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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

Commission file number 000-12230

BAKBONE SOFTWARE INCORPORATED

(Exact name of Registrant as specified in
its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Canada                                                         |  | Not applicable                      
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9540 Towne Centre Drive, Suite 100
San Diego, California       |  | 92121                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (858) 450-9009

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈                      |  | Smaller reporting company  x
|                           |  |                      |  | (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  x

As of November 1, 2010 there were approximately 80,884,509 shares of the registrants common stock outstanding.









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BAKBONE SOFTWARE
INCORPORATED

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010



|                              |  |                                                                                                                |    |  |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                                | 3  | 
|                              |  |                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                           |    |  | 3  | 
|                              |  |                                                                                                               
|                              |  | Consolidated Balance Sheets as of September 30, 2010 (unaudited) and March 31, 2010                            |    |  | 3  | 
|                              |  |                                                                                                               
|                              |  | Unaudited Consolidated Statements of Operations for the three and six months ended September 30, 2010 and 2009 |    |  | 4  | 
|                              |  |                                                                                                               
|                              |  | Unaudited Consolidated Statements of Cash Flows for the six months ended September 30, 2010 and 2009           |    |  | 5  | 
|                              |  |                                                                                                               
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                         |    |  | 6  | 
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |    |  | 12 | 
|                              |  |                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                     |    |  | 29 | 
|                              |  |                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                        |    |  | 29 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                | 29 | 
|                              |  |                                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                                              |    |  | 29 | 
|                              |  |                                                                                                               
|Item 1A.                      |  | Risk Factors                                                                                                   |    |  | 29 | 
|                              |  |                                                                                                               
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                    |    |  | 38 | 
|                              |  |                                                                                                               
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                |    |  | 38 | 
|                              |  |                                                                                                               
|Item 4.                       |  | (Removed and Reserved)                                                                                         |    |  | 38 | 
|                              |  |                                                                                                               
|Item 5.                       |  | Other Information                                                                                              |    |  | 38 | 
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                       |    |  | 38 | 
|                              |  |                                                                                                               
|                              |  | Signature                                                                                                      |    |  | 39 | 
|                              |  |                                                                                                               
|                              |  | Exhibit 10.1                                                                                                   |    |  |    | 
|                              |  |                                                                                                               
|                              |  | Exhibit 31.1                                                                                                   |    |  |    | 
|                              |  |                                                                                                               
|                              |  | Exhibit 32.1                                                                                                   |    |  |    | 



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | -------- | - | -------------- | - | -------- | -
|                                                                                                                                                                                                                                                                   |  | September 30, 2010 |          |   | March 31, 2010 |  
|                                                                                                                                                                                                                                                                   |  | (Unaudited)        |          |   |                |  
|ASSETS                                                                                                                                                                                                                                                             |  |                    |          |   |                |   |          |  
|Current assets:                                                                                                                                                                                                                                                    |  |                    |          |   |                |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                          |  | $                  | 5,550    |   |                | $ | 4,903    |  
|Restricted cash                                                                                                                                                                                                                                                    |  |                    | 339      |   |                |   | 51       |  
|Accounts receivable, less allowances for doubtful accounts and sales returns of $147 at September 30, 2010 and $78 at
March 31, 2010                                                                                                                               |  |                    | 7,926    |   |                |   | 10,582   |  
|Prepaid expenses                                                                                                                                                                                                                                                   |  |                    | 669      |   |                |   | 490      |  
|Other assets                                                                                                                                                                                                                                                       |  |                    | 985      |   |                |   | 249      |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total current assets                                                                                                                                                                                                                                               |  |                    | 15,469   |   |                |   | 16,275   |  
|Property and equipment, at cost                                                                                                                                                                                                                                    |  |                    | 7,560    |   |                |   | 7,676    |  
|Less accumulated depreciation                                                                                                                                                                                                                                      |  |                    | (6,033   | ) |                |   | (5,656   | )
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Property and equipment, net                                                                                                                                                                                                                                        |  |                    | 1,527    |   |                |   | 2,020    |  
|Intangible assets, net                                                                                                                                                                                                                                             |  |                    | 1,471    |   |                |   | 1,814    |  
|Goodwill                                                                                                                                                                                                                                                           |  |                    | 7,615    |   |                |   | 7,615    |  
|Other assets                                                                                                                                                                                                                                                       |  |                    | 767      |   |                |   | 946      |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total assets                                                                                                                                                                                                                                                       |  | $                  | 26,849   |   |                | $ | 28,670   |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                                                                                                              |  |                    |          |   |                |   |          |  
|Current liabilities:                                                                                                                                                                                                                                               |  |                    |          |   |                |   |          |  
|Accounts payable                                                                                                                                                                                                                                                   |  | $                  | 1,445    |   |                | $ | 1,841    |  
|Accrued liabilities                                                                                                                                                                                                                                                |  |                    | 6,384    |   |                |   | 6,101    |  
|Current portion of acquisition consideration payable                                                                                                                                                                                                               |  |                    | 2,420    |   |                |   | 809      |  
|Current portion of deferred revenue                                                                                                                                                                                                                                |  |                    | 44,614   |   |                |   | 44,337   |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total current liabilities                                                                                                                                                                                                                                          |  |                    | 54,863   |   |                |   | 53,088   |  
|Deferred revenue, excluding current portion                                                                                                                                                                                                                        |  |                    | 43,623   |   |                |   | 44,840   |  
|Acquisition consideration payable, excluding current portion                                                                                                                                                                                                       |  |                    | 4,154    |   |                |   | 6,037    |  
|Other liabilities                                                                                                                                                                                                                                                  |  |                    | 513      |   |                |   | 697      |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total liabilities                                                                                                                                                                                                                                                  |  |                    | 103,153  |   |                |   | 104,662  |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Commitments and contingencies (Note 5)                                                                                                                                                                                                                             |  |                    |          |   |                |   |          |  
|Shareholders deficit:                                                                                                                                                                                                                                             |  |                    |          |   |                |   |          |  
|Series A convertible preferred stock, no par value, 22,000 shares authorized at September 30, 2010, and March 31, 2010,
18,000 shares issued and outstanding at September 30, 2010 and March 31, 2010, liquidation preference of $26,229 and $26,491, respectively |  |                    | 11,160   |   |                |   | 11,160   |  
|Share capital, no par value, unlimited shares authorized, 80,535 and 77,642 shares issued and outstanding at September 30,
2010 and March 31, 2010, respectively                                                                                                   |  |                    | 160,299  |   |                |   | 159,940  |  
|Employee benefit trust                                                                                                                                                                                                                                             |  |                    | (3       | ) |                |   | (8       | )
|Accumulated deficit                                                                                                                                                                                                                                                |  |                    | (238,419 | ) |                |   | (242,409 | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                               |  |                    | (9,341   | ) |                |   | (4,675   | )
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total shareholders deficit                                                                                                                                                                                                                                        |  |                    | (76,304  | ) |                |   | (75,992  | )
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  
|Total liabilities and shareholders deficit                                                                                                                                                                                                                        |  | $                  | 26,849   |   |                | $ | 28,670   |  
|                                                                                                                                                                                                                                                                   |  |                    |          |   |                |   |          |  

See accompanying notes to consolidated financial statements.



3



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BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share
data)

(Unaudited)



|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|------------------------------------------------------ |  | -------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                       |  | Three months ended September 30, |         |   | Six months ended September 30, |  
|                                                       |  | 2010                             |         |   | 2009                           |   |         | 2010 |  |   | 2009    |  
|Revenues:                                              |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|License and service                                    |  | $                                | 14,521  |   |                                | $ | 14,929  |      |  | $ | 28,504  |   |  | $ | 30,029 |  
|Other                                                  |  |                                  |        |   |                                |   |        |      |  |   |        |   |  |   | 1,500  |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Total revenues                                         |  |                                  | 14,521  |   |                                |   | 14,929  |      |  |   | 28,504  |   |  |   | 31,529 |  
|Cost of revenues                                       |  |                                  | 1,347   |   |                                |   | 1,499   |      |  |   | 2,773   |   |  |   | 2,844  |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Gross profit                                           |  |                                  | 13,174  |   |                                |   | 13,430  |      |  |   | 25,731  |   |  |   | 28,685 |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Operating expenses:                                    |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Sales and marketing                                    |  |                                  | 5,039   |   |                                |   | 6,096   |      |  |   | 10,899  |   |  |   | 12,631 |  
|Research and development                               |  |                                  | 2,108   |   |                                |   | 2,780   |      |  |   | 4,451   |   |  |   | 5,608  |  
|General and administrative                             |  |                                  | 2,231   |   |                                |   | 2,654   |      |  |   | 5,561   |   |  |   | 6,869  |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Total operating expenses                               |  |                                  | 9,378   |   |                                |   | 11,530  |      |  |   | 20,911  |   |  |   | 25,108 |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Operating income from continuing operations            |  |                                  | 3,796   |   |                                |   | 1,900   |      |  |   | 4,820   |   |  |   | 3,577  |  
|Interest income                                        |  |                                  | 4       |   |                                |   | 2       |      |  |   | 7       |   |  |   | 5      |  
|Interest expense                                       |  |                                  | (202    | ) |                                |   | (234    | )    |  |   | (413    | ) |  |   | (374   | )
|Foreign exchange gain, net                             |  |                                  | 386     |   |                                |   | 480     |      |  |   | 382     |   |  |   | 234    |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income before income taxes and discontinued operations |  |                                  | 3,984   |   |                                |   | 2,148   |      |  |   | 4,796   |   |  |   | 3,442  |  
|Provision for income taxes                             |  |                                  | 7       |   |                                |   | 37      |      |  |   | 16      |   |  |   | 62     |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income from continuing operations                      |  |                                  | 3,977   |   |                                |   | 2,111   |      |  |   | 4,780   |   |  |   | 3,380  |  
|Income (loss) from discontinued operations, net        |  |                                  | 16      |   |                                |   | (981    | )    |  |   | (790    | ) |  |   | (1,558 | )
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Net income                                             |  | $                                | 3,993   |   |                                | $ | 1,130   |      |  | $ | 3,990   |   |  | $ | 1,822  |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Basic net income per common share:                     |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income from continuing operations                      |  | $                                | 0.05    |   |                                | $ | 0.02    |      |  | $ | 0.06    |   |  | $ | 0.04   |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income (loss) from discontinued operations             |  | $                                | 0.00    |   |                                | $ | (0.01   | )    |  | $ | (0.01   | ) |  | $ | (0.02  | )
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Net income                                             |  | $                                | 0.05    |   |                                | $ | 0.01    |      |  | $ | 0.05    |   |  | $ | 0.02   |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Diluted net income per common share:                   |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income from continuing operations                      |  | $                                | 0.04    |   |                                | $ | 0.02    |      |  | $ | 0.05    |   |  | $ | 0.03   |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Income (loss) from discontinued operations             |  | $                                | 0.00    |   |                                | $ | (0.01   | )    |  | $ | (0.01   | ) |  | $ | (0.01  | )
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Net income                                             |  | $                                | 0.04    |   |                                | $ | 0.01    |      |  | $ | 0.04    |   |  | $ | 0.02   |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Weighted-average common shares outstanding:            |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Basic                                                  |  |                                  | 84,827  |   |                                |   | 86,644  |      |  |   | 85,573  |   |  |   | 81,723 |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  
|Diluted                                                |  |                                  | 102,827 |   |                                |   | 104,661 |      |  |   | 103,636 |   |  |   | 99,817 |  
|                                                       |  |                                  |         |   |                                |   |         |      |  |   |         |   |  |   |        |  



See accompanying notes to consolidated
financial statements.



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BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                                                                       |  |                                |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                                       |  | Six months ended September 30, |       
|                                                                                                                       |  | 2010                           |        |   | 2009 |  
|Cash flows from operating activities:                                                                                  |  |                                |        |   |      |   |        |  
|Net income                                                                                                             |  | $                              | 3,990  |   |      | $ | 1,822  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities from continuing
operations: |  |                                |        |   |      |   |        |  
|Loss from discontinued operations                                                                                      |  |                                | 790    |   |      |   | 1,558  |  
|Depreciation and amortization                                                                                          |  |                                | 900    |   |      |   | 946    |  
|Non-cash interest expense                                                                                              |  |                                | 351    |   |      |   | 284    |  
|Stock-based compensation                                                                                               |  |                                | 226    |   |      |   | 20     |  
|Operating expenses funded by financing arrangement                                                                     |  |                                | 162    |   |      |   | 213    |  
|Bad debt expense                                                                                                       |  |                                | 84     |   |      |   | 142    |  
|Loss on disposal of capital assets                                                                                     |  |                                | 6      |   |      |   | 8      |  
|Changes in assets and liabilities, net of effects from acquisition of ColdSpark, Inc:                                  |  |                                |        |   |      |   |        |  
|Accounts receivable                                                                                                    |  |                                | 2,099  |   |      |   | 792    |  
|Prepaid expenses and other assets                                                                                      |  |                                | (959   | ) |      |   | (299   | )
|Accounts payable                                                                                                       |  |                                | (348   | ) |      |   | (661   | )
|Accrued and other liabilities                                                                                          |  |                                | 139    |   |      |   | 62     |  
|Deferred revenue                                                                                                       |  |                                | (5,226 | ) |      |   | (5,306 | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities of continuing operations                                           |  |                                | 2,214  |   |      |   | (419   | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Cash flows from investing activities:                                                                                  |  |                                |        |   |      |   |        |  
|Cash paid for acquisitions, net of cash acquired                                                                       |  |                                |       |   |      |   | (1,014 | )
|(Deposit) release of restricted cash                                                                                   |  |                                | (288   | ) |      |   | 325    |  
|Capital expenditures                                                                                                   |  |                                | (138   | ) |      |   | (161   | )
|Payments to ColdSpark shareholders                                                                                     |  |                                | (476   | ) |      |   |       |  
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Net cash used in investing activities of continuing operations                                                         |  |                                | (902   | ) |      |   | (850   | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Cash flows from financing activities:                                                                                  |  |                                |        |   |      |   |        |  
|Payments on capital lease obligations                                                                                  |  |                                | (16    | ) |      |   | (214   | )
|Payments on long term debt obligations                                                                                 |  |                                | (98    | ) |      |   | (319   | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Net cash used in financing activities of continuing operations                                                         |  |                                | (114   | ) |      |   | (533   | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Cash flows from discontinued operations                                                                                |  |                                |        |   |      |   |        |  
|Net cash used in operating activities of discontinued operations                                                       |  |                                | (885   | ) |      |   | (754   | )
|Net cash used in financing activities of discontinued operations                                                       |  |                                | (22    | ) |      |   | (7     | )
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Net cash used in discontinued operations                                                                               |  |                                | (907   | ) |      |   | (761   | )
|Effect of exchange rate changes on cash and cash equivalents                                                           |  |                                | 356    |   |      |   | 626    |  
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                   |  |                                | 647    |   |      |   | (1,937 | )
|Cash and cash equivalents, beginning of period                                                                         |  |                                | 4,903  |   |      |   | 8,398  |  
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                                               |  | $                              | 5,550  |   |      | $ | 6,461  |  
|                                                                                                                       |  |                                |        |   |      |   |        |  
|Cash paid during the period for:                                                                                       |  |                                |        |   |      |   |        |  
|Interest                                                                                                               |  | $                              | 13     |   |      | $ | 33     |  
|Income taxes                                                                                                           |  | $                              | 95     |   |      | $ | 80     |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                     |  |                                |        |   |      |   |        |  
|Equipment acquired under capital leases                                                                                |  | $                              |       |   |      | $ | 12     |  
|Capital expenditures included in accounts payable at end of period                                                     |  | $                              | 16     |   |      | $ | 39     |  

See accompanying notes
to consolidated financial statements.



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BAKBONE SOFTWARE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | The Company
|-- | -----------

BakBone
Software Incorporated (BakBone or the Company), a Canadian federal company, is a leading provider of data protection, retention and availability technologies that reduce storage management complexity.

