation pursuant to the express terms of this Lease.

13.2.2 Contracts. Tenant shall, at Tenant’s sole cost and expense, procure and maintain contracts, with copies to Landlord, for, and with contractors specializing and experienced in, the inspection, maintenance and service of HVAC, mechanical, electrical and other systems serving the Premises, if any, servicing the Premises. Tenant shall keep a reasonably detailed preventative maintenance schedule and log showing the frequency of maintenance on all mechanical, electrical and other systems, servicing the Premises and provide Landlord with a copy of same quarterly.

13.2.3 As-Is Condition. The parties affirm that Landlord, its subsidiaries, officers, shareholders, directors, members, managers, agents and/or employees have made no representations to Tenant respecting the condition of the Premises except as specifically stated herein.

13.2.4 ADA. Tenant acknowledges that as of the Effective Date, the Premises may not comply with the accessibility provisions of Title 24 of the California Code of Regulations as interpreted by the Office of the State Architect, and that Landlord shall have no obligation with respect to any such failure of the Premises to so comply. Tenant shall, at its cost, at any time during the Term as required by any applicable governmental agency having jurisdiction over the Premises, make such modifications and alterations to the Premises as may be required in order to fully comply with the provisions of the ADA, as from time to time amended, and any and all regulations issued pursuant to or in connection with the ADA in such a manner as to satisfy the applicable governmental agency or agencies requiring remediation.

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Tenant shall at least fifteen (15) days prior to the commencement of any construction in connection with satisfaction of the ADA, give written notice to Landlord of its intended commencement of construction together with sufficient details so as to reasonably disclose to Landlord the nature of the proposed construction, copies of any notices received by Tenant from applicable governmental agencies in connection with the ADA and such other documents or information as Landlord may reasonably request.

13.3 Compliance with Governmental Regulations. Tenant shall, at its own cost and expense, promptly and properly observe and comply with all present and future orders, regulations, directions, rules, laws, ordinances, and requirements of all governmental authorities (including but not limited to state, municipal, county and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of, or applicable to, the Premises or privileges appurtenant to or in connection with the enjoyment of the Premises. Tenant shall also comply with all such rules, laws, ordinances and requirements at the time Tenant makes any alteration, addition or change to the Premises.

13.4 Miscellaneous.

13.4.1 Subject to the other terms and conditions of this Lease, Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances and rules of any public authority relating to their respective maintenance obligations as set forth herein.

13.4.2 Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord’s expense or to terminate this Lease because of Landlord’s failure to keep the Premises and the Business Park in good order, condition and repair and Tenant hereby specifically waives the provisions of California Civil Code Sections 1941 and 1942.

13.4.3 Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as reasonably determined by Landlord or Landlord’s structural engineer. The cost of any such determination made by Landlord’s structural engineer shall be paid for by Tenant upon demand.

13.4.4 Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant’s obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord making any repairs or changes which Landlord is required to make or is permitted to make by this Lease or by any tenant’s lease or is required by law to make in or to any portion of the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant’s business in the Premises.

13.4.5 Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Premises’ mechanical, electrical, plumbing, HVAC or other systems serving, located in or passing through the Premises. Upon request by Landlord, Tenant shall provide Landlord with evidence reasonably acceptable to Landlord of service contracts on such HVAC systems.

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13.4.6 Landlord may, at Landlord’s option, choose to perform any of the Tenant’s obligations in this ¶13. The cost of any such Tenant’s obligations so performed by Landlord shall be at Tenant’s sole cost and expense. Tenant shall reimburse Landlord for any such costs incurred by Landlord in the performance of such Tenant’s obligations within ten (10) days of receipt of a billing from Landlord.

If Tenant is prevented from using either the 5020 Premises or the 5070 Premises, or both, for more than seven (7) consecutive calendar days in any thirty (30) calendar day period as a sole consequence of Landlord’s failure to maintain and repair the Premises (to the extent Landlord is obligated to do so under this Lease) and such failure is within Landlord’s reasonable control, then Tenant shall be entitled to an equitable abatement of Rent to the extent of the interference with Tenant’s use of either the 5020 Premises or the 5070 Premises, or both, occasioned thereby. If Tenant is prevented from using the Premises as a result of the foregoing for more than thirty (30) consecutive calendar days in any 180 calendar day period, then Tenant shall have the right to terminate this Lease.

13.5 Certain Capital Expenditures. Notwithstanding the foregoing provisions of this Section 13 or of Section 7, if the Laws are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises or the reinforcement or other physical modification of the Premises or if the repair or replacement of any portion of the Building (excluding any of the Tenant’s Alterations) for which Tenant is otherwise responsible to repair or replace under this Lease is of a capital nature under generally accepted accounting principals and the cost to repair or replace the same exceeds $10,000 per occasion not to exceed $40,000 per year (each, a “CAP Expenditure”), then Landlord and Tenant shall allocate the cost of such work as follows:

13.5.1 If such CAP Expenditure is not the result of the specific and unique use of the Premises by Tenant (such as, governmentally mandated seismic modifications), then Landlord and Tenant shall allocate the cost of such CAP Expenditure as follows: Landlord shall perform the capital improvement and advance the funds necessary for such CAP Expenditure but Tenant shall be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amortized portion of such expenditure. Provided, however, that if such CAP Expenditure exceeds the Landlord Max CAP Exp (defined below), Landlord shall have the option to terminate this Lease upon 90 days prior written notice to Tenant unless Tenant notifies Landlord, in writing, within 30 days after receipt of Landlord’s termination notice that Tenant will pay for the CAP Expenditure in excess of the Landlord Max CAP Exp. For purposes of this Lease, “Landlord Max CAP Exp” shall mean $500,000 from the 5070 Commencement Date through December 31, 2011, and shall be reduced to $250,000 from January 1, 2012 through the expiration of the Term.

13.5.2 Notwithstanding the foregoing, if the CAP Expenditures are instead triggered by Tenant as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Tenant shall be fully responsible for the cost thereof.

13.6 Timing of Obligations. Notwithstanding anything in this Section 13 to the contrary, all of Tenant’s repair, maintenance and compliance obligations with respect to the Premises shall refer only to the 5070 Premises prior to the 5020 Commencement Date and to the entire Premises from and after the 5020 Commencement Date.

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14. ALTERATIONS. Tenant shall not make any alterations (“Alterations”) to the Premises or the Business Park without Landlord’s prior written consent, which consent shall not be unreasonably withheld. Once Landlord’s written consent is granted, Tenant must provide Landlord at least ten (10) business days prior to the commencement of any Alteration with a complete description of each such Alteration including any building permit drawing(s) and specifications. Landlord may post notices regarding non-responsibility in accordance with the laws of the state in which the Premises are located. All Alterations made by Tenant shall be performed by Tenant and its contractors in a good and workmanlike manner and permits and inspections shall be obtained from all required governmental entities. Any Alterations made shall remain on and be surrendered with the Premises upon expiration or termination of this Lease, except that Landlord may, within thirty (30) days before or thirty (30) days after expiration of the Term, elect to require Tenant to remove some or all of the Alterations which Tenant may have made to the Premises. If Landlord so elects, Tenant shall at its own cost restore the 5020 Premises to the condition that existed as of the 5020 Commencement Date and the 5070 Premises to the condition that existed as of the 5070 Commencement Date, before the last day of the Term or within thirty (30) days after notice of its election is given, whichever is later. If requested by Tenant at the time of Tenant’s request for approval of Alterations, Landlord shall advise Tenant in writing whether Landlord shall require Tenant to remove some or all of said Alterations upon expiration or termination of the Lease. Should Landlord consent in writing to Tenant’s Alteration of the Premises, Tenant shall contract with a contractor approved by Landlord for the construction of such Alterations, shall secure all appropriate governmental approvals and permits, and shall complete such Alterations with due diligence in compliance with plans and specifications reasonably approved by Landlord. Tenant shall pay all costs for such construction and shall keep the Premises free and clear of all mechanics’ liens which may result from construction by Tenant. Notwithstanding the foregoing, Tenant may construct non-structural Alterations within the interior of either the 5020 Building or the 5070 Building without Landlord’s prior approval, if the cost of any such project does not exceed Fifty Thousand Dollars ($50,000) in each of the 5020 Building or the 5070 Building in any twelve (12)-month period. Tenant’s trade fixtures, furniture, equipment and other personal property installed in the Premises (collectively, “Tenant’s Property”) shall at all times be and remain Tenant’s property. Tenant may remove Tenant’s Property from the Premises, provided that Tenant repairs all damage caused by such removal. Landlord shall have no lien or other interest in any item of Tenant’s Property.

