The amount of data stored by enterprises is growing rapidly. As data is created, shared and stored, extra copies are made by multiple users across an enterprise’s network and in multiple storage systems, requiring dramatically greater storage capacity and resulting in significantly increased costs.

This problem is particularly pronounced for backup and disaster recovery storage because backup systems routinely make complete, redundant copies of largely identical files even if only minimal changes have occurred since the last backup event. Even enterprises using leading backup software experience this problem. With enterprises typically performing backup events on a regular basis, redundant data is multiplied, further increasing storage requirements and associated costs.

Enterprises generally have two types of storage systems. Primary storage systems store frequently accessed data from applications and servers as users work. Protection storage systems store large amounts of infrequently accessed data for backup and disaster recovery. Disk-based systems are generally used for primary storage, despite their high upfront costs, because they read and write data quickly. On the other hand, tape-based systems have historically been used for protection storage, despite their lower performance characteristics, primarily because of their relatively low upfront costs.

In 2007, revenues from the tape-based storage market are expected to be approximately $4.7 billion based on estimates from Freeman Reports, an industry research firm.

Customers can augment the storage capacity of the Company’s DD560 appliance with up to two expansion shelves, each of which adds approximately 8 TB of additional internal storage capacity. The Company’s appliances also can be combined together in an array configuration, which is referred to as a DDX, to reach higher levels of capacity and throughput. For customers that want to utilize their existing excess storage capacity, the Company offers so called Gateway appliances, which are versions of its appliances without internal storage.

Different technologies can be enabled or disabled based on the licenses purchased by the Company’s customers. The Company also offers a capacity-optimized VTL software option that emulates multiple tape libraries over a Fibre Channel interface and integrates with an enterprise’s existing backup infrastructure.

Each of the Company’s appliances is designed to be compatible with leading enterprise backup software available from such vendors as CommVault Systems, Inc., EMC Corporation, International Business Machines Corporation and Symantec Corporation.

The Company outsources the manufacturing, assembly, testing, packaging and shipping of its appliances to FinePitch Technology, a division of Solectron Corporation.

The Company provides purchase orders for finished goods inventory to FinePitch on a monthly basis. The product mix and volume of the order is adjusted each month based on anticipated demand and actual sales and shipments in prior periods.

The Company purchases its capacity expansion shelves from Xyratex Technology Limited pursuant to an agreement that has a three-year term ending in March 2010, subject to early termination by either party under certain circumstances.

Support and services revenue increased $2.0 million, from $172,000 in the three months ended March 31, 2006 to $2.1 million in the three months ended March 31, 2007.

Ratable product and related support and services decreased $2.1 million, from $2.3 million in the three months ended March 31, 2006 to $192,000 in the three months ended March 31, 2007.