Effective with the closing of the Companys Message Management division in May 2010, BakBone operates in one reporting segment:
Storage Management, which sells the NetVault products and solutions. During fiscal 2010, the Company operated two reporting segments: (i) Storage Management, which sells the NetVault products and solutions and (ii) Message Management,
which sells ColdSparks SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. The Company has operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or
EMEA, and conducts commercial operations primarily through three of its respective wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, and BakBone Software Ltd.



|2. | Basis of Presentation
|-- | ---------------------

The accompanying consolidated balance sheet at September 30, 2010, the consolidated statements of operations for the three and six
months ended September 30, 2010 and 2009 and cash flows for the six months ended September 2010 and 2009, have been prepared by the Company and have not been audited. These financial statements should be read in conjunction with the financial
statements and notes thereto for the fiscal year ended March 31, 2010 included in the Companys Annual Report on Form 10-K.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for
interim financial information, in accordance with the instructions to Form 10-Q and the guidance in Article 10 of Regulation S-X. Accordingly, since they are interim financial statements, the accompanying unaudited consolidated financial
statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring
adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented. Interim operating results are not necessarily indicative of operating results for the full year.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation. The Company operates and reports using a fiscal year end of March 31.

Restricted Cash

In June 2010, the Company withheld a $339,100 cash
payment owed to a former ColdSpark shareholder. During the three months ended September 30, 2010, the Company transferred the withheld amount to an escrow account and as a result the amount is reflected as restricted cash on the Companys
consolidated balance sheet as of September 30, 2010. The restricted funds were paid to the former shareholder on October 5, 2010.

Significant Customers

As of September 30, 2010, there were no
customers representing 10% or more of the Companys consolidated accounts receivable balance. As of September 30, 2009, the Company had one customer with an accounts receivable balance representing approximately 10% of its consolidated
accounts receivable balance. During the three and six months ended September 30, 2010 and 2009, there were no customers representing 10% or more of the Companys consolidated revenues.

Subsequent Events

The Company evaluated all events or transactions that occurred after the balance sheet date of September 30, 2010 through the date it issued these financial statements. Except as disclosed in Note 7,
no subsequent events were identified requiring additional disclosure in the notes to these financial statements.



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|3. | Significant Accounting Policies
|-- | -------------------------------

Use of Estimates

The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Significant estimates and assumptions made by management include the allowance for doubtful accounts, the accounting for income taxes including the future realizability of our deferred tax assets,
the accounting for business combinations, and the determination of the estimated useful life of our software for purposes of revenue recognition amortization. Estimates have been prepared on the basis of the most current and best available
information and actual results could differ from those estimates.

Revenue Recognition

The Company derives revenues from software licenses, maintenance services, and professional services from three distinct groups of
customers: resellers, OEMs, and direct end users.

The Company commences recognizing revenue under these arrangements when all
of the following are met:



| |  |  | Persuasive Evidence of an Arrangement Exists.It is the Companys practice to require a contract signed by both the partner and the Company
and/or a customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delivery Has Occurred. The Company delivers software by both physical and electronic means. Both means of delivery transfer title and risk to
the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of the Companys arrangements
contain customer acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Vendors Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within the
Companys standard credit terms.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collectability is Probable. Customers must meet collectability requirements pursuant to the Companys credit policy. For contracts that do
not meet the Companys collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys customers are not contractually permitted to return products, but the Company accepts returns under certain
circumstances. The Company accounts for potential returns from its reseller and OEM customers using historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales incentives or other consideration given by the Company to its customers that are considered adjustments of the selling
price of the Companys products, such as rebates, are generally reflected as reductions to revenue.

Sales tax collected
by the Company from its customers is not reported in revenue.

The Company licenses its software to its reseller customers
under multiple-element arrangements involving a combination of software, post-contract support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services
include services related to implementation of the Companys software as well as training. Software license arrangements with resellers include implicit platform transfer rights, which allow end users to exchange an original product for a
different product or to exchange an original product on one platform for the same product operating on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the
customer has to exercise this right. We have also historically provided our customers with a range of product concessions and other services which are not explicitly provided for in our sales arrangements. As no contract period exists under these
arrangements, software-related revenue is recognized ratably over the estimated economic useful life of the software product of four years.

The economic useful life of the software product is estimated to be four years based upon the Companys version release and end of life data, as well as Company practice with respect to supporting
the product. The Company weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful life of the software product.

Maintenance renewal fees are recognized ratably over the arrangement period, which is typically one year. Professional services may also
be sold separately and all fees generated from stand-alone sales of professional services are recognized when the service is complete.



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The Company has
multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, the Company has a commitment to provide unspecified future software products. As vendor
specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over the arrangement period.

Business Combinations

The Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date.
The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies.
Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:



| |  |  | future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, acquired developed technologies and
patents; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | discount rates.
| | - |  | ---------------

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the
acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period of the
estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations, financial position and cash flows in the period of the change in estimate.

Deferred Revenue

Deferred revenue represents software license, maintenance contract and professional services bookings, net of recognized revenue amounts. A majority of the Companys sales transactions are deferred
and recognized over the applicable period, generally three to five years.

Comprehensive Income (Loss)

Comprehensive income (loss) is the total of net income and all other non-owner changes in shareholders deficit.
The Companys comprehensive income (loss) combines net income and foreign currency translation adjustment. Comprehensive income (loss) for the three and six months ended September 30, 2010 and 2009 is as follows:



|                                        |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three months
endedSeptember 30, |        |   | Six months
endedSeptember 30, |  
|                                        |  | 2010                            |        |   | 2009                          |   |        | 2010 |  |   | 2009   |  
|Net income                              |  | $                               | 3,993  |   |                               | $ | 1,131  |      |  | $ | 3,990  |   |  | $ | 1,822  |  
|Foreign currency translation adjustment |  |                                 | (3,136 | ) |                               |   | (1,482 | )    |  |   | (4,666 | ) |  |   | (4,555 | )
|                                        |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)       |  | $                               | 857    |   |                               | $ | (351   | )    |  | $ | (676   | ) |  | $ | (2,733 | )
|                                        |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  

The foreign currency translation adjustment each period represents the effect of the translation of assets
and liabilities that are denominated in the functional currencies of foreign subsidiaries to the Companys reporting currency. During the three and six months ended September 30, 2010, the foreign currency translation decreases of $3.1
million and $4.7 million, respectively, were related to the translation of the Companys assets and liabilities in its Asia-Pacific and EMEA subsidiaries as the U.S. dollar weakened against the Japanese yen and the British pound during the
periods. During the three months ended September 30, 2009, the foreign currency translation decrease of $1.5 million was related primarily to the translation of the Companys assets and liabilities in its Asia-Pacific subsidiary as the
U.S. dollar weakened against the Japanese yen during the period. During the six months ended September 30, 2009, the foreign currency decrease of $4.6 million related to the translation of the Companys assets and liabilities in its EMEA
and Asia- Pacific subsidiaries as the U.S. dollar weakened against the British pound and Japanese yen during the period.

Net Income Per Share

Basic net income per common share is computed by dividing the net income attributable to common shareholders for



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the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income attributable to common
shareholders for the period by the weighted average number of common shares and potential common shares outstanding during the period, except where the effect of including potential common shares would be antidilutive.

The following table summarizes the weighted average potential common shares that are not included in the denominator used in the diluted
net income per share calculation because to do so would be anti-dilutive (in thousands):



|                                |  |                                  |       |  |                                |  |       |      |  |  |       |  |  |  |       | 
|------------------------------- |  | -------------------------------- | ----- |  | ------------------------------ |  | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                |  | Three months 
endedSeptember 30, |       |  | Six months 
endedSeptember 30, | 
|                                |  | 2010                             |       |  | 2009                           |  |       | 2010 |  |  | 2009  | 
|Stock options                   |  |                                  | 7,121 |  |                                |  | 5,050 |      |  |  | 7,711 |  |  |  | 5,191 | 
|Employee Benefit Trust          |  |                                  | 23    |  |                                |  | 23    |      |  |  | 23    |  |  |  | 23    | 
|Warrants                        |  |                                  | 885   |  |                                |  | 2,105 |      |  |  | 885   |  |  |  | 2,118 | 
|                                |  |                                  |       |  |                                |  |       |      |  |  |       |  |  |  |       | 
|Total anti-dilutive instruments |  |                                  | 8,029 |  |                                |  | 7,178 |      |  |  | 8,619 |  |  |  | 7,332 | 
|                                |  |                                  |       |  |                                |  |       |      |  |  |       |  |  |  |       | 



|4. | Discontinued Operations
|-- | -----------------------

In May 2010, the Company decided to close its Message Management division and cease operations. As a result, the results of operations and
cash flows related to the division have been classified as discontinued operations in the consolidated financial statements for all periods presented and the prior period comparative financial statements have been reclassified to conform to the
current period presentation.

The following represents the results of the Companys discontinued operations:



|                                           |  |                                  |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | -------------------------------- | ---- | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three months 
endedSeptember 30, |      |   | Six months
endedSeptember 30, |  
|                                           |  | 2010                             |      |   | 2009                          |   |        | 2010 |  |   | 2009   |  
|Revenue                                    |  | $                                | 116  |   |                               | $ | 301    |      |  | $ | 278    |   |  | $ | 391    |  
|Expenses                                   |  |                                  | (100 | ) |                               |   | (1,282 | )    |  |   | (1,068 | ) |  |   | (1,949 | )
|                                           |  |                                  |      |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from discontinued operations |  | $                                | 16   |   |                               | $ | (981   | )    |  | $ | (790   | ) |  | $ | (1,558 | )
|                                           |  |                                  |      |   |                               |   |        |      |  |   |        |   |  |   |        |  

Revenue for the three months ended September 30, 2010 relates to the recognition of maintenance revenue
previously deferred as a result of the Companys ongoing maintenance service obligations. Revenue for the six months ended September 30, 2010 relates to the recognition of maintenance revenue previously deferred as a result of the
Companys ongoing maintenance service obligations combined with license and services revenues earned up to May 21, 2010, the date of the closing of the Message Management division.

At September 30, 2010, the assets and liabilities of discontinued operations primarily represent residual amounts of receivables,
property and equipment, liabilities and deferred revenue related to the division which was closed. The assets and liabilities of discontinued operations are included in the balances on the face of the Companys consolidated balance sheets.
Additional detail related to the assets and liabilities of the Companys discontinued operations is as follows:



|                                         |  |                    |     |  |                |   |       | 
|---------------------------------------- |  | ------------------ | --- |  | -------------- | - | ----- | 
|(in thousands)                           |  | September 30, 2010 |     |  | March 31, 2010 |  
|Assets of Discontinued Operations        |  |                    |     |  |                |   |       | 
|Accounts receivable                      |  | $                  |    |  |                | $ | 148   | 
|Other current assets                     |  |                    | 36  |  |                |   | 63    | 
|                                         |  |                    |     |  |                |   |       | 
|Total current assets                     |  |                    | 36  |  |                |   | 211   | 
|Property and equipment, net              |  |                    |    |  |                |   | 54    | 
|Other non-current assets                 |  |                    |    |  |                |   | 12    | 
|                                         |  |                    |     |  |                |   |       | 
|Total assets                             |  | $                  | 36  |  |                | $ | 277   | 
|                                         |  |                    |     |  |                |   |       | 
|                                         |  |                   
|Liabilities of Discontinued Operations   |  |                    |     |  |                |   |       | 
|Accounts payable and accrued liabilities |  | $                  | 537 |  |                | $ | 613   | 
|Deferred revenue, current                |  |                    | 316 |  |                |   | 513   | 
|                                         |  |                    |     |  |                |   |       | 
|Total current liabilities                |  |                    | 853 |  |                |   | 1,126 | 
|Deferred revenue, non-current            |  |                    |    |  |                |   | 77    | 
|Other non-current liabilities            |  |                    |    |  |                |   | 8     | 
|                                         |  |                    |     |  |                |   |       | 
|Total liabilities                        |  | $                  | 853 |  |                | $ | 1,211 | 
|                                         |  |                    |     |  |                |   |       | 



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|5. | Commitments and Contingencies
|-- | -----------------------------

In the normal course of business, the Company may be involved in various claims, negotiations and legal actions; however, as of September 30, 2010, the Company is not party to any litigation that is
expected to have a material effect on the Companys financial position, results of operations or cash flows.



|6. | Shareholders Deficit
|-- | ---------------------

During the six months ended September 30, 2010, 75,000 restricted stock units vested pursuant to the vesting conditions of an
outstanding restricted stock unit award. In connection with the vesting of the restricted stock units, the Company issued 45,000 shares. The remaining 30,000 restricted stock units were settled in cash pursuant to the contingent cash-settlement
conditions of the amended award. A summary of the change in restricted stock unit awards during the six months ended September 30, 2010 is as follows:



|                               |  |                 |         |  
|------------------------------ |  | --------------- | ------- | -
|                               |  | Number ofshares |        
|Unvested at March 31, 2010     |  |                 | 75,000  |  
|Awarded                        |  |                 |        |  
|Vested                         |  |                 | (75,000 | )
|Forfeited                      |  |                 |        |  
|                               |  |                 |         |  
|Unvested at September 30, 2010 |  |                 |        |  
|                               |  |                 |         |  



|7. | Subsequent Events
|-- | -----------------

On
November 8, 2010, the Company, Quest Software, Inc. (Quest) and Bolts Acquisition Corporation, a Canadian corporation and a wholly-owned subsidiary of Quest (Acquisition Sub), entered into an Arrangement Agreement (the
Arrangement Agreement), which contemplates the acquisition by Quest, through Acquisition Sub, of all of the outstanding equity securities of the Company pursuant to a plan of arrangement (the Arrangement) under
Canadian law. Upon the closing of the Arrangement, (i) the Company will become a wholly-owned subsidiary of Quest, (ii) each of the Companys common shares issued and outstanding immediately prior to the closing will be acquired for
$0.33 in cash, (iii) each of the Companys Series A Preferred shares will be acquired for $1.291667 in cash, and (iv) all outstanding options and warrants to acquire the Companys common shares will be terminated for no
consideration. In addition, in fulfillment of certain obligations of the Company in connection with its acquisition of ColdSpark, Inc. in May 2009, the Company will, concurrently with the consummation of the Arrangement, become obligated to issue
certain additional common shares and pay approximately $4.1 million to the former shareholders of ColdSpark, Inc. The aggregate purchase price for the transaction is approximately $55 million, including the payment of certain debt obligations and
net of anticipated cash on hand.

The Arrangement is to be implemented by way of a statutory plan of arrangement and is
subject to the approval of (i) 66 2/3% of the votes cast by the Companys security holders, including common shareholders, Series A Preferred shareholders and holders of stock options and warrants, voting as a single class, and (ii) a
simple majority of the votes cast by the common shareholders (excluding the shares held by certain entities affiliated with JK&B Capital, the Companys largest common shareholder). The JK&B Capital-affiliated shareholders, affiliates of
VantagePoint Venture Partners, and each of the Companys directors who owns common shares, have entered into Voting and Support Agreements with Quest and Acquisition Sub providing, among other things, that they will vote in favor of the
resolutions approving the Arrangement. The completion of the Arrangement must also be approved by the Court of Queens Bench, Alberta, Canada and is subject to other closing conditions as set forth in the Arrangement Agreement.



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In connection with
entering into the Arrangement Agreement, the Company also entered into two separate agreements with groups of its shareholders, both intended to facilitate the Arrangement Agreement and the Arrangement, as follows:

First, pursuant to an Agreement dated as of November 8, 2010 (the VantagePoint Agreement) among the Company,
VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P. and VantagePoint Venture Partners IV Principals Fund, L.P. (collectively, the VantagePoint Shareholders), the VantagePoint Shareholders have agreed,
concurrently with the consummation of the Arrangement, to accept cash consideration equal to $1.291667 per share of Preferred Stock held by them, in lieu of the amount per share to which the VantagePoint Shareholders would otherwise be entitled, as
set forth in the Companys charter documents. The VantagePoint Agreement also provides for mutual general releases between the Company and the VantagePoint Shareholders and other persons associated with them. The VantagePoint Agreement is
terminable by the VantagePoint Shareholders upon any amendment of the Arrangement Agreement to alter the amount of any of the consideration payable thereunder and certain other matters, or upon any amendment of the ColdSpark Agreement (as defined
below), and terminates automatically upon any termination of the Arrangement Agreement.