15. RELEASE AND INDEMNITY. As material consideration to Landlord, Tenant agrees that Landlord shall not be liable to Tenant for any damage to Tenant or Tenant’s property from any cause, except for damages resulting from Landlord’s gross negligence or willful misconduct, and Tenant waives all claims against Landlord for damage to persons or property arising for any reason, except for damage resulting directly from Landlord’s breach of its express obligations under this Lease which Landlord has not cured within a reasonable time after written notice of such breach from Tenant. Tenant shall indemnify and hold Landlord harmless from all damages including attorneys’ fees and costs arising out of any damage to any person or property occurring in, on or about the Premises or Tenant’s use of the Premises or Tenant’s breach of any term of this Lease.

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16. INSURANCE.

16.1 Payment For Insurance. Regardless of whether the Landlord or Tenant is the Insuring Party, Tenant shall pay for its proportionate share of all insurance required under this ¶16 (“Insurance Costs”) either directly or by reimbursement to Landlord as specified in this ¶16. Premiums for policy periods commencing prior to or extending beyond the Lease Term shall be prorated to correspond to the Lease Term. Payment shall be made by Tenant to Landlord within sixty (60) days following receipt of an invoice for any amount due.

16.2 Liability Insurance.

16.2.1 Carried by Tenant. Whether or not Tenant is the Insuring Party, Tenant shall obtain and keep in force during the Term of this Lease workers’ compensation insurance and commercial general liability policy of insurance protecting Tenant and Landlord (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the 5070 Premises and all areas appurtenant thereto prior to the 5020 Commencement Date and the entire Premises and all areas appurtenant thereto from and after the 5020 Commencement Date. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $3,000,000 per occurrence with an “Additional Insured Managers or Landlords of Premises” endorsement and contain an “Amendment of the Pollution Exclusion” for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-Insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Tenant’s indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Tenant shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. All insurance to be carried by Tenant shall be primary to and not contributory with any similar insurance carded by Landlord, whose insurance shall be considered excess insurance only. All insurance coverage required pursuant to this ¶16 which is to name Landlord as an additional insured shall also name Landlord’s members and managers as additional insureds.

16.2.2 Carried by Landlord. In the event Landlord is the Insuring Party, Landlord shall also maintain liability insurance as described in ¶16.2.1), in addition to, and not in lieu of the insurance required to be maintained by Tenant. Tenant shall be named as an additional insured therein under any insurance obtained by Landlord in accordance with this ¶16.2.2).

16.3 Property Insurance - Building, Improvements and Rental Value.

16.3.1 Building and Improvements. The Insuring Party shall obtain and keep in force during the Term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and to the holders of any mortgages, deeds of trust or ground leases on the Business Park (“Lender(s)”), insuring loss or damage to the Business Park. The amount of such insurance shall be equal to the full replacement cost of the Business Park, as the same shall exist from time to time, or the amount required by Lender(s), but in no event more than the commercially reasonable and available insurable value thereof. If, by reason of the unique

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nature or age of the Improvements involved, such latter amount is less than full replacement cost, such policy or policies shall insure against all risks of direct physical loss or damage (including at Landlord’s sole discretion Boiler and Machinery coverage and the perils of flood and earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Business Park required to be demolished shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Business Park is located. If such insurance coverage has a deductible clause, then Tenant shall be liable for its proportionate share of such deductible amount, subject to Section 5 above. Even if Landlord is the Insuring Party, Tenant’s personal property shall be insured by Tenant under ¶16.4 rather than by Landlord.

16.3.2 Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and Lender(s), insuring the loss of the full rental and other charges payable by Tenant to Landlord under this Lease for one (1) year (including all Real Property Taxes, Insurance Costs and any scheduled Rent Increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year’s loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent, Real Property Taxes, Insurance Costs and other expenses, if any, otherwise payable by Tenant, for the next twelve (12) month period. Tenant shall be liable for any deductible amount in the event of such loss.

16.3.3 Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Landlord which are adjacent to the Premises, the Tenant shall pay for any increase in the premiums for the property insurance of such building or buildings to the extent said increase is caused by Tenant’s acts, omissions, use or occupancy of the Premises.

16.3.4 Tenant’s Improvements. If the Landlord is the Insuring Party, the Landlord shall not be required to insure Tenant’s personal property and leasehold improvements unless the item in question has become the property of Landlord under the terms of this Lease. If Tenant is the Insuring Party, the policy carried by Tenant under this ¶16.3 shall insure Tenant’s personal property and leasehold improvements.

16.4 Tenant’s Property Insurance. Subject to the requirements of ¶16.5, Tenant at its cost shall either by separate policy or by endorsement to a policy already carried, maintain insurance coverage on all of Tenant’s personal property and Tenant’s leasehold Improvements in, on or about the Premises similar in coverage to that carried by the Insuring Party under ¶16.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Tenant for the replacement of personal property or the restoration of Tenant owned leasehold improvements. Tenant shall be the Insuring Party with respect to the insurance required by this ¶16.4 and shall provide Landlord with written evidence that such insurance is in force.

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16.5 Insurance Policies. Insurance required per this ¶16 shall be with companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least A- VIII, or such other minimal rating as may be required by Lender(s) as set forth in the most current issue of “Best’s Insurance Guide.” Tenant shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this ¶16. If Tenant is the Insuring Party, Tenant shall cause to be delivered to Landlord certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification or lapse except after thirty (30) days prior written notice to Landlord. Tenant shall at least thirty (30) days prior to the expiration of such policies, furnish Landlord with evidence of renewals or “insurance binders” evidencing renewal thereof, or Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant to Landlord upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this ¶16, the other Party may, but shall not be required to, procure and maintain the same, but at the expense of the Party that was originally required to pay such insurance either directly or as part of Operating Expenses.

16.6 Mutual Waiver. Notwithstanding anything to the contrary contained in this Lease, to the extent that this release and waiver does not invalidate or impair their respective insurance policies, the parties hereto release each other, and their respective agents, employees, officers, directors, shareholders, members, managers, successors, assignees and subtenants from all liability for damage to any property that is caused by or results from a risk which is actually insured against, or would have been insured against if the parties had maintained the insurance required to be maintained pursuant to the provisions of this Lease, without regard to the negligence or willful misconduct of the parties so released. Each party shall use its reasonable efforts to cause each insurance policy it obtains to provide that the insurer thereunder waives all right of recovery by way of subrogation as required herein in connection with any injury or damage covered by the policy. If such insurance policy cannot be obtained with such waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is not obtained does not pay such additional costs after reasonable notice, then the party obtaining such insurance shall promptly notify the other party of the inability to obtain insurance coverage with the waiver of subrogation.

