Information is increasingly recorded and communicated in images and pictures rather than in text and words. This trend is resulting in the creation of innovative new applications in computer processing, digital imaging, video, satellite imagery, Internet services, business analysis, and visualization displays, modeling and simulation. These new applications, combined with higher levels of digital resolution and the adoption of high-bandwidth communication networks, are driving the widespread proliferation of digital content in the form of video, audio, digital images, computer models, PDF files, scanned images, reference information, test and simulation data and other unstructured data. As more business and consumer activities create and utilize digital content, the need for ways to store, manage and access this information is growing rapidly.

According to IDC the worldwide market for external disk storage systems will grow from approximately $17.4 billion in 2005 to approximately $22.7 billion in 2010. The external disk storage systems market has traditionally been served by storage solutions based on Storage Area Network, or SAN, Network Attached Storage, or NAS, and Direct Attached Storage, or DAS, architectures. In addition, IDC estimates the worldwide market for storage software will grow from approximately $9.1 billion in 2005 to approximately $14.3 billion in 2010.

While the worldwide market for external disk storage systems is expected to grow at a steady rate from 2005 to 2010, the market for storage solutions dedicated to digital content is estimated to grow at a much faster rate. According to ESG, certain industries including multimedia, oil and gas, scientific research, healthcare, personal Internet services and software development will experience rapid growth in file-based storage capacity. For example, in disk-based digital archiving ESG forecasts that the demand for storage capacity will grow from 377 petabytes in 2005 to nearly 11,000 petabytes in 2010, representing a 96% compound annual growth rate, with the substantial majority of this stored information comprised of unstructured content, such as office documents, web pages, digital images and audio and video files.

The Company’s Isilon IQ platform nodes combine a storage server and, depending on the system, 1.92, 3.00 or 6.00 terabytes of disk capacity in dense, self-contained storage nodes that work together in a single cluster. Each Isilon IQ node is a 3.5 inch high server and has 12 SATA-II disk drives and 4.5 gigabytes of globally coherent, read and write cache. A system requires a minimum of three nodes and can scale up to 88 nodes in a cluster. All nodes support both high-performance InfiniBand and standard Gigabit Ethernet interfaces for intra-cluster communication and provide front-side communication via standard Gigabit Ethernet.

The Company’s Isilon IQ Accelerator enables customers to increase the performance, or aggregate write and read throughput, of their data storage system modularly without adding storage capacity. Isilon IQ Accelerator nodes can be easily added to any Isilon IQ storage cluster in as little as 15 seconds and utilizes InfiniBand networking to scale aggregate data throughput independently to more than 7 gigabytes per second with no system downtime.

The Company’s Isilon EX 6000 enables customers to increase their data storage capacity modularly without the cost of adding additional performance. The Company’s EX 6000 contains 6 terabytes of SATA-II disk capacity in a 3.5 inch high chassis and utilizes Serial Attached SCSI, or SAS, technology to connect to each Isilon IQ 6000 platform node. Combining the Company’s OneFS operating system software with a high-speed SAS interconnect creates a high-density system that modularly scales from 60 terabytes to hundreds of terabytes in a single data storage pool.

The Company’s SyncIQ replication software application provides asynchronous file-based replication to one or more Isilon IQ clusters over any WAN/LAN IP network through a policy-based engine for disaster recovery disk-to-disk backup/recovery, and distributed workflow or delivery environments. Only those parts of a file system that have changed are communicated to the cluster.

Gross margin increased four percentage points to 52% in the first six months of 2006 from 48% in the first six months of 2005.

Research and development expenses increased $1.8 million, or 32%, to $7.5 million in the first six months of 2006 from $5.7 million in the first six months of 2005.

Sales and marketing expenses increased $5.1 million, or 95%, to $10.5 million in the first six months of 2006 from $5.4 million in the first six months of 2005.

General and administrative expenses increased $1.5 million, or 93%, to $3.1 million in the first six months of 2006 from $1.6 million in the first six months of 2005.

Other expense, net increased by $1.4 million to $1.4 million in the first six months of 2006 from $19,000 in the first six months of 2005.