Second, pursuant to a Settlement
Agreement and General Release of Claims dated as of November 8, 2010 (the ColdSpark Agreement) between the Company and JK&B Capital IV, JK&B Capital IV QIP and Tom Neustaetter, individually and in his capacity as
attorney-in-fact for and on behalf of the former shareholders of ColdSpark, Inc. (collectively, the ColdSpark Shareholders), the ColdSpark Shareholders have agreed to accept $4,106,000 concurrently with the consummation of the
Arrangement, as payment in full of the remaining cash consideration owed by the Company to the ColdSpark Shareholders pursuant to the Agreement and Plan of Merger dated as of May 11, 2009 between the Company and the ColdSpark shareholders, in
lieu of the $6,625,000 to which the ColdSpark Shareholders would otherwise be entitled thereunder. The ColdSpark Agreement also provides for mutual general releases between the Company and the ColdSpark Shareholders and other persons associated with
them. The ColdSpark Agreement is terminable by the ColdSpark Shareholders upon any amendment of the Arrangement Agreement to alter the amount of any of the consideration payable thereunder and certain other matters, or upon any amendment of the
VantagePoint Agreement, and terminates automatically upon any termination of the Arrangement Agreement.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Special Note About Forward-Looking Statements

This Quarterly Report,
including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under
the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management.
We use words such as anticipate, believe, continue, could, estimate, expect, goal, intend, may, plan, project,
seek, should, target, will, would, variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to our ability to consummate
the transaction with Quest Software; projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key markets; future growth and revenues from our products; anticipated performance of products or
services; plans, objectives and strategies for future operations; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are
subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other
financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including,
without limitation, the disclosures, made under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors, and the audited consolidated financial statements and
related notes included in our Form 10-K for the fiscal year ended March 31, 2010 and other reports and filings made with the Securities and Exchange Commission. Risks that could cause actual results to differ from those contained in the
forward-looking statements include, but are not limited to risks related to: the possibility that the closing conditions for the transaction with Quest will not be satisfied, including the approval by our security holders and the Court of
Queens Bench of Alberta, Canada; the possibility that the transaction will not be completed, or if completed, not completed on a timely basis; weak economic and market conditions that could result in further reductions in spending on
information technology products; costs and distractions associated with the proposed transaction with Quest; effects of the transition of our senior management team; competition in our target markets; potential capital needs; management of future
growth and expansion; the development, implementation and execution of our Integrated Data Protection strategic vision; customer acceptance of our existing and newly introduced products and fee structures; the success of our brand development
efforts; and other risks identified elsewhere in this Quarterly Report and in our most recent reports on Forms 10-K and 8-K. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on
which it was made, other than as required under applicable securities laws.

Overview

We are a leading provider of data protection, retention and availability technologies that reduce storage management complexity. We
develop, market, sell and support a portfolio of products sold globally under the NetVault brand name. Our products include award-winning Linux solutions, application-focused solutions to protect the Windows environment, and unique solutions to
leverage emerging disk-based and virtual environments. Our products provide protection for the applications that drive the business computing environments such as Microsoft SQL Server, Oracle, Microsoft Exchange, MySQL, Lotus Notes and others. The
object-oriented design of our products allows them to be flexibly installed in complex, multi-platform environments, providing users with a consistent look-and-feel across all platforms. The current NetVault portfolio of products provides customers
with:



| |  |  | Enterprise data protection, including backup and recovery;
| | - |  | ----------------------------------------------------------



| |  |  | Long-term data retention capabilities;
| | - |  | --------------------------------------



| |  |  | Disaster recovery of data and systems as well as application failover;
| | - |  | ----------------------------------------------------------------------



| |  |  | Global replication of data;
| | - |  | ---------------------------



| |  |  | Storage resource management and reporting; and
| | - |  | ----------------------------------------------



| |  |  | Application resource reporting and discovery.
| | - |  | ---------------------------------------------

In May 2010, we closed our Message Management division. The division is reported in discontinued operations in the accompanying consolidated financial statements. As a result of closing our Message
Management division, we operate one reporting segment: Storage Management, which sells the NetVault products and solutions. We have operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or
EMEA, and conduct commercial operations primarily through three of our respective wholly-owned subsidiaries: BakBone Software, Inc., and BakBone Software KK, BakBone Software Ltd.



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On November 8,
2010, we entered into an Arrangement Agreement with Quest Software, Inc. (Quest) and Bolts Acquisition Corporation, a Canadian corporation and a wholly-owned subsidiary of Quest (Acquisition Sub), which contemplates the
acquisition by Quest, through Acquisition Sub, of all of our outstanding equity securities pursuant to a plan of arrangement (the Arrangement) under Canadian law. Upon the closing of the Arrangement, (i) we will become a
wholly-owned subsidiary of Quest, (ii) each of our common shares issued and outstanding immediately prior to the closing will be acquired for $0.33 in cash, (iii) each of our Series A Preferred shares will be acquired for $1.291667 in
cash, and (iv) all outstanding options and warrants to acquire our common shares will be terminated for no consideration. In addition, in fulfillment of certain obligations in connection with our acquisition of ColdSpark, Inc. in May 2009, we
will, concurrently with the consummation of the Arrangement, become obligated to issue certain additional common shares and pay approximately $4.1 million to the former shareholders of ColdSpark, Inc. The aggregate purchase price for the transaction
is approximately $55 million, including the payment of certain debt obligations and net of anticipated cash on hand.

The
Arrangement is to be implemented by way of a statutory plan of arrangement and is subject to the approval of (i) 66 2/3% of the votes cast by our security holders, including common shareholders, Series A Preferred shareholders and holders of
stock options and warrants, voting as a single class, and (ii) a simple majority of the votes cast by the common shareholders (excluding the shares held by certain entities affiliated with JK&B Capital, our largest common shareholder). The
JK&B Capital-affiliated shareholders, affiliates of VantagePoint Venture Partners, and each of our directors who owns common shares, have entered into Voting and Support Agreements with Quest and Acquisition Sub providing, among other things,
that they will vote in favor of the Arrangement Agreement and the Arrangement. The completion of the Arrangement must also be approved by the Court of Queens Bench, Alberta, Canada and is subject to other closing conditions as set forth in the
Arrangement Agreement.

In connection with entering into the Arrangement Agreement, we also entered into two separate
agreements with groups of our shareholders, both intended to facilitate the Arrangement Agreement and the Arrangement. On November 8, 2010 we entered into an agreement (the VantagePoint Settlement Agreement) with VantagePoint
Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P. and VantagePoint Venture Partners IV Principals Fund, L.P. (collectively, the VantagePoint Shareholders). Under the VantagePoint Settlement Agreement, the VantagePoint
Shareholders have agreed to accept cash consideration equal to $1.291667 per Series A Preferred Share held by them concurrently with the consummation of the Arrangement, in lieu of the amount per share to which they would otherwise be entitled as a
result of the Arrangement pursuant to our charter documents. The VantagePoint Settlement Agreement is terminable by the VantagePoint Shareholders upon any amendment of the Arrangement Agreement to alter the amount of any of the consideration payable
thereunder and certain other matters, or upon any amendment of the ColdSpark Agreement (as defined below), and terminates automatically upon any termination of the Arrangement Agreement.

In addition, on November 8, 2010, we entered into an agreement (the ColdSpark Settlement Agreement) with JK&B
Capital IV, JK&B Capital IV QIP and Tom Neustaetter, individually and in his capacity as attorney-in-fact for and on behalf of the former shareholders of ColdSpark, Inc. (collectively, the ColdSpark Shareholders), whereby the
ColdSpark Shareholders agreed, concurrently with the consummation of the Arrangement, to accept approximately $4.1 million as payment in full of the remaining cash consideration owed by us to them pursuant to the merger agreement for the acquisition
of ColdSpark, Inc. The ColdSpark Settlement Agreement is terminable by the ColdSpark Shareholders upon any amendment of the Arrangement Agreement to alter the amount of any of the consideration payable thereunder and certain other matters, or upon
any amendment of the VantagePoint Settlement Agreement, and terminates automatically upon any termination of the Arrangement Agreement.

Overview of Revenues and Other Operating Results

The following table summarizes consolidated revenues from continuing operations and revenues of each region on an absolute dollar basis and as a percentage of total consolidated revenues (in thousands):



|                                         |  |                                 |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                         |  | Three months
endedSeptember 30, |        |   | Six months
endedSeptember 30, |  
|                                         |  | 2010                            |        |   | 2009                          |   |        | 2010 |  |   | 2009   |  
|Consolidated revenues, net               |  | $                               | 14,521 |   |                               | $ | 14,929 |      |  | $ | 28,504 |   |  | $ | 31,529 |  
|North America                            |  |                                 | 4,209  |   |                               |   | 4,909  |      |  |   | 8,624  |   |  |   | 11,995 |  
|As a percentage of consolidated revenues |  |                                 | 29     | % |                               |   | 33     | %    |  |   | 30     | % |  |   | 38     | %
|Asia-Pacific                             |  |                                 | 6,224  |   |                               |   | 5,831  |      |  |   | 11,775 |   |  |   | 11,389 |  
|As a percentage of consolidated revenues |  |                                 | 43     | % |                               |   | 39     | %    |  |   | 41     | % |  |   | 36     | %
|EMEA                                     |  |                                 | 4,088  |   |                               |   | 4,189  |      |  |   | 8,105  |   |  |   | 8,145  |  
|As a percentage of consolidated revenues |  |                                 | 28     | % |                               |   | 28     | %    |  |   | 29     | % |  |   | 26     | %



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In addition, we had
consolidated deferred revenue balances, attributable to our continuing operations, as follows (in thousands):



|                              |  |                          |        |  |                      |   |        | 
|----------------------------- |  | ------------------------ | ------ |  | -------------------- | - | ------ | 
|                              |  | As of September 
30,2010 |        |  | As of March 
31,2010 |  
|Consolidated deferred revenue |  | $                        | 87,921 |  |                      | $ | 88,587 | 

The following table
summarizes the change in our consolidated deferred revenue balance attributable to our continuing operations, for the six months ended September 30, 2010:



|                                               |  |   |         |  
|---------------------------------------------- |  | - | ------- | -
|Deferred revenue balance at March 31, 2010     |  | $ | 88,587  |  
|Consolidated bookings for the six months       |  |   | 23,279  |  
|Consolidated revenue for the six months        |  |   | (28,504 | )
|Foreign exchange impact                        |  |   | 4,559   |  
|                                               |  |   |         |  
|Deferred revenue balance at September 30, 2010 |  | $ | 87,921  |  
|                                               |  |   |         |  

The foreign exchange impact on deferred revenue in the table above is related to the translation of the
Companys deferred revenue balance in its Asia-Pacific and EMEA subsidiaries as the U.S. dollar weakened against the Japanese yen and the British pound during the periods.

Revenues from continuing operations for the three months ended September 30, 2010 were $14.5 million, approximately $0.4 million, or
3%, lower than the $14.9 million in revenues during the three months ended September 30, 2009. Bookings from continuing operations for the three months ended September 30, 2010 were $11.8 million, approximately $1.0 million, or 8%, lower
than the $12.8 million in bookings from continuing operations during the three months ended September 30, 2009.

Revenues
from continuing operations for the six months ended September 30, 2010 were $28.5 million, approximately $3.0 million, or 10%, lower than the $31.5 million in revenues during the six months ended September 30, 2009. Bookings from
continuing operations for the six months ended September 30, 2010 were $23.3 million, approximately $3.0 million, or 11%, lower than the $26.3 million in bookings from continuing operations during the six months ended September 30, 2009.
Our bookings for the six months ended September 30, 2009 included a $1.5 million contribution from the sale of non-core intellectual property rights to an OEM customer. Excluding this item, bookings during the six months ended
September 30, 2010 decreased 6% as compared to bookings during the six months ended September 30, 2009.

Operating
income from continuing operations totaled $3.8 million and $4.8 million, respectively, during the three and six months ended September 30, 2010, as compared to $1.9 million and $3.6 million, respectively, during the three and six months ended
September 30, 2009. Excluding the non-recurring contribution from the sale of non-core IP in the six months ended September 30, 2009, our operating income from continuing operations increased by $2.7 million. Our operating expenses from
continuing operations decreased $2.2 million, or 19%, to $9.4 million during the three months ended September 30, 2010 as compared to $11.5 million during the three months ended September 30, 2009, and decreased $4.2 million, or 17%, to
$20.9 million for the six months ended September 30, 2010 as compared to $25.1 million for the six months ended September 30, 2009. The decrease in operating expenses from continuing operations was primarily the result of strategic cost
reductions across most operating functions. We reported net income of $4.0 million for the three and six months ended September 30, 2010, compared with net income of $1.1 million and $1.8 million, during the three and six months ended
September 30, 2009, respectively.

While we expect the near term market conditions to be challenging, we believe the need
for organizations to protect, recover, maintain and manage their data will require our current customers, as well as new customers, to invest in their infrastructure. As a result, we intend to continue to prudently invest in our business, through
continued product development and sales and marketing efforts. The predictability of bookings for existing products remains uncertain due to the economic environment.

Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our product more
expensive and, therefore, potentially less



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competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from
normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction
gains and losses. Due to the volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we could experience currency losses in the future. We have not
previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities.

Cost of revenues consists of the direct cost of providing customer support, including payroll and other benefits of staff working in our customer support departments, as well as associated costs of
computer equipment, telephone and other general costs necessary to maintain support for our end users. Also included in cost of revenues are third party software license royalties, third party professional service costs and the direct costs of
products delivered to customers.

Sales and marketing expenses consist primarily of employee payroll and other benefits,
commissions, trade show costs, web advertising and travel costs for our worldwide sales and marketing staff. Commissions are part of our sales personnel compensation package, which is based on the procurement of sales orders and subsequent
collection of customer receivables. As we expand our sales and marketing force, we expect sales and marketing expenses to increase.

Research and development expenses consist primarily of salary and related costs for our worldwide engineering staff. We have engineering personnel in our Poole, United Kingdom, San Diego, California,
Santa Clara, California, and Novosibirsk, Russia offices that are responsible for the development effort of our NetVault products and our application plug-in modules.

General and administrative expenses include salaries and benefits for our corporate personnel and other expenses, such as facilities costs and professional services.

As part of the process of preparing our consolidated financial statements, we are required to estimate our provision for income taxes in
each of the tax jurisdictions in which we do business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items
for tax and financial accounting purposes. These temporary differences result in the establishment of deferred tax assets and liabilities, which are presented on a net basis. We assess on a periodic basis the probability that our net deferred tax
assets will be recovered. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, our ability to deduct tax loss
carryforwards against future taxable income, and tax planning strategies among the various tax jurisdictions that we do business in when making this assessment. Although we have generated consolidated pre-tax income during the three and six months
ended September 30, 2010, we have incurred operating losses in all years prior to the second quarter of fiscal 2011. As of September 30, 2010 we have determined that it is not more likely than not that our deferred tax assets will be
realized. Accordingly, we have recorded a valuation allowance for our net deferred tax assets and have not recorded a benefit for income taxes.

Our provision for income taxes is comprised of federal, state, and foreign income taxes. Our federal, state and foreign income taxes relate to income generated in the various tax jurisdictions in which we
do business. We also recognize estimated tax liabilities for any tax positions we have taken which are not more likely than not to be sustained upon examination by the applicable taxing authority. The final payment of the amounts related to these
uncertainties may ultimately prove to be less than or greater than our estimate. If this occurs we would record either a benefit or a charge to our income tax provision.