17. DAMAGE AND DESTRUCTION.

17.1 Damage - Restoration Required. In the event that the Business Park is damaged by fire or other casualty which is covered under insurance pursuant to the provisions of ¶16 above, Landlord shall restore such damage provided that: (i) the destruction of either the 5020 Building or the 5070 Building does not exceed sixty percent (60%) of the then replacement value of the 5020 Building or the 5070 Building, respectively; (ii) the insurance proceeds are available (inclusive of any deductible amounts) to pay one hundred percent (100%) of the cost of restoration; and (iii) in the reasonable judgment of Landlord, the restoration can be completed within two hundred and seventy (270) days after the date of the damage or casualty under the

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laws and regulations of the state, federal, county and municipal authorities having jurisdiction. The deductible amount of any insurance coverage for damage to the Premises shall be paid by Tenant. If such conditions apply so as to require Landlord to restore such damage pursuant to this ¶17.1, this Lease shall continue in full force and effect, unless otherwise agreed to in writing by Landlord and Tenant shall be entitled to a proportionate reduction of Rent while such restoration takes place, such proportionate reduction to be based on the extent to which the damage and restoration efforts interfere with Tenant’s business in the Premises; and Tenant’s right to a reduction of Rent hereunder shall be Tenant’s sole and exclusive remedy in connection with any such damage.

17.2 Damage - Restoration Not Required. In the event that the Business Park is damaged by a fire or other casualty and Landlord is not required to restore such damage in accordance with the provisions of ¶17.1 immediately above, Landlord shall have the option to either (i) repair or restore such damage, with the Lease continuing in full force and effect, but Rent to be proportionately abated as provided in ¶17.1 above; or (ii) give notice to Tenant at any time within thirty (30) days after the occurrence of such damage terminating this Lease with respect to the 5020 Building or the 5070 Building, as applicable, as of a date to be specified in such notice which date shall not be less than thirty (30) nor more than sixty (60) days after the date on which such notice of termination is given. In the event of the giving of such notice of termination, this Lease shall expire and all interest of Tenant in either or both of the 5020 Premises and/or 5070 Premises, as applicable, shall terminate on the date so specified in such notice and the Rent, reduced by any proportionate reduction in Rent as provided for in ¶17.1 above, shall be paid to the date of such termination. Notwithstanding the foregoing, if Tenant delivers to Landlord the funds necessary to make up the shortage (or absence) in insurance proceeds and the restoration can be completed in a two hundred seventy (270) day period, as reasonably determined by Landlord, and the destruction of either the 5020 Building and/or the 5070 Building does not exceed sixty percent (60%) of the then replacement value of the applicable building, then Landlord shall restore the Premises as provided in ¶17.1 above.

17.3 End of Term Casualty. Notwithstanding the provisions of ¶17.1 and ¶17.2 above, if the 5020 Building or the 5070 Building is damaged by fire or other casualty, then either Landlord or Tenant may terminate this Lease as it pertains the building that is damaged, so long as Landlord’s reasonably estimated cost of restoration of the 5020 Building and/or the 5070 Building exceeds ten percent (10%) of the then replacement value of the 5020 Building and/or the 5070 Building and such damage or casualty occurs during the last twelve (12) months of the Term of this Lease (or the Term of any renewal option, if applicable) by giving the other notice thereof at any time within thirty (30) days following the occurrence of such damage or casualty. Such notice shall specify the date of such termination which date shall not be less than thirty (30) nor more than sixty (60) days following the date on which such notice of termination is given. In the event of the giving of such notice of termination, this Lease shall expire and all interest of Tenant in the 5020 Building or the 5070 Building, as applicable, shall terminate on the date so specified in such notice and the Rent, reduced by any proportionate reduction in Rent as provided for in ¶17.1 above, shall be paid to the date of such termination.

17.4 Termination by Tenant. In the event that the damage to the Business Park (i) cannot be restored as required herein under applicable laws and regulations within one hundred eighty (180) days of the date of discovery of the damage or casualty, as reasonably

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determined by Landlord at the date of the discovery of the casualty; or (ii) is not restored as required herein under applicable laws and regulations within one hundred eighty (180) days of the date of the discovery of the damage or casualty where Landlord had determined at the date of the discovery of the casualty that such restoration would be done within one hundred eighty (180) days, then Tenant shall have the right to terminate this Lease by giving the Landlord notice thereof within thirty (30) days of date of Landlord’s determination that the Premises cannot be restored within the 180 days as specified under clause (i) above or of that date by which the Premises were scheduled to but not restored within the 180 days as specified under clause (ii) above, specifying the date of termination which shall not be less than thirty (30) days nor more than sixty (60) days following the date on which such notice of termination is given. In the event of the giving of such notice of termination, this Lease shall expire and all interest of Tenant in the Premises shall terminate on the date so specified in such notice and the Rent, reduced by any proportionate reduction in Rent as provided for in 17.1 above, shall be paid to the date of such termination. Notwithstanding anything to the contrary herein, in addition to Tenant’s termination rights provided above, Tenant’s termination rights with respect to this Section 17.4 may be exercised with respect to either the 5020 Premises only or the 5070 Premises only with respect to which either clause (i) or clause (ii) above applies.

17.5 Restoration. Notwithstanding the foregoing, in the event that the damage to the Business Park (i) was as a result of an uninsured or underinsured casualty, (ii) was not caused by any act or omission of Tenant or any of its agents, employees, invitees or contractors, (iii) did not occur during the last six (6) months of the term, and (iv) did not cost more than $250,000 of the replacement cost of either the 5020 Building or the 5070 Building, as applicable, to repair or restore, then Landlord shall not have the right to terminate this Lease and shall repair and restore the 5020 Building or the 5070 Building, as applicable. In addition, if the damage is limited only to one of the building comprising the Premises, then Landlord’s right to terminate this Lease pursuant to this Section 17.5 shall only extend to the building that was damaged. Landlord agrees that, in any case in which Landlord is required to, or otherwise agrees to restore the 5020 Building and the 5070 Building, Landlord shall proceed with due diligence to make all appropriate claims and applications for the proceeds of insurance and to apply for and obtain all permits necessary for the restoration of the 5020 Building and the 5070 Building. Landlord shall use reasonable efforts to enforce any and all provisions in any mortgage, deed of trust or other encumbrance on the Business Park requiring Landlord and Lender to permit insurance proceeds to be used for restoration. Landlord shall restore the Premises at least equal to the condition existing prior to the date of the damage if permitted by applicable law. Landlord shall not be required to restore alterations made by Tenant, Tenant’s improvements, Tenant’s trade fixtures and Tenant’s personal property, such excluded Items being the sole responsibility of Tenant to restore provided, however, that Landlord shall, to the extent of available insurance proceeds, restore Tenant Improvements to the Premises made by Tenant such as interior offices, lab and production improvements and other like improvements.

17.6 Waiver. Tenant waives the provisions of Civil Code § 1932(2) and Civil Code § 1933(4) with respect to any destruction of the Premises.

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18. CONDEMNATION.

18.1 Definitions. The following definitions shall apply: (1) “Condemnation” means (a) the exercise of any governmental power of eminent domain, whether by legal proceedings or otherwise by condemnor, or (b) the voluntary sale or transfer by Landlord to any condemnor either under threat of condemnation or while legal proceedings for condemnation are proceeding; (2) “Date of Taking” means the date the condemnor has right to possession of the property being condemned; (3) “Award” means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation; and (4) “Condemnor” means any public or quasi-public authority, or private corporation or individual, having power of Condemnation.

18.2 Obligations to be Governed by Lease. If during the Term of the Lease there is any taking of all or any part of the Business Park, the rights and obligations of the parties shall be determined strictly pursuant to this Lease. Each party waives the provisions of Code of Civil Procedure § 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial condemnation of the Premises.