Application of Critical Accounting Policies

The preparation of our
financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation allowance for deferred tax assets, valuation of goodwill and stock-based
compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe there are several accounting policies that are critical to understanding our historical and future performance. These policies affect the reported amounts of revenue and other significant areas
that involve managements judgments and estimates. These significant accounting policies are:



| |  |  | revenue recognition;
| | - |  | --------------------



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| |  |  | valuation allowance for deferred tax assets;
| | - |  | --------------------------------------------



| |  |  | valuation of goodwill and long-lived assets; and
| | - |  | ------------------------------------------------



| |  |  | stock-based compensation expense.
| | - |  | ---------------------------------

These policies, and our procedures related to these policies, are described below.

Revenue
Recognition

We derive revenues from software licenses, maintenance services, and professional services from three
distinct groups of customers: resellers, OEMs, and direct end users.

We commence recognizing revenue under these arrangements
when all of the following are met:



| |  |  | Persuasive Evidence of an Arrangement Exists.It is our practice to require a contract signed by both the partner and BakBone and/or a
customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delivery Has Occurred. We deliver software by both physical and electronic means. Both means of delivery transfer title and risk to the
customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of our arrangements contain customer
acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Vendors Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within our standard
credit terms.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collectability is Probable. Customers must meet collectability requirements pursuant to our credit policy. For contracts that do not meet our
collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our customers are not contractually permitted to return products, but we accept returns under certain circumstances. We account for potential returns from our customers using historical returns experience
with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales
incentives or other consideration given by BakBone to our customers are considered adjustments of the selling price of our products, such as rebates, and are generally reflected as reductions to revenue.

We license our software to our reseller customers under multiple-element arrangements involving a combination of software, post-contract
support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services related to implementation of our software as well as training.
Software license arrangements with resellers include implicit platform transfer rights, which allow end users to exchange an original product for a different product or to exchange an original product on one platform for the same product operating
on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the customer has to exercise this right. We have also historically provided our customers with a range of
product concessions and other services which are not explicitly provided for in our sales arrangements. As no contract period exists under these arrangements, software-related revenue is recognized ratably over the estimated economic useful life of
the software product of four years.

The economic useful life of the software product is estimated to be four years based upon
our version release and end of life data as well as our practice with respect to supporting the product. We weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful
life of the software product.

Maintenance renewal fees are recognized ratably over the arrangement period, which is typically
one year. Professional services may also be sold separately and all fees generated from stand-alone sales of professional services are recognized when the service is complete.

We have multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, we have a commitment to provide
unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over
the arrangement period.



16



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Valuation Allowance for Deferred
Tax Assets

In preparing our consolidated financial statements, we estimate our income tax liability in each of the
jurisdictions in which we operate by estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. These differences result in deferred
tax assets and liabilities. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which those temporary differences become deductible. We
consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event that actual results differ from our estimates or we adjust our estimates in future
periods, we may need to reduce our valuation allowance, which could materially impact our financial position and results of operations.

Valuation of Goodwill and Long-Lived Assets

We have recorded goodwill and indefinite-lived intangible assets in connection with the acquisitions we have completed in prior periods. We review our goodwill and indefinite-lived intangible assets for
impairment as of April 1stof each fiscal year or
when an event or a change in facts and circumstances indicates the fair value of a reporting unit may be below its carrying amount. Significant management judgment is required in assessing the impairment of our goodwill.

A reporting unit is an operating segment, or one unit below. Effective with the acquisition of ColdSpark in May 2009, we operated in two
reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells the ColdSpark SparkEngine, MailFusion and Compliance Catalyst families of products and solutions.
Effective with the closing of our Message Management segment in May 2010, we operate in one reporting segment, Storage Management.

Events or changes in facts and circumstances that we consider as impairment indicators include but are not limited to the following:



| |  |  | significant underperformance of our business relative to expected operating results;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | significant adverse economic and industry trends;
| | - |  | -------------------------------------------------



| |  |  | significant decline in our market capitalization for an extended period of time relative to net book value; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | expectations that a reporting unit will be sold or otherwise disposed.
| | - |  | ----------------------------------------------------------------------

The annual goodwill impairment test consists of a two-step process as follows:

Step 1.We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value
of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying value of each reporting unit is determined by specifically identifying and allocating the assets and liabilities of BakBone to each reporting unit
based on headcount, relative revenues, or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting units goodwill may be impaired and we then
perform the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.

Step 2.If further analysis is required, we compare the implied fair value of the reporting units goodwill, determined by allocating the reporting units fair value to all of its assets
and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting units goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that
excess.

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet, if material.



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Stock-Based Compensation Expense

Stock-based compensation expense is estimated at the grant date based upon the fair-value of the award and is
recognized as expense using the straight-line amortization method over the requisite service period of the award, which is normally the vesting period. We estimate the fair value of stock options using the Black-Scholes option pricing model, which
requires the input of certain highly subjective assumptions, including expected stock price volatility, expected term and expected forfeiture rates. A small change in the estimates used can result in a relatively large change in the estimated
fair-value. We established the assumption for expected stock price volatility based on our historical stock price volatility. We estimated the expected term assumption for stock options using the Simplified Method. We estimate forward-looking
forfeiture rates based upon our historical employee termination experience.

Results of Operations

Comparison of Results for the Three Months Ended September 30, 2010 and 2009

REVENUESLICENSE AND SERVICE

We define bookings as the gross
dollars invoiced through the sale of software licenses, maintenance contracts and professional services. We utilize bookings information as an operations measure, but it is not intended to replace U.S. GAAP accounting. Under the ratable revenue
recognition method, license bookings are recognized as revenue over the appropriate period (generally three to five years). In general, variations in revenues period-over-period are affected by the amortization of current and prior period license
bookings. Accordingly, we believe that trends in current and historical bookings are key factors in analyzing our operating results.

On a worldwide basis, we sell our storage management products through two different sales channels: value-added resellers (VAR) and original equipment manufacturers and direct customers
(OEM). VAR revenues are sourced from the sale of software licenses, related maintenance contracts and professional services through the reseller channel. Software licenses sold through the reseller channel do not generally
involve customer-specific customization. OEM revenues are sourced from the sale of software licenses, related maintenance contracts and professional services sold through our OEM partners and to direct customers. Software licenses sold
through the OEM channel generally involve customer-specific customization and are governed by specifically-negotiated contracts. OEM bookings and revenues are billed and collected centrally in North America in U.S. dollars and presented for each of
our three regions based upon the region in which the direct customer is located. As such, OEM bookings and revenues are not impacted by foreign exchange movements to the degree that our VAR bookings and revenues are impacted.

VAR revenues.The following table summarizes VAR revenues by geographic region and their percentage changes over the same period
of the prior year (dollars in thousands):



|                                          |  |                                  |        |    |      |   |        | 
|----------------------------------------- |  | -------------------------------- | ------ | -- | ---- | - | ------ | 
|                                          |  | Three months 
endedSeptember 30, |       
|                                          |  | 2010                             |        |    | 2009 |  
|North America                             |  | $                                | 3,253  |    |      | $ | 3,822  | 
|(Decrease) over same period of prior year |  |                                  | (15    | )% |      |   |        | 
|Asia-Pacific                              |  | $                                | 5,855  |    |      | $ | 5,442  | 
|Increase over same period of prior year   |  |                                  | 8      | %  |      |   |        | 
|EMEA                                      |  | $                                | 3,770  |    |      | $ | 3,826  | 
|(Decrease) over same period of prior year |  |                                  | (1     | )% |      |   |        | 
|Consolidated                              |  | $                                | 12,878 |    |      | $ | 13,090 | 
|(Decrease) over same period of prior year |  |                                  | (2     | )% |      |   |        | 

VAR revenues in North America decreased by $0.6 million, or 15%, to $3.3 million for the three
months ended September 30, 2010 compared to $3.8 million for the three months ended September 30, 2009. The decrease in revenues during the three months ended September 30, 2010 was primarily due to decreased license bookings in both
the current and most recent prior periods.

VAR revenues in the Asia-Pacific region increased $0.4 million, or 8%, to $5.9
million for the three months ended September 30, 2010 compared to $5.4 million for the three months ended September 30, 2009. The increase in revenues during the three months ended September 30, 2010 was due to a 9% increase in the
average Japanese yen to U.S. dollar exchange rate as compared to the three months ended September 30, 2009, which caused an approximate increase of $0.5 million in our Asia-Pacific revenues as reported in U.S. dollars. During the three months
ended September 30, 2010, our functional currency revenues in Asia-Pacific decreased approximately $0.1 million primarily due to a single large transaction that was recognized as revenue entirely in fiscal 2010.



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VAR revenues in EMEA
remained consistent at $3.8 million for both the three months ended September 30, 2010 and 2009. During the three months ended September 30, 2010, EMEAs functional currency revenues increased approximately $0.1 million, or 4%, due to
increased license and maintenance and maintenance renewal bookings in prior periods. However, this increase was partially off-set by a weakening of the British pound during the three months ended September 30, 2010 as compared to the three
months ended September 30, 2009. During the three months ended September 30, 2010, the average British pound to U.S. dollar exchange rate decreased 6% as compared to the three months ended September 30, 2009, causing an approximate
decrease of $0.2 million in our EMEA revenues as reported in U.S. dollars.

VAR bookings.As discussed above, revenues
are impacted by both current and prior period bookings. The information below summarizes VAR bookings by geographic region and their percentage changes over the same period in the prior year (dollars in thousands):



|                                          |  |                                 |        |    |      |   |        | 
|----------------------------------------- |  | ------------------------------- | ------ | -- | ---- | - | ------ | 
|                                          |  | Three months endedSeptember
30, |       
|                                          |  | 2010                            |        |    | 2009 |  
|North America                             |  | $                               | 2,706  |    |      | $ | 2,976  | 
|(Decrease) over same period of prior year |  |                                 | (9     | %) |      |   |        | 
|Asia-Pacific                              |  | $                               | 5,834  |    |      | $ | 4,980  | 
|Increase over same period of prior year   |  |                                 | 17     | %  |      |   |        | 
|EMEA                                      |  | $                               | 2,430  |    |      | $ | 3,684  | 
|(Decrease) over same period of prior year |  |                                 | (34    | %) |      |   |        | 
|Consolidated                              |  | $                               | 10,970 |    |      | $ | 11,640 | 
|(Decrease) over same period of prior year |  |                                 | (6     | %) |      |   |        | 

VAR bookings in North America decreased $0.3 million, or 9%, to $2.7 million for the three months
ended September 30, 2010 from $3.0 million for the three months ended September 30, 2009, primarily due to a decrease in the volume of new license bookings sold through our existing distribution channels.

VAR bookings in Asia-Pacific increased $0.9 million, or 17%, to $5.8 million for the three months ended September 30, 2010 from $5.0
million for the three months ended September 30, 2009. During the three months ended September 30, 2010, our functional currency license and maintenance bookings increased approximately $0.5 million, or 10%, primarily due to market growth
in Japan. Additionally, during the three months ended September 30, 2010, the average Japanese yen to U.S. dollar exchange rate increased 9% as compared to the three months ended September 30, 2009 causing an approximate increase of $0.4
million in our Asia-Pacific bookings as reported in U.S. dollars.

VAR bookings in EMEA decreased $1.3 million, or 34%, to
$2.4 million for the three months ended September 30, 2010 from $3.7 million for the three months ended September 30, 2009. During the three months ended September 30, 2010, our functional currency license and maintenance and
maintenance renewal bookings decreased approximately $1.2 million, or 32%, primarily due to lower bookings in the United Kingdom, France and Germany, as a result of significant turnover of our sales representatives and the timing of certain large
multi-year license and maintenance contracts. Additionally, during the three months ended September 30, 2010, the average British pound to U.S. dollar exchange rate decreased 6% as compared to the three months ended September 30, 2009,
causing an approximate decrease of $0.1 million in our EMEA bookings as reported in U.S. dollars.

OEM revenues. The
following table summarizes OEM revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):



|                                          |  |                                  |       |    |      |   |       | 
|----------------------------------------- |  | -------------------------------- | ----- | -- | ---- | - | ----- | 
|                                          |  | Three months 
endedSeptember 30, |      
|                                          |  | 2010                             |       |    | 2009 |  
|North America                             |  | $                                | 955   |    |      | $ | 1,086 | 
|(Decrease) over same period of prior year |  |                                  | (12   | %) |      |   |       | 
|Asia-Pacific                              |  | $                                | 370   |    |      | $ | 390   | 
|(Decrease) over same period of prior year |  |                                  | (5    | %) |      |   |       | 
|EMEA                                      |  | $                                | 318   |    |      | $ | 363   | 
|(Decrease) over same period of prior year |  |                                  | (12   | %) |      |   |       | 
|Consolidated                              |  | $                                | 1,643 |    |      | $ | 1,839 | 
|(Decrease) over same period of prior year |  |                                  | (11   | %) |      |   |       | 



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North America OEM
revenues decreased $0.1 million, or 12%, to $1.0 million for the three months ended September 30, 2010 from $1.1 million for the three months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in
current period and prior period bookings from four of our OEM partners.

Asia-Pacific OEM revenues decreased $20,000, or 5%,
to $370,000 for the three months ended September 30, 2010 from $390,000 for the three months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in current period and prior period bookings from two of
our OEM partners.

EMEA OEM revenues decreased $45,000, or 12%, to $318,000 for the three months ended September 30, 2010
from $363,000 for the three months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in current period and prior period bookings from two of our OEM partners.

OEM bookings.As discussed above, revenues are impacted by both current and prior period bookings. Included below is a summary of
OEM bookings by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):



|                                          |  |                                  |     |    |      |   |       | 
|----------------------------------------- |  | -------------------------------- | --- | -- | ---- | - | ----- | 
|                                          |  | Three months 
endedSeptember 30, |    
|                                          |  | 2010                             |     |    | 2009 |  
|North America                             |  | $                                | 273 |    |      | $ | 606   | 
|(Decrease) over same period of prior year |  |                                  | (55 | %) |      |   |       | 
|Asia-Pacific                              |  | $                                | 260 |    |      | $ | 319   | 
|(Decrease) over same period of prior year |  |                                  | (18 | %) |      |   |       | 
|EMEA                                      |  | $                                | 302 |    |      | $ | 248   | 
|Increase over same period of prior year   |  |                                  | 22  | %  |      |   |       | 
|Consolidated                              |  | $                                | 835 |    |      | $ | 1,173 | 
|(Decrease) over same period of prior year |  |                                  | (29 | %) |      |   |       | 

North America OEM bookings decreased $0.3 million, or 55%, to $0.3 million for the three months
ended September 30, 2010 from $0.6 million for the three months ended September 30, 2009. During the first quarter of fiscal 2010, we sold certain non-core intellectual property rights to one of our OEM partners. As a result, the bookings
from this customer have significantly decreased as compared to the prior year. Additionally, we experienced a decrease in bookings from three of our other existing OEM partners.

Asia-Pacific OEM bookings decreased $59,000, or 18%, to $260,000 for the three months ended September 30, 2010 from $319,000 for the
three months ended September 30, 2009. During the three months ended September 30, 2010, we experienced a decrease in bookings from three of our OEM partners.

EMEA OEM bookings increased $54,000, or 22%, to $302,000 for the three months ended September 30, 2010 from $248,000 for the three months ended September 30, 2009. During the three months ended
September 30, 2010, we experienced an increase in bookings from one of our existing OEM partners which was partially offset by a decrease in bookings related to two of our other OEM partners.

Included below is a reconciliation of our VAR and OEM bookings to the total revenues recognized for the three months ended
September 30, 2010 and 2009 (in thousands):



|                                                                        |  |     |         |   |     |   |       |       |  |   |         |  
|----------------------------------------------------------------------- |  | --- | ------- | - | --- | - | ----- | ----- |  | - | ------- | -
|For the three months ended September 30, 2010                           |  | VAR |         |   | OEM |   |       | Total | 
|Revenues sourced from current period bookings:                          |  |     |         |   |     |   |       |       |  |   |         |  
|Total bookings for the three months ended September 30, 2010            |  | $   | 10,970  |   |     | $ | 835   |       |  | $ | 11,805  |  
|Bookings deferred into subsequent periods                               |  |     | (10,166 | ) |     |   | (812  | )     |  |   | (10,978 | )
|                                                                        |  |     |         |   |     |   |       |       |  |   |         |  
|Revenues from bookings during the three months ended September 30, 2010 |  | $   | 804     |   |     | $ | 23    |       |  | $ | 827     |  
|Revenues sourced from prior period bookings:                            |  |     | 12,074  |   |     |   | 1,620 |       |  |   | 13,694  |  
|                                                                        |  |     |         |   |     |   |       |       |  |   |         |  
|Total revenues recognized in the three months ended September 30, 2010  |  | $   | 12,878  |   |     | $ | 1,643 |       |  | $ | 14,521  |  
|                                                                        |  |     |         |   |     |   |       |       |  |   |         |  



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|                                                                        |  |     |         |   |     |   |        |       |  |   |         |  
|----------------------------------------------------------------------- |  | --- | ------- | - | --- | - | ------ | ----- |  | - | ------- | -
|For the three months ended September 30, 2009                           |  | VAR |         |   | OEM |   |        | Total | 
|Revenues sourced from current period bookings:                          |  |     |         |   |     |   |        |       |  |   |         |  
|Total bookings for the three months ended September 30, 2009            |  | $   | 11,640  |   |     | $ | 1,173  |       |  | $ | 12,813  |  
|Bookings deferred into subsequent periods                               |  |     | (10,925 | ) |     |   | (1,054 | )     |  |   | (11,979 | )
|                                                                        |  |     |         |   |     |   |        |       |  |   |         |  
|Revenues from bookings during the three months ended September 30, 2009 |  | $   | 715     |   |     | $ | 119    |       |  | $ | 834     |  
|Revenues sourced from prior period bookings:                            |  |     | 12,375  |   |     |   | 1,720  |       |  |   | 14,095  |  
|                                                                        |  |     |         |   |     |   |        |       |  |   |         |  
|Total revenues recognized in the three months ended September 30, 2009  |  | $   | 13,090  |   |     | $ | 1,839  |       |  | $ | 14,929  |  
|                                                                        |  |     |         |   |     |   |        |       |  |   |         |  

COST OF REVENUES

Cost of revenues for the three months ended September 30, 2010 totaled $1.3 million compared with cost of revenues of $1.5 million for the three months ended September 30, 2009. During the three
months ended September 30, 2010, our gross margin increased slightly to 90.7% from 90.0 % for the three months ended September 30, 2009. The increase in gross margin is primarily attributable to a decrease in payroll related costs as
a result of a reduction in client service related personnel.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by $1.1 million, or 17%, to $5.0 million for the three months ended September 30, 2010, from
$6.1 million for the three months ended September 30, 2009. During the three months ended September 30, 2010, we experienced a $0.8 million decrease in payroll-related expenses due primarily to a reduction in sales and marketing personnel
from September 2009 to September 2010. Additionally, a $0.1 million decrease in marketing- related expenses was due primarily to fewer marketing-related programs during the three months ended September 30, 2010 as compared to the three months
ended September 30, 2009.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased $0.7 million, or 24%, to $2.1 million for the three months ended September 30, 2010 from
$2.8 million for the three months ended September 30, 2009. During the three months ended September 30, 2010, payroll-related expenses decreased by approximately $0.4 million, due primarily to a decrease in research and development related
personnel from September 2009 to September 2010. Additionally we experienced a decrease in professional service and consulting expenses of approximately $0.2 million.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative
expenses decreased by $0.4 million, or 16%, to $2.2 million for the three months ended September 30, 2010, from $2.7 million for the three months ended September 30, 2009. During the three months ended September 30, 2009, we incurred
additional legal and accounting costs related to the SEC reporting requirements for our ColdSpark acquisition and our 2009 annual shareholder meeting.

INTEREST EXPENSE

During each of the three months ended
September 30, 2010 and 2009, we incurred interest expense of $0.2 million. Our interest expense primarily relates to interest expense associated with our ColdSpark acquisition. As the consideration given to the ColdSpark shareholders will be
paid over three years, we calculated the present value of the consideration payable to the ColdSpark shareholders as of the acquisition date, for both the cash payments and common shares to be issued, and recorded the applicable interest expense
using the effective interest method. We anticipate the following amounts of non-cash interest expense will be charged to earnings in each of the fiscal years related to the ColdSpark acquisition, until the acquisition consideration is paid in full
in fiscal 2013:



|                     |  |                                         |     | 
|-------------------- |  | --------------------------------------- | --- | 
|Year ended March 31, |  | Non-cashInterest 
Expense(in Thousands) |    
|2011                 |  | $                                       | 681 | 
|2012                 |  |                                         | 380 | 
|2013                 |  |                                         | 64  | 



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FOREIGN EXCHANGE GAIN (LOSS),
NET

During the three months ended September 30, 2010 and 2009, we recorded net foreign exchange gains of $0.4
million and $0.5 million, respectively, related to foreign exchange rate changes that impacted or are expected to impact cash flows. During the three months ended September 30, 2010, our net foreign exchange gains consisted of $0.3 million of
foreign exchange gains related to the strengthening of the Japanese yen against the U.S. dollar on intercompany balances, supplemented by $0.1 million of foreign exchange gains related to the strengthening of the British pound against the U.S.
dollar on intercompany balances. During the three months ended September 30, 2009, our net foreign exchange gains consisted primarily of foreign exchange gains on intercompany balances as a result of the strengthening of the Japanese yen
against the U.S. dollar.

PROVISION FOR INCOME TAXES

During the three months ended September 30, 2010 and 2009, we recorded provisions for income taxes of $7,000 and $37,000, respectively. During the three months ended September 30, 2010, our
provision for income taxes consisted of approximately $65,000 of charges related to taxes on income generated in certain foreign jurisdictions, which were off-set by the reversal of approximately $58,000 of tax accruals as a result of the expiration
of the related statute of limitations. During the three months ended September 30, 2009, our provision for income taxes consisted of charges related primarily to taxes on income generated in certain foreign jurisdictions.

Although we have generated consolidated pre-tax income during the three months ended September 30, 2010, we have incurred operating
losses in all years prior to the second quarter of fiscal 2011. Management has determined that it is more likely than not that a tax benefit from such losses will not be realized. Accordingly, we did not record a benefit for income taxes for these
periods.

DISCONTINUED OPERATIONS

On May 21, 2010, we decided to close our Message Management division. This business had been classified as discontinued operations in the accompanying consolidated financial statements. During the
three months ended September 30, 2010 we generated income of $16,000 as compared to a loss of $1.0 million during the three months ended September 30, 2009. During the three months ended September 30, 2010, our income from
discontinued operations was due primarily to the recognition of previously deferred revenue, off-set partially by insignificant expenses incurred during the period. During the three months ended September 30, 2009, the loss was due primarily
due to significant costs incurred by our Message Management division.

Comparison of Results for the Six Months Ended September 30,
2010 and 2009

The following summarizes consolidated revenues from continuing operations and their percentage changes
over the same period of the prior year (dollars in thousands):



|                                          |  |                                |        |    |      |   |        | 
|----------------------------------------- |  | ------------------------------ | ------ | -- | ---- | - | ------ | 
|                                          |  | Six months 
endedSeptember 30, |       
|                                          |  | 2010                           |        |    | 2009 |  
|Consolidated revenues, net                |  |                                | 28,504 |    |      | $ | 31,529 | 
|(Decrease) over same period of prior year |  |                                | (10    | )% |      |   |        | 
|License and service revenues              |  |                                | 28,504 |    |      | $ | 30,029 | 
|(Decrease) over same period of prior year |  |                                | (5     | )% |      |   |        | 
|Other revenues                            |  |                                |       |    |      | $ | 1,500  | 



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REVENUESLICENSE AND
SERVICE

VAR revenues.The following table summarizes VAR revenues by geographic region and their percentage
changes over the same period of the prior year (dollars in thousands):



|                                          |  |                                |        |    |      |   |        | 
|----------------------------------------- |  | ------------------------------ | ------ | -- | ---- | - | ------ | 
|                                          |  | Six months 
endedSeptember 30, |       
|                                          |  | 2010                           |        |    | 2009 |  
|North America                             |  | $                              | 6,631  |    |      | $ | 7,756  | 
|(Decrease) over same period of prior year |  |                                | (15    | )% |      |   |        | 
|Asia-Pacific                              |  | $                              | 11,031 |    |      | $ | 10,556 | 
|Increase over same period of prior year   |  |                                | 5      | %  |      |   |        | 
|EMEA                                      |  | $                              | 7,406  |    |      | $ | 7,347  | 
|Increase over same period of prior year   |  |                                | 1      | %  |      |   |        | 
|Consolidated                              |  | $                              | 25,068 |    |      | $ | 25,659 | 
|(Decrease) over same period of prior year |  |                                | (2     | )% |      |   |        | 

VAR revenues in North America decreased by $1.1 million, or 15%, to $6.6 million for the six
months ended September 30, 2010 compared to $7.8 million for the six months ended September 30, 2009. The decrease in revenues during the six months ended September 30, 2010 was primarily due to a decrease in new license bookings over
the past two years.

VAR revenues in the Asia-Pacific region increased $0.5 million, or 5%, to $11.0 million for the six
months ended September 30, 2010 compared to $10.6 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, the average Japanese yen to U.S. dollar exchange rate increased 7% as compared to
the six months ended September 30, 2009, causing an approximate increase of $0.8 million in our Asia-Pacific revenues as reported in U.S. dollars. During the six months ended September 30, 2010 our Asia-Pacific functional currency revenue
decreased $0.3 million, or 3%, primarily due to a single large transaction that was recognized as revenue entirely in fiscal 2010.

VAR revenues in EMEA increased $59,000, or 1%, to $7.4 million for the six months ended September 30, 2010 compared to $7.3 million for the six months ended September 30, 2009. During the six
months ended September 31, 2010 our functional currency revenues increased $0.4 million, or 5%, due to increased license and maintenance, and maintenance renewal bookings in prior periods. However, this increase was partially off-set by the
weakening of the British pound during the six months ended September 30, 2010 as compared to the six months ended September 30, 2009. During the six months ended September 30, 2010, the average British pound to U.S. dollar exchange
rate decreased 5% as compared to the six months ended September 30, 2009, causing an approximate decrease of $0.3 million in our EMEA revenues as reported in U.S. dollars.

VAR bookings.As discussed above, revenues are impacted by both current and prior period bookings. The information below
summarizes VAR bookings by geographic region and their percentage changes over the same period in the prior year (dollars in thousands):



|                                          |  |                                |        |    |      |   |        | 
|----------------------------------------- |  | ------------------------------ | ------ | -- | ---- | - | ------ | 
|                                          |  | Six months 
endedSeptember 30, |       
|                                          |  | 2010                           |        |    | 2009 |  
|North America                             |  | $                              | 4,896  |    |      | $ | 5,749  | 
|(Decrease) over same period of prior year |  |                                | (15    | %) |      |   |        | 
|Asia-Pacific                              |  | $                              | 11,478 |    |      | $ | 9,221  | 
|Increase over same period of prior year   |  |                                | 24     | %  |      |   |        | 
|EMEA                                      |  | $                              | 5,307  |    |      | $ | 7,338  | 
|(Decrease) over same period of prior year |  |                                | (28    | %) |      |   |        | 
|Consolidated                              |  | $                              | 21,681 |    |      | $ | 22,308 | 
|(Decrease) over same period of prior year |  |                                | (3     | %) |      |   |        | 

VAR bookings in North America decreased $0.9 million, or 15%, to $4.9 million for the six months
ended September 30, 2010 from $5.7 million for the six months ended September 30, 2009, primarily due to a decrease in the volume of new license bookings sold through our existing distribution channels.

VAR bookings in Asia-Pacific increased $2.3 million, or 24%, to $11.5 million for the six months ended September 30, 2010 from $9.2
million for the six months ended September 30, 2009. During the six months ended September 30, 2010, our functional currency license and maintenance bookings increased approximately $1.6 million, or 17%, primarily due to market growth in
Japan. Additionally, during the six months ended September 30, 2010, the average Japanese yen to U.S. dollar exchange rate increased 7% as compared to the six months ended September 30, 2009 causing an approximate increase of $0.6 million
in our Asia-Pacific bookings as reported in U.S. dollars.



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VAR bookings in EMEA
decreased $2.0 million, or 28%, to $5.3 million for the six months ended September 30, 2010 from $7.3 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, our functional currency license
and maintenance and maintenance renewal bookings decreased approximately $1.8 million, or 25%, primarily due to lower bookings in the United Kingdom, France and Germany, as a result of significant turnover of our sales representatives and the timing
of certain significant maintenance renewal contracts and multi-year license and maintenance contracts. Additionally, during the six months ended September 30, 2010, the average British pound to U.S. dollar exchange rate decreased 5% as compared
to the six months ended September 30, 2009, causing an approximate decrease of $0.3 million in our EMEA bookings as reported in U.S. dollars.

OEM revenues. The following table summarizes OEM revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):



|                                          |  |                               |       |    |      |   |       | 
|----------------------------------------- |  | ----------------------------- | ----- | -- | ---- | - | ----- | 
|                                          |  | Six months endedSeptember
30, |      
|                                          |  | 2010                          |       |    | 2009 |  
|North America                             |  | $                             | 1,993 |    |      | $ | 2,737 | 
|(Decrease) over same period of prior year |  |                               | (27   | %) |      |   |       | 
|Asia-Pacific                              |  | $                             | 745   |    |      | $ | 835   | 
|(Decrease) over same period of prior year |  |                               | (11   | %) |      |   |       | 
|EMEA                                      |  | $                             | 698   |    |      | $ | 798   | 
|(Decrease) over same period of prior year |  |                               | (13   | %) |      |   |       | 
|Consolidated                              |  | $                             | 3,436 |    |      | $ | 4,370 | 
|(Decrease) over same period of prior year |  |                               | (21   | %) |      |   |       | 

North America OEM revenues decreased $0.7 million, or 27%, to $2.0 million for the six months
ended September 30, 2010 from $2.7 million for the six months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in current period and prior period bookings from several of our OEM partners.

Asia-Pacific OEM revenues decreased $90,000, or 11%, to $745,000 for the six months ended September 30, 2010 from
$835,000 for the six months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in current period and prior period bookings from three of our OEM partners.

EMEA OEM revenues decreased $0.1 million, or 13%, to $0.7 million for the six months ended September 30, 2010 from $0.8 million for
the three months ended September 30, 2009. The decrease in revenues is primarily the result of a decrease in current period and prior period bookings from three of our OEM partners.

OEM bookings.As discussed above, revenues are impacted by both current and prior period bookings. Included below is a summary of
OEM bookings by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):



|                                          |  |                                |       |    |      |   |       | 
|----------------------------------------- |  | ------------------------------ | ----- | -- | ---- | - | ----- | 
|                                          |  | Six months 
endedSeptember 30, |      
|                                          |  | 2010                           |       |    | 2009 |  
|North America                             |  | $                              | 497   |    |      | $ | 1,227 | 
|(Decrease) over same period of prior year |  |                                | (59   | %) |      |   |       | 
|Asia-Pacific                              |  | $                              | 598   |    |      | $ | 652   | 
|(Decrease) over same period of prior year |  |                                | (8    | %) |      |   |       | 
|EMEA                                      |  | $                              | 503   |    |      | $ | 604   | 
|(Decrease) over same period of prior year |  |                                | (17   | %) |      |   |       | 
|Consolidated                              |  | $                              | 1,598 |    |      | $ | 2,483 | 
|(Decrease) over same period of prior year |  |                                | (36   | %) |      |   |       | 

North America OEM bookings decreased $0.7 million, or 59%, to $0.5 million for the six months
ended September 30, 2010 from $1.2 million for the six months ended September 30, 2009. During the first quarter of fiscal 2010, we sold certain non-core intellectual property rights to one of our OEM partners. As a result, the bookings
from this customer have significantly decreased as compared to the prior year. Additionally, we experienced a decrease in bookings from four of our other existing OEM partners.