18.3 Total or Partial Taking. If the Business Park is totally taken by Condemnation, this Lease shall terminate on the Date of Taking. If any portion of the Business Park is taken by Condemnation, this Lease shall remain in effect, except that Tenant can elect to terminate this Lease if the remaining portion of the Premises is rendered unsuitable for Tenant’s continued use of the Premises. If Tenant elects to terminate this Lease, Tenant must exercise its right to terminate by giving notice to Landlord within thirty (30) days after the nature and extent of the Condemnation have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than thirty (30) days nor later than ninety (90) days after Tenant has notified Landlord of its election to terminate; except that this Lease shall terminate on the Date of Taking if the Date of Taking falls on a date before the date of termination as designated by Tenant. If any portion of the Premises is taken by Condemnation and this Lease remains in full force and effect, on the Date of Taking the Base Rent shall be reduced by an amount in the same ratio as the total number of square feet in the Premises taken bears to the total number of square feet in the Premises immediately before the Date of Taking. Any Award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such Award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any compensation separately awarded to Tenant for Tenant’s relocation expenses and/or loss of Tenant’s trade fixtures.

19. ASSIGNMENT OR SUBLEASE.

19.1 Tenant shall not assign or encumber its interest in this Lease or the Premises or sublease all or any part of the Premises or allow any other person or entity (except Tenant’s authorized representatives, employees, invitees or guests) to occupy or use all or any part of the Premises without first obtaining Landlord’s written consent, which consent shall not be unreasonably withheld. Any assignment, encumbrance or sublease without Landlord’s prior written consent shall be voidable and at Landlord’s election (after applicable notice and cure periods, if any), shall constitute a default. If Tenant is a partnership, a sale or other transfer of a

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controlling percentage of the partnership interest of Tenant, or the sale of at least fifty percent (50%) of the value of the assets of Tenant, or the dissolution of the partnership shall be deemed a voluntary assignment. If Tenant consists of more than one person, a purported assignment, voluntary or involuntary or by operation of law from one person to the other shall be deemed a voluntary assignment. Except as otherwise set forth below, if Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least fifty percent (50%) of the value of the assets of Tenant shall be deemed a voluntary assignment.

In the event of a sublease all Sublease Rent received by Tenant in excess of the Rent payable by Tenant to Landlord under this Lease applicable to the portion of the Premises subleased shall be deemed the “Bonus Amount”, after deducting therefrom the “Subleasing Costs” which shall include (i) commercially reasonable brokerage commissions, (ii) tenant Improvements made at the request of a subtenant, and (iii) attorneys’ fees incurred by Tenant in negotiating and documenting the sublease. Fifty percent (50%) of the Bonus Amount shall be promptly paid to Landlord following receipt by Tenant. If the Subleasing Costs are not known at the commencement of the sublease, the fifty percent (50%) of Bonus Amount due Landlord will be computed without deduction of Subleasing Costs and promptly paid to Landlord. Once the Subleasing Costs are presented to and verified by Landlord, the Bonus Amount paid by Tenant to date will be adjusted and Landlord shall give Tenant a credit against the next payment(s) due to Landlord from Tenant. The term “Sublease Rent” as used herein shall include any consideration of any kind received by Tenant from or on behalf of any subtenant, if the sums are reasonably related to the Premises, including, without limitation Rent, operating expense payments, bonus money and payments (in excess of fair market value) for the purchase of or usage of Tenant’s furniture, fixtures, inventory, equipment, accounts, goodwill, general intangibles and other assets. Each sublease approved by Landlord shall stand alone as to the computation of the Bonus Amount.

In the event of an assignment all Transfer Payments received by Tenant shall be deemed the “Bonus Amount”, after deducting therefrom the “Assignment Costs” which shall include (i) commercially reasonable brokerage commissions and (ii) attorneys’ fees incurred by Tenant in negotiating and documenting the assignment. Fifty percent (50%) of the Bonus Amount shall be promptly paid to Landlord following receipt by Tenant. If the Assignment Costs are not known at the commencement of the Assignment, the fifty percent (50%) of Bonus Amount due Landlord will be computed without deduction of Assignment Costs and promptly paid to Landlord. Once the Assignment Costs are presented to and verified by Landlord, the Bonus Amount paid by Tenant to date will be adjusted and Landlord shall give Tenant a credit against the next payment(s) due to Landlord from Tenant. The term “Transfer Payments” as used herein shall include any consideration of any kind received by Tenant from or on behalf of any assignee, if the sums are reasonably related to the Premises, including, without limitation assignment consideration, Rent, operating expense payments, bonus money, and payments (in excess of fair market value) for the purchase of or usage of Tenant’s furniture, fixtures, inventory, equipment, accounts, goodwill, general intangibles and other assets.

If Tenant requests Landlord to consent to a proposed assignment or subletting, Tenant shall pay to Landlord, whether or not consent is ultimately given, an amount equal to Landlord’s reasonable attorneys’ fees and costs incurred in connection with such request. Each request for

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consent to an assignment or subletting shall be in writing, and shall be accompanied by reasonable information as may be relevant to Landlord’s determination as to the financial and operational responsibility and stability of the proposed assignee or sublessee and the appropriateness of the proposed use by such assignee or sublessee. Such information shall include a summary of the proposed use of, and any proposed modifications to, the Premises. Tenant shall provide Landlord with such other or additional information and/or documentation as may reasonably be requested by Landlord. Tenant shall, upon completion of any assignment or subletting of all or any portion of the Premises, immediately and irrevocably assign to Landlord as security for Tenant’s obligations under the Lease, all Sublease Rent and/or Transfer Payments from any such subletting or assignment. While a default (after applicable notice and cure periods, if any) by Tenant exists under this Lease, Landlord, as assignee for Tenant, shall have the right to collect all rent and other revenues collectable pursuant to any such sublet or assignment and apply such rent and other revenues towards Tenant’s obligations under the Lease.

Any assignee of, or subtenant under this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Tenant during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions or an assignment or subtenant to which Landlord has specifically consented in writing. Any such assignee or subtenant shall execute an acknowledgment that they have entered into occupancy of the Premises after Landlord acquired the Business Park, that Landlord plans to redevelop the Business Park and, therefore, that the assignee or subtenant is an interim tenant post acquisition who will not be entitled to relocation benefits under state or federal law if Landlord requires the assignee or subtenant to relocate from the Premises after the expiration of the original Term of this Lease.

19.2 No interest of Tenant in this Lease shall be assignable by involuntary assignment through operation of law (including without limitation the transfer of this Lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: (a) if Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes proceedings under the Bankruptcy Act in which Tenant is the bankrupt; or if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt insolvent, or makes an assignment for the benefit of creditors; or (b) if a writ of attachment or execution is levied on this Lease; or (c) if in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An involuntary assignment (after applicable notice and cure periods, if any) shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant.

19.3 Notwithstanding any provision to this Lease to the contrary, in any event where Landlord’s consent is required for assignment or sublease, Landlord may, at its option, elect to terminate the Lease by giving written notice to Tenant instead of approving the requested assignment or sublease (as to the portion of the Premises being subleased). Should Landlord so elect to terminate this Lease, all of the obligations of the parties thereunder shall terminate on the later of sixty (60) days following Landlord’s notice to Tenant of its election hereunder, or the

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effective date of the proposed assignment or subletting sought by the Tenant, but in no event later than one hundred twenty (120) days following the date of Landlord’s election under this ¶19.3. At the time of termination, all obligations of both parties hereunder shall terminate as to obligations thereafter accruing except as otherwise expressly provided in this Lease.