Asia-Pacific OEM bookings decreased $54,000, or 8%, to $598,000 for the six months ended September 30, 2010 from $652,000 for the
six months ended September 30, 2009. During the six months ended September 30, 2010, we experienced a decrease in bookings from two of our OEM partners.



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EMEA OEM bookings
decreased $0.1 million, or 17%, to $0.5 million for the six months ended September 30, 2010 from $0.6 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, we experienced a decrease in
bookings related to two of our existing OEM partners, which was partially offset by an increase in bookings related to another one of our OEM partners.

Included below is a reconciliation of our VAR and OEM bookings to the total revenues recognized for the six months ended September 30, 2010 and 2009 (in thousands):



|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|-------------------------------------------------------------------- |  | --- | ------- | - | --- | - | ------ | ----- |  | - | ------- | -
|For the six months ended September 30, 2010                          |  | VAR |         |   | OEM |   |        | Total | 
|Revenues sourced from current period bookings:                       |  |     |         |   |     |   |        |       |  |   |         |  
|Total bookings for the six months ended September 30, 2010           |  | $   | 21,681  |   |     | $ | 1,598  |       |  | $ | 23,279  |  
|Bookings deferred into subsequent periods                            |  |     | (18,704 | ) |     |   | (1,495 | )     |  |   | (20,199 | )
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|Revenues from fiscal 2011 bookings                                   |  | $   | 2,977   |   |     | $ | 103    |       |  | $ | 3,080   |  
|Revenues sourced from prior period bookings:                         |  |     | 22,091  |   |     |   | 3,333  |       |  |   | 25,424  |  
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|Total revenues recognized in the six months ended September 30, 2010 |  | $   | 25,068  |   |     | $ | 3,436  |       |  | $ | 28,504  |  
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|                                                                     |  |     |        
|For the six months ended September 30, 2009                          |  | VAR |         |   | OEM |   |        | Total | 
|Revenues sourced from current period bookings:                       |  |     |         |   |     |   |        |       |  |   |         |  
|Total bookings for the six months ended September 30, 2009           |  | $   | 22,308  |   |     | $ | 2,483  |       |  | $ | 24,791  |  
|Bookings deferred into subsequent periods                            |  |     | (19,041 | ) |     |   | (1,839 | )     |  |   | (20,880 | )
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|Revenues from fiscal 2010 bookings                                   |  | $   | 3,267   |   |     | $ | 644    |       |  | $ | 3,911   |  
|Revenues sourced from prior period bookings:                         |  |     | 22,392  |   |     |   | 3,726  |       |  |   | 26,118  |  
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  
|Total revenues recognized in the six months ended September 30, 2009 |  | $   | 25,659  |   |     | $ | 4,370  |       |  | $ | 30,029  |  
|                                                                     |  |     |         |   |     |   |        |       |  |   |         |  

REVENUESOTHER

During the six months ended September 30, 2009, we entered into an intellectual property transfer and license agreement with one of our OEM partners. Under the terms of this agreement we sold certain
non-core intellectual property rights to this partner for $1.5 million. As our support commitment, as specified by the arrangement, was insignificant and no other obligation exists, the full contract amount was recognized as revenue during the six
months ended September 30, 2009.

COST OF REVENUES

Cost of revenues totaled $2.8 million for both the six months ended September 30, 2010 and 2009. During the six months ended September 30, 2010, our gross margin decreased to 90.3% from
91.0 % for the six months ended September 30, 2009. The decrease in gross margin is primarily attributable to the decrease in revenues as a result of the intellectual property transfer and license agreement with one of our OEM partners,
which was recognized during the six months ended September 30, 2009.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by $1.7 million, or 14%, to $10.9 million for the six months ended September 30, 2010, from
$12.6 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, we experienced a $1.2 million decrease in payroll-related expenses due primarily to a reduction in sales and marketing personnel
from September 2009 to September 2010. Additionally, we experienced a $0.3 million decrease in marketing-related expenses due primarily to fewer marketing-related programs during the six months ended September 30, 2010 as compared to the six
months ended September 30, 2009.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased $1.2 million, or 21%, to $4.5 million for the six months ended September 30, 2010 from
$5.6 million for the six months ended September 30, 2009. During the six months ended September 30, 2010, we experienced a decrease in payroll-related expenses of approximately $0.7 million, due primarily to a decrease in research and
development related personnel from September 2009 to September 2010. Additionally we experienced a decrease in professional service and consulting expenses of approximately $0.3 million.



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##### Table of Contents



GENERAL AND ADMINISTRATIVE
EXPENSES

General and administrative expenses decreased by $1.3 million, or 19%, to $5.6 million for the six months
ended September 30, 2010, from $6.9 million for the six months ended September 30, 2009. The decrease was primarily attributable to a decrease in professional service fees for legal and accounting services. During the six months ended
September 30, 2009 we incurred $0.7 million related to the acquisition of ColdSpark and certain assets of Asempra. During the six months ended September 30, 2010, we experienced an additional $0.7 million decrease in professional service
related costs as a result of lower audit costs for our fiscal 2010 financial statements and lower costs associated with other SEC related filings.

INTEREST EXPENSE

During each of the six months ended
September 30, 2010 and 2009, we incurred interest expense of $0.4 million. Our interest expense primarily relates to interest expense associated with our ColdSpark acquisition. As the consideration given to the ColdSpark shareholders will be
paid over three years, we calculated the present value of the consideration payable to the ColdSpark shareholders as of the acquisition date, for both the cash payments and common shares to be issued, and recorded the applicable interest expense
using the effective interest method.

FOREIGN EXCHANGE GAIN (LOSS), NET

During the six months ended September 30, 2010 and 2009, we recorded net foreign exchange gains of $0.4 million and $0.2 million,
respectively, related to foreign exchange rate changes that impacted or are expected to impact cash flows. During the six months ended September 30, 2010, our net foreign exchange gains consisted of $0.7 million of foreign exchange gains
related primarily to the strengthening of the Japanese yen against the U.S. dollar on intercompany balances, offset by $0.3 million of foreign exchange losses related to Euro currency holdings in our EMEA region and to U.S. dollar currency holdings
in our Asia-Pacific region. During the six months ended September 30, 2009, our net foreign exchange gains consisted of $0.6 million of foreign exchange gains related to the strengthening of the British pound and Japanese yen against the U.S.
dollar on intercompany balances, offset by $0.4 million of foreign exchange losses related to U.S. dollar and Euro currency holdings in our EMEA region.

PROVISION FOR INCOME TAXES

During the six months ended
September 30, 2010 and 2009, we recorded provisions for income taxes of $16,000 and $62,000, respectively. During the six months ended September 30, 2010, our provision for income taxes consisted of approximately $130,000 of charges
related to taxes on income generated in certain foreign jurisdictions, which were off-set by the reversal of approximately $114,000 of tax accruals as a result of the expiration of the related statute of limitations. During the six months ended
September 30, 2009, our provision for income taxes consisted of charges related primarily to taxes on income generated in certain foreign jurisdictions.

Although we have generated consolidated pre-tax income during the six months ended September 30, 2010, we have incurred operating losses in all years prior to fiscal 2011. Management has determined
that it is more likely than not that a tax benefit from such losses will not be realized. Accordingly, we did not record a benefit for income taxes for these periods.

DISCONTINUED OPERATIONS

On May 21, 2010, we closed our Message
Management division. This business had been classified as discontinued operations in the accompanying consolidated financial statements. During the six months ended September 30, 2010 and 2009, we incurred losses from discontinued operations of
$0.8 million and $1.6 million, respectively. During the six months ended September 30, 2010, our loss from discontinued operations was due primarily to payroll, severance and lease termination costs associated with closing the operations.
During the six months ended September 30, 2009, the loss was due primarily to a loss from our Message Management operations.

Liquidity and Capital Resources

As of September 30, 2010, we had $5.6 million of cash and cash equivalents and $39.4 million in negative working capital, or $5.2 million in positive working capital after excluding the current
portion of deferred revenue, as compared to $4.9 million of cash and cash equivalents and $36.8 million in negative working capital, or $7.5 million in positive working capital after excluding the current portion of deferred revenue, as of
March 31, 2010. Working capital, defined as current



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assets minus current liabilities, is intended to measure our short-term liquidity, or our ability to pay off short-term liabilities with current assets. Because short-term deferred revenue
does not require the future use of current assets, management has excluded the current portion of deferred revenue from the calculation of working capital as an indicator of short-term liquidity. Our cash, combined with our cash flow from operating
activities, have been our principal sources of liquidity.

Operating Activities of Continuing Operations

We generate cash from operations primarily from cash collected on software license and software maintenance contract sales. Net cash
provided by operating activities of continuing operations was $2.2 million during the six months ended September 30, 2010 as compared to net cash used in operations of $0.4 million during the six months ended September 30, 2009. Net cash
provided by operating activities during the six months ended September 30, 2010 was primarily the result of an increase in cash collections and a decrease in operating expenses from continuing operations during the period. During the six months
ended September 30, 2009, our cash used in operating activities was the result of significant cash resources used for the acquisition transaction costs related to our acquisition of ColdSpark and certain assets of Asempra and higher general
operating costs.

Investing Activities of Continuing Operations

Net cash used in investing activities was $0.9 million for each of the six months ended September 30, 2010 and 2009. During the six
months ended September 30, 2010, we made cash payments to the former shareholders of ColdSpark totaling $0.5 million pursuant to the terms of the merger agreement and incurred capital expenditures of $0.1 million. Additionally, during the six
months ended September 30, 2010, our restricted cash balance increased $0.3 million. During the six months ended September 30, 2010, we deposited $339,100 into an escrow account related to the portion of the cash payment to a former
ColdSpark shareholder that was withheld in June 2010. This deposit was offset by the release of our prior restricted cash balance of $51,000.

During the six months ended September 30, 2009, we paid $1.0 million to acquire ColdSpark and certain assets of Asempra, net of cash acquired and incurred capital expenditures of $0.2 million. These
cash outflows were partially offset by the release of $0.3 million of our restricted cash balance during the same period.

Financing Activities of Continuing Operations

During the six months ended September 30, 2010 and 2009, net cash used in financing activities of $0.1 million and $0.5 million, respectively, consisted of payments on capital lease and long term
debt obligations.

Cash Flows of Discontinued Operations

Net cash used in discontinued operations was $0.9 million and $0.8 million for the six months ended September 30, 2010 and 2009,
respectively, and primarily related to the cash outflows for payroll and other operating expenses. Additionally, during the six months ended September 30, 2010, we incurred significant cash resources in connection with closing our Message
Management division.

During the six months ended September 30, 2010 and 2009, net cash used in financing activities of
discontinued operations of $22,000 and $7,000, consisted of payments on capital lease and debt obligations.

Factors That
May Affect Future Financial Condition and Liquidity

Currently our cash commitments include normal recurring trade
payables, expense accruals, minimum royalty obligations, debt, and operating and capital leases, all of which are currently expected to be funded through existing working capital. We expect to incur approximately $0.4 million in capital expenditures
during the remainder of fiscal 2011.

Pursuant to the terms of the merger agreement for our acquisition of ColdSpark in May
2009, we are required to pay aggregate consideration of $8.1 million and issue up to 18.2 million common shares, less up to $1.625 million in cash and shares to cover indemnification obligations under the merger agreement, if any. The merger
agreement provides for payment of the merger consideration in four tranches as follows: (i) $1.5 million and 9,117,877 common shares at the closing of the transaction, which occurred on May 13, 2009, provided that $750,000 of the cash
amount payable at closing may be paid 13 months after the closing date along with interest at the rate equal to the greater of (A) the applicable prime rate as reported in the Wall Street Journal on the closing date plus 3.5% or (B) 8%;
(ii) $1.5 million and 3,488,383 common shares thirteen months after the closing date, or June 13, 2010; (iii) $1.5 million and 3,488,383 common shares twenty-five months after the closing date; and (iv) $3,625,000 and 2,075,137
common shares thirty-seven months after the closing date. We may defer all or a portion of the cash amounts payable in (ii) and (iii) above by issuing common shares equal to the deferred amount and paying interest on any deferred cash
payment. We are entitled to satisfy any indemnification claims by reducing subsequent payments of merger consideration by a pro rata amount of the indemnification claims, 50% in common shares and 50% in cash.



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In June 2010 we paid
cash of $437,945 related to the deferred portion of the initial payment plus interest of $37,955, for a total cash payment of $475,900. Also in June 2010, we notified the ColdSpark shareholders representative that we were withholding payment
of $812,500 and 1,889,535 common shares that would otherwise be due in June 2010 in order to satisfy certain indemnification claims pursuant to the terms of the merger agreement. We issued the remaining 1,423,894 common shares and elected to defer
the remaining $687,500 cash payment due in June 2010. We issued an additional 1,423,884 common shares in connection with this deferral. As a result of the deferral election, we are required to accrue and pay interest at a rate of 8% per year.
If it were determined that we are not entitled to indemnification for our claims, we could become obligated to pay some or all of the withheld cash and issue some or all of the withheld shares. Additionally, in June 2010, we withheld $339,100 of the
deferred portion of the initial payment plus interest and delayed issuance of 349,908 common shares, in connection with a dispute with a former ColdSpark shareholder. As a result, the withheld cash amount of $339,100 is reflected in restricted cash
on our consolidated balance sheet as of September 30, 2010. The restricted funds were paid and the withheld shares issued to the former ColdSpark shareholder on October 5, 2010.

The ColdSpark Settlement Agreement, which reduces the amount of cash consideration owed the ColdSpark shareholders upon the consummation
of the arrangement, terminates automatically upon termination of the arrangement agreement. If the arrangement is not completed, we will be obligated to comply with the original payment terms of the merger agreement. As of September 30, 2010,
our maximum future obligations under the ColdSpark merger agreement are as follows:



|                                       |  |          |              |  |      |   |       |               |  |  |       | 
|-------------------------------------- |  | -------- | ------------ |  | ---- | - | ----- | ------------- |  |  | ----- | 
|(in thousands) Payment Type            |  | Due Date |              |  | Cash |   |       | Common Shares | 
|Deferred payments made in October 2010 |  |          | October 2010 |  |      | $ | 339   |               |  |  | 350   | 
|Third payment(1)                       |  |          | June 2011    |  |      |   | 1,295 |               |  |  | 3,965 | 
|Interest on deferred payment(1)        |  |          | June 2011    |  |      |   | 55    |               |  |  |      | 
|Fourth payment(2)                      |  |          | June 2012    |  |      |   | 4,517 |               |  |  |      | 
|Interest on deferred payment(2)        |  |          | June 2012    |  |      |   | 71    |               |  |  |      | 
|Indemnification amounts claimed        |  |          |              |  |      |   | 813   |               |  |  | 1,890 | 
|                                       |  |          |              |  |      |   |       |               |  |  |       | 
|Total                                  |  |          |              |  |      | $ | 7,090 |               |  |  | 6,205 | 
|                                       |  |          |              |  |      |   |       |               |  |  |       | 



|(1) | Our expected June 2011 payment consists of (i) $607,686 of the $1.5 million cash payment due pursuant to the merger agreement; (ii) the $687,500 cash payment
deferred in June 2010; and (iii) the remaining 4.0 million common shares due pursuant to the merger agreement. Additionally, we expect to pay approximately $55,000 of interest related to the $687,500 deferred cash payment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our expected June 2012 payment consists of the remaining $4.5 million of cash due pursuant to the merger agreement. Additionally, we expect to pay approximately $71,000
of interest related to the deferred portion of the June 2011 cash payment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the six months ended
September 30, 2010, we experienced a decrease in bookings as a result of weak economic and industry conditions as well as other financial and business factors, many of which are beyond our control. In May 2010, we decided to realign our
corporate strategy and focus on our core storage and data protection business. As part of this strategy we closed our Message Management operations. By closing our Message Management operations and focusing on our Storage Management business we have
eliminated the operating losses incurred by our Message Management division, which we believe will result in a more profitable business, as our core Storage Management division generated approximately $3.8 million and $4.8 million of operating
income from continuing operations during the three and six months ended September 30, 2010, respectively, and $7.6 million of operating income during the year ended March 31, 2010. We believe that our current cash and cash equivalents will
be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from the date of the filing of this Quarterly Report and that we will have sufficient liquidity to fund our business and meet our
contractual obligations over a period beyond the next 12 months. However, we may be required to obtain additional financing in order to fund our continued operations or make required payments pursuant to the merger agreement with ColdSpark. Due
to the tightening that has occurred in the credit markets, general economic conditions, our previous SEC filing delinquencies, our previous material weaknesses in our internal controls over financial reporting and other economic and business
factors, this financing may not be available to us on acceptable terms or at all. Although we cannot accurately anticipate the effect of inflation or foreign exchange fluctuations on our operations, we do not believe these external economic forces
have had, or are likely in the foreseeable future to have, a material impact on our financial position, results of operations and cash flows.