19.4 Notwithstanding any other term or condition in this Article 19 (but subject to Section 19.5 below), Tenant may, without Landlord’s prior written consent and without payment of any amount to Landlord, reincorporate in any other jurisdiction and/or sublet the Premises or assign this Lease to (a) a subsidiary, affiliate, division or corporation controlling, controlled by or under common control with Tenant, (b) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization, or government action, or (c) a purchaser of substantially all of Tenant’s assets or stock (each, a “Permitted Transferee”). Neither the sale or transfer of Tenant’s stock in connection with the merger, consolidation or nonbankruptcy reorganization of Tenant or any sale through any private or public offering or public stock exchange or market, nor the pledge of or grant of a security interest in any of the Tenant’s stock, shall be deemed an assignment, subletting or other transfer of this Lease or the Premises. In addition, Tenant may from time to time, without Landlord’s prior written consent or payment of any amount to Landlord, permit Tenant’s suppliers to store and warehouse at the Premises products and goods intended to be purchased by Tenant.

19.5 Notwithstanding anything to the contrary contained in this Lease, no sublease, assignment or other transfer of this Lease shall relieve Tenant of any of its obligations and/or liabilities under this Lease. Tenant shall give Landlord written notice no later than ten (10) days after any transfer to a Permitted Transferee and in connection with such transfer shall provide to Landlord copies of any documents or other information as Landlord may reasonably request.

20. DEFAULT. The occurrence of any of the following shall constitute a default by Tenant: (a) a failure of Tenant to pay Rent within ten (10) days of its due date; (b) abandonment of the Premises; or (c) failure to timely perform any other provision of this Lease where such failure continues for a period in excess of thirty days following notice of such failure, provided however, that if the nature of such failure is such that it cannot reasonably be cured within thirty days, then Tenant shall not be in default if Tenant commences to cure such failure within thirty days and thereafter diligently prosecutes the cure to completion. Tenant shall give written notice to Landlord of any default by Landlord of its obligations pursuant to this Lease asserted by Tenant (with a copy of such notice to any lender (“Lender”) whose loan is secured by the Business Park and who has previously notified Tenant in writing of such Lender’s address). Landlord and Landlord’s Lender shall be afforded a reasonable opportunity to cure any claimed default by Landlord and Landlord shall not be considered in default so long as Landlord (or Landlord’s Lender) commences such cure within a reasonable period of time and thereafter, continues to attempt to complete such cure. Landlord, from time to time, shall provide Tenant with the name and address of its Lender.

21. LANDLORD’S REMEDIES. Upon the occurrence of a default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.

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21.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following:

(i) The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus

(ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions allocable to the remainder term of this Lease and advertising expenses incurred, expenses of restoring the Premises or any portion thereof to the condition required under Section 26 below; and

(v) At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

The term “rent” as used in this Section 21 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in this Section 21.1(i) and (ii), above, the “worth at the time of award” shall be computed by allowing interest at the rate of 12% per annum, but in no case greater than the maximum amount of such interest permitted by law. As used in Section 21.1(iii) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

21.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach and abandonment and recover Rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.

21.3 Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 21, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord’s sole discretion, succeed to Tenant’s

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interest in such subleases, licenses, concessions or arrangements. In the event of Landlord’s election to succeed to Tenant’s interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no right to or interest in the rent or other consideration thereafter accruing. For the purposes of this Article 21, Tenant’s right to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver to protect Landlord’s interests hereunder. The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant’s right to possession.

22. ENTRY OF PREMISES. Landlord and/or its authorized representatives shall have the right after reasonable notice except for emergencies to enter the Premises at all reasonable times for any of the following purposes: (a) to determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; (b) to do any necessary maintenance and to make any restoration to the Premises that Landlord has the right or obligation to perform; (c) to post “for sale” signs at any time during the Term, or to post “for rent” or “for lease” signs during the last one hundred eighty (180) days of the Term or during any period while Tenant is in default; (d) to show the Premises to prospective brokers, agents, buyers, tenants or persons interested in leasing or purchasing the Premises, at any time during the Term; or (e) to repair, maintain or improve the Premises and to erect scaffolding and protective barricades around and about the Premises but not so as to prevent entry to the Premises or to unreasonably interfere with Tenant’s use of the Premises and to do any other act or thing necessary for the safety or preservation of the Premises. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance or other damage arising out of Landlord’s entry onto the Premises as provided in this ¶22. Tenant shall not be entitled to an abatement or reduction of Rent if Landlord exercises any rights reserved in this ¶22. Landlord shall conduct its activities on the Premises as provided herein in a commercially reasonable manner that will lessen the inconvenience, annoyance or disturbance to Tenant, and Landlord shall use reasonable efforts to comply with Tenant’s reasonable security measures and operating procedures.

23. SUBORDINATION.

23.1 Automatic Subordination. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or Landlord’s Lender, this Lease shall be subject and subordinate at all times to (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises, (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed affecting the Premises, and (iii) the lien of any mortgage or deed of trust which may hereafter be executed in any amount for which the Premises, ground leases or underlying leases, or Landlord’s interest or estate in any of said items is specified as security. In the event that any ground lease or underlying lease terminates for any reason or pay mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest (including without limitation to Lender) to Landlord (“Successor”). In connection with any such termination of a ground lease or underlying lease or any foreclosure or conveyance in lieu of foreclosure made in connection with any mortgage or deed of trust and as a condition to the

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foregoing attornment by Tenant, then so long as Tenant is not in default after all applicable notice and cure periods pursuant to this Lease, Tenant shall not be disturbed in its possession of the Premises or in the enjoyment of its rights pursuant to this Lease during the Term of this Lease or any extension or renewal thereof. Notwithstanding any subordination of this Lease to the lien of any mortgage or deed of trust, the Lender, at any time, shall be entitled to subordinate the lien of its mortgage or deed of trust to this Lease by filing a notice of subordination in the County in which the Premises are located, and Lender shall agree in connection with any such filing, that Tenant shall not be disturbed in its possession of the Premises so long as Tenant is not in default pursuant to this Lease after applicable notice and cure periods, if any. In connection with any such filing, Tenant shall be obligated to attorn to and to become a Tenant of any Successor.

23.2 Additional Subordination. From time to time at the request of Landlord, Tenant covenants and agrees to execute and deliver within ten (10) business days following the date of written request from Landlord, documents evidencing the priority or subordination of this Lease with respect to any ground lease or underlying lease or the lien of any mortgage or deed of trust in connection with the Premises. Any and all such documents shall be in such form as is reasonably acceptable to the Lender(s) and in a commercially reasonable form. Any subordination agreement so requested by Landlord shall provide for Tenant to attorn to the Successor and shall further provide that Tenant shall not be disturbed in its possession of the Premises or in the enjoyment of its rights pursuant to this Lease so long as Tenant is not in default after all applicable notice and cure periods with respect to its obligations pursuant to the Lease. Any such Subordination, Non-disturbance and Attornment Agreement shall be recorded in the official records of the office of the County Recorder in the County in which the Premises is located.

23.3 Notice from Lender. Tenant shall be entitled to rely upon any notice given by a Lender in connection with the Premises requesting that Tenant make all future Rent payments to such Lender, and Tenant shall not be liable to Landlord for any payment made to such Lender in accordance with such notice. Notwithstanding any provision to the contrary of this Lease, a Successor shall not be (i) obligated to recognize the payment of Rent for a period of more than one month in advance; (ii) responsible for liabilities accrued pursuant to this Lease prior to the date (“Succession Date”) upon which the Successor becomes the “Landlord” hereunder; (iii) responsible to cure defaults of the Landlord pursuant to this Lease existing as of the Succession Date, except for defaults of a continuing nature of which Tenant afforded Successor a reasonable cure period following notice; (iv) responsible for any Security Deposit delivered by Tenant pursuant to this Lease not actually received by the Successor; or (v) bound by any execution, modification, termination or extension of this Lease made without a Lender’s consent or any grant of a purchase option or right of first refusal to purchase pursuant to this Lease, except in accordance with the provisions of an assignment of leases executed by Landlord in favor of a Lender.

24. ESTOPPEL CERTIFICATE; TENANT FINANCIAL STATEMENTS. Tenant, at any time and from time to time, upon not less than ten (10) business days written notice from Landlord, will execute, acknowledge and deliver to Landlord and, at Landlord’s request, to any existing or prospective purchaser, ground lessor or mortgagee of any part of the Premises, a certificate of Tenant stating: (a) that Tenant has accepted the Premises (or, if Tenant has not done

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so, Tenant has not accepted the Premises and specifying the reasons therefor); (b) the Commencement and Expiration Dates of this Lease; (c) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that same is in full force and effect as modified and stating the modifications); (d) whether or not to Tenant’s knowledge there are then existing any defenses against the enforcement of any of the obligations of Tenant under this Lease (and, if so, specifying same); (e) whether or not to Tenant’s knowledge there are then existing any defaults by Landlord in the performance of its obligations under this Lease (and, if so, specifying same); (f) the dates, if any, to which the Rent and other charges under this Lease have been paid; (g) whether or not there are Rent increases during the Lease Term and if so the amount of same; (h) whether or not the Lease contains any options or rights of first offer or first refusal; (i) the amount of any Security Deposit or other sums due Tenant; (j) the current notice address for Tenant; and (k) any other information that may reasonably be required by any of such persons. It is intended that any such certificate of Tenant delivered pursuant to this ¶24 may be relied upon by Landlord and any existing or prospective purchaser, ground lessor or mortgagee of the Business Park. Tenant agrees, at any time upon request by Landlord, to deliver to Landlord the most recent unaudited financial statements of Tenant, including a balance sheet and profit and loss statement for the most recent prior three years, all prepared in accordance with generally accepted accounting principles consistently applied. Landlord agrees to hold such financial statements confidential and to share them only with prospective lenders and purchasers of the Premises. Other than for prospective lenders and purchasers, Landlord shall not request financial statements more often than twice in any calendar year.

25. WAIVER. No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including without limitation, acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish termination of the Lease. Landlord’s consent to or approval of any act by Tenant requiring Landlord’s consent or approval shall not be deemed to waive or render unnecessary Landlord’s consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provision of the Lease.

26. SURRENDER OF PREMISES. Upon expiration of the Term, Tenant shall surrender to Landlord the 5020 Premises and the 5070 Premises and all tenant Improvements and Alterations clean and in the same condition as existed at the 5020 Commencement Date and the 5070 Commencement Date, respectively, except for ordinary wear and tear, casualty, and condemnation, Alterations which Tenant has the right or is obligated to remove under the provisions of ¶14 herein, and Hazardous Materials that (a) exist on the 5020 Premises as of the 5020 Commencement Date and on the 5070 Premises as of the 5070 Commencement Date, (b) result from underground migration from property outside of the Business Park, and (c) have been released at the Business Park by other tenants of the Business Park. Tenant shall remove all personal property including, without limitation, all wallpaper, paneling and other decorative improvements or fixtures and shall perform all restoration made necessary by the removal of any Alterations or Tenant’s fixtures, furnishings, equipment and other personal property before the expiration of the Term, including, for example, restoring all wall surfaces located in the 5020 Premises and the 5070 Premises to their condition as of the 5020 Commencement Date and the

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5070 Commencement Date, respectively. In any event, Tenant shall cause the following to be done prior to the expiration or the sooner termination of this Lease: (i) all interior walls shall be cleaned; (ii) all tiled floors shall be cleaned; (iii) all carpets shall be cleaned and shampooed; (iv) all broken, marred, stained or nonconforming acoustical ceiling tile shall be replaced; (v) all exterior and interior windows shall be washed; (vi) the HVAC system shall be serviced by a reputable and licensed service firm and left in good operating condition and repair as so certified by such firm; and (vii) the plumbing and electrical systems and lighting shall be placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses). Landlord can elect to retain or dispose of in any manner permitted by law Tenant’s personal property not removed from the Premises by Tenant prior to the expiration of the Term. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord’s retention or disposition of Tenant’s personal property in compliance with law. Tenant shall be liable to Landlord for Landlord’s cost for storage, removal and disposal of Tenant’s personal property. Notwithstanding the foregoing, upon expiration of the Term Tenant shall not be required to remove the following Alterations on the 5070 Building that have been approved pursuant to Section 29 below: (a) the new enclosure surrounding the loading dock door, (b) the portion of the office area improvements crosshatched on Exhibit D attached hereto, and (c) the 30 ton HVAC unit to be installed on the lower roof of the 5070 Building which will service the warehouse portion of the 5070 Premises.

27. HOLDOVER. If Tenant with Landlord’s consent remains in possession of the Premises after expiration of the Term or after the date in any notice given by Landlord to Tenant terminating this Lease, such possession by Tenant shall be deemed to be a month to month tenancy cancelable by either party on thirty (30) days written notice given at any time by either party and all provisions of this Lease, except those pertaining to Term, renewal options and Base Rent, shall apply and Tenant shall thereafter pay monthly Base Rent computed on a per month basis, for each month or part thereof (without reduction for any partial month) that Tenant remains in possession, in an amount equal to the Base Rent that was in effect for the last full calendar month immediately preceding expiration of the Term.

If Tenant holds over after the expiration or earlier termination of the Term hereof, without the consent of Landlord, Tenant shall become a Tenant at sufferance only with a continuing obligation to pay Rent provided that the Base Rent shall be one hundred fifty percent (150%) of the Base Rent that was in effect for the last full calendar month immediately preceding expiration of the Term. In any such case of Holdover without the consent of Landlord, the monthly Base Rent shall be computed on a per month basis, for each month or part thereof (without reduction for any partial month) that Tenant remains in possession. Acceptance by Landlord of Rent after expiration or earlier termination of the Term shall not constitute a consent to a holdover hereunder or result in a renewal. The foregoing provisions of this ¶27 are in addition to and do not affect Landlord’s right of re-entry or any rights of Landlord hereunder or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability arising out of such failure, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure to surrender. No provision of this ¶27 shall be construed as implied consent by Landlord to any holding over by Tenant. Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon expiration or other termination of this

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Lease. The provisions of this ¶27 shall not be considered to limit or constitute a waiver of any other rights or remedies of Landlord provided in this Lease or at law. Notwithstanding anything to the contrary herein, if Tenant’s holdover is limited to either the 5020 Premises or the 5070 Premises, then such holdover penalty shall only be payable with respect to such premises.

28. NOTICES. All notices, demands, or other communications required or contemplated under this Lease, including any notice delivered to Tenant by the Lender, shall be in writing and shall be deemed to have been duly given two (2) business days from the time of mailing if mailed by registered or certified mail, return receipt requested, postage prepaid, or 24 hours from the time of shipping by overnight carrier, or the actual time of delivery if delivered by personal service to the parties at the addresses specified in ¶1. Either Tenant or Landlord may change the address to which notices are to be given to such party hereunder by giving written notice of such change of address to the other in accordance with the notice provisions hereof.

29. TENANT IMPROVEMENTS. Except as otherwise expressly provided in this Lease, Tenant shall accept the 5020 Premises as of the 5020 Commencement Date and the 5070 Premises as of the 5070 Commencement Date in their then current, AS IS condition, with no additional improvements completed by Landlord. As of the 5020 Commencement Date, the 5020 Building shall be served by a 225 kVA transformer. Landlord hereby tentatively approves, in concept only, the proposed alterations described in Exhibit C attached hereto (the “Anticipated Tenant Improvements”); provided, however, that Landlord’s approval of the Anticipated Tenant Improvements is expressly conditioned upon Tenant’s compliance with all of the terms, conditions and procedures set forth in ¶14 above when processing and prosecuting the Anticipated Tenant Improvements, including, without limitation, Landlord’s review and approval of the plans and specifications to be submitted by Tenant prior to construction.