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Off-Balance Sheet Arrangements

At September 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have
relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed elsewhere in this Quarterly Report and in our most recent Annual Report on Form
10-K.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Market risk represents the risk of loss that may impact our consolidated financial statements through adverse changes in financial market prices and rates. Our market risk exposure results primarily from
fluctuations in foreign exchange rates. We do not have a significant market risk exposure to fluctuations in interest rates. International revenues represented 70% and 62% of our total revenue for each of the six months ended September 30, 2010
and 2009, respectively. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore,
potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have
experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. We could experience
currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

Our management, with the participation of our principal executive and financial
officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of September 30, 2010. Based on that evaluation, our principal
executive officer and principal financial officer concluded that, as of September 30, 2010, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no
changes in our internal control over financial reporting that occurred during the second quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance of
achieving the desired control objectives. As a result, any controls and procedures, no matter how well designed and operated, may not prevent or detect misstatements. Internal control over financial reporting also can be circumvented by collusion or
improper management override of controls. Projections of any evaluation of control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We are
involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of management, any liability that may arise from such contingencies would not have a significant adverse effect on our consolidated
financial position, results of operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

There are risks and
uncertainties associated with the proposed transaction with Quest.



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On November 8,
2010, we entered into an Arrangement Agreement with Quest and Acquisition Sub, which contemplates the acquisition by Quest, through Acquisition Sub, of all of our outstanding equity securities. There are a number of risks and uncertainties relating
to the Arrangement. For example, the Arrangement may not be consummated on a timely basis, or at all, as a result of several factors, including but not limited to failure to obtain the approval of the arrangement by our security holders or by the
Court of Queens Beach of Alberta, Canada, or failure to satisfy other closing conditions set forth in the Arrangement Agreement. If the proposed Arrangement is not completed, the price of our common shares may decline to the extent that the
current market price of our common shares reflects an assumption that the Arrangement will be consummated. In addition, we have incurred substantial expenses in pursuing the transaction, which must be paid even if the Arrangement is not completed.
We are also restricted in our ability to pursue alternative strategic transactions under the Arrangement Agreement, and if the Arrangement Agreement is terminated under certain circumstances, we are required to pay a termination fee and certain
expenses of Quest.

Our business could be adversely impacted as a result of uncertainty related to the proposed transaction with Quest.

Any delay in closing or failure to close the Arrangement could have a negative impact on our business, including our
relationships with customers, partners, vendors and employees. Pending the closing of the Arrangement, the Arrangement Agreement restricts us from engaging in certain actions without Quests consent. These restrictions could limit our ability
to operate our business. Failure to complete the Arrangement could cause our customers, partners, employees and vendors to question our future as a stand-alone company and reconsider their relationships with us. Whether or not the Arrangement is
completed, some of our customers and partners may consider utilizing our competitors because of concerns about potential changes in our employees, and concerns with respect to the transaction and related issues. Uncertainty concerning potential
changes to us and our business could also harm our ability to enter into agreements with new customers, partners and vendors. Our employees may experience uncertainty about their future roles with us and/or Quest, which could adversely affect our
ability to retain and hire key employees. Our management may also be distracted by transaction-related considerations and may not focus their attention on the operation of our business.

Our business could continue to be harmed by the weak general economic and market conditions that lead to reduced spending on information technology products.

Because we are a global business, we are subject to the risks arising from adverse changes in domestic and global economic and political
conditions. General economic conditions during recent periods caused our customers to delay or reduce information technology purchases. If economic activity in the United States and other countries remains slow, customers may continue to delay or
further reduce information technology purchases. This could result in additional reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end user
market could negatively affect the cash flow of our resellers and customers who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure and cause a decrease in operating cash flows. Also, if our resellers
experience excessive financial difficulties and/or insolvency, and we are unable to successfully transition end users to purchase our product from other resellers or directly from us, our sales could decline significantly. Any of these events would
likely harm our business, results of operations and financial condition.

We have incurred substantial net losses since inception, and we
may not be able to achieve or maintain profitability or positive cash flow.

We have incurred operating and net losses
since the inception of our operations in March 2000. During the six months ended September 30, 2010, we generated net income of $4.0 million. However, our net losses were $9.8 million and $5.5 million for the years ended March 31, 2010 and
2009, respectively. As of September 30, 2010, our accumulated deficit was $238.4 million. We may not be able to achieve positive cash flow from operations in future periods. If we cannot achieve and sustain operating profitability, we may not
be able to meet our working capital requirements, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our future capital needs are uncertain and our ability to access additional financing may be negatively impacted by the volatility and disruption of the capital and credit markets and adverse changes
in the global economy.

Our capital requirements in the future will depend on many factors, including:



| |  |  | acceptance of and demand for our software products;
| | - |  | ---------------------------------------------------



| |  |  | the costs associated with integrating and developing acquired products and businesses;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the extent to which we invest in new technology and product development;
| | - |  | ------------------------------------------------------------------------



| |  |  | the costs of developing new products, services or technologies; and
| | - |  | -------------------------------------------------------------------



| |  |  | the costs associated with the growth of our business, if any.
| | - |  | -------------------------------------------------------------



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We intend to finance
our operations and any growth of our business with existing cash and any cash flow from operations. We expect our cash balance to vary based on our bookings, core operating costs and the timing of any payments related to the ColdSpark acquisition.
We believe that our existing cash and anticipated net cash flows from operations will be sufficient to meet our operating and capital requirements through at least the next 12 months from the date of the filing of this Quarterly Report. However, if
the costs associated with closing our Message Management operations exceed our current projections, we are faced with unexpected legal costs associated with exiting the Message Management business or adverse global economic conditions persist or
worsen, we could experience an additional decrease in cash from operations and we may be required to obtain additional financing in order to fund our continued operations. Due to the existing uncertainty in the equity markets including debt, private
equity and venture capital and traditional bank lending markets, access to additional debt or equity may not be available to us on acceptable terms or at all. If we cannot raise funds on acceptable terms when necessary, we may not be able to develop
or enhance our products and services, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Furthermore, if we issue equity or convertible debt securities to raise additional funds, our
existing shareholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing shareholders. If we incur additional debt, it would increase our leverage relative to
our results of operations or to our equity capitalization.

Our acquisition of ColdSpark and subsequent exiting of the ColdSpark Message
Management business have had and could continue to have an adverse affect on our financial condition.

In May 2010, we
announced that we intended to exit our ColdSpark Message Management business, which we acquired in connection with our acquisition of ColdSpark, Inc. in May 2009. We incurred significant costs in connection with acquiring, integrating and further
developing the ColdSpark Message Management business, which, among other things, resulted in a decrease in our cash balance since the completion of the acquisition. We recorded an impairment charge in the fourth quarter of fiscal 2010 of
approximately $12.6 million, which reduces the current carrying value of the business to its estimated fair value as of March 31, 2010. We made cash payments of approximately $0.5 million in connection with the closing of the Message Management
business.

Pursuant to the terms of the merger agreement for our acquisition of ColdSpark in May 2009, we are required to pay
aggregate consideration of $8.1 million and issue up to 18.2 million common shares in four tranches over a four year period, less up to $1.625 million in cash and shares to cover indemnification obligations under the merger agreement, if any.
In June 2010, we notified the ColdSpark shareholders representative that we were withholding payment of $812,500 and 1,889,535 common shares that would have otherwise been due in June 2010 in order to satisfy certain indemnification claims
pursuant to the terms of the merger agreement. However, we could be required to make these payments to the former ColdSpark shareholders if it were determined that we are not entitled to indemnification for our claims.

Although we have closed our Message Management business, we are still required to make future payments of cash and common shares to the
former ColdSpark stockholders. Payments of a portion of the cash consideration may be deferred by issuing common shares equal to the deferred amount plus interest on any deferred payment. In June 2010, we opted to defer the portion of the cash
payment due in June 2010 and not held back for indemnification purposes. We expect to make the following cash payments to former ColdSpark stockholders: (i) $339,100 in October 2010, which relates to funds previously withheld from a former ColdSpark
shareholder; (ii) $1.35 million in June 2011, which includes $687,500 of the June 2010 payment we elected to defer and $55,000 of related interest and (iii) $4,588,000 in June 2012, which includes $892,314 of the June 2011 payment we
expect to defer, approximately $71,000 of related interest; and the remaining cash amounts due pursuant to the merger agreement. See our discussion under Liquidity and Capital Resources in Part I, Item 2 of this Quarterly Report. In
addition, we expect to issue approximately 4.0 million common shares to the former ColdSpark stockholders in June 2011 as payment of the remaining stock consideration under the merger agreement. Making the above cash payments will have a
significant impact on our cash balances and working capital. We may not have sufficient cash available to make the cash payments and additional financing may not be available to us on favorable terms or at all. In addition, the above share issuances
will result in significant dilution to our shareholders. Our dispute with the former ColdSpark stockholders could also result in significant legal and other expenses and cause diversion of management attention and resources from the operation of our
business.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results
or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot
provide reliable financial reports, our operating results could be misstated, our reputation may be harmed and the trading price of our common shares could be negatively affected. In connection with the audits of our financial statements for the
fiscal years ended March 31, 2006, 2007, 2008 and 2009, we identified material weaknesses in our internal controls as further described in our Annual Reports on Form 10-K for those fiscal years. We have implemented actions to address these
weaknesses and to



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enhance the reliability and effectiveness of our internal controls and operations, and our management concluded that there are no material weaknesses in our internal control over financial
reporting as of September 30, 2010 and March 31, 2010. However, our internal control over financial reporting is not required to be and has not been audited by our independent registered public accounting firm. In addition, our controls
over financial processes and reporting may not be effective in the future and additional material weaknesses or significant deficiencies in our internal controls may not be discovered or remediated in the future. Any failure to remediate any future
material weaknesses or implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our
financial statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Competition in our target markets could reduce our sales.

We operate in a segment of the intensely competitive storage management software market. This market is characterized by rapidly changing technology and evolving standards. We have a number of competitors
that vary in size and scope and breadth of products offered. Many of our competitors have greater financial resources than we do in the areas of sales, marketing, branding and product development, and we expect to face additional competition from
these competitors in the future. Our current competitors include, among others, Symantec Corporation, EMC Corporation, IBMs Tivoli division, CA Inc. and CommVault Systems, Inc. Some of these companies compete against us by offering a full
suite of storage management tools, including software that addresses data protection. We also face competition from a number of smaller companies who, like us, focus solely or primarily on the data protection software market. Furthermore, our OEM
partners, who do not currently compete with us, could decide to compete with us by offering their own data protection solutions that exclude our software, and other storage equipment vendors may enter our market either through acquisition of
competing technologies or products, or through development of their own data protection software solutions.

Our existing and
future competitors could introduce products with superior features, scalability and functionality at lower prices than our product. Most of our competitors provide broad suites of storage management software solutions and thus could gain market
share by bundling existing or new data protection products with other more established storage products or by acquiring or forming strategic alliances with our other competitors. If our competitors are successful in gaining market share, our
business, results of operations, financial condition and cash flows could be adversely affected.

Our future revenues depend upon continued
market acceptance of our NetVault product portfolio.

Currently we derive substantially all of our revenues from our
NetVault product portfolio, and we expect this will continue for the foreseeable future. If the market does not continue to accept these products, our revenues will decline significantly, and this would negatively affect our results of operations,
financial condition and cash flows. Factors that may affect the market acceptance of our NetVault products include the performance, price and total cost of ownership of our products, and the availability, functionality and price of competing
products and technologies. Many of these factors are beyond our control.

Our bookings, revenues and operating results may fluctuate
significantly, which could cause the market price of our stock to fall.

Our operating results have fluctuated in the past
and can be expected to fluctuate from time to time in the future. We may experience a shortfall in bookings or revenues in any given quarter in relation to our plans or investor expectations. In addition, if we have a shortfall in bookings or
revenues, our efforts to reduce operating expenses in response will likely lag behind such shortfall. Our revenues and bookings, and our licensing revenues and bookings in particular, are difficult to forecast and are likely to fluctuate
significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control. Factors that may cause fluctuations in our revenues and bookings include the following:



| |  |  | timing and magnitude of sales;
| | - |  | ------------------------------



| |  |  | historical sales patterns in the IT industry which often involve customer purchase decisions being made at or near the end of each calendar quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timing of large enterprise transactions which are typified by long solicitation and decision periods and often remain highly uncertain until the sale
is actually completed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | introduction, timing and market acceptance of new products by us and our competitors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | rate of growth of Network Attached Storage and Storage Area Network technology deployment;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | rate of adoption and associated growth of the Linux operating system;
| | - |  | ---------------------------------------------------------------------



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| |  |  | changes in our pricing policies and distribution terms;
| | - |  | -------------------------------------------------------



| |  |  | possibility that our customers may defer purchases in anticipation of new products or product updates by us or by our competitors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in market demand for IT products in general.
| | - |  | ----------------------------------------------------

Any deterioration in our operating results, including fluctuations based on any shortfalls in bookings or revenues, could cause the market price of our stock to fall substantially. If our operating
results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.

We rely on indirect sales channels such as value-added resellers, distributors and OEMs, and this makes it difficult for us to predict our revenues.

We rely, and will continue to rely, on our indirect sales channel for the marketing and distribution of our products. Our agreements with
value-added resellers and distributors do not contain exclusivity provisions and in most cases may be terminated by either party without cause and with limited or no notice. Many of our resellers also carry other product lines that are competitive
with ours. These resellers may not give a high priority to the marketing of our products. They may give a higher priority to other products, including the products of competitors, or may decide not to continue to carry our products. In addition, we
may not be able to retain our current resellers or successfully recruit new resellers. Any such changes in our distribution channels could seriously harm our business, operating results and financial condition.

Our strategy also involves developing significant partnerships with key hardware and software providers to integrate NetVault products
into their offerings to support more robust data protection solutions. We may fail to implement this strategy successfully. We are currently investing, and will continue to invest, resources to develop this channel. Such investments, if not
successful, could seriously harm our operating margins. Before we can sell our products to an OEM, generally we must engage in a lengthy sales cycle and develop a version of our software customized for and integrated with the hardware or software
product of the OEM. This process, which can take up to 12 months or more, requires the commitment of OEM personnel and resources, and we compete with other suppliers for these resources. Any delays in completing this process or any failure to timely
develop a customized and integrated version of our software for an OEM would adversely affect our ability to sell our products.

Sales of our products through our OEMs depend on the success of our OEMs in developing and effectively marketing new products,
applications and product enhancements on a timely and cost-effective basis that meet changing customer needs and respond to emerging industry standards and other technological changes. Our reliance on OEMs exposes us to additional risks. If our OEMs
do not meet these challenges our revenues may suffer. The OEMs we partner with may incorporate the technologies of other companies in addition to, or to the exclusion of, our technologies, and are not obligated to purchase our product from us, and
they may not continue to include our products with their products. In addition, we have no control over the shipping dates or volumes of products the OEMs ship. Our OEM customers may compete with one another. If one of our OEM customers views the
products we have developed for another OEM as competing with its products, it might decide to stop doing business with us, which could adversely affect our business, results of operations, financial condition and cash flows. The inability to
recruit, or the loss of, important OEMs could seriously harm our business, operating results and financial condition. Finally, should one of our OEM partners create or acquire competitive products to ours, our OEM revenues would likely decline.

Because our intellectual property is critical to the success of our business, our results of operations may suffer if we are unable to
adequately protect or enforce our intellectual property rights.

Our proprietary technologies are crucial to our success
and ability to compete. We rely primarily on a combination of patents, copyrights, trade secret laws, contractual provisions and trademarks to establish and protect our intellectual property rights in our proprietary technologies. Sometimes our
products are licensed under shrink wrap license agreements that do not require a physical signature by the end user licensee and therefore may be unenforceable under the laws of some jurisdictions. We presently have five patents issued
and we continually invest resources to gain additional patent protection for our proprietary technology. We may not be issued additional patents in the future, and the benefit we may derive from any patents, if and when issued, may equal or exceed
the costs of obtaining such patents.

Our general practice is to enter into confidentiality or license agreements with
employees, consultants and customers and seek to control access to and distribution of our source code, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our product or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult. Other parties also may independently develop or otherwise acquire equivalent or superior
technology. In addition, the laws in some countries in which our product is or may be developed, manufactured or sold may not protect our intellectual property rights



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to the same extent as the laws of the United States, or at all. Our failure to protect our intellectual property rights could result in increased competition and therefore reduce our market
share, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

We may
become involved in costly and lengthy patent infringement or intellectual property litigation which could seriously harm our business.

In recent years, there has been significant litigation in the United States and in foreign countries involving patents and other intellectual property rights. We may become party to litigation in the
future as a result of an alleged infringement of others intellectual property. From time to time, we receive inquiries from other companies concerning whether we used their proprietary information or technology. It also is possible that patent
holders will assert patent rights which apply broadly to our industry, and that such patent rights, if valid, may apply to our product or technology. Any claims that we improperly use another partys proprietary information or technology or
that we infringe another partys intellectual property, with or without merit, could adversely affect or delay sales of our product, result in costly and time-consuming litigation, divert our technical and management personnel, or require us to
develop non-infringing technology or enter into royalty or licensing arrangements, any of which could adversely affect our business. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially
reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner or on reasonable terms, our business, results of operations, financial condition and cash flows could be materially adversely affected.

Our foreign operations create special challenges that could adversely affect our results of operations.

We have significant operations outside of the United States, including a significant portion of our engineering and sales operations, and
we generate a significant portion of our revenues from sales outside the United States. It is our intention to expand our international operations in order to increase our revenues from sales outside the United States and to continue to take
advantage of lower costs associated with software development outside the United States. As of November 1, 2010, we had 79 employees in Europe, the Middle East and Africa (EMEA) and 70 employees in the Asia-Pacific region out of 231
total employees. Our foreign operations and revenues are subject to a number of risks, including:



| |  |  | potential loss of proprietary information due to piracy, misappropriation, or weaker intellectual property protection laws or weaker enforcement of
such laws;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | imposition of foreign laws and other governmental controls, including trade restrictions, as well as the burdens of complying with a wide variety of
multiple local, country and regional laws;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected domestic and international political or regulatory changes;
| | - |  | ----------------------------------------------------------------------



| |  |  | fluctuations in currency exchange rates and general economic instability;
| | - |  | -------------------------------------------------------------------------



| |  |  | lack of acceptance of localized products, if any, in foreign countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | longer negotiation and accounts receivable payment cycles;
| | - |  | ----------------------------------------------------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in ensuring that our subsidiaries maintain sufficient internal control over financial reporting in order to produce financial statements
in compliance with accounting principles generally accepted in the United States (U.S. GAAP).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our continued growth will require further expansion of our international operations. To expand international operations successfully, we
must establish additional foreign operations, hire and retain additional personnel and recruit additional international resellers, all of which will require significant management attention and financial resources. If we fail to further expand our
international operations and revenues, we may not achieve our anticipated growth.

A majority of our international business is
presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the
value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency
exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we may experience currency losses. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As
a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. We have not previously undertaken hedging transactions to
cover currency exposure, and we do not currently intend to engage in hedging activities. As a result, our results of operations, financial condition and cash flows could be adversely affected by such exchange rate fluctuations.



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Our success depends on our ability
to keep pace with rapid technological developments in the storage industry.

Our future success depends, in part, on our
ability to address the rapidly changing needs of organizations by developing and introducing new product updates and features on a timely basis. To achieve this objective we must extend the operation of our products to new platforms and keep pace
with technological developments and emerging industry standards. To achieve broad acceptance of our software, we must obtain certifications from hardware vendors approving our software for use as a data protection solution on their platforms. This
process requires continual testing and development, and we must invest significant technical resources in adapting our products to the changing hardware specifications. If we are unsuccessful in obtaining new certifications, the market for our
software may be limited. Moreover, software products typically have a limited life cycle, and it is difficult to estimate when they will become obsolete. We must therefore continually develop and introduce innovative products and/or upgraded
versions of our existing products before the current software has completed its life cycle. Our failure to do so may result in our inability to achieve and maintain profitability.

Our products may contain significant defects, which may result in liability and/or decreased sales.

Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Despite our efforts to test our products, we may experience significant errors
or failures in our products, or software may not work with other hardware or software as expected, which could delay the development or release of new products or new versions of our products and adversely affect market acceptance of our products.
End user customers use our products for applications that are critical to their businesses, and they have a greater sensitivity to product defects than the market for other software products generally. Our end users and distribution partners may
claim that we are responsible for damages to the extent they are harmed by any failure of our products.

If we were to
experience significant delays in the release of new products or new versions of our products, or if customers were dissatisfied with product functionality or performance, we could lose revenue or be subject to liability for service or warranty
costs, and our business, results of operations, financial condition and cash flows could be adversely affected.

Our success depends on
hiring and retaining key personnel, including our executive officers and other qualified employees.

We have experienced
significant changes in our senior management team within the past few months. James Johnson, our former Chief Executive Officer, and Ken Horner, our former Senior Vice President, Corporate Development and Strategy, are no longer employed by us, and
our Chief Financial Officer, Steve Martin, is currently operating as our Interim Chief Executive Officer. These management transitions and uncertainties have resulted, and could continue to result, in further disruption of our business.

Our future growth and success depends on the continued contributions of our senior management, as well as our ability to hire and retain
key management, engineering, sales and marketing and operations personnel as needed. If we are unable to hire and retain qualified employees, our business and operating results may be adversely affected. We need to hire and retain qualified
personnel to meet customer demand for our products and services and develop new products and services, and we may not be able to do so. All of our employees are free to terminate their employment with us at any time. Competition for people with the
skills we require is intense, particularly in the San Diego area where our headquarters are located, and the high cost of living in this area makes our recruiting and compensation costs higher. As a result, we expect to continue to experience
increases in compensation costs.

We rely upon software licensed from third parties, and if it became unavailable to us, we could be
required to modify our software or to acquire a license or right to use alternative technology.

We license and use
software owned by third parties in our business, some of which is incorporated into our products. These third party software licenses may not continue to be available to us on acceptable terms. Also, these third parties may from time to time receive
claims that they have infringed the intellectual property rights of others, including patent and copyright infringement claims, which may affect our ability to continue licensing this software. Our inability to use any of this third party software
could result in shipment delays or other disruptions in our business, which could adversely affect our business, results of operations, financial condition and cash flows.

Potential future acquisitions could adversely affect our ongoing operations.

Although we do not have any current plans to make material acquisitions, we may in the future make further acquisitions or investments in
companies, products or technologies that we believe complement or expand our existing business and assist us in quickly bringing new products to market. However, we have limited experience in making



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acquisitions and investments. As a result, our ability to identify and evaluate prospects, complete acquisitions and properly manage the integration of businesses is relatively unproven. Failure
to properly evaluate and execute acquisitions or investments or to integrate completed acquisitions may have a material adverse effect on our business, results of operations, financial condition and cash flows.

In making or attempting to make acquisitions or investments, we face a number of risks, including risks related to:



| |  |  | identifying suitable candidates, performing appropriate due diligence, identifying potential liabilities and negotiating acceptable terms;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reducing our working capital and hindering our ability to expand or maintain our business, if we make acquisitions using cash;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential distraction of our management, diversion of our resources and disruption of our business;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | retaining and motivating key employees of the acquired companies;
| | - |  | -----------------------------------------------------------------



| |  |  | managing operations that are distant from our current headquarters and operation locations;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | competing for acquisition opportunities with competitors that are larger than we are or have greater financial and other resources than we have;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | accurately forecasting the financial impact of a transaction;
| | - |  | -------------------------------------------------------------



| |  |  | assuming liabilities of acquired companies, including existing or potential litigation related to the operation of the business prior to the
acquisition;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining good relations with the customers and suppliers of the acquired company;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | effectively integrating acquired companies and assets and achieving expected synergies; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | maintaining sufficient cash to build the acquired business operations until they generate positive cash flow.
| | - |  | -------------------------------------------------------------------------------------------------------------

Any acquired businesses, products or technologies may not generate sufficient revenue and cash flows to offset the associated costs of
such acquisitions. In addition, such acquisitions could result in other adverse effects. For example, if the acquisition resulted in goodwill, the company is subject to annual review for goodwill impairment. If impairment testing indicates that the
carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired. Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could have a material
adverse effect on our operating results. Moreover, from time to time, we may enter into negotiations for the acquisition of businesses, products or technologies but be unable or unwilling to consummate the acquisitions under consideration. This
could cause significant diversion of managerial attention and resources.

Because we are a Canadian corporation, certain civil liabilities
and judgments against us or our directors by U.S. investors may be unenforceable.

We are incorporated under the laws of
Canada and some of our directors are residents of Canada. As a result, it may be difficult for our U.S.-based shareholders to initiate a lawsuit within the United States. It may also be difficult for shareholders to enforce a U.S. judgment in Canada
or elsewhere or to succeed in a lawsuit in Canada or elsewhere based only on violations of U.S. securities laws.

Litigation may harm our
business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large
expenditures and distract our management. For example, we may in the future be subject to class actions, other securities litigation or other proceedings or actions arising in relation to the restatement of our prior period financial statements or
related to our past or future acquisition activities. Litigation and any potential regulatory proceeding or action may be time consuming, expensive and distracting from the conduct of our business, and the outcome of litigation and any potential
regulatory proceeding or action is difficult to predict. The adverse resolution of any specific lawsuit or any potential regulatory proceeding or action could have a material adverse effect on our business, results of operations and financial
condition. To the extent expenses incurred in connection with litigation or any potential regulatory proceeding or action (which may include substantial fees of attorneys and other professional advisers and potential obligations to indemnify
officers and directors who may be parties to such actions) are not covered by available insurance, such expenses could adversely affect our business, results of operations, financial condition and cash flows.

We are dependent on certain key customers.

During the three and six months ended September 30, 2010, we had no customers that comprised 10% or more of our



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consolidated revenues. However, we have derived, and may continue to derive, a meaningful portion of our revenues from a limited number of OEM customers. If any of our largest OEM customers were
to reduce purchases from us or we are unable to attract new OEM customers, our business would be adversely affected. For example, during fiscal 2009, several of our OEM arrangements terminated, resulting in a significant decline in OEM bookings for
fiscal 2010. In addition, we do not have contracts with our key customers that require such customers to make any minimum purchases from us. Therefore, we cannot be sure that these customers will continue to purchase our product at current levels,
or at all. As a result, a significant customer in one period may decide not to purchase our product in a subsequent period, which would have an adverse impact on our revenues, results of operations, financial condition and cash flows.

There is a limited market for our common shares and selling our shares may be difficult.

Our common shares have been quoted on the OTCBB since May 2009. From February 2005 until May 27, 2009, trading of our common shares
was conducted on the Pink Sheets due to our failure to keep current in filing our periodic reports with the SEC. In addition, our common shares have not traded on the TSX since December 2004, when the Canadian jurisdictions of Ontario,
Alberta and British Columbia issued cease trade orders due to delays in the filing of our financial statements. Our common shares were subsequently de-listed from the TSX in May 2006. In April 2009, the cease trade orders in all of the Canadian
jurisdictions were lifted. The trading market for our common shares is limited and an active trading market may not develop. Selling our common shares may be difficult because the limited trading market for our shares on the OTCBB could result in
lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume.

In addition, our
stock may be defined as a penny stock under Rule 3a51-1 under the Exchange Act. Penny stocks are subject to Rule 15g-9, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to
persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchasers written
consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our
common stock is subject to the penny stock regulations, the market liquidity for the shares will be adversely affected.

Our share price is
volatile and your investment could decline in value.

Our stock price has fluctuated significantly in the past and is
likely to continue to fluctuate significantly, making it difficult to resell shares when investors want to at prices they find attractive. General economic, political and stock market conditions may affect the market price of our common shares, and
may cause our share price to fluctuate in ways unrelated or disproportionate to our operating performance. Factors affecting the trading price of our common shares could include:



| |  |  | variations in our financial results;
| | - |  | ------------------------------------



| |  |  | our restatement of previously reported financial information and delayed filings for subsequent years;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | announcements of innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | recruitment or departure of key personnel;
| | - |  | ------------------------------------------



| |  |  | changes in estimates of our financial results;
| | - |  | ----------------------------------------------



| |  |  | changes in the recommendations of any securities analysts that elect to follow our common stock;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | any significant litigation brought against us;
| | - |  | ----------------------------------------------



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



| |  |  | sales of substantial amounts of our common shares, or the perception that substantial amounts of our common shares will be sold, by our existing
stockholders in the public.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The stock market is subject to price and volume fluctuations that affect the
market prices for companies in general, and small-capitalization, high technology companies in particular, which are often unrelated to the operating performance of these companies. In addition, in the past, securities class action litigation has
been instituted against companies following periods of volatility in the market price of their securities, and we may be subject to a heightened risk of securities class action litigation and due to our restatement of previously published financial
information.



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

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | (Removed and Reserved)
|------- | ----------------------



|Item 5. | Other Information
|------- | -----------------

On
September 29, 2010, the Company signed Amendment No. 1 to the Agreement dated September 22, 2009 by and among BakBone Software Incorporated, VantagePoint Venture Partners IV(Q) L.P., VantagePoint Venture Partners Principals Fund IV,
L.P. and VantagePoint Venture Partners IV, L.P. This amendment changed the Companys deadline to for holding its 2010 annual meeting of shareholders from September 30, 2010 to December 31, 2010.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                          
|              | 
|10.1          |  | Amendment No. 1 to the Agreement dated September 22, 2009 by and among BakBone Software Incorporated, VantagePoint Venture Partners IV(Q) L.P., VantagePoint Venture Partners
Principals Fund IV, L.P. and VantagePoint Venture Partners IV, L.P.
|              | 
|31.1          |  | Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                             
|              | 
|32.1          |  | Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                             





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SIGNATURE

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



|                        |  |                                                                                                                                           
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|                        |  | BAKBONE SOFTWARE INCORPORATED                                                                                                             
|                        | 
|DATE: November 15, 2010 |  | /S/    STEVE R.
MARTIN                                                                                                                    
|                        |  | Steve R. Martin                                                                                                                           
|                        |  | Senior Vice President, Chief Financial Officer and Interim Chief Executive Officer
(Principal Executive, Financial and Accounting Officer)



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