30. DELIVERY OF 5020 PREMISES.

30.1 Delivery of 5020 Second Floor. Landlord and Tenant acknowledge and agree as follows: (i) on or before November 1, 2008 (the “Second Floor Delivery Date”) Landlord shall deliver only the second floor of the 5020 Building (the “5020 Second Floor”) to Tenant, (ii) notwithstanding anything to the contrary contained in this Lease, in addition to any other charges or expenses owed by Tenant to Landlord under this Lease, Tenant only shall be obligated to pay Operating Expenses to the extent they are applicable to the 5020 Second Floor commencing on the Second Floor Delivery Date; (iii) from and after the 5020 Commencement Date, Tenant shall be obligated to pay both Base Rent and Operating Expenses for the 5020 Second Floor; (iv) Landlord has informed Tenant that the 5020 Second Floor is subject to the FICA Lease, and Landlord will use its commercially reasonable efforts to deliver possession of the 5020 Second Floor to Tenant on or before the Second Floor Delivery Date; (v) if, however, Landlord is unable to deliver possession of the 5020 Second Floor to Tenant on or before the Second Floor Delivery Date, then the terms and conditions of ¶30.3 shall apply; and (vi) all other terms and conditions contained in this Lease (including, without limitation, the obligation of Tenant to pay Rent owed to Landlord for the 5070 Premises) shall apply throughout the entire effective Term of this Lease as set forth herein.

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30.2 Delivery of 5020 First Floor. Landlord and Tenant acknowledge and agree as follows: (i) on or before the 5020 Commencement Date Landlord shall deliver the first floor of the 5020 Building (the “5020 First Floor”) to Tenant, (ii) Landlord has informed Tenant that the 5020 First Floor is subject to the FICA Lease, and Landlord will use its commercially reasonable efforts to deliver possession of the 5020 First Floor to Tenant on or before the 5020 Commencement Date; (iii) if, however, Landlord is unable to deliver possession of the 5020 First Floor to Tenant on or before the 5020 Commencement Date, then the terms and conditions of ¶30.3 shall apply; (iv) upon the later of the 5020 Commencement Date and the date on which Landlord delivers the 5020 First Floor to Tenant, in addition to any other charges or expenses owed by Tenant to Landlord under this Lease, Tenant shall be obligated thereafter to pay all Rent as it is applicable to the entire 5020 Premises; and (v) all other terms and conditions contained in this Lease (including, without limitation, the obligation of Tenant to pay Rent owed to Landlord for the 5070 Premises) shall apply throughout the entire effective Term of this Lease as set forth herein.

30.3 Delay in Possession. If Landlord, for any reason, cannot deliver possession of the 5020 Second Floor to Tenant on or before November 1, 2008, or the 5020 Premises to Tenant on or before January 1, 2009, then this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from such delay. In that event, however, there shall be an abatement of Rent for the 5020 Premises covering the period between the 5020 Commencement Date, and the date when Landlord delivers possession to Tenant, and all other terms and conditions of this Lease shall remain in full force and effect (and such abatement of Rent shall serve to advance the six (6) months of free Base Rent for the 5020 Premises following the 5020 Commencement Date). If a delay in possession is caused by Tenant’s failure to perform any obligation in accordance with this Lease, then the Term with respect to the 5020 Premises shall commence as of the date when the 5020 Commencement Date would have occurred but for Tenant’s failure, and there shall be no reduction of Rent for the 5020 Premises between such date and the time Tenant takes possession of the 5020 Premises. Notwithstanding anything to the contrary in this Lease, in the event Landlord cannot deliver possession of any or all of the 5020 Building on or before March 1, 2009, then Tenant shall have a right to terminate this Lease as to the 5020 Premises only, and any amounts of Rent or Security Deposit paid by Tenant to Landlord with respect to the 5020 Premises shall be refunded to Tenant.

31. MISCELLANEOUS PROVISIONS.

31.1 Time of Essence. Time is of the essence of each provision of this Lease.

31.2 Successor. This Lease shall be binding on and inure to the benefit of the parties and their successors, except as provided in ¶19.

31.3 Approvals. Except as otherwise set forth in this Lease, whenever this Lease requires an approval, consent, designation, determination, selection or judgment by either Landlord or Tenant, such approval, consent, designation, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed.

31.4 Personal Rights. Notwithstanding any other provision(s) of this Lease to the contrary, any provisions of this Lease providing for the renewal, extension or early termination of the Lease and/or for the expansion of the Premises (to include without limitation rights to

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negotiate, rights of first refusal, etc.) shall be (1) personal to the original Tenant and shall not be assignable or otherwise transferable other than to a Permitted Transferee (either voluntarily or involuntarily) to any third party for any reason whatsoever, and (2) conditioned upon Tenant not then being in default (after applicable notice and cure periods, if any) under this Lease.

31.5 Commissions. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for the Broker(s) identified in ¶1, who shall be compensated by Landlord in accordance with the separate agreement between Landlord and the Broker(s).

31.6 Other Charges; Legal Fees. If Landlord becomes a party to any litigation concerning this Lease or the Premises by reason of any act or omission of Tenant or Tenant’s authorized representatives, Tenant shall be liable to Landlord for reasonable attorneys’ fees and court costs incurred by Landlord in the litigation. Should the court render a decision which is thereafter appealed by any party thereto, Tenant shall be liable to Landlord for reasonable attorneys’ fees and court costs incurred by Landlord in connection with such appeal. If either party commences any litigation against the other party or files an appeal of a decision arising out of or in connection with the Lease, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees and costs of suit. If Landlord employs a collection agency to recover delinquent charges, Tenant agrees to pay all collection agency and attorneys’ fees charged to Landlord in addition to Rent, late charges, interest and other sums payable under this Lease.

31.7 Landlord’s Successors. In the event of a sale or conveyance by Landlord of the Business Park, the same shall operate to release Landlord from any liability thereafter accruing under this Lease, including as to any Security Deposit to the extent transferred to Landlord’s successor-in-interest, and in such event Landlord’s successor in interest shall assume in writing Landlord’s obligations under this Lease and shall be solely responsible for all obligations of Landlord thereafter accruing under this Lease.

31.8 Interpretation. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Premises are located. This Lease constitutes the entire agreement between the parties with respect to the Premises, except for such guarantees or modifications as may be executed in writing by the parties from time to time. When required by the context of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. “Party” shall mean Landlord or Tenant. If more than one person or entity constitutes Landlord or Tenant, the obligations Imposed upon that party shall be joint and several. The unenforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal.

31.9 Auctions. Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord’s prior written consent. Notwithstanding anything to the contrary in this Lease, Landlord shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent.

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31.10 Quiet Possession. Upon payment by Tenant of the Rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Tenant’s part to be observed and performed under this Lease, Tenant shall have quiet possession of the Premises for the entire Term hereof subject to all of the provisions of this Lease.

31.11 Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions initial by all parties hereto.

31.12 Offer. Preparation of this Lease by Landlord or Landlord’s agent and submission of same to Tenant shall not be deemed an offer to lease to Tenant. This Lease is not intended to be binding until executed by all Parties hereto.

31.13 Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other Rent payable under this Lease.

31.14 Construction. The Landlord and Tenant acknowledge that each has had its counsel review this Lease, and hereby agree that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or in any amendments or exhibits hereto.

31.15 Relocation Waiver. Tenant acknowledges that they have entered into occupancy of the Premises after Landlord acquired the Premises and that Landlord plans to redevelop the Business Park. Therefore, Tenant acknowledges and agrees that it is an interim tenant post acquisition that will not be entitled to relocation benefits under state or federal law if Landlord requires Tenant to relocate from the Premises after the expiration of the original Term of this Lease. Nothing in this ¶31.15 changes the Term, the Monthly Base Rent or any other provision in this Lease. For example, this ¶31.15 does not allow Landlord to relocate Tenant prior to the expiration of the Term, but after the expiration of the Term, Tenant will not receive (and has hereby waived) relocation benefits if Landlord requires Tenant to relocate from the Premises.

31.16 Intentionally Deleted.

31.17 Captions. Article, section and paragraph captions are not a part hereof.

31.18 Exhibits. For reference purposes the Exhibits are listed below.

         Exhibit A: Business Park

         Exhibit B: Rules and Regulations

         Exhibit C: Anticipated Tenant Improvements

         Exhibit D: Crosshatch of Office Area Alterations Not Required to be Removed

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31.19 Reasonable Expenditures. Any expenditure by a party permitted or required under this Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours.

31.20 Amended and Restated Lease. Upon the mutual execution and delivery of this Lease by Landlord and Tenant, this Lease shall completely amend, restate, replace, and supersede the Original Lease, and the Original Lease shall be of no further force and effect.

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IN WITNESS WHEREOF, the parties have executed this Lease as of the Effective Date.

BRANDIN COURT PARTNERS, LLC,				3PAR Inc., a Delaware Corporation
a California limited liability company
By:	WOLFF URBAN DEVELOPMENT,			By:	/s/ ADRIEL LARES
	LLC, a California limited liability company			Name:	Adriel Lares
Its:	Manager			Title:	VP Finance & CFO
				Date:	10/15/08
	By:	/s/ KEITH WOLFF
		Name:	Keith M. Wolff
		Title:	Manager

Signature Page

EXHIBIT A

Business Park

5020 – 5070 Brandin Court, Fremont, California

Exhibit A

EXHIBIT B

Rules & Regulations

This Exhibit B is attached to and made a part of that certain Lease by and between Brandin Court Partners LLC, a California Limited Liability Company as Landlord and 3PAR Inc., a Delaware Corporation as Tenant.

1. No sign, placard, picture, advertisement, name or notice (collectively, “Signs”) shall be installed or displayed on any part of the Premises without the prior written consent of Landlord, except that Tenant may post Signs inside the Building which are not visible from the exterior of the Building. Landlord shall have the right to remove, at Tenant’s expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant.

2. Except as consented to in writing by Landlord, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the Premises and no awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises.

3. Neither Tenant nor any employee or invitee of Tenant, shall make any structural roof or terrace penetrations.

4. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, or for any damage to any Tenant’s property, except as otherwise provided in the Lease.

5. Landlord will furnish Tenant, free of charge, with six (6) keys to the Premises. Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises without Landlord’s prior written consent. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all locks for doors on the Premises, and in the event of loss of any keys furnished by Landlord, shall pay Landlord therefore.

6. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord’s reasonable instructions in their installation.

7. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the reasonable right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Premises. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Premises to such a degree as to be unreasonable, shall be placed and maintained by Tenant, at Tenant’s expense, on vibration eliminators or other devices sufficient to eliminate noise or vibrations. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Premises by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant.

Exhibit B

1

8. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those reasonable quantities necessary for the operation of Tenant’s business. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord by reason of noise, odors or vibrations. Tenant shall not bring or keep or permit to be brought or kept in the Premises any animal life form, other than human, except seeing eye dogs when in the company of their masters.

9. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate reasonably with Landlord to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice.

10. Landlord reserves the right, exercisable with one hundred twenty (120) days prior written notice, but without liability to Tenant, to change the name and street address of the Premises.

11. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and other equipment which is not required to be continuously run.

12. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting for the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it.

13. Tenant shall not sell, or permit the retail sale of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Business Park. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant’s Lease. Notwithstanding the above, Tenant shall have the right to install vending machines for use by Tenant, its employees and invitees.

14. Tenant shall not interfere with radio or television broadcasting or reception from or in neighboring areas.

15. Canvassing, soliciting and distribution of handbills or any other written materials, and peddling in the Business Park are prohibited, and Tenant shall cooperate to prevent same.

16. Landlord reserves the right to exclude or expel from the Premises any person who, in Landlord’s judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Premises.

Exhibit B

2

17. Tenant shall store all its trash and garbage within its Premises or in reasonable locations specifically identified by Landlord for such purposes. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with reasonable directions issued from time to time by Landlord.

18. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging nor shall the Premises by used for any illegal purpose. No cooking (other than customary heating or ordinary lunchroom items for Tenant’s employees) shall be done or permitted by any tenant on the Premises, except that (a) use by Tenant in its kitchen, if any, located in the Premises and Underwriters Laboratory’s approved equipment for brewing coffee, tea, hot chocolate and similar beverages and microwaving food shall be permitted, and (b) Tenant shall have the right to hold company picnics, barbeques, and similar functions at the Premises or in the parking lot from time to time subject to Landlord’s prior written approval, provided that such kitchen, equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations.

19. Tenant shall not use in any part of the Premises any hand truck except those equipped with rubber tires and side guards or such other reasonable material-handling equipment as Landlord may approve.

20. Without the written consent of Landlord. Tenant shall not use the name of the Business Park in connection with or in promoting or advertising the business of Tenant except as Tenant’s address.

21. Tenant shall comply with all reasonable safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

22. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes locking doors and securing other means of entry to the Premises.

23. The requirements of Tenant will be attended to only upon appropriate application to the office of Landlord by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord.

24. Tenant shall not park its vehicles in any parking areas outside the Business Park. Tenant shall not store or abandon vehicles in the Business Park parking areas nor park any vehicles in the Business Park parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles, four-wheeled trucks, or other equipment used in the operation of Tenant’s business. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space.

25. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be appropriate for safety and security, for care and cleanliness of the Premises and for the preservation of good order therein. Tenant agrees to abide for all such Rules and Regulations hereinabove stated and any additional Rules and Regulations which are adopted.

26. Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant’s employees, agents, clients, customers, invitees and guests.

Exhibit B

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EXHIBIT C

Anticipated Tenant Improvements

List of anticipated Tenant Improvements of 5020 Brandin Court

• Construction of additional offices on the first floor

• Construction of a training facility for students, customers and internal employees

• Construction of a Fitness Center

• Installation of a new security system and cameras similar to 5070 Brandin Court

• Installation of signage on the 5020 Building duplicating 5070 Brandin Court

• Construction of a small lab for a demo room

Exhibit C

EXHIBIT D

Crosshatch of Office Area Alterations Not Required to be Removed

See attached.

Exhibit D

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14(A), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David C. Scott, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 3PAR Inc.;

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)) 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. 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

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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.

Date: November 12, 2008	/s/ DAVID C. SCOTT
	David C. Scott
	President, Chief Executive Officer and Director (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14(A), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Adriel G. Lares, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 3PAR Inc.;

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)) 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. 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

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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.

Date: November 12, 2008	/s/ ADRIEL G. LARES
	Adriel G. Lares
	Vice President of Finance, Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, David C. Scott, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report of 3PAR Inc., on Form 10-Q for the quarterly period ended September 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of 3PAR Inc.

Date: November 12, 2008	/s/ DAVID C. SCOTT
	David C. Scott
	President, Chief Executive Officer and Director (Principal Executive Officer)

I, Adriel G. Lares, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report of 3PAR Inc., on Form 10-Q for the quarterly period ended September 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of 3PAR Inc.

Date: November 12, 2008	/s/ ADRIEL G. LARES
	Adriel G. Lares
	Vice President of Finance and Chief Financial Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to 3PAR Inc. and will be retained by 3PAR Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification “accompanies” the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing