##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-K/A





Amendment
No. 1

(Mark One)

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

For the fiscal year ended: July 1, 2012

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 000-22071





OVERLAND STORAGE, INC.

(Exact name of registrant as specified in its charter)







|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|California                                     |  | 95-3535285                       
|(State or other jurisdiction of incorporation) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|9112 Spectrum Center Boulevard,          |  |           
|San Diego, California                    |  | 92123     
|(Address of principal executive offices) |  | (Zip Code)

(858) 571-5555

(Registrants telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:



|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of each class        |  | Name of each exchange on which registered
|Common Stock, no par value |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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  x    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈

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 definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act.:



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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 30, 2011, the last business
day of the registrants second fiscal quarter, was approximately $41,332,000 (based on the closing price reported on such date by the NASDAQ Capital Market of the registrants Common Stock). Shares of Common Stock held by officers and
directors and holders of 10% or more of the outstanding Common Stock have been excluded from the calculation of this amount because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

As of August 31, 2012, the number of outstanding shares of the registrants
Common Stock was 27,832,271.









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##### Table of Contents

Explanatory Note

The purpose of this Amendment No. 1 to Form 10-K/A (this Amendment No. 1) to Overland Storage, Inc.s (the
Company) Annual Report on Form 10-K for the fiscal year ended July 1, 2012, filed with the Securities and Exchange Commission on September 13, 2012 (the Form 10-K), is to file: (i) a list of the Companys
subsidiaries as Exhibit 21.1 and (ii) amended certifications of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Companys Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act and the Companys Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act to correct references to an incorrect period that appeared in the
certifications filed with the Form 10-K. This Amendment No. 1 does not otherwise change or update the disclosure or financial information set forth in the Form 10-K as originally filed and does not otherwise reflect events occurring after the
original filing of the Form 10-K.



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##### Table of Contents

OVERLAND STORAGE, INC.

FORM 10-K

For the fiscal year ended July 1, 2012

Table of Contents



|         |  |                                                                                                              |  |  |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|PART I   | 
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  |  | 1  | 
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  |  | 6  | 
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  |  | 11 | 
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  |  | 11 | 
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  |  | 11 | 
|         |  |                                                                                                             
|Item 4.  |  | Mine Safety Disclosures                                                                                      |  |  | 12 | 
|         |  |                                                                                                             
|PART II  |  |                                                                                                              |  |  |    | 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  |  | 13 | 
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  |  | 13 | 
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |  | 13 | 
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  |  | 19 | 
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  |  | 20 | 
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  |  | 20 | 
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  |  | 20 | 
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  |  | 20 | 
|         |  |                                                                                                             
|PART III |  |                                                                                                              |  |  |    | 
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  |  | 21 | 
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  |  | 23 | 
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  |  | 28 | 
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Party Transactions, and Director Independence                              |  |  | 29 | 
|         |  |                                                                                                             
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  |  | 30 | 
|         |  |                                                                                                             
|PART IV  |  |                                                                                                              |  |  |    | 
|         |  |                                                                                                             
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  |  | 31 | 
|         |  |                                                                                                             
|         |  | Signatures                                                                                                   |  |  | 35 | 



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PART I



|Item 1. | Business.
|------- | ---------

This report
contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as
believes, hopes, intends, estimates, expects, projects, plans, anticipates and variations thereof, or the use of future tense, identify forward-looking
statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors
that could cause or contribute to such differences include, but are not limited to: our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to
achieve the intended cost savings and maintain quality with our new manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent
with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new
products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers, suppliers and
creditors perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; general competition and price measures in the market place; unexpected shortages of critical components; worldwide
information technology spending levels; and general economic conditions. In evaluating such statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading Risk
Factors in Part I, Item 1A of this report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and
we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements.

Overview

We are a
trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (SMEs), distributed enterprises, and small and medium businesses (SMBs) to anticipate and
respond to data storage requirements. Whether an organizations data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to
expend fewer resources on information technology (IT) allowing them to focus on being more responsive to the needs of their customers.

We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapServer ® product is a complete line of network attached storage (NAS) products, and our SnapSAN  products
are storage area network (SAN) solutions designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapServer ® and SnapSAN  solutions are available with backup, replication and mirroring software in highly scalable configurations. These solutions provide simplified
disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO SERIES ® and REO SERIES ® libraries
are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.

Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed
with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.

End users of our products include SMEs, SMBs, distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational
institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development and many others.

We sell our solutions worldwide in the Americas, Europe, the Middle East and Africa (EMEA) and the Asia Pacific
(APAC) region. We generate sales of our branded products through a worldwide channel, which consists of commercial distributors, direct market resellers (DMRs) and value-added resellers (VARs).

We were incorporated in California in 1980 as Overland Data, Inc., and changed our name to Overland Storage, Inc. in 2002. Our
headquarters is located at 9112 Spectrum Center Boulevard, San Diego, California 92123, and our telephone number is (858) 571-5555.

Our Direction and Strategy

In todays business environment, we believe that improving productivity and effectively managing digital assets, while controlling operating expenses, has become one of the top priorities for
organizations worldwide. At the same time, we believe that the cost and complexity of managing vital information has risen exponentially. As a result of these opposing forces, we believe that many companies find themselves lacking the essential
resources and expertise required to adequately manage information across their businesses and they continue to



1



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spend a significant portion of their time and money tying isolated islands of data together. Without an effective alternative to mitigate the cost and complexity of traditional approaches, their
data simply cannot be effectively shared and sufficiently protected. We provide solutions designed to deliver enterprise features with the simplicity that allows organizations to reduce the cost of managing and protecting their information. Our
comprehensive data storage and protection solutions are designed to enable IT managers to easily and cost effectively share and preserve critical and non-critical data across their organizations and to provide continuous access, replication for
disaster recovery, and reduced backup windows for improved business continuity.

We estimate that the
cost of managing digital assets is four times the cost of acquiring storage devices. Furthermore, many SMEs and SMBs are seeking to implement tiered storage for primary and secondary data utilizing a combination of low cost Serial Advanced
Technology Attachment (SATA) drives, high performance Serial Attached SCSI (SAS) drives and Solid State Drives (SSDs). International Data Corporation (IDC) estimates that the total NAS market will grow
at approximately 12.6% through 2014, and the growth rate for NAS storage systems in price bands up to $15,000, where our SnapServer
® solutions lie, is estimated to be 17.4%. According to IDC, tape storage still constitutes approximately 7.3%
of the total storage revenue in the global storage market. Sales of tape automation appliances represented 31.4% and 37.7% of our revenue during fiscal 2012 and 2011, respectively.

Our Products and Services

Our data management and data protection
solutions provide SMEs, SMBs, distributed enterprises and branch offices with disk-based systems for primary or nearline storage, disk backup and recovery, and software for data management and protection. For long-term storage requirements, we offer
automated tape solutions for tape backup and archive.

Data Management Software

Our GuardianOS  storage-optimized platform OS is designed for SnapServer ® NAS devices to deliver simplified data management and consolidation throughout distributed IT environments. The
GuardianOS  platform provides a flexible solution for storage infrastructures, combining cross-platform file sharing with block-level data access on a single device. In addition to a unified storage architecture, the GuardianOS  platform
offers scalability through features such as DynamicRAID  , centralized storage management and a comprehensive suite of data protection tools. The flexibility and scalability of GuardianOS  reduces the total cost of ownership of storage
infrastructures.

Our Snap Enterprise Data Replicator ® (Snap EDR) provides multi-directional, WAN-optimized replication for SnapServer ® systems. With Snap EDR, administrators can automatically replicate data between multiple SnapServer systems for data distribution, data consolidation, and disaster
recovery.

Our Protection OS ® software provides virtualization, data protection, data management and connectivity features for REO ® virtual tape library (VTL) systems. With our Protection OS ® software, administrators can implement REO
® appliances in a wide variety of storage and backup environments. The Protection OS ® software is compatible with all major operating systems, popular backup software solutions and iSCSI networks and
Fibre Channel networks.

SnapSAN  Storage Area Network Solutions

Our SnapSAN  products provide block-based primary storage for virtual server environments and low latency
applications. Systems can be managed through intuitive management interfaces that employ guided wizards to facilitate easy installation and administration. Our SnapSAN  products also offer a powerful set of features including auto
provisioning, mirroring for high availability, replication and snapshots for data protection.



| |  |  | The SnapSAN  S1000 is a 2U storage array with iSCSI, Fibre Channel, or SAS host connections, designed for providing non-stop services to the most
demanding applications. The SnapSAN  S1000 can be configured to utilize high capacity SATA II drives for up to 24 terabytes, or high performance SAS drives for up to 7.2 terabytes, with maximum scalability using SnapServer ® E1000 enclosures up to 120 terabytes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The SnapSAN  S2000 is a 2U iSCSI SAN appliance designed for high performance and simple, straight-forward administration. The SnapSAN 
S2000 can be configured with up to 12 SATA II drives for 12 terabytes or 24 terabytes of storage capacity; or 12 high performance SAS drives for 3.6 terabytes or 7.2 terabytes of storage capacity. SATA and SAS drives can also be intermixed in the
S2000 for increased flexibility. The SnapSAN  S2000 can be scaled to 192 terabytes by adding up to seven SnapServer
® E2000 Expansion enclosures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SnapServer ® Network-Attached Storage Solutions

Our SnapServer ® family is an ideal platform for primary or
nearline storage. With a full range of appliances, from desktop systems to rackmount systems that scale to hundreds of terabytes, the SnapServer ® line delivers stability and best-in-class integration with Windows, UNIX/Linux, and Macintosh environments. For virtual servers and database applications, the
SnapServer ® family supports iSCSI block-level access with Microsoft VSS and VDS integration to simplify Windows
management. For data protection, the SnapServer ® family offers RAID replication, and snapshots for
point-in-time data recovery.



2



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Rackmount Systems



| |  |  | The SnapServer
® DX Series products are rack-mountable systems intended for the server room or data center. The rackmount
systems provide higher performance and capacity than desktop systems, and are designed for data protection and server consolidation. The SnapServer ® DX Series products support Dynamic RAID  and traditional RAID levels 0, 1, 5, 6, and 10. The SnapServer ® DX1 is a 1U server that can be configured with up to four SATA II drives, and can scale to 120 terabytes of storage capacity by adding SnapExpansion enclosures. The
SnapServer ® DX2 is a 2U server that can be configured with up to 12 SATA II drives, and can scale to 288
terabytes of storage capacity by adding up to seven SnapExpansion enclosures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The SnapServer
® N2000 is a 2U server that can be configured with up to 12 SATAII drives for up to 24 terabytes of storage
capacity or 12 high performance SAS drives for up to 7.2 terabytes of storage capacity. SATA and SAS drives can also be intermixed in the SnapServer ® N2000 for increased flexibility. The SnapServer
® N2000 can be scaled to 144 terabytes by adding SnapServer ® E2000 Expansion enclosures and supports RAID levels 0, 1, 5, 6, and 10.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Desktop System



| |  |  | The SnapServer
® 210 is designed for easy set up and maintenance and is an ideal solution for branch and remote offices or
departments that do not have dedicated IT personnel. These systems provide network accessible storage and cost effective data protection in a compact, portable, desktop storage unit. The SnapServer ® 210 is configured with two SATA II drives for up to 4 terabytes of storage capacity and supports RAID levels 0 and 1.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

REO ® Virtual Tape Library Solutions

Our REO SERIES ® VTL solutions provide best-in-class disk-based
backup and recovery. Systems can be configured as virtual tape libraries, standalone virtual tape drives, and/or disk volumes, or LUNs. Powered by our REO Protection OS ® software, our REO ® system
includes a unique feature known as dynamic virtual tape which provides more efficient and cost-effective disk storage than other competitive products on the market. REO ® solutions are compatible with all popular open systems or windows-based backup software, physical tape drives or tape libraries and connect easily to iSCSI Ethernet
networks for seamless integration into existing backup environments.

The REO ® 4600 is a 2U rackmount VTL designed for high performance, scalable backup and recovery. The REO ® 4600 can be configured with 12 SATA II drives for 12 or 24 terabytes of storage capacity. The REO ® 4600 can be scaled to 120 terabytes by adding up to four SnapServer
® E2000 Expansion enclosures and supports RAID levels 5 and 6.

NEO ® Tape-Based Backup and Long-Term Archive Solutions

Our NEO ® Series Tape Libraries and Autoloaders are designed for
small and medium businesses looking for simple, cost-effective data protection, or a complex enterprise environment with stringent performance and data availability requirements. We provide a complete range of high capacity, high performance,
flexible tape-based solutions for data backup, recovery and archive. When combined with our SnapServer ®
systems, our NEO SERIES ® products create a complete disk-to-disk-to-tape solution with a variety of storage
capacity options. The NEO ® tape solutions can accommodate up to 24 tape drives and 1,000 cartridges for maximum
efficiency and data protection.



| |  |  | The NEO ® S
Series provides affordable, tape backup for small and medium-sized businesses. The NEO ® S libraries incorporate
the latest linear tape-open (LTO) technologies, as well as SAS and FC connectivity. The NEO ® 100s
is a tape drive in a compact, rack-friendly 1u form factor. The NEO ® 200s is a 2U tape library that supports up
to 24 cartridge slots and 2 tape drives. The NEO ® 400s is a 4U tape library that supports up to 48 cartridge
slots and 4 tape drives.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The NEO ® E
Series provides scalable, high capacity, data-center class tape automation that is ideal for large businesses. The NEO
® E systems incorporate the latest LTO technologies as well as redundant robotics, partitioning capability, mail
slot access and SCSI, SAS and FC connectivity. The NEO ® 2000e is a 5U tape library that supports up to 30
cartridge slots and 2 tape drives. The NEO ® 4000e is a 10U tape library that supports up to 60 cartridge slots
and 4 tape drives. The NEO ® 2000e and NEO ® 4000e modules can be combined to provide a maximum capacity of up to 240 cartridge slots and 16 tape drives. The NEO
® 8000e is a 43U tape library that supports up to 500 cartridge slots and 12 tape drives in a single module,
scalable to 1,000 cartridge slots and 24 tape drives.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Customers

Our solution-focused product offerings are designed specifically for SMEs, SMBs, and distributed enterprises. We sell all of our products
through our worldwide distributor and reseller network.

All of our products and services are designed and manufactured to
address enterprise customer requirements and reliability standards. The following provides additional detail on our channels:



| |  |  | Distribution channel -Our primary distribution partners in North America include Promark Technology, Synnex Corporation, and Ingram Micro
Inc. We have approximately 34 distribution partners throughout Europe and Asia. We sell through a two-tier distribution model where distributors sell our products to system integrators, VARs or DMRs, who in turn sell to end users. We support these
distribution partners through our dedicated field sales force and field engineers. No distribution partner accounted for more than 10% of net revenue for fiscal 2012 and 2011.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Reseller channel -Our reseller channel includes systems integrators, VARs and DMRs. Our resellers frequently package our products as part
of a complete data processing system or with other storage devices to deliver a complete storage subsystem. Our resellers sometimes recommend our products as replacement solutions when backup systems are upgraded or bundle our products with storage
management software specific to the end users system. We support the reseller channel through our dedicated field sales representatives, field engineers and technical support organizations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We divide our worldwide sales into three geographical regions:



| |  |  | the Americas, consisting of North America and South America;
| | - |  | ------------------------------------------------------------



| |  |  | EMEA, consisting of Europe, the Middle East and Africa; and
| | - |  | -----------------------------------------------------------



| |  |  | APAC, consisting of Asia Pacific countries.
| | - |  | -------------------------------------------

We support our customers in the Americas primarily from our San Diego, California and San Jose, California locations. We support our EMEA customers through our wholly-owned subsidiaries located in
Wokingham, England; Paris, France; and Munich, Germany. Each of these subsidiaries provides sales and technical support. Our subsidiary in England also provides repair services. We support our APAC customers from Singapore and South Korea. We grant
our distributors the nonexclusive right to sell our products in a country or group of countries.

Sales to customers outside
of the United States represent a significant portion of our sales and international sales are subject to various risks and uncertainties. See Our international operations are important to our business and involve unique risks under the
heading Risk Factors in Part I, Item 1A of this report. Sales generated by our European channel generally show seasonal slowing during our first fiscal quarter (July through September), reflecting the summer holiday period in
Europe.

The following table sets forth foreign revenue by geographic area (in thousands):



|                                                        |  |      |        |   |      |   |        |  
|------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                        |  | 2012 |        |   | 2011 |  
|Foreign revenue:                                        |  |      |        |   |      |   |        |  
|France                                                  |  | $    | 7,458  |   |      | $ | 6,971  |  
|Netherlands                                             |  |      | 4,867  |   |      |   | 3,918  |  
|United Kingdom                                          |  |      | 4,201  |   |      |   | 4,991  |  
|Germany                                                 |  |      | 3,741  |   |      |   | 4,599  |  
|Europe (other than UK, France, Germany and Netherlands) |  |      | 3,636  |   |      |   | 6,009  |  
|Singapore                                               |  |      | 2,074  |   |      |   | 2,924  |  
|Other foreign countries                                 |  |      | 6,111  |   |      |   | 6,184  |  
|                                                        |  |      |        |   |      |   |        |  
|                                                        |  | $    | 32,088 |   |      | $ | 35,596 |  
|                                                        |  |      |        |   |      |   |        |  
|Foreign revenue as a percentage of net revenue          |  |      | 53.8   | % |      |   | 50.7   | %

We provide a full range of marketing materials for our branded products, including training videos,
webinars, product specific literature and application notes. We also offer lead generation opportunities and market development funds to key channel partners. Our sales management and field engineering personnel provide support to channel partners
and visit potential customer sites to demonstrate the technical advantages of its products. We maintain press relations in the United States and Europe, and we participate in national and regional trade shows worldwide.

Customer Service and Support

Customer service and support are key elements of our strategy and critical components of our commitment to making enterprise-class support and services available to companies of all sizes. Our technical
support staff is trained to assist our customers with deployment and compatibility for any combination of hardware platforms, operating systems and backup, data interchange and storage management software. Our application engineers assist with more
complex customer issues. We maintain global toll-free service and support phone lines and we also provide self-service and support through our website support portal and email.

In July 2011, we introduced the enhanced OverlandCare  service offering for our entire line of disk-based and tape-based products.
OverlandCare  offers on-site service and installation options, round-the-clock phone access to solution experts, as well as proof of concept and architectural design offerings. The OverlandCare  program strengthens our ability to provide
comprehensive technical assistance on a global scale.

The following details the warranties we currently offer on our major
products:



| |  |  | three-year advance replacement OverlandCare  Level 1 limited warranty on our REO SERIES ® and SnapSAN  products;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | three-year return-to-factory limited warranty on our SnapServer ® NAS products;
| | - |  | -------------------------------------------------------------------------------





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| |  |  | one-year advance replacement OverlandCare  Level 1 limited warranty on our NEO ® 100s, NEO ® 200s, NEO ® 400s and NEO ® 2000e products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | one-year on-site by next business day service OverlandCare  Level 2 limited warranty on our NEO
® 4000e and NEO ® 8000e products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

Research and
Development

We incurred research and development costs of $8.1 million and $7.7 million in fiscal
2012 and 2011, representing 13.7% and 10.9% of net revenue, respectively. In fiscal 2012, we continued to augment our product lines by expanding our hardware platforms and feature enhancements to our software. Noteworthy product releases for fiscal
2012 included the SnapServer ® DX Series with DynamicRAID  . Our plans for fiscal 2013 include hardware
and software enhancements across all of our product lines. Particular areas of focus are the introduction of the next generation SnapSAN solutions, Scale-out NAS products, cloud capabilities and enterprise storage software.

Manufacturing and Suppliers

We perform product assembly, integration and testing at our manufacturing facility in San Diego, California. We purchase servers, tape drives, chassis, printed circuit boards, integrated circuits, and all
other major components from outside suppliers. We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. We actively monitor these suppliers but we are
subject to substantial risks associated with the performance of our suppliers. For certain components, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier. See If our
suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations under the heading Risk Factors in Part I, Section 1A of this report. We
had $0.1 million of firm backlog orders at June 30, 2012 and 2011.

We have occupied our current headquarters and
manufacturing facility since March 2002. On July 1, 2010, we modified our San Diego headquarters lease and reduced our facility by one building, or 67,285 square feet, which proportionally reduced our monthly base rent and share of facility
expenses. The San Diego headquarters is subject to a 12-year lease with one five-year extension option. Currently, we have the capacity to support unit production levels several times greater than the current rate of production. In order to
accommodate normal business fluctuations and control staffing levels carefully to meet customer requirements at any time, we augment our direct labor force by employing temporary staff from time to time.

Competition

The
worldwide storage market is highly competitive. Competitors vary in size from small start-ups to large multi-national corporations which may have substantially greater financial, research and development and marketing resources. In the tape
automation market, we believe our primary competitors are Dell Inc. (Dell), Hewlett-Packard Company, Spectra Logic and Quantum Corporation. Key competitive factors include product features, reliability, durability, scalability and price.
Barriers to entry in tape automation are relatively high.

Our primary disk-based platform competitors are EMC Corporation
(both branded EMC and Iomega division), NetGear, Inc., NetApp, Inc., HP, IBM, and Dell. Key competitive factors in these markets include performance, functionality, scalability, availability, interoperability, connectivity, time to market
enhancements and total value of ownership. Barriers to entry for disk-based backup products are low.

The markets for all of
our products are characterized by significant price competition and we anticipate that our products will continue to face price pressure.

Proprietary Rights

General  We presently hold 33 United States patents and we have eight United States patents pending. In general, these
patents have a 20-year term from the first effective filing date for each patent. The patents that are material to our business will begin to expire in November 2015. We also hold a number of foreign patents and patent applications for certain of
our products and technologies. These rights, however, may not prevent competitors from developing products substantially equivalent or superior to our products. In addition, our present and future patents may be challenged, invalidated or
circumvented, reducing or eliminating our proprietary protection. We continue to be diligent about maintaining our patent portfolio and monitoring potential infringement of our patents.

VR 2® Technology  We have entered into various intellectual property licensing agreements relating to our VR 2® technology. These agreements require the payment of royalty fees based on sales by licensees of products containing our VR 2® technology.

Employees

As of June 30, 2012, we had 184 full-time employees and 3
part-time employees, including 79 in sales and marketing, 33 in research and development, 50 in manufacturing and operations and 25 in finance, information systems, human resources and other management. There are no collective bargaining contracts
covering any of the employees and we believe that our relationship with our employees is good.



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Financial Information about Segments and Geographic Areas

We operate our business in one reportable segment. For information about our revenues from external customers, measures of profits, losses
and total assets, and our revenues from external customers and long-lived assets broken down by geographic area, see Note 1 (Operations and Summary of Significant Accounting Policies-Segment Data and Information about Geographic
Areas) to our consolidated financial statements.

Recent Developments

In July 2012, we released the SnapSAN  3000 for midrange businesses, and the SnapSAN  5000 for the enterprise, which replaced
the SnapSAN  S2000. Both systems are highlighted by features like thin provisioning, volume cloning, synchronous and asynchronous remote replication, snapshots and disk spin down for reduced power consumption. The SnapSAN  5000 offers
additional performance, SSD integration for caching and policy-based tiering, and performance analysis, tuning and compliance tools.

In August 2012, we announced that Randy Gast joined us as Senior Vice President of Strategic Alliances and Client Services.

Additional Information

Our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available on our website at
http://www.overlandstorage.com , free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission. The contents of our website are not a part
of this report.



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

An
investment in our company involves a high degree of risk. In addition to the other information included or incorporated by reference in this report, you should carefully consider each of the following risk factors in evaluating our business and
prospects as well as an investment in our company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our
business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline.

Our cash and other sources of liquidity may not be adequate to fund our operations for the next 12 months. If we raise additional funding through sales of equity or equity-based securities, your shares
will be diluted. If we need additional funding for operations and we are unable to raise it, we may be forced to liquidate assets and/or curtail or cease operations.

We have projected that cash on hand, combined with available borrowings under our credit facility, will be sufficient to allow us to continue operations for the next 12 months. Significant changes from
our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs and/or (iv) changes to the historical timing of
collecting accounts receivable could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional
funding, we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of
operations and future prospects.

We may seek debt, equity or equity-based financing (such as convertible debt) when market
conditions permit. Such financing may not be available on favorable terms, or at all. If we need additional funding for operations and are unable to raise it through debt or equity financings, we may be forced to liquidate assets and/or curtail or
cease operations. In addition, such financing may not be available on favorable terms, or at all. If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the
ownership interest of our existing shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.

We urge you to review the additional information about our liquidity and capital resources in the Managements Discussion and
Analysis of Financial Condition and Results of Operations section of this report. If we cease to continue as a going concern due to lack of available capital or otherwise, you may lose your entire investment in our company.

We have a history of net losses. We expect to continue to incur net losses for some time and we may not achieve or maintain profitability.

We have incurred significant operating losses in our last seven fiscal years and we anticipate continued losses during
fiscal 2013. As of June 30, 2012, we had an accumulated deficit of $112.7 million . To return to profitability we will need to maintain or increase revenue, increase gross profit margins and improve our operating model. We may also need to
implement additional cost reduction efforts across our operations as discussed below.



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Our financial condition and the going concern opinion from our independent registered public
accounting firm may negatively impact our business.

As a result of our recurring losses from operations and negative cash
flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2012 includes an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. Such report, and our financial condition and history of net losses, could cause current or potential customers to defer new orders with us or to select other suppliers, and may cause suppliers to require terms that are
unfavorable to us.

We may need to implement additional cost reduction efforts across our operations.

In 2010, we implemented cost reduction efforts, including reductions in our worldwide workforce. There can be no assurance that our cost
reduction efforts will be successful and we may need to implement additional cost reduction initiatives, such as further reductions in the cost of our workforce and/or suspending or curtailing planned programs, either of which could materially harm
our business, results of operations and future prospects.

We rely on indirect sales channels to market and sell our branded products.
Therefore, the loss of, or deterioration in, our relationship with one or more of our distributors or resellers could negatively affect our operating results.

We sell all of our branded products through our network of distributors, VARs and DMRs, who in turn sell our products to end users. In fiscal 2012 and 2011, we had no distributors that accounted for more
than 10% of our sales. The long-term success of any of our distributors or resellers is difficult to predict, and we have no purchase commitments or long-term orders from any of them to assure us of any baseline sales through these channels. Most of
our distributors and resellers also carry competing product lines that they may promote over our products. A distributor or reseller might not continue to purchase our products or market them effectively, and each determines the type and amount of
our products that it will purchase from us and the pricing of the products that it sells to end user customers. Our operating results could be adversely affected by a number of factors, including, but not limited to:



| |  |  | a change in competitive strategy that adversely affects a distributors or resellers willingness or ability to stock and distribute our
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the reduction, delay or cancellation of orders or the return of a significant amount of our products;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the loss of one or more of our distributors or resellers; and
| | - |  | -------------------------------------------------------------



| |  |  | any financial difficulties of our distributors or resellers that result in their inability to pay amounts owed to us.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our
operations.

Our products have a large number of components and subassemblies produced by outside suppliers. We depend
greatly on these suppliers for items that are essential to the manufacture of our products, including tape drives, printed circuit boards and integrated circuits. We work closely with our regional, national and international suppliers, which are
carefully selected based on their ability to provide quality parts and components that meet both our technical specifications and volume requirements. For certain items, we qualify only a single source, which magnifies the risk of shortages and
decreases our ability to negotiate with that supplier on the basis of price. From time to time, we have been unable to obtain as many drives as we have needed due to drive shortages or quality issues from certain of our suppliers. If our suppliers
fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.

We have granted security interests over certain of our assets in connection with various debt arrangements.

We have granted security interests over certain of our assets in connection with our credit facility and we may grant additional security interests to secure future borrowings. If we are unable to satisfy
our obligations under these arrangements, we could be forced to sell certain assets that secure these loans, which could have a material adverse effect on our ability to operate our business. In the event we are unable to maintain compliance with
covenants set forth in these arrangements or if these arrangements are otherwise terminated for any reason, it could have a material adverse effect on our ability to access the level of funding necessary to continue operations at current levels. If
any of these events occur, management may be forced to make further reductions in spending, further extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could
materially harm our business, results of operations and future prospects.

Our success depends on our ability to anticipate rapid
technological changes and develop new and enhanced products.

As an advanced technology company, we are subject to numerous
risks and uncertainties characterized by rapid technological change and intense competition. Our future success will depend on our ability to anticipate changes in technology, and to develop, introduce, manufacture and achieve market acceptance of
new and enhanced products on a timely and cost-effective basis.

Development schedules for technology products are inherently
uncertain. We may not meet our product development schedules, and development costs could exceed budgeted amounts. Our business, results of operations, financial position and liquidity may be materially and



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adversely affected if the products or product enhancements that we develop are delayed or not delivered due to developmental problems, quality issues or component shortage problems, or if our
products or product enhancements do not achieve market acceptance or are unreliable. We or our competitors will continue to introduce products embodying new technologies, such as new sequential or random access mass storage devices. In addition, new
industry standards may emerge. Such events could render our existing products obsolete or not marketable, which would have a material adverse effect on our business, results of operations, financial position and liquidity.

Our disk-based products involve many significant risks and may fail to achieve or maintain market acceptance.

The success of our SnapServer ® family of disk-based products is uncertain and subject to significant risks that could have a material adverse effect on our business, results of operations,
financial position and liquidity. We must commit significant resources to sustain these products and will continuously need to update and upgrade them to stay competitive. Any delay in the commercial release of new or enhanced disk-based products
could result in a significant loss of potential revenue and may adversely impact the market price of our common stock. Furthermore, if our disk-based products do not achieve market acceptance or success, then the association of our brand name with
these products may adversely affect our reputation and sales of other products, diluting the value of our brand name.

We face intense
competition and price pressure, and many of our competitors have substantially greater resources than we do.

The worldwide
storage market is intensely competitive. A number of manufacturers of tape and disk-based storage solutions compete for a limited number of customers. In addition, barriers to entry are relatively low in these markets. Some of our competitors have
substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products. Ongoing pricing pressure could result in significant price
erosion, reduced profit margins and loss of market share, any of which could have a material adverse effect on our business, results of operations, financial position and liquidity.

Our business is highly dependent on the continued market acceptance and usage of tape-based systems for data backup and recovery.

We have historically derived a majority of our revenue from products that use magnetic tape drives for backup and recovery of digital
data. Our tape-based storage solutions now compete directly with other storage technologies, such as hard disk drives, and may face competition in the future from other emerging technologies. The prices of hard disk drives continue to decrease as
their capacity and performance increase. We expect our tape-based products to face increased competition from these alternative technologies and come under increasing pricing pressure. If our strategy to compete in disk-based markets does not
succeed, it could have a material adverse effect on our business, results of operations, financial position and liquidity.

If our revenue
base continues to decline, we may choose to discontinue or exit some or a substantial portion of our current operations.

Our management team continually reviews and evaluates our product portfolio, operating structure and markets to assess the future
viability of our existing products and market positions. We may determine that the infrastructure and expenses necessary to sustain an existing product offering are greater than the potential contribution margin that we would realize. As a result,
we may determine that it is in our interest to exit or divest one or more existing product offerings, which could result in costs incurred for exit or disposal activities and/or impairments of long-lived assets. Moreover, if we do not identify other
opportunities to replace discontinued products or operations, our revenues would decline, which could lead to further net losses and adversely impact the market price of our common stock.

Our ability to compete depends in part on our ability to protect our intellectual property rights.

We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property laws to protect our intellectual property rights. However, these rights may not prevent competitors
from developing products that are substantially equivalent or superior to our products. To the extent that we have or obtain patents, such patents may not afford meaningful protection for our technology and products. Others may challenge our patents
and, as a result, our patents could be narrowed, invalidated or declared unenforceable. The patents that are material to our business will begin to expire in November 2015. In addition, our current or future patent applications may not result in the
issuance of patents in the United States or foreign countries. The laws of certain foreign countries may not protect our intellectual property to the same extent as U.S. laws. Furthermore, competitors may independently develop similar products,
duplicate our products or, if patents are issued to us, design around these patents.

In order to protect or enforce our
patent rights, we may initiate interference proceedings, oppositions, or patent litigation against third parties, such as infringement suits. Such enforcement efforts could be expensive and divert managements time and attention from other
business concerns. The patent position of information technology firms in particular is highly uncertain, involves complex legal and factual questions, and continues to be the subject of much litigation. No consistent policy has emerged from the
U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under information technology patents.

In August and October 2010, we filed patent infringement lawsuits in the United States District Court for the Southern District of California and United States International Trade Commission
(ITC), respectively, against various parties. Both lawsuits claim infringement of two of our United States patents, Nos. 6,328,766 and 6,353,581.



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In November 2011, we entered into a multi-year settlement and cross-licensing agreement with
IBM pursuant to which we released all claims we had against Dell and IBM in the United States District Court for the Southern District of California and at the ITC. However, our infringement case against BDT AG and its affiliates continues.

In July 2012, the ITC released the public version of the Initial Determination, which finds that the six asserted claims of
U.S. Patent No. 6,328,766 are valid. The Initial Determination finds no infringement of United States Patent No. 6,353,581. The ITC may review and modify the Initial Determination, which is not a final determination of the ITC action. The
ITCs Final Determination in the investigation is expected by October 22, 2012. See Item 3. Legal Proceedings for additional information on the patent litigation lawsuits.

In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of
California against seven companies. See Item 3. Legal Proceedings for additional information on these patent litigation lawsuits.

In August 2012, Quantum Corporation filed counterclaims against us in the United States District Court for the Southern District of California action, alleging trademark infringement and unfair
competition claims, and infringement of United States Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. Quantum is seeking monetary damages from us and injunctive relief.

We could incur charges for excess and obsolete inventory.

The value of our inventory may be adversely affected by factors that affect our ability to sell the products in our inventory. Such factors include changes in technology, introductions of new products by
us or our competitors, the current or future economic downturns, or other actions by our competitors. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which adversely affects cost
of sales and gross profit. We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new products that we or our competitors may
introduce. We have established reserves for slow moving or obsolete inventory. These reserves, however, may prove to be inadequate, which would result in additional charges for excess or obsolete inventory.

Our warranty reserves may not adequately cover our warranty obligations.

We have established reserves for the estimated liability associated with our product warranties. However, we could experience unforeseen circumstances where these or future reserves may not adequately
cover our warranty obligations. For example, the failure or inadequate performance of product components that we purchase could increase our warranty obligations beyond these reserves.

The failure to attract, hire, retain and motivate key personnel could have a significant adverse impact on our operations.

Our business is dependent on our ability to attract, hire, retain and motivate talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including competition for
such highly skilled personnel; fluctuations in global economic and industry conditions; changes in our management or leadership; competitors hiring practices; and the effectiveness of our compensation programs. Additionally, we have
experienced a prolonged period of operating losses and declines in our stock price and cash position, which have affected and may continue to affect employee morale and retention. Turnover, particularly among senior management, may also create
distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and
operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. We cannot guarantee that we will successfully attract or retain the management we need, or be able to maintain an optimal workforce
size. Any inability to attract, hire, retain or motivate such personnel or to address manpower constraints could materially adversely affect our results of operations, financial position or cash flows. We do not currently maintain any key-man
insurance for any of our employees.

We face risks related to the continuing economic downturn.

The continuing economic downturn in the U.S. and global financial markets, and in the U.S. and global economies, has had, and may continue
to have, a material and adverse impact on our business and our financial condition. Businesses may further reduce or postpone spending on IT infrastructure in response to tighter credit, negative financial news and declines in income or asset
values. We believe that such reduction in, or postponement of, spending has had and may continue to have a material adverse effect on the demand for our products. We cannot predict the length or severity of the current economic downturn, or the
timing or severity of future economic or industry downturns. The continuing uncertainty in the capital markets may also severely restrict our ability to access the capital markets, which would limit our ability to react to changing economic and
business conditions. A prolonged recession or continued or further decline in the global economy would materially adversely affect our results of operations, financial position or cash flows.

Our financial results may fluctuate substantially for many reasons, and past results should not be relied on as indications of future performance.

The markets that we serve are volatile and subject to market shifts that we may be unable to anticipate. A slowdown in the demand for
workstations, mid-range computer systems, networks and servers could have a significant adverse effect on the demand for our products in any given period. In the past, we have experienced delays in the receipt of purchase orders and, on occasion,
anticipated purchase orders have been



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rescheduled or have not materialized due to changes in customer requirements. Our customers may cancel or delay purchase orders for a variety of reasons, including, but not limited to, the
rescheduling of new product introductions, changes in our customers inventory practices or forecasted demand, general economic conditions affecting our customers markets, changes in our pricing or the pricing of our competitors, new
product announcements by us or others, quality or reliability problems related to our products, or selection of competitive products as alternate sources of supply. In particular, our ability to forecast sales to distributors, VARs and DMRs is
especially limited because these customers typically provide us with relatively short order lead times or are permitted to change orders on short notice. Because a large portion of our sales is generated by our European channel, our first fiscal
quarter (July through September) results of operations are often impacted by seasonally slow European orders, reflecting the summer holiday period in Europe. None of our customers is obligated to purchase a specific amount of our products.

Our financial results have fluctuated and will continue to fluctuate quarterly and annually based on, among others, the
following factors:



| |  |  | changes in customer mix;
| | - |  | ------------------------



| |  |  | increases in the cost of, or limitations on, the availability of materials;
| | - |  | ---------------------------------------------------------------------------



| |  |  | fluctuations in average selling prices;
| | - |  | ---------------------------------------



| |  |  | changes in product mix;
| | - |  | -----------------------



| |  |  | increases in costs and expenses associated with the introduction of new products; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | currency exchange fluctuations.
| | - |  | -------------------------------

We therefore believe that our revenue and operating results will continue to fluctuate, and that period-to-period comparisons are not necessarily meaningful and should not be relied on as indications of
future performance. Our revenue and operating results may fail to meet the expectations of public market analysts or investors, which could have a material adverse effect on the price of our common stock. In addition, portions of our expenses are
fixed and difficult to reduce if our revenues do not meet our expectations. These fixed expenses magnify the adverse effect of any revenue shortfall.

We plan to replace our Enterprise Resource Planning (ERP) System within the next year. This will be expensive and may be disruptive to our business.

Our ERP system is 15 years old, and we plan to replace it within the next year. Transitioning to a new ERP system will be expensive and
time consuming, and our business and results of operations may be materially and adversely affected if problems occur during the transition. In addition, we have modified our current ERP system significantly during its term of use and it is possible
that we will experience a significant system failure before we replace it. Any such failure may materially and adversely affect our business, liquidity, results of operations and financial position.

Our international operations are important to our business and involve unique risks.

Sales to customers outside of the United States represent a significant portion of our total sales and we expect them to continue to do
so. Sales to customers outside the United States are subject to various risks, including, but not limited to:



| |  |  | the imposition of governmental controls mandating compliance with various foreign and U.S. export laws;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | currency exchange fluctuations;
| | - |  | -------------------------------



| |  |  | weak economic conditions in foreign markets;
| | - |  | --------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | trade restrictions, tariffs and taxes;
| | - |  | --------------------------------------



| |  |  | longer payment cycles typically associated with international sales; and
| | - |  | ------------------------------------------------------------------------



| |  |  | difficulties in staffing and managing international operations.
| | - |  | ---------------------------------------------------------------

Furthermore, we may be unable to comply with changes in foreign laws, rules and regulations applicable to us in the future, which could
have a material adverse effect on our business, results of operations, financial position and liquidity.

We are subject to exchange rate
risk in connection with our international operations.

We do not currently engage in foreign currency hedging activities
and, therefore, we are exposed to some level of currency risk. While essentially all of our sales in international markets are denominated in U.S. dollars, our wholly-owned subsidiaries in the United Kingdom, France and Germany incur costs that are
denominated in local currencies. As exchange rates vary, these results when translated into U.S. dollars may vary from expectations and adversely impact overall expected results. A weaker U.S. dollar would result in an increase to revenue and
expenses upon consolidation, and a stronger U.S. dollar would result in a decrease to revenue and expenses upon consolidation. Exchange rate transactions resulted in a net gain of $0.2 million during fiscal 2012.

We have made a number of acquisitions in the past and we may make acquisitions in the future. The failure to successfully integrate acquisitions and
successfully complete product development and launch of the related products could harm our business, financial condition and operating results.

We have in the past and may in the future make acquisitions of complementary businesses, products or technologies as we implement our business strategy. Mergers and acquisitions involve numerous risks,
including liabilities that we may assume from the acquired company,



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difficulties in completion of in-process product development and assimilation of the operations and personnel of the acquired business, the diversion of managements attention from other
business concerns, risks of entering markets in which we have no direct prior experience, and the potential loss of key employees of the acquired business.

Future mergers and acquisitions by us also may result in dilutive issuances of our equity securities and the incurrence of debt, amortization expense and potential impairment charges related to intangible
assets. Any of these factors could adversely affect our business, liquidity, results of operations and financial position.

The market
price of our common stock is volatile.

The market price of our common stock has experienced significant
fluctuations since it commenced trading in February 1997, and may continue to fluctuate significantly in the future. Many factors could cause the market price of our common stock to fluctuate, including, but not limited to:



| |  |  | our ability to meet our working capital needs;
| | - |  | ----------------------------------------------



| |  |  | announcements concerning us, our competitors, our customers or our industry;
| | - |  | ----------------------------------------------------------------------------



| |  |  | changes in earnings estimates by analysts;
| | - |  | ------------------------------------------



| |  |  | purchasing decisions of significant customers;
| | - |  | ----------------------------------------------



| |  |  | quarterly variations in operating results;
| | - |  | ------------------------------------------



| |  |  | the introduction of new technologies or products by us or our competitors;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in product pricing policies by us or our competitors;
| | - |  | -------------------------------------------------------------



| |  |  | the terms of any financing arrangements we enter into; and
| | - |  | ----------------------------------------------------------



| |  |  | changes in general economic conditions.
| | - |  | ---------------------------------------

In addition, stock markets have generally experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller
public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

We may not be able to continue to meet the continued listing requirements for the NASDAQ Capital Market. If our common stock is delisted from the
NASDAQ Capital Market, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.

We are currently in compliance with all of the listing standards for listing on the NASDAQ Capital Market, but we cannot provide any
assurance that we will continue to be in compliance in the future. Any delisting of our common stock from the NASDAQ Capital Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of
common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades and increase the transaction costs inherent in trading such shares with overall negative effects for our shareholders. In addition,
delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. For these
reasons and others, delisting could adversely affect our business, financial condition and results of operations.



|Item 1B. | Unresolved Staff Comments.
|-------- | --------------------------

We have no unresolved comments from the SEC.



|Item 2. | Properties.
|------- | -----------

We own no
real property and we currently lease all facilities used in our business. Our headquarters is located in San Diego, California, where we lease a 91,300 square foot facility in a light industrial complex. The lease expires in February 2014 and
may be renewed for one additional five-year period. This facility houses manufacturing, repair services, research and development, technical support, and administrative functions.

We lease a 20,777 square foot facility in San Jose, California. The lease expires in May 2017 and can be renewed for one additional
five-year period. The San Jose facility houses research and development, technical support, sales and marketing, and administrative functions.

We lease a 17,000 square foot facility located in Wokingham, England, which houses sales, technical support and repair services, and administration functions. The lease expires in January 2018. We
also maintain small sales offices located close to Paris, France; Munich, Germany; and in Singapore.



|Item 3. | Legal Proceedings.
|------- | ------------------

We
are from time to time involved in various lawsuits, legal proceedings or claims that arise in the ordinary course of business. We do not believe any such legal proceedings or claims will have, individually or in the aggregate, a material adverse
effect on our business, liquidity, results of operations or financial position. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.



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In August 2010, we filed a patent infringement lawsuit in the United
States District Court for the Southern District of California against BDT AG, BDT Products, Inc. and BDT-Solutions GmbH. In October 2010, we filed an amended complaint for patent infringement in that court naming the following defendants: BDT AG;
BDT Products, Inc.; BDT-Solutions GmbH & Co. KG; BDT Automation Technology (Zhuhai FTZ) Co., Ltd.; BDT de México, S. de R.L. de C.V.; Dell; and IBM. Also in October 2010, we filed a complaint for patent infringement with the United
States International Trade Commission (ITC) against the same defendants. Both lawsuits claim infringement of two of our United States patents, Nos. 6,328,766 and 6,353,581. The complaints broadly claimed infringement by BDTs
products, and they specifically identify BDTs FlexStor II ® product line as infringing our patents. The
complaints also claimed infringement by Dell Inc. and IBM products that are manufactured by BDT based on the FlexStor II
® . The Southern District of California case has been stayed to allow the ITC case to move forward first. The
ITC instituted the case on November 18, 2010 (Investigation No. 337-TA-746). The trial for such case began on August 29, 2011 and ended on September 7, 2011.

In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims
we had against IBM and Dell in connection with the patent infringement lawsuits we had filed in the United States District Court for the Southern District of California and at the ITC against BDT AG and certain of its affiliates, Dell and IBM.
However, our infringement case against BDT AG and its affiliates continues and in June 2012, the Chief Administrative Law Judge of the ITC issued a public notice of the Initial Determination affirming that both of our asserted patents are valid, but
that BDT did not violate Section 337 of the Tariff Act of 1930. In July 2012, the ITC released the public version of the Initial Determination, which finds that the six asserted claims of U.S. Patent No. 6,328,766 are valid. The Initial
Determination finds no infringement of United States Patent No. 6,353,581.

We petitioned the full Commission of the ITC
for a review of some of the Initial Determination findings. The Commission has decided to review in part the Initial Determination on its merits and the Commission is expected to issue its decision in a final determination by October 22, 2012.
Upon completion of the ITC case, we plan to pursue monetary damages against BDT in district court.

In June 2012, we filed
five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In these lawsuits we have asserted claims of infringement on one or both of the following United States
Patent Nos. owned by us: 6,328,766 and 6,353,581, against the following defendants: Quantum Corporation, based in San Jose, California; Spectra Logic Corporation, based in Boulder, Colorado; PivotStor, Inc., based in Irvine, California; Qualstar
Corporation, based in Simi Valley, California; Tandberg Data GmbH, based in Germany; Tandberg Data Corp., based in Westminster, Colorado; and Venture Corporation Limited, based in Singapore.

In August 2012, Quantum Corporation filed counterclaims against us in the United States District Court for the Southern District of
California action, alleging trademark infringement and unfair competition claims, and infringement of United States Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. Quantum is seeking monetary damages from us and injunctive
relief.



|Item 4. | Mine Safety Disclosures.
|------- | ------------------------

Not Applicable.



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##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
|------- | -------------------------------------------------------------------------------------------------------------

Our common stock trades on the NASDAQ Capital Market under the symbol OVRL. As of August 31, 2012 , there were
approximately 53 shareholders of record.



|                  |  |              |      |  |     |   |      | 
|----------------- |  | ------------ | ---- |  | --- | - | ---- | 
|                  |  | Sales Prices |     
|                  |  | High         |      |  | Low |  
|Fiscal Year 2012: |  |              |      |  |     |   |      | 
|Fourth quarter    |  | $            | 2.39 |  |     | $ | 1.18 | 
|Third quarter     |  | $            | 2.80 |  |     | $ | 1.91 | 
|Second quarter    |  | $            | 2.60 |  |     | $ | 2.04 | 
|First quarter     |  | $            | 3.24 |  |     | $ | 2.00 | 
|Fiscal Year 2011: |  |              |      |  |     |   |      | 
|Fourth quarter    |  | $            | 2.82 |  |     | $ | 1.99 | 
|Third quarter     |  | $            | 2.50 |  |     | $ | 1.32 | 
|Second quarter    |  | $            | 1.65 |  |     | $ | 1.13 | 
|First quarter     |  | $            | 2.02 |  |     | $ | 1.37 | 

The above quotations reflect inter-dealer prices, without retail markup, markdown or commission and may
not necessarily represent actual transactions. We have not paid any cash dividends on our common stock for our two most recent fiscal years and do not anticipate paying any cash dividends in the foreseeable future.



|Item 6. | Selected Financial Data.
|------- | ------------------------

Not applicable.



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

The following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that are
difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as believes, hopes, intends, estimates,
expects, projects, plans, anticipates and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking.
Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our
ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our new manufacturing partner;
our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it
comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with
branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers, suppliers and creditors perceptions of our continued viability; rescheduling or cancellation of customer
orders; loss of a major customer; general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such
statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading Risk Factors in Part I, Item 1A of this report, any of which could cause actual
results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new
information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements.

We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (SMEs), distributed enterprises, and small and medium
businesses (SMBs) to anticipate and respond to data storage requirements. Whether an organizations data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different
tiers of information. We enable companies to expend fewer resources on information technology (IT) allowing them to focus on being more responsive to the needs of their customers.

We develop and deliver a comprehensive solution set of award-winning products and services for storing data
throughout the organization and during the entire data lifecycle. Our SnapServer ® product is a complete line of
network attached storage (NAS) products, and our SnapSAN  products are storage area network (SAN) solutions designed to ensure primary and secondary data is accessible and protected regardless of its location. Our
SnapServer ® and SnapSAN  solutions are available with backup, replication and mirroring software in
highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO SERIES ® and REO SERIES ® libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.



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Our approach emphasizes long-term investment protection for our customers and reduces the
complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it
available instantly without downtime.

End users of our products include SMEs, SMBs, distributed enterprise companies such as
divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail,
manufacturing, telecommunications, broadcasting, research and development and many others. See Business in Part I, Item 1 of this report for more information about our business, products and operations.

Overview

This overview discusses matters on which our management primarily focuses in evaluating our financial position and operating performance.

Generation of revenue . We generate the majority of our revenue from sales of our data protection products. The
balance of our revenue is provided by selling maintenance contracts and rendering related services, and earning royalties on our licensed technology. The majority of our sales are generated from sales of our branded products through a worldwide
channel, which includes systems integrators and VARs.

Business Transition. During the fourth quarter of fiscal 2011,
we fulfilled all our obligations for supply of tape libraries to our sole OEM customer; however, we will continue to provide spare parts and services under the agreement. In fiscal 2012, revenue from our sole OEM customer decreased by 23.2% compared
to fiscal 2011. OEM product revenue, including spare parts, accounted for 3.9% and 10.3% of sales in fiscal 2012 and 2011, respectively. OEM total revenue accounted for 17.0% and 18.8% of net revenues in fiscal 2012 and 2011, respectively.

We reported net revenue of $59.6 million for fiscal 2012, compared with $70.2 million for fiscal 2011. The decline in net
revenue resulted in a net loss of $16.2 million , or $0.66 per share, for fiscal 2012 compared with a net loss of $14.5 million , or $0.94 per share, for fiscal 2011.

Intellectual property rights . In August and October 2010, we filed patent infringement lawsuits in the United States District Court for the Southern District of California and United States
International Trade Commission (ITC), respectively, against various parties. Both lawsuits claim infringement of two of our United States patents, Nos. 6,328,766 and 6,353,581.

In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims
we had against Dell and IBM in the United States District Court for the Southern District of California and at the ITC. However, our infringement case against BDT AG and its affiliates continues.

In July 2012, the ITC released the public version of the Initial Determination, which finds that the six asserted claims of U.S. Patent
No. 6,328,766 are valid. The Initial Determination finds no infringement of United States Patent No. 6,353,581. We petitioned the full Commission of the ITC for a review of some of the Initial Determination findings. The Commission has
decided to review in part the Initial Determination on its merits and the Commission is expected to issue its decision in a final determination by October 22, 2012. See Item 3. Legal Proceedings for additional information on the
patent litigation lawsuits.

In June 2012, we filed five additional patent infringement lawsuits in the United States District
Court for the Southern District of California against seven companies. See Item 3. Legal Proceedings for additional information on these patent litigation lawsuits.

In August 2012, Quantum Corporation filed counterclaims against us in the United States District Court for the Southern District of
California action, alleging trademark infringement and unfair competition claims, and infringement of United States Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. Quantum is seeking monetary damages from us and injunctive
relief.

Liquidity and capital resources. At June 30, 2012, we had a cash balance of $10.5 million , compared to
$10.2 million at June 30, 2011. In fiscal 2012, we incurred a net loss of $16.2 million . During the third quarter of fiscal 2012, we sold an aggregate of 3,640,000 shares of our common stock for gross proceeds of approximately $7.3 million and
net proceeds of approximately $6.6 million. In August 2011, we entered into a credit facility that provides for an $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. Cash management
and preservation continue to be a top priority. We expect to incur negative operating cash flows during the remainder of calendar year 2012 as we continue to reshape our business model and further improve operational efficiencies.

Management has projected that cash on hand, combined with available borrowings under our credit facility, will be sufficient to allow us
to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in
operating costs and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in spending, extend payment terms with
suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.



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##### Table of Contents

As of June 30, 2012, we had working capital of $7.4 million , reflecting decreases in
current assets and current liabilities of $2.1 million and $0.8 million, respectively, during fiscal 2012. The decrease in current assets is primarily attributable to a $1.8 million decrease in accounts receivable due to lower sales, and a $1.9
million decrease in other current assets primarily due to a decrease in prepaid service contracts. These decreases were offset by a $1.2 million increase in inventory due to significant purchases at fiscal year end for the first quarter of fiscal
2013 product sales, and $0.3 million increase in cash. The decrease in current liabilities is primarily attributable to a $0.9 million decrease in the fair value of an equity award, offset by a slight increase in accounts payable and accrued
liabilities related to operating activities.

Industry trends. We estimate that the cost of
managing digital assets is four times the cost of acquiring storage devices. Furthermore, many SMEs and SMBs are seeking to implement tiered storage for primary and secondary data utilizing a combination of low cost SATA (Serial ATA) drives, high
performance SAS (Serial Attached SCSI) and Solid State Drives (SSDs) drives. IDC estimates that the total NAS market will grow at approximately 9.1% through 2015, and the growth rate for NAS storage systems in price bands up to $15,000,
where our SnapServer ® solutions lie, is estimated to be 17.3%. According to IDC, tape storage still constitutes
approximately 7.3% of the total storage revenue in the global storage market. Sales of tape automation appliances represented 31.4% and 37.7% of our revenue during fiscal 2012 and 2011, respectively.

Recent Developments

In
July 2012, we released the SnapSAN  3000 for midrange businesses, and the SnapSAN  5000 for the enterprise, which replaced the SnapSAN  S2000. Both systems are highlighted by features like thin provisioning, volume cloning,
synchronous and asynchronous remote replication, snapshots and disk spin down for reduced power consumption. The SnapSAN  5000 offers additional performance, SSD integration for caching and policy-based tiering, and performance analysis,
tuning and compliance tools.

In August 2012, we announced that Randy Gast joined us as Senior Vice President of Strategic
Alliances and Client Services.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts
of assets, liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, share-based compensation, bad
debts, inventories, intangible and other long-lived assets, warranty obligations and income taxes. We base our estimates on historical experience and on various 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.

Critical accounting policies are those policies that, in managements view, are most important in the portrayal of our financial
condition and results of operations. The footnotes to our consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a
significant impact on the results that we report in our consolidated financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters
that are inherently uncertain. Our critical accounting policies and estimates that require the most significant judgment are discussed further below.

Revenue Recognition

We recognize revenue from sales of products
when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales (excluding sales to distributors) is recognized
upon shipment of products to our customers. These customers are not entitled to any specific right of return or price protection, except for any defective product that may be returned under our warranty policy.

Generally, title and risk of loss transfer to the customer when the product leaves our dock. Product sales to distribution customers are
subject to certain rights of return, stock rotation privileges and price protection. Because we are unable to estimate our exposure for returned product or price adjustments, revenue from shipments to these customers is not recognized until the
related products are in turn sold to the ultimate customer by the distributor. For products in which software is more than an incidental component, we recognize revenue in accordance with current authoritative guidance for software revenue
recognition.

We have various royalty arrangements with independent service providers that sell our product and also sell and
provide service on our product. These independent service providers pay a royalty fee for service contracts in place on our product. The royalty fee is calculated by us for the units covered in the quarter, and agreed to by the service provider,
based upon the monthly fee for each unit covered by the independent service provider.

We have various
licensing agreements relating to our Variable Rate Randomizer (VR 2®) technology with third parties.
The licensees pay us a royalty fee for sales of their products that incorporate our VR 2® technology. The
licensees provide us with periodic reports that include the quantity of units, subject to royalty, sold to their end users. We record the royalty when reported to us by the licensee, generally in the period during which the licensee ships the
products containing VR 2® technology.



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Allowance for Doubtful Accounts

We estimate our allowance for doubtful accounts based on an assessment of the collectibility of specific accounts and the overall
condition of the accounts receivable portfolio. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific trade and other receivables, historical bad debts, customer credits, customer concentrations, customer
credit-worthiness, current economic trends and changes in customers payment terms and/or patterns. If the financial condition of our customers were to deteriorate, impairing their ability to make additional payments, then we may need to make
additional allowances. Likewise, if we determine that we could realize more of our receivables in the future than previously estimated, we would adjust the allowance to increase income in the period we made the determination. We review the allowance
for doubtful accounts on a quarterly basis and record adjustments as considered necessary. Generally, our allowance for doubtful accounts is based on specific identification. If we fail to identify an account as doubtful, or if we identify an
account as uncollectible that is later collected, our results could vary.

Share-based Compensation

Share-based compensation expense can be significant to our results of operations, even though no cash is used for such expense. In
determining period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We use the Black-Scholes option pricing model to determine the fair value of the award. This model requires the input of
highly subjective assumptions, including the expected volatility of our stock and the expected term the average employee will hold the option prior to the date of exercise. In addition, we estimate pre-vesting forfeitures for share-based awards that
are not expected to vest. We primarily use historical data to determine the inputs and assumptions to be used in the Black-Scholes pricing model. Changes in these inputs and assumptions could occur and could materially affect the measure of
estimated fair value and make it difficult to compare the results in future periods to our current results.

A 10% change in
our share-based compensation for the year ended June 30, 2012 would have affected our net loss by $0.5 million.

Inventory
Valuation

We record inventories at the lower of cost or market. We assess the value of our inventories periodically
based upon numerous factors including, among others, expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, we adjust our inventory for obsolete or
unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated market value. If actual market conditions are less favorable than we project, we may need to record additional inventory adjustments and
adverse purchase commitments.

Warranty Obligations

We provide for estimated future costs of warranty obligations in accordance with current accounting rules. For return-to-factory and on-site warranties, we accrue for warranty costs at the time revenue is
recognized based on contractual rights and on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims above historical experience or our costs to provide warranty services increase, we
may be required to increase our warranty accrual. Any such unforeseen increases may have an adverse impact on our gross margins in the periods in which they occur. Similarly, if we experience a decrease in warranty claims or our costs to provide
services decline, we may be required to decrease our warranty accrual, which may have a favorable impact on our gross margins in the periods in which they occur.

Results of Operations

The following table sets forth certain financial
data as a percentage of net revenue:



|                                          |  |             |       |    |      |  |       |   
|----------------------------------------- |  | ----------- | ----- | -- | ---- |  | ----- | --
|                                          |  | Fiscal Year |      
|                                          |  | 2012        |       |    | 2011 | 
|Net revenue                               |  |             | 100.0 | %  |      |  | 100.0 | % 
|Cost of revenue                           |  |             | 67.9  |    |      |  | 69.8  |   
|                                          |  |             |       |    |      |  |       |   
|Gross profit                              |  |             | 32.1  |    |      |  | 30.2  |   
|Operating expenses:                       |  |             |       |    |      |  |       |   
|Sales and marketing                       |  |             | 27.1  |    |      |  | 23.4  |   
|Research and development                  |  |             | 13.7  |    |      |  | 10.9  |   
|General and administrative                |  |             | 19.9  |    |      |  | 18.2  |   
|                                          |  |             |       |    |      |  |       |   
|                                          |  |             | 60.7  |    |      |  | 52.5  |   
|Loss from operations                      |  |             | (28.6 | )  |      |  | (22.3 | ) 
|Other income (expense), net               |  |             | 1.5   |    |      |  | 1.9   |   
|                                          |  |             |       |    |      |  |       |   
|Loss before income taxes                  |  |             | (27.1 | )  |      |  | (20.4 | ) 
|Provision for (benefit from) income taxes |  |             | 0.1   |    |      |  | 0.4   |   
|                                          |  |             |       |    |      |  |       |   
|Net loss                                  |  |             | (27.2 | )% |      |  | (20.8 | )%
|                                          |  |             |       |    |      |  |       |   



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##### Table of Contents

A summary of the sales mix by product follows:



|                      |  |             |       |   |      |  |       |  
|--------------------- |  | ----------- | ----- | - | ---- |  | ----- | -
|                      |  | Fiscal Year |      
|                      |  | 2012        |       |   | 2011 | 
|Tape-based products:  |  |             |       |   |      |  |       |  
|NEO Series
®          |  |             | 31.4  | % |      |  | 37.6  | %
|ARCvault
® family     |  |             |      |   |      |  | 0.1   |  
|                      |  |             |       |   |      |  |       |  
|                      |  |             | 31.4  |   |      |  | 37.7  |  
|Disk-based products:  |  |             |       |   |      |  |       |  
|REO Series
®          |  |             | 1.8   |   |      |  | 2.2   |  
|SnapServer
®          |  |             | 16.7  |   |      |  | 15.8  |  
|                      |  |             |       |   |      |  |       |  
|                      |  |             | 18.5  |   |      |  | 18.0  |  
|Service               |  |             | 40.7  |   |      |  | 34.5  |  
|Spare parts and other |  |             | 9.3   |   |      |  | 9.6   |  
|VR
2®                 |  |             | 0.1   |   |      |  | 0.2   |  
|                      |  |             |       |   |      |  |       |  
|                      |  |             | 100.0 | % |      |  | 100.0 | %
|                      |  |             |       |   |      |  |       |  

Fiscal 2012 Compared with Fiscal 2011

Net Revenue. Net revenue decreased to $59.6 million during fiscal 2012 from $70.2 million during fiscal 2011, a decrease of
$10.6 million, or 15.1%. The decline was due to lower revenue from our Overland branded products primarily as a result of decreased sales volumes in our taped-based and disk-based products sold in the Americas and EMEA. In addition, decreased
revenues from our sole OEM customer represented approximately 29.0% of the overall decrease in revenues, as a result of the fulfillment of all our obligations for the supply of tape libraries in the fourth quarter of fiscal 2011.

Product Revenue

Net product revenue decreased to $35.2 million during fiscal 2012 from $45.7 million during fiscal 2011. The decrease of approximately $10.5 million, or 23.0%, was primarily associated with (i) a
decrease of $4.2 million in OEM revenue related to the fulfillment of our obligations under the product supply portion of an agreement with our sole OEM customer, (ii) $3.5 million decrease in sales of our NEO ® products, (iii) $1.2 million decrease in sales of our SnapServer ® products, (iv) $1.1 million decrease in sales of spare parts, and (v) $0.4 million decrease in sales of
our REO ® products. The decrease in sales of our SnapServer ® products was primarily attributable to two factors: (i) we increased the selling price of our SnapServer ® products as a result of the increased cost of disk drives due to the severe flooding in Thailand in October 2011, which negatively impacted short-term demand for
these products; and (ii) the production ramp-up time for our newly launched disk-based products was longer than originally anticipated, which has caused customers to delay orders.

Service Revenue

Net service revenue was relatively constant at $24.3 million during fiscal 2012 compared to $24.2 million during fiscal 2011.

Royalty Fees

Net royalty fees decreased to $0.2
million during fiscal 2012 from $0.3 million during fiscal 2011. The decrease of $0.1 million, or 33.3%, was primarily associated with lower VR 2® technology royalties. VR 2®
technology royalties during fiscal 2012 totaled $0.1 million compared with $0.2 million during fiscal 2011.

Gross
Profit. Overall gross profit decreased to $19.2 million during fiscal 2012 compared to $21.2 million during fiscal 2011. Gross margin increased to 32.1% during fiscal 2012 from 30.2% during fiscal 2011 primarily related to the increase in
higher margin service revenue as a percentage of total revenue.

Product Revenue

Gross profit on product revenue during fiscal 2012 was $4.9 million compared to $7.5 million during fiscal 2011. The decrease of $2.6
million, or 34.7%, was primarily due to the 23.0% decrease in net product revenue. Gross margin on product revenue at 13.9% for fiscal 2012 decreased from 16.5% for fiscal 2011. This decrease was primarily due to increased prices for disk drives for
our disk-based products as a result of the flooding in Thailand in October 2011, as well as additional production costs incurred when we launched our new disk based products.



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##### Table of Contents

Service Revenue

Gross profit on service revenue during fiscal 2012 was $14.1 million compared to $13.3 million during fiscal 2011. The increase of $0.8
million, or 6.0%, was primarily due to our performing an increasing portion of service repair internally beginning the third quarter of fiscal 2011, rather than utilizing third-party vendors. Gross margin on service revenue at 58.2% for fiscal 2012
increased from 55.0% for fiscal 2011.

Sales and Marketing Expense. Sales and marketing expense in fiscal 2012
decreased to $16.2 million from $16.4 million during fiscal 2011. The decrease of $0.2 million, or 1.2%, was primarily a result of a decrease of $0.7 million in employee and related expenses associated with a decrease in the average headcount,
offset by an increase of $0.3 million in public relations and advertising expense, including contractor fees, due to reductions in marketing programs and bringing previously outsourced projects in house, and an increase of $0.2 million in
share-based compensation expense primarily associated with options granted to an executive officer.

Research and
Development Expense. Research and development expense in fiscal 2012 increased to $8.1 million from $7.7 million during fiscal 2011. The increase of $0.4 million, or 5.2%, was primarily a result of an increase of $0.3 million in development
expense associated with new product development, and an increase of $0.1 million in share-based compensation expense primarily associated with options granted to an executive officer.

General and Administrative Expense. General and administrative expense in fiscal 2012 decreased to $11.8 million from $12.7
million during fiscal 2011. The decrease of $0.9 million, or 7.1%, was primarily a result of (i) a decrease of $1.5 million in employee related expenses associated with a decreases in average headcount and facility costs related to the
downsizing of our San Diego facility, (ii) a decrease of $0.8 million in outside contractor and audit expenses, principally for financial and accounting services, and (iii) a decrease of $0.3 million in fees as a result of the termination
of our two non-OEM financing agreements. These decreases were offset by an increase of $1.6 million in share-based compensation expense primarily associated with options granted to executive officers, and an increase of $0.2 million in legal fees.

Interest Income. We generated interest income of $0.4 million during fiscal 2012 related to the recovery of
accounts receivable in our foreign subsidiaries previously written off in fiscal 2003. We had no interest income in fiscal 2011.

Interest Expense. We incurred interest expense of $0.1 million and $1.1 million during fiscal 2012 and 2011, respectively. The decrease was primarily a result of the termination of our two
non-OEM financing agreements. Interest expense in fiscal 2012 was related to borrowings on our credit facility.

Other
Income (expense), net. During fiscal 2012, we incurred other income (expense), net, of $0.7 million of income compared with $2.5 million of income during fiscal 2011. The change of $1.8 million, or 72.0%, was primarily due to the receipt of
$0.5 million in fiscal 2012 related to the recovery of accounts receivable in our foreign subsidiaries previously written off in 2003, compared to the receipt of $3.0 million in fiscal 2011 from various institutional investors in consideration for a
minority ownership interest in any amounts we receive from litigation awards or settlements arising from our patent infringement lawsuits. In addition, we realized $0.2 million in foreign currency gains in fiscal 2012, compared to $0.5 million in
realized foreign currency losses in fiscal 2011.

Provision for Income Taxes. During fiscal 2012, we recognized
income tax expense of $0.1 million compared to $0.3 million in fiscal 2011. The decrease of $0.2 million is primarily due to a reduction in tax rate for our foreign operations.

Liquidity and Capital Resources

At June 30, 2012, we had a cash
balance of $10.5 million , compared to $10.2 million at June 30, 2011. In fiscal 2012, we incurred a net loss of $16.2 million . During the third quarter of fiscal 2012, we sold an aggregate of 3,640,000 shares of our common stock for gross
proceeds of approximately $7.3 million and net proceeds of approximately $6.6 million. In August 2011, we entered into a credit facility that provides for an $8.0 million secured revolving loan and may be used to fund our working capital and our
general business requirements. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during the remainder of calendar 2012 as we continue to reshape our business model and further improve
operational efficiencies.

As of June 30, 2012, we had working capital of $7.4 million , reflecting decreases in current
assets and current liabilities of $2.1 million and $0.8 million , respectively, during fiscal 2012. The decrease in current assets is primarily attributable to a $1.8 million decrease in accounts receivable due to lower sales, and a $1.9 million
decrease in other current assets primarily due to a decrease in prepaid service contracts. These decreases were offset by a $1.2 million increase in inventory due to significant purchases at fiscal year end for first quarter of fiscal 2013 product
sales, and $0.3 million increase in cash. The decrease in current liabilities is primarily attributable to a $0.9 million decrease in the fair value of an equity award, offset by a slight increase in accounts payable and accrued liabilities related
to operating activities.

Management has projected that cash on hand, combined with available borrowings under our credit
facility, will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in
product costs, (iii) increases in operating costs and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in
spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.



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##### Table of Contents

As a result of our recurring losses from operations and negative cash flows, the report from
our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2012 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

During fiscal 2012, we used cash in operating activities of $8.7 million , compared to $10.9 million in fiscal 2011. The use
of cash during fiscal 2012 was primarily a result of our net loss of $16.2 million offset by $6.6 million in non-cash items, which were share-based compensation, depreciation and amortization. In addition, we had decreases in accounts receivable due
to lower sales, offset by increases in inventory.

We used cash in investing activities of $0.9 million during fiscal 2012,
compared to $0.5 million in fiscal 2011. During fiscal 2012 and 2011, capital expenditures totaled $0.9 million and $0.3 million, respectively. Such expenditures were associated with machinery and equipment to support new product introductions.
During fiscal 2011, we acquired intangible assets consisting of existing technology (acquired technology) for $150,000.

We
generated cash from our financing activities of $9.9 million during fiscal 2012, compared to $12.7 million during fiscal 2011. During fiscal 2012, we sold an aggregate of 3,640,000 shares of our common stock for gross proceeds of approximately $7.3
million (net proceeds of approximately $6.6 million), we drew $3.5 million on our credit facility, and received $0.7 million from the exercise of warrants and stock options, offset by $0.8 million paid for taxes for net settlement of restricted
stock units. During fiscal 2011, cash generated from financing activities primarily relates to the sale of 3,376,000 shares of our common stock to certain institutional investors at $1.25 per share for gross proceeds of $4.2 million (net proceeds of
$4.0 million), and the sale of 8,653,045 shares of our common stock and warrants to purchase up to 3,807,331 shares of common stock in a private placement for a total issuance price of approximately $15.3 million (net proceeds of approximately $13.8
million). During fiscal 2011, cash generated from financing activities was offset by payments totaling $0.7 million against a note payable, and repayments of $4.4 million for amounts funded under our non-OEM accounts receivable financing agreements.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or significant guarantees to third parties that are not fully recorded in our consolidated balance sheet or fully disclosed in the notes to our consolidated
financial statements.

Contractual Obligations

The following schedule summarizes our contractual obligations to make future payments at June 30, 2012 (in thousands):



|                                |  |       |        |  |                 |   |       |           |  |   |           |  |  |              |       |  |  |   |    | 
|------------------------------- |  | ----- | ------ |  | --------------- | - | ----- | --------- |  | - | --------- |  |  | ------------ | ----- |  |  | - | -- | 
|Contractual Obligations         |  | Total |        |  | Less than1 year |   |       | 1-3 years |  |   | 4-5 years |  |  | After 5years |      
|Operating lease obligations (1) |  | $     | 7,256  |  |                 | $ | 2,882 |           |  | $ | 3,017     |  |  | $            | 1,265 |  |  | $ | 92 | 
|Purchase obligations (2)        |  |       | 4,120  |  |                 |   | 3,291 |           |  |   | 829       |  |  |              |      |  |  |   |   | 
|                                |  |       |        |  |                 |   |       |           |  |   |           |  |  |              |       |  |  |   |    | 
|Total contractual obligations   |  | $     | 11,376 |  |                 | $ | 6,173 |           |  | $ | 3,846     |  |  | $            | 1,265 |  |  | $ | 92 | 
|                                |  |       |        |  |                 |   |       |           |  |   |           |  |  |              |       |  |  |   |    | 



|(1) | Represents contractual lease obligations under non-cancelable operating leases on our San Diego, California; San Jose, California; Wokingham, England; and Paris, France
facilities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents purchase orders for inventory and non-inventory items entered into prior to June 30, 2012, with purchase dates extending beyond July 1, 2012. Some
of these purchase obligations may be canceled.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inflation

Inflation has not had a significant impact on our operations during the periods presented. Historically, we have been able to pass on to
our customers increases in raw material prices caused by inflation. If at any time we cannot pass on such increases, our margins could suffer.

Recently Issued Accounting Pronouncements

See Note 1 to our consolidated financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk.
|-------- | -----------------------------------------------------------

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are
exposed to market risk from changes in foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to our normal operating and funding activities. Historically, we have not used derivative instruments or
engaged in hedging activities.



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##### Table of Contents

Foreign Currency Risk. We conduct business on a global basis and essentially
all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and are expected to continue to represent a significant portion of sales. Our
wholly-owned subsidiaries in the United Kingdom, France and Germany incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely
impact overall expected results. The effect of exchange rate fluctuations on our results of operations during fiscal 2012 and 2011 resulted in a gain of $0.2 million for fiscal 2012 and a loss of $0.5 million for fiscal 2011.



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

Our consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a)(1) and 15(a)(2), respectively.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

Not applicable.



|Item 9A. | Controls and Procedures.
|-------- | ------------------------

Disclosure
Controls and Procedures

Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Internal Control Over Financial Reporting

Managements Report on
Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal
control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using
the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Based on our evaluation under the framework in Internal Control-Integrated Framework, our Chief Executive Officer and Chief Financial
Officer concluded that our internal control over financial reporting was effective as of June 30, 2012.

Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

This
annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Managements report on internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only managements report in this annual report.

This report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal year ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



|Item 9B. | Other Information.
|-------- | ------------------

Not
applicable.



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##### Table of Contents

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

The following table sets forth the name, age, and position of our directors. The table also sets forth the year in which each director was first elected to the Board. Directors are elected each year, and
all directors serve one-year terms. As of August 31, 2012 , directors are as follows:



|                         |  |     |  |                |  |                                                           |  |                                                                
|------------------------ |  | --- |  | -------------- |  | --------------------------------------------------------- |  | ---------------------------------------------------------------
|Name of Director Nominee |  | Age |  | Director Since |  | Position                                                  |  | Committee Membership                                           
|Robert A. Degan          |  | 73  |  | 2000           |  | Independent Director                                      |  | Audit (Chairperson),
Compensation and Nominating and Governance
|Nora M. Denzel           |  | 50  |  | 2007           |  | Independent Director                                      |  | Audit and Compensation (Chairperson)                           
|Joseph A. De Perio       |  | 34  |  | 2011           |  | Independent Director                                      |  | Audit                                                          
|Eric L. Kelly            |  | 54  |  | 2007           |  | President and Chief
Executive Officer                     |  | None                                                           
|Scott McClendon          |  | 73  |  | 1991           |  | Executive Chairperson of the Board (Independent Director) |  | Compensation and Nominating and Governance (Chairperson)       
|Shmuel Shottan           |  | 60  |  | 2011           |  | Independent Director                                      |  | Audit and Nominating and Governance                            

Each of the above-listed committee members served in such capacities for all of fiscal 2012 except for
Mr. McClendon, who was appointed to the Compensation Committee in August 2012, and Mr. De Perio, who was appointed to the Audit Committee in August 2012.

There are no family relationships between any of our directors or executive officers, and there are no arrangements or understandings between any of the directors and any other person pursuant to which
such director was or is selected as a director.

We have a standing audit committee as defined in Section 3(a)(58)(A) of
the Securities Exchange Act of 1934, as amended. The members of the Audit Committee are Robert A. Degan, Nora M. Denzel, Joseph A. De Perio, and Shmuel Shottan.

In addition to being independent under NASDAQ Marketplace Rule 5605(a)(2), all members of the Audit Committee must meet the additional independence standards for audit committee members set forth in Rule
10A-3(b)(1) of the Exchange Act and NASDAQ Marketplace Rule 5605(c)(2)(A). The Board of Directors has determined that each of Ms. Denzel and Mr. Degan qualify as an audit committee financial expert as defined in Item 407(d)(5) of
Regulation S-K under the Exchange Act.

Biographical Information of Directors

Robert A. Degan has been a private investor since January 2000. From November 1998 to December 1999, Mr. Degan served
as General Manager of the Enhanced Services & Migration Business Unit (formerly, Summa Four, Inc.) of Cisco Systems, Inc., an Internet networking company. From July 1998 to November 1998, Mr. Degan was Chairperson, President and Chief
Executive Officer of Summa Four, Inc., and from January 1997 to July 1998, he served as its President and Chief Executive Officer and as a director. Mr. Degan retired from the board of directors of CaminoSoft Corp. in December 2007,
FlexiInternational Software, Inc. in July 2006 and Gensym Corporation in May 2005. Mr. Degan was formerly on the research staff at Massachusetts Institute of Technology. Mr. Degans significant prior experience as a director and Chief
Executive Officer of Summa Four, along with his experience from his career in related industries and as a board member of other public technology companies, provides our Board of Directors with financial and operational expertise and analytical
skills relevant to the storage industry.

Nora M. Denzel served as the Senior Vice President of payroll services
at Intuit, Inc. (Intuit), a provider of business and financial management software, from February 2008 through August 2012. From February 2006 to January 2008, Ms. Denzel served as an independent consultant to technology companies.
From August 2000 to February 2006, she held several executive level positions in technology with Hewlett-Packard Company (HP), a global manufacturer of computing, communications and measurement products and services, including: Senior
Vice President/General Manager Software Global Business Unit (May 2002 to February 2006); Senior Vice President Adaptive Enterprise (June 2004 to May 2005); and Vice President Storage Organization (August 2000 to May 2002). Prior to HP, she served
as Senior Vice President of Product Operations from February 1997 to August 2000 at Legato Systems, Inc. Since September 2011, Ms. Denzel has served on the board of directors of Saba Software, Inc., a provider of learning, people management and
collaboration technologies, and also serves on the board of directors and advisory boards of several privately-held organizations. Ms. Denzels experience at Intuit and HP, combined with her prior consulting work for technology companies,
provides her with valuable knowledge of technology companies and of companies with a global presence. She is able to provide our Board of Directors with current working knowledge of business and economic trends that affect the storage industry.

Joseph A. De Perio has served as a Senior Portfolio Manager, Activist Investments and Private Equity of Clinton
Group, Inc. since October 2010. Since June 2011, Mr. De Perio has been a board member of Viking Systems, Inc., a developer, manufacturer and marketer of visualization solutions for complex, minimally invasive surgery. Since September
2011, Mr. De Perio has been the President and Vice Chairperson of ROI Acquisition Corporation. In April 2011, Mr. De Perio was elected to our Board of Directors pursuant to the terms of a purchase agreement, dated March 16, 2011
(the Purchase Agreement), by and among us and certain investors, including, Clinton Magnolia



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##### Table of Contents

Master Fund, Ltd. (CMAG) and CMAGs investment manager, Clinton Group, Inc. (CGI). From December 2007 to September 2010, Mr. De Perio was a
Vice President at Millennium Management, L.L.C. From June 2006 to December 2007, Mr. De Perio served as Vice President, Activist Investments and Long/Short Equity and Private Equity of the Clinton Group. Mr. De
Perios experience as an investor in public technology companies enables him to provide our Board of Directors with insights as to the perspectives of our institutional shareholder base.

Eric L. Kelly has served as our Chief Executive Officer since January 2009, our President since January 2010 and a member
of our Board of Directors since November 2007. From April 2007 to January 2009, Mr. Kelly served as President of Silicon Valley Management Partners Inc., a management consulting and M&A advisory firm, which he co-founded in April 2007. From
July 2004 to August 2006, Mr. Kelly was Vice President and General Manager of storage systems solutions at Adaptec, Inc. (Adaptec). From August 2002 to July 2004, he served as President and Chief Executive Officer of Snap Appliance,
Inc., which was acquired by Adaptec in July 2004. The Snap division of Adaptec was acquired by us in June 2008. From March 2000 to June 2002, Mr. Kelly served as President, Network Systems Division of Maxtor Corporation. From 1980 to 1998, he
served in executive or managerial roles with Netpower Incorporated, Diamond Multimedia Systems Incorporated, Conner Peripherals Incorporated, Marq Technologies Incorporated and IBM. Mr. Kellys position as our President and Chief Executive
Officer provides our Board of Directors with unique insight and direct access to strategic and operational information about us. His significant experience in the storage industry, including his involvement in Snap Appliance, allows him to draw on
experiences and knowledge from across the storage industry and enables him to identify best practices and strategic initiatives for us.

Scott McClendon has served as the Executive Chairperson of our Board of Directors since May 2011 and, from March 2001 to May 2011, served as Chairperson of our Board of Directors. From
November 2006 to August 2007, Mr. McClendon served as our interim President and Chief Executive Officer and as our President and Chief Executive Officer from October 1991 to March 2001, when he was named Chairperson of our Board of Directors,
and continued as an executive officer and employee until June 2001. Mr. McClendon has been a business consultant since June 2001. Mr. McClendon was employed by HP for over 32 years in various positions in engineering, manufacturing, sales
and marketing. He last served as the general manager of the San Diego Technical Graphics Division and site manager of HP in San Diego, California. Mr. McClendon is Chairperson and a director of Procera Networks, Inc., a network equipment
company. Mr. McClendons significant experience with HP, his prior tenure as our President and Chief Executive Office and his current experience as the Executive Chairperson of our Board of Directors and director of Procera provide him
with a unique set of managerial, operational and strategic skills, which provides our Board of Directors insights into our challenges, opportunities and operations.

Shmuel Shottan served as Chief Technology Officer of BlueArc Corporation (BlueArc), a supplier of enterprise network attached storage from September 2001 to September 2011 and
Senior Vice President of Engineering of BlueArc from September 2001 to April 2006. In September 2011, BlueArc was acquired by Hitachi Data Systems Corporation, a supplier of mid-range and high-end storage systems, where Mr. Shottan holds the
position of Vice President of Product Operations and Technology. Prior to BlueArc, Mr. Shottan was a General Partner of Quantum Technology Ventures, a $100 million corporate venture fund. From 1995 to March 1999, Mr. Shottan served as
Senior Vice President and Chief Technical Officer for Snap Appliance, which was sold to Quantum Corporation in March 1999. From March 1999 to February 2000, Mr. Shottan served as Senior Vice President of Engineering and Chief Strategy Officer
for the Snap Division of Quantum. Prior to Snap, Mr. Shottan served as Vice President of Engineering and Chief Technical Officer of Parallan Computer, Inc. from 1993 to 1995. Mr. Shottans significant experience at BlueArc and other
technology companies provides our Board of Directors with valuable insight directly related to technology developments in the storage industry. His engineering background and storage experience makes him particularly well suited to understanding our
technology and allows him to provide valuable perspective to our Board of Directors on new product initiatives.

Executive Officers of the
Registrant

The executive officers, their ages, positions held and biographical information as of August 31, 2012 ,
are as follows:



|                    |  |     |  |                                                             
|------------------- |  | --- |  | ------------------------------------------------------------
|Name                |  | Age |  | Position Held                                               
|Eric L. Kelly       |  | 54  |  | President and Chief Executive Officer                       
|Kurt L. Kalbfleisch |  | 46  |  | Senior Vice President, Chief Financial Officer and Secretary
|Jillian Mansolf     |  | 46  |  | Senior Vice President of Global Sales and Marketing         

Eric L. Kelly is our President and Chief Executive Officer and a director. See the
description of his business experience above under Biographical Information of Directors.

Kurt L. Kalbfleisch
has 18 years of service with Overland Storage and has served as our Senior Vice President since June 2012, Chief Financial Officer since February 2008, and Secretary since October 2009. He served as our Vice President of Finance from July 2007 to
June 2012. He served as our Interim Chief Financial Officer from August 2007 to February 2008.

Jillian Mansolf
has served as our Senior Vice President of Global Sales and Marketing since June 2012, and prior to that as our Vice President of Worldwide Sales and Marketing since joining us in July 2009. From August 2007 to June 2009, Ms. Mansolf served as
Senior Vice President of Worldwide Sales and Marketing for Data Robotics-The Makers of Drobo. From May 2006 to July 2007, she was Vice President of Worldwide Marketing & Product Management for Motion Computing, Inc., a creator of tablet
personal computers.



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##### Table of Contents

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, executive officers and beneficial owners of more than 10% of our common
stock to file reports of ownership and changes in ownership with the SEC. Based solely on copies of these reports provided to us and written representations that no other reports were required, we believe that these persons met all of the applicable
Section 16(a) filing requirements during fiscal 2012.

Code of Business Conduct and Ethics

We have adopted the Overland Storage, Inc. Code of Business Conduct and Ethics, which applies to our directors, executive officers and
employees. A copy of the Code of Business Conduct and Ethics is publicly available on our website at www.overlandstorage.com . If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a
provision of the code applying to our principal executive officer or our principal financial or accounting officer, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K.



|Item 11. | Executive Compensation.
|-------- | -----------------------

Summary
Compensation Table for Fiscal Year 2012

The following table summarizes the total compensation paid to or earned by our
principal executive officer and our two other most highly compensated executive officers (referred to as our named executive officers) for the Companys 2012 and 2011 fiscal years.



|                                                             |  |            |      |  |           |  |         |              |  |  |                    |  |  |                                             |           |  |                              |  |         |          |  |  |        |  |  |  |           | 
|------------------------------------------------------------ |  | ---------- | ---- |  | --------- |  | ------- | ------------ |  |  | ------------------ |  |  | ------------------------------------------- | --------- |  | ---------------------------- |  | ------- | -------- |  |  | ------ |  |  |  | --------- | 
|Name and Principal Position                                  |  | FiscalYear |      |  | Salary($) |  |         | Bonus($) (1) |  |  | StockAwards($) (2) |  |  | Non-EquityIncentive PlanCompensation($) (3) |           |  | All OtherCompensation($) (4) |  |         | Total($) | 
|Eric L. Kelly                                                |  |            | 2012 |  |           |  | 400,000 |              |  |  |                   |  |  |                                             |          |  |                              |  | 180,000 |          |  |  | 16,260 |  |  |  | 596,260   | 
|President and Chief Executive Officer                        |  |            | 2011 |  |           |  | 400,000 |              |  |  |                   |  |  |                                             | 4,419,519 |  |                              |  | 350,000 |          |  |  | 22,929 |  |  |  | 5,192,448 | 
|                                                             |  |            |      |  |           |  |        
|Kurt L. Kalbfleisch                                          |  |            | 2012 |  |           |  | 266,000 |              |  |  |                   |  |  |                                             |          |  |                              |  | 73,250  |          |  |  | 25,306 |  |  |  | 364,556   | 
|Senior Vice President, Chief
Financial Officer and Secretary |  |            | 2011 |  |           |  | 243,500 |              |  |  | 10,000             |  |  |                                             | 1,767,859 |  |                              |  | 109,875 |          |  |  | 25,096 |  |  |  | 2,156,330 | 
|                                                             |  |            |      |  |           |  |        
|Jillian Mansolf                                              |  |            | 2012 |  |           |  | 326,500 | (5)          |  |  |                   |  |  |                                             |          |  |                              |  | 9,688   |          |  |  | 29,617 |  |  |  | 365,805   | 
|Senior Vice President of Global Sales and Marketing          |  |            | 2011 |  |           |  | 334,095 | (5)          |  |  |                   |  |  |                                             | 1,537,980 |  |                              |  | 21,275  |          |  |  | 28,214 |  |  |  | 1,921,564 | 



|(1) | The amount shown in the Bonus column represents a discretionary bonus awarded by the Compensation Committee for the fiscal year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(2) | The amounts shown in the Stock Awards column do not reflect compensation actually received by the named executive officer. These amounts represent the fair
value on the grant date of the awards granted to these officers during the applicable fiscal year. These values have been determined under the principles used to calculate the grant date fair value of equity awards for purposes of our consolidated
financial statements. For a more detailed discussion on the valuation model and assumptions used to calculate the fair value of these awards, see Note 7 to the consolidated financial statements included herein. There were no option awards granted in
fiscal 2012 and 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The amounts shown in the Non-Equity Incentive Plan column represent bonuses awarded for fiscal 2012 and 2011 pursuant to the terms of our Executive Bonus
Plan and as established by the Compensation Committee for the fiscal year.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The amounts shown in the All Other Compensation column reflect premiums we paid on the officers behalf for health insurance, term life insurance and
certain out-of-pocket medical and wellness expenses we paid on the officers behalf.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | This amount includes sales commissions of $76,500 and $94,490 earned in fiscal 2012 and 2011, respectively.
|--- | -----------------------------------------------------------------------------------------------------------



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Outstanding Equity Awards at End of Fiscal Year 2012

The following table provides information about the holdings of stock and option awards by our named executive officers outstanding at the
end of fiscal year 2012.



|                    |  |            |            |  |                                                               |  |         |                                                                 |  |  |                        |     |  |                      |       |  |                                              |  |            |                                                        |  |  |           |     |  |   |           | 
|------------------- |  | ---------- | ---------- |  | ------------------------------------------------------------- |  | ------- | --------------------------------------------------------------- |  |  | ---------------------- | --- |  | -------------------- | ----- |  | -------------------------------------------- |  | ---------- | ------------------------------------------------------ |  |  | --------- | --- |  | - | --------- | 
|                    |  |            |            |  | Option Awards                                                 |  |         | Stock Awards                                                    | 
|Name                |  | Grant Date |            |  | Number
ofsecuritiesunderlyingunexercisedoptions(#)exercisable |  |         | Number ofsecuritiesunderlyingunexercisedoptions(#)unexercisable |  |  | Optionexerciseprice($) |     |  | Optionexpirationdate |       |  | Number ofunits ofstock thathave notvested(#) |  |            | Market valueof units ofstock thathave notvested($) (4) | 
|Eric L. Kelly       |  |            | 11/13/2007 |  |                                                               |  | 6,000   |                                                                 |  |  |                       |     |  |                      | 5.31  |  |                                              |  | 11/13/2013 |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 12/9/2008  |  |                                                               |  | 6,000   |                                                                 |  |  |                       |     |  |                      | 0.75  |  |                                              |  | 12/9/2014  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 1/27/2009  |  |                                                               |  | 299,999 |                                                                 |  |  |                       |     |  |                      | 0.78  |  |                                              |  | 1/27/2015  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 2/18/2010  |  |                                                               |  | 962,889 | (1)                                                             |  |  | 275,111                | (2) |  |                      | 2.49  |  |                                              |  | 4/23/2016  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 6/29/2011  |  |                                                               |  |         |                                                                 |  |  |                        |     |  |                      |       |  |                                              |  |            |                                                        |  |  | 1,311,154 | (3) |  | $ | 2,464,970 | 
|Kurt L. Kalbfleisch |  |            | 8/8/2002   |  |                                                               |  | 833     |                                                                 |  |  |                       |     |  |                      | 29.16 |  |                                              |  | 8/8/2012   |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 5/22/2006  |  |                                                               |  | 333     |                                                                 |  |  |                       |     |  |                      | 24.09 |  |                                              |  | 5/22/2016  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 2/18/2010  |  |                                                               |  | 177,000 | (1)                                                             |  |  |                       |     |  |                      | 2.49  |  |                                              |  | 4/23/2016  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 6/29/2011  |  |                                                               |  |         |                                                                 |  |  |                        |     |  |                      |       |  |                                              |  |            |                                                        |  |  | 522,633   | (3) |  | $ | 982,550   | 
|Jillian Mansolf     |  |            | 7/16/2009  |  |                                                               |  | 40,000  |                                                                 |  |  |                       |     |  |                      | 1.65  |  |                                              |  | 7/16/2015  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 2/18/2010  |  |                                                               |  | 178,356 | (1)                                                             |  |  |                       |     |  |                      | 2.49  |  |                                              |  | 4/23/2016  |                                                        |  |  |           |     |  |   |           | 
|                    |  |            | 6/29/2011  |  |                                                               |  |         |                                                                 |  |  |                        |     |  |                      |       |  |                                              |  |            |                                                        |  |  | 449,516   | (3) |  | $ | 845,090   | 



|(1) | This award was originally granted as a stock option award and was amended and reissued on June 29, 2011 as a stock appreciation rights (SAR) award. The
purpose of the amendment and reissuance is to provide that, upon exercise, the SAR award will be settled in cash or stock, at our discretion. No other terms of the award changed.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This SAR award vests in equal monthly installments over a thirty-six month period following the grant date.
|--- | -----------------------------------------------------------------------------------------------------------

|(3) | This stock award vests in six equal installments, with the first installment vesting six months after July 15, 2011 and an additional installment vesting at the
end of each six-month period thereafter.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Amounts listed represent the aggregate market value of the unvested restricted stock awards held by the named executive officers based on the closing price of a share
of our common stock of $1.88 on the last trading day of fiscal 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment, Severance and Change in Control Agreements

Employment Agreements. The following describes the employment arrangements we have with our named
executive officers.

Eric L. Kelly . We entered into an employment agreement with Mr. Kelly, our President
and Chief Executive Officer, on June 24, 2009, which was amended and restated on June 29, 2011 (the Kelly Agreement). The Kelly Agreement provides for Mr. Kelly to earn a base salary of $400,000, which has been his base
salary since his appointment as Chief Executive Officer on January 27, 2009. Mr. Kelly is eligible to receive an annual bonus based upon the achievement of financial and management objectives reasonably established by our Board of
Directors or an authorized committee of our Board of Directors. His annual bonus target is 100% of the greater of $400,000 or his base salary as of the end of the applicable fiscal quarter or year in which the bonus is earned, and he has the
opportunity to earn an annual bonus of up to 150% of the target bonus. If we terminate Mr. Kellys employment without cause or he resigns for good reason, or if he dies or becomes disabled, before the end of a fiscal quarter or year, he
will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For purposes of the Kelly Agreement, the terms cause and good reason are defined in the
agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in effect. To the extent that any travel, lodging or auto expense reimbursements are taxable to Mr. Kelly, we will provide
him with a tax restoration payment so that he will be put in the same after-tax position as if such reimbursements had not been subject to tax. The Kelly Agreement has a three-year term and automatically renews for additional one-year terms. We may
unilaterally modify Mr. Kellys cash compensation at any time, subject to Mr. Kellys right to terminate his employment for good reason.

The Kelly Agreement also provides that if we terminate Mr. Kellys employment without cause or if Mr. Kelly resigns from employment for good reason, then we will be obligated to pay him an
aggregate severance payment equal to the sum of (i) 150% of the greater of his base salary then in effect or his original base salary, (ii) a portion of his target bonus prorated based on the number of days he was employed during the
period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 18 months
following the date of his termination, and (iv) an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received
immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal
monthly installments over 18 months in accordance with our regular payroll practices. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based
awards that



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would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any
time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. The severance benefits described above are
contingent upon Mr. Kelly providing us with a general release of all claims.

Kurt L. Kalbfleisch. We entered into
an employment and severance agreement with Mr. Kalbfleisch, our Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary on September 29, 2009, which was amended and restated on June 29, 2011 (the
Kalbfleisch Agreement). The Kalbfleisch Agreement provides for Mr. Kalbfleisch to earn a base salary of $266,000 which was effective in May 2011. Prior to that time Mr. Kalbfleisch earned a base salary of $240,000.
Mr. Kalbfleisch is eligible to receive an annual bonus based upon the achievement of financial and management objectives reasonably established by our Board of Directors or an authorized committee of our Board of Directors. If we terminate
Mr. Kalbfleischs employment without cause or he resigns his employment for good reason before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in
which his employment terminates. For purposes of the Kalbfleisch Agreement, the terms cause and good reason are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the
end of the term then in effect. The Kalbfleisch Agreement has a three-year term and automatically renews for additional one-year terms. We may unilaterally modify Mr. Kalbfleischs cash compensation at any time, subject to
Mr. Kalbfleischs right to terminate his employment for good reason.

The Kalbfleisch Agreement provides that if we
terminate Mr. Kalbfleischs employment without cause or if Mr. Kalbfleisch resigns from employment for good reason, we will be obligated to pay him an aggregate severance payment equal to the sum of (i) the greater of his annual
base salary then in effect or his original base salary of $266,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the
premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 12 months following the date of his termination, and (iv) an amount necessary for him
to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 12 months
following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over the 12 months following termination of
employment. In addition, Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested during the 12-month period
following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the
maximum term of the applicable options under the applicable plan or upon a change in control. If such a termination of employment occurs within two years following a change in control of our company, then the severance benefits will generally be the
same as described above except that the cash severance will paid in a single lump sum on the sixtieth day after termination of employment and Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then
outstanding stock options and any other equity-based awards. The severance benefits described above are contingent upon Mr. Kalbfleisch providing us with a general release of all claims.

Jillian Mansolf . As our Senior Vice President of Global Sales and Marketing, Ms. Mansolf is an at-will employee and her
employment may be terminated by us for any reason, with or without notice. Prior to May 2011, Ms. Mansolf earned an annual salary of $238,000, was eligible for quarterly commission earnings of up to $25,500 for a total compensation package
equal up to $340,000 annually. Ms. Mansolf currently earns an annual salary of $250,000 and is eligible for quarterly commission earnings of $25,500, for a total annual compensation package of up to $352,000. Ms. Mansolf is also eligible
to receive an annual bonus based upon the achievement of financial and management objectives reasonably established by our Board of Directors or an authorized committee of our Board of Directors. Ms. Mansolfs offer letter provides that if
her employment is terminated by us without cause she is eligible to receive severance benefits consisting of six months of base salary plus earned commissions and twelve months of continued health benefits coverage.

Retention Agreements. The following describes the severance arrangements we have with our named executive officers
in the case of a change of control. For these purposes, the terms cause, good reason, and change in control are defined in each executives retention agreement.

Eric L. Kelly . On June 24, 2009, we entered into a retention agreement with Mr. Kelly, which provides that he will
receive a lump sum severance payment if, within 60 days before or two years following a change of control of our company, his employment is terminated by us without cause or he resigns for good reason. The severance payment will equal 150% of the
sum of Mr. Kellys base salary at the time of the consummation of the change of control or termination date or $400,000, whichever is higher, plus any annual target bonus. The retention agreement provides that (i) if Mr. Kelly
elects to continue insurance coverage as provided by COBRA, we will reimburse him for an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents
under COBRA for 18 months following the date of his termination, and (ii) we will reimburse him for an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts
substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursements for COBRA premiums as described in clause
(i) above). We are required to reimburse Mr. Kelly for the estimated costs of these benefits in one lump sum payment on his termination date. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of
his then outstanding stock options and any other equity-based awards. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to
earlier termination



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upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change of control. The consideration payable to Mr. Kelly under the retention agreement
is contingent upon him providing us a general release of claims. If any portion of any payment under the retention agreement would constitute an excess parachute payment within the meaning of Section 280G of the Internal Revenue
Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the Internal Revenue Code.

Jillian Mansolf . We entered into a retention agreement with Ms. Mansolf effective July 13, 2009. This agreement
generally provides that Ms. Mansolf will receive a lump sum severance payment if, within two years of the consummation of a change of control of our company, her employment is terminated without cause or she resigns with good reason. These
severance payments are based on Ms. Mansolfs base salary and target commission at the time of the consummation of the change of control or the termination date, whichever is higher, plus her target bonus for the year before the
consummation of the change of control. The agreement provides that, upon a qualifying termination in connection with a change of control, Ms. Mansolf is entitled to receive an amount equal to her annual base salary, target commissions plus
target bonus. If any portion of any payment under the retention agreement would constitute an excess parachute payment within the meaning of Section 280G of the Internal Revenue Code, then that payment will be reduced to an amount
that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the Internal Revenue Code. The agreement also provides that if Ms. Mansolf elects to continue health insurance coverage as provided by COBRA, we
would reimburse her for the amount of the premiums incurred by her for 12 months following the termination date. The consideration payable to Ms. Mansolf under the retention agreement is contingent upon her providing us a general release of
claims.

Equity Awards Granted in Fiscal 2012

There were no equity awards granted to our named executive officers during fiscal 2012.

Executive Bonus Plan

In
September 2010, the Compensation Committee approved an Executive Bonus Plan (Bonus Plan), which provides bonus opportunities for selected employees of the Company, including each of our executive officers. Each participant in the Bonus
Plan is assigned a target bonus percentage that is expressed as a percentage of the participants base salary for the applicable bonus period (Bonus Period). Bonuses are payable based upon our attainment of one or more performance
goal(s) for revenue, gross profit, operating income, operating expenses and/or earnings per share as approved by the Compensation Committee for the applicable Bonus Period. The Compensation Committee may establish minimum, target and/or maximum
performance goals for one or more of these performance metrics. The Compensation Committee establishes target bonus amounts for each Bonus Period and also establishes the percentage of the total bonus that will be determined based on our performance
and the percentage of the total bonus that will be determined based on individual performance and, as applicable, the performance goals that will be used to determine a participants individual performance for the Bonus Period. The Bonus Plan
is effective for each fiscal year unless and until otherwise determined by the Compensation Committee.

For fiscal 2012, the
Compensation Committee established performance goals for our revenue growth and gross operating expenses. The named executive officers target bonuses for fiscal 2012 (expressed as a percentage of the executives annual base salary) were
as follows: Mr. Kelly-100%; Mr. Kalbfleisch-50%; and Ms. Mansolf-10%. (Ms. Mansolfs participation in the Bonus Plan is in addition to her opportunity to be awarded sales commissions under her employment agreement as described
above.) The bonuses awarded to each named executive officer under the Bonus Plan for fiscal 2012 are reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for Fiscal 2012 above.

401(k) Plan

In February
1994, we adopted our On-Track 401(k) Savings Plan that covers all of our eligible employees who are at least 21 years old. Our 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code so that employee contributions and
income earned on such contributions are not taxable to employees until withdrawn. Employees may elect to defer up to 60% of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective deferral
contributions to our 401(k) plan. However, our named executive officers qualify as highly compensated employees and may only elect to defer up to 8.5% of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form
of elective deferral contributions to our 401(k) plan. Our 401(k) plan also has a catch up contribution feature for employees aged 50 or older (including those who qualify as highly compensated employees) who can defer amounts over the statutory
limit that applies to all other employees. In October 2008, we suspended the matching by us of contributions made by participants under our 401(k) plan.



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Director Compensation Table for Fiscal Year 2012

The following table provides compensation information for each individual who served on our Board of Directors during fiscal 2012 and was
not employed by us or one of our subsidiaries (non-employee directors). See Summary Compensation Table for Fiscal 2012 above for information related to the compensation of Mr. Kelly who was a director in fiscal 2012 and
who also served as an executive officer during the fiscal year.



|                |  |                            |        |  |                        |   |        |       |  |   |        | 
|--------------- |  | -------------------------- | ------ |  | ---------------------- | - | ------ | ----- |  | - | ------ | 
|Name            |  | Fees earned orpaid in cash |        |  | Optionawards (1)(2)(3) |   |        | Total | 
|Joseph De Perio |  | $                          | 40,000 |  |                        | $ | 31,946 |       |  | $ | 71,946 | 
|Robert A. Degan |  | $                          | 40,000 |  |                        | $ | 31,946 |       |  | $ | 71,946 | 
|Nora M. Denzel  |  | $                          | 40,000 |  |                        | $ | 31,946 |       |  | $ | 71,946 | 
|Scott McClendon |  | $                          | 50,000 |  |                        | $ | 31,946 |       |  | $ | 81,946 | 
|Shmuel Shottan  |  | $                          | 40,000 |  |                        | $ | 31,946 |       |  | $ | 71,946 | 



|(1) | The amounts shown in this column do not reflect compensation actually received by the non-employee director. These amounts represent the fair value on the grant date of
the awards granted to the directors during fiscal 2012. These values have been determined under the principles used to calculate the grant date fair value of equity awards for purposes of our consolidated financial statements. For a more detailed
discussion on the valuation model and assumptions used to calculate the fair value of these awards, see Note 7 to the consolidated financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The amounts in this column represent the fair value on the grant date of stock option awards granted on June 4, 2012 to each non-employee director, in exchange for
the cancellation of the unvested restricted stock awards granted to the director on May 10, 2011. Each of the canceled restricted stock awards had a fair value on the May 2011 grant date of $50,000. There were no stock awards granted in fiscal
2012.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | At the end of fiscal 2012, the number of shares subject to outstanding option awards for each non-employee director were as follows: Mr. De Perio-22,728;
Mr. Degan-85,816; Ms. Denzel-57,150; Mr. McClendon-93,149; and Mr. Shottan-22,728. The number of shares subject to outstanding stock awards were as follows: Mr. De Perio-0; Mr. Degan-0; Ms. Denzel-0;
Mr. McClendon-565,869; and Mr. Shottan-0.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Overview of Non-Employee Director Compensation and Procedures

We compensate non-employee directors through cash and equity-based compensation. Each non-employee director receives an
annual retainer of $40,000 payable quarterly. The Executive Chairperson of the Board of Directors receives an additional $10,000 retainer annually. No additional fees are paid for attendance at meetings of the Board of Directors or committees. We
also reimburse expenses incurred by non-employee directors to attend meetings.

In addition to the above fees, each
non-employee director receives an annual equity award with a grant date fair value of $50,000 (based on the assumptions used to value equity awards for purposes of our financial reporting). These equity awards generally vest one year from the grant
date and, in the case of options and similar awards, have a per share exercise price equal to the fair market value of our common stock on the grant date, and a maximum exercise term of six years. In August 2012, each non-employee director, except
for the Executive Chairperson, received an annual equity award in the form of an option to purchase 40,000 shares of our common stock.

In May 2011, Ms. Denzel and Messrs. De Perio, Degan, McClendon, and Shottan each received a restricted stock award for 22,728 shares which were scheduled to vest in full on June 14, 2012. On
June 4, 2012, the restricted stock awards granted in May 2011 were canceled, and Ms. Denzel and Messrs. De Perio, Degan, McClendon, and Shottan each received a nonqualified stock option award for 22,728 shares with a per share exercise
price of $2.16. These nonqualified stock option awards vested in full on June 14, 2012, and have a six year term.



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##### Table of Contents

|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

The following table sets forth certain information regarding the beneficial ownership of our common stock as of August 31, 2012
(except as otherwise indicated) by each person who is known by us to own more than 5% of our shares of common stock, each named executive officer, each director and all of our directors and executive officers as a group.

Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each
of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.



|                                                                |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|--------------------------------------------------------------- |  | ------------------------------------ | --------- | ---- | ----------------------------------- |  | --------- | ------------------------------ |  |  | ------------------ | - |  |  | ---- | -
|                                                                |  | Beneficial Ownership                 |          
|Beneficial Owner                                                |  | Shares ofcommon stockcurrently owned |           |      | Shares acquirablewithin 60 days (1) |  |           | Totalshares ofcommonstockowned |  |  | Percentofclass (2) |  
|5% shareholders                                                 |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|Special Situations Fund                                         |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|527 Madison Avenue, Suite 600
New York, NY 10022                |  |                                      | 3,143,459 | (3)  |                                     |  | 5,967,220 |                                |  |  | 9,110,679          |   |  |  | 27.0 | %
|                                                                |  |                                      |           |     
|Clinton Group, Inc.                                             |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|9 West 57th Street, 26th Floor
New York, NY 10019               |  |                                      | 2,832,861 | (4)  |                                     |  | 1,246,458 | (4)                            |  |  | 4,079,319          |   |  |  | 14.0 | %
|                                                                |  |                                      |           |     
|Marathon Capital Management                                     |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|4 North Park Drive, Suite 106
Hunt Valley, MD 21030             |  |                                      | 3,556,373 | (5)  |                                     |  |          |                                |  |  | 3,556,373          |   |  |  | 12.8 | %
|                                                                |  |                                      |           |     
|Pinnacle Family Office Investments, L.P.                        |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|4965 Preston Park Blvd., Suite 240
Plano, TX 75093              |  |                                      | 1,517,150 | (6)  |                                     |  | 347,600   |                                |  |  | 1,864,750          |   |  |  | 6.6  | %
|                                                                |  |                                      |           |     
|Southwell Partners, L.P.                                        |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|1901 North Akard, 2nd Floor
Dallas TX 75201                     |  |                                      | 1,184,062 | (12) |                                     |  | 347,600   | (12)                           |  |  | 1,531,662          |   |  |  | 5.4  | %
|                                                                |  |                                      |           |     
|Executive Officers and Directors+                               |  |                                      |           |      |                                     |  |           |                                |  |  |                    |   |  |  |      |  
|Eric Kelly                                                      |  |                                      | 214,580   | (8)  |                                     |  | 1,765,938 |                                |  |  | 1,980,518          |   |  |  | 6.7  | %
|Jillian Mansolf                                                 |  |                                      | 105,115   | (9)  |                                     |  | 350,381   |                                |  |  | 455,496            |   |  |  | 1.6  | %
|Kurt L. Kalbfleisch                                             |  |                                      | 69,462    |      |                                     |  | 281,860   |                                |  |  | 351,322            |   |  |  | 1.2  | %
|Scott McClendon                                                 |  |                                      | 294,137   | (10) |                                     |  | 241,422   |                                |  |  | 535,559            |   |  |  | 1.9  | %
|Robert A. Degan                                                 |  |                                      | 666       | (7)  |                                     |  | 75,817    |                                |  |  | 76,483             | * |  |  |      |  
|Nora M. Denzel                                                  |  |                                      | 666       |      |                                     |  | 63,817    |                                |  |  | 64,483             | * |  |  |      |  
|Joseph A. De Perio (11)                                         |  |                                      | 6,000     |      |                                     |  | 29,395    |                                |  |  | 35,395             | * |  |  |      |  
|Shmuel Shottan                                                  |  |                                      | 2,500     |      |                                     |  | 29,395    |                                |  |  | 31,895             | * |  |  |      |  
|Current directors and executive officers as a group (8 persons) |  |                                      | 693,126   |      |                                     |  | 2,838,025 |                                |  |  | 3,531,151          |   |  |  | 11.5 | %



|+ | Except as otherwise indicated, the address for each beneficial owner is 9112 Spectrum Center Boulevard, San Diego, CA, 92123.
|- | -----------------------------------------------------------------------------------------------------------------------------

|* | Less than 1%.
|- | -------------

|(1) | With respect to holders of 5% or more of our shares of common stock, this amount includes shares of our common stock, which could be acquired upon exercise of
outstanding warrants. With respect to our executive officers and directors, this amount includes shares of our common stock, which could be acquired upon exercise of stock options which are either currently vested and exercisable or will vest and
become exercisable within 60 days of August 31, 2012 , with respect to Ms. Mansolf and Messrs. Kelly and McClendon, shares of common stock which could be acquired upon exercise of outstanding warrants within 60 days of August 31, 2012
, and with respect to Ms. Mansolf and Messrs. Kelly, Kalbfleisch, and McClendon, shares of common stock which will be issued upon the settlement of stock awards within 60 days of August 31, 2012 .
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Based on 27,832,271 shares of common stock outstanding on August 31, 2012 and calculated in accordance with Rule 13d-3 promulgated under the Exchange Act.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | According to a Form 4 filed with the SEC on March 14, 2012 and our records, the number of shares of our common stock currently owned (Shares) and the
number of shares of our common stock acquirable within 60 days pursuant to warrants (Warrant Shares) includes 1,311,720 Shares and 2,457,092 Warrant Shares held directly by Special Situations Fund III Q.P., L.P., 893,661 Shares and
1,755,064 Warrant Shares held directly by Special Situations Private Equity Fund, L.P., 131,329 Shares and 245,708 Warrant Shares held directly by Special Situations Technology Fund, L.P. and 806,749 Shares and 1,509,356 Warrant Shares held directly
by Special Situations Technology Fund II, L.P. MGP Advisors Limited (MGP) is the general partner of the Special Situations Fund III, QP, L.P. AWM Investment Company, Inc. (AWM) is the general partner of MGP and the investment
adviser to the Special Situations Fund III, QP, L.P., the Special Situations Technology Fund, L.P., the Special Situations Technology Fund II, L.P. and the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the
principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | These shares are held directly by CMAG. CGI is the investment manager of CMAG and consequently has voting control and investment discretion over securities held by
CMAG. CGI and George Hall, as chief investment officer and president of CGI, may be deemed to beneficially own any securities owned by CGI and CMAG. Each of CGI and Mr. Hall disclaim beneficial ownership of these securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Based on the Schedule 13F filed August 14, 2012, Marathon has sole investment authority for these shares and sole voting authority with respect to 393,200 of these
shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Based on the Schedule 13G filed on February 6, 2012, Pinnacle has sole voting and disposition power.
|--- | ----------------------------------------------------------------------------------------------------

|(7) | Includes 333 shares of common stock held by Mr. Degans wife.
|--- | -------------------------------------------------------------

|(8) | Includes 49,309 shares of common stock owned by Mr. Kelly through his family trust.
|--- | -----------------------------------------------------------------------------------

|(9) | Includes 22,760 shares of common stock owned by Ms. Mansolf through her family trust.
|--- | -------------------------------------------------------------------------------------



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|(10) | Represents 260,471 shares of common stock owned by Mr. McClendon through his family trust, 33,333 shares through his self-directed IRA and 333 shares held by his
wife.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Mr. De Perio was elected to our Board of Directors pursuant to the terms of the Purchase Agreement. CMAG is the nominee of, and is employed by, CGI and CGI is the
investment manager of CMAG. Pursuant to the Purchase Agreement, CMAG acquired 2,832,861 Shares and 1,246,458 Warrant Shares for total consideration of $5.0 million.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Based on the Schedule 13G filed on August 7, 2012, Southwell has shared voting and disposition power with respect to these shares.
|---- | ----------------------------------------------------------------------------------------------------------------------------------

We are aware of no arrangements, including any pledge by any person of our common stock, the operation of which may at a subsequent date
result in a change of control of us.

Equity Compensation Plan Information

The following table provides information about our equity compensation plans as of the last day of fiscal 2012 .



|                                                               |  |                                                                                     |           |  |                                                                      |   |      |                                                                                                                                          |  |  |           | 
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- | --------- |  | -------------------------------------------------------------------- | - | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | 
|Plan Category                                                  |  | (a)Number of 
commonsharesto be issued uponexerciseof outstandingoptions and rights |           |  | (b)Weighted-averageexercise
price ofoutstandingoptions andrights (3) |   |      | (c)Number of 
common sharesremaining available forfuture issuance under equitycompensation plans (excludingshares reflectedin column(a)) | 
|Equity compensation plans approved by our shareholders (1)     |  |                                                                                     | 5,427,435 |  |                                                                      | $ | 2.86 |                                                                                                                                          |  |  | 2,614,129 | 
|Equity compensation plans not approved by our shareholders (2) |  |                                                                                     | 283,356   |  |                                                                      | $ | 1.69 |                                                                                                                                          |  |  |          | 
|                                                               |  |                                                                                     |           |  |                                                                      |   |      |                                                                                                                                          |  |  |           | 
|Total                                                          |  |                                                                                     | 5,710,791 |  |                                                                      | $ | 2.66 |                                                                                                                                          |  |  | 2,614,129 | 



|(1) | Of the aggregate number of shares that remained available for future issuance reported in column (c), 1,939,742 were available under the 2009 Plan and 674,387 were
available under the 2006 Employee Stock Purchase Plan. The 2009 Plan permits the granting of the following types of incentive awards: stock options, stock appreciation rights, restricted shares, and stock units. Subject to any accelerated
vesting that may apply in the circumstances, the unvested portion of a named executive officers outstanding awards will immediately terminate upon a termination of the named executive officers employment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These figures represent options to purchase shares of our common stock granted to certain employees (including Ms. Mansolf) as an inducement to their commencing
employment with us (the Inducement Options). The Inducement Options were not granted under a plan and are administered by the Compensation Committee. The Inducement Options are generally subject to the same terms as options granted under
the 2009 Plan. The Inducement Options have a six-year term and are subject to earlier termination in the case of termination of the optionees employment or a change in control of us. These options generally may not be transferred by the
optionee.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The weighted-average exercise prices do not reflect shares subject to outstanding awards of restricted stock units.
|--- | -------------------------------------------------------------------------------------------------------------------



|Item 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

Indemnification of Our Executive Officers and Directors

Our executive
officers and directors are entitled to be indemnified under our articles of incorporation and bylaws to the fullest extent permitted under California law. We have also entered into indemnification agreements with each of our executive officers and
directors.

Director Independence

The Board of Directors, upon the recommendation of the Nominating and Governance Committee, has affirmatively determined that Ms. Denzel and Messrs. Degan, McClendon, De Perio and Shottan are
independent directors within the meaning of NASDAQ Marketplace Rule 5605(a)(2). Mr. Kelly does not meet the independence requirements under NASDAQ Marketplace Rule 5605(a)(2) because he is our President and Chief Executive Officer. In the
course of determining whether Ms. Denzel and Messrs. Degan, McClendon, De Perio and Shottan were independent under NASDAQ Marketplace Rule 5605(a)(2), the Board of Directors considered the following transactions, relationships and arrangements
not required to be disclosed in Certain Relationships and Related Party Transactions:



| |  |  | Although Mr. McClendon served as our Interim President and Chief Executive Officer from November 2006 through August 2007, he is not automatically
disqualified from being an independent director under NASDAQ Marketplace Rule 5605(a)(2) because he served in these interim positions more than three years prior to our Board of Directors determination of his independence and for less than one
year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although Mr. De Perio was elected to our Board of Directors pursuant to the terms of the Purchase Agreement and is the nominee of, and is employed
by, one of our shareholders, he is not automatically disqualified from being an independent director under NASDAQ Marketplace Rule 5605(a)(2). In April 2011, the Board of Directors, upon the recommendation of the Nominating and Governance Committee,
found that Mr. De Perio had no relationship with us which, in the opinion of the Board of Directors, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. In making this determination, the
Board of Directors found that ownership of our securities by Mr. De Perios employer does not preclude a finding of independence.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

|Item 14. | Principal Accounting Fees and Services.
|-------- | ---------------------------------------

The following table summarizes the aggregate fees billed to us by our independent registered public accounting firm, Moss Adams LLP (Moss Adams) (in thousands):



|                       |  |             |     |  |      |   |     | 
|---------------------- |  | ----------- | --- |  | ---- | - | --- | 
|                       |  | Fiscal Year |    
|                       |  | 2012        |     |  | 2011 |  
|Audit fees (1)         |  | $           | 347 |  |      | $ | 405 | 
|Audit-related fees (2) |  |             | 20  |  |      |   | 92  | 
|Tax fees (3)           |  |             |    |  |      |   |    | 
|All other fees (4)     |  |             |    |  |      |   |    | 
|                       |  |             |     |  |      |   |     | 
|Total                  |  | $           | 367 |  |      | $ | 497 | 
|                       |  |             |     |  |      |   |     | 



|(1) | Audit fees consist of fees incurred for professional services rendered in connection with the audit of the annual financial statements, and for the review of the
quarterly financial statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related fees includes fees incurred for professional services rendered in conjunction with assurance and related services that are not explicitly related to the
audit or review of our financial statements, including registration statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax fees includes fees incurred for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include
assistance regarding federal, state and international tax compliance, acquisitions and international tax planning. There were no such services rendered to us by Moss Adams during fiscal years 2012 or 2011.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | All other fees includes fees for products and services other than the services reported above. There were no such services rendered to us by Moss Adams during fiscal
years 2012 or 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pre-Approval Policies and Procedures

As a matter of policy, all audit and non-audit services provided by our independent registered public accounting firm are approved in
advance by the Audit Committee, which considers whether the provision of non-audit services is compatible with maintaining such firms independence. All services provided by Moss Adams during fiscal years 2012 and 2011 were pre-approved by the
Audit Committee.



30



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##### Table of Contents

PART IV



|Item 15. | Exhibits, Financial Statement Schedules.
|-------- | ----------------------------------------

(a)(1) Financial Statements.

The following consolidated financial
statements of Overland Storage, Inc. and reports of independent registered public accounting firms are included in a separate section of this report:



|                                                                                         |  |  |     | 
|---------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Registered Public Accounting Firm                                  |  |  | F-1 | 
|Consolidated Balance Sheets as of June 30, 2012 and 2011                                 |  |  | F-2 | 
|Consolidated Statements of Operations for the Years Ended June 30, 2012 and 2011         |  |  | F-3 | 
|Consolidated Statements of Comprehensive Loss for the Years Ended June 30, 2012 and
2011 |  |  | F-4 | 
|Consolidated Statements of Shareholders Equity for Years Ended June 30, 2012 and
2011   |  |  | F-5 | 
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2012 and 2011         |  |  | F-6 | 
|Notes to Consolidated Financial Statements                                               |  |  | F-7 | 

(a)(2)Financial Statement Schedules.

Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements or notes thereto.

(a)(3)Exhibits.



|     |  |                                                                                                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Asset Purchase Agreement dated June 27, 2008 between the Company and Adaptec, Inc. (incorporated by reference to the Companys Form 8-K filed July 3, 2008).
++                                                                                   
|     | 
|3.1  |  | Amended and Restated Articles of Incorporation (incorporated by reference to the Companys Form 10-K filed September 27, 2002).                                                                                                                   
|     | 
|3.2  |  | Certificate of Amendment of Articles of Incorporation dated November 15, 2005 (incorporated by reference to the Companys Form 10-Q filed February 10,
2006).                                                                                     
|     | 
|3.3  |  | Certificate of Amendment of Articles of Incorporation dated December 12, 2008 (incorporated by reference to the Companys Form 10-Q filed February 11,
2009).                                                                                     
|     | 
|3.4  |  | Certificate of Amendment to the Companys Amended and Restated Articles of Incorporation dated December 8, 2009 (incorporated by reference to the Companys Form 8-K
filed December 8, 2009).                                                     
|     | 
|3.5  |  | Certificate of Determination of Rights, Preferences, Privileges and Restrictions of Series A Convertible Preferred Stock dated February 19, 2010 (incorporated by reference to the
Companys Form 8-K filed February 24, 2010).                   
|     | 
|3.6  |  | Certificate of Amendment to the Companys Amended and Restated Articles of Incorporation dated April 28, 2010 (incorporated by reference to the Companys Form 8-K
filed April 29, 2010).                                                         
|     | 
|3.7  |  | Certificate of Amendment of Certificate of Determination of Rights, Preferences, Privileges and Restrictions of Series A Convertible Preferred Stock dated April 29, 2010
(incorporated by reference to the Companys Form 8-K filed May 5, 2010).
|     | 
|3.8  |  | Certificate of Amendment to the Companys Amended and Restated Articles of Incorporation dated June 23, 2011 (incorporated by reference to the Companys Form 10-K
filed September 14, 2011).                                                     
|     | 
|3.9  |  | Amended and Restated Bylaws (incorporated by reference to the Companys Form 8-K filed August 26, 2005).                                                                                                                                          
|     | 
|3.10 |  | Certificate of Amendment of Bylaws (incorporated by reference to the Companys Form 8-K filed April 30, 2007).                                                                                                                                    
|     | 
|4.1  |  | Specimen stock certificate (incorporated by reference to the Companys Form 10-Q filed February 10, 2010).                                                                                                                                        
|     | 
|4.2  |  | Shareholder Rights Agreement dated August 22, 2005 between the Company and Wells Fargo Bank, N.A., as Transfer Agent (incorporated by reference to the Companys
Form 8-K filed August 26, 2005).                                                 
|     | 
|4.3  |  | Amendment No. 1 to Shareholder Rights Agreement dated March 21, 2011 (incorporated by reference to the Companys Form 8-K filed March 22, 2011).                                                                                                  



31



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|4.4    |  | Common Stock Purchase Warrant between the Company and Roth Capital Partners, LLC dated November 4, 2009 (incorporated by reference to the Companys Form 10-Q dated
February 10, 2010).                                                                                         
|       | 
|4.5    |  | Form of Common Stock Purchase Warrant dated February 18, 2010 (incorporated by reference to the Companys Form 8-K filed February 24, 2010).                                                                                                                                    
|       | 
|4.6    |  | Form of Registration Rights Agreement dated February 22, 2010 (incorporated by reference to the Companys Form 8-K filed February 24, 2010).                                                                                                                                    
|       | 
|4.7    |  | Form of Common Stock Purchase Warrant dated March 16, 2011 (incorporated by reference to the Companys Form 8-K filed March 22, 2011).                                                                                                                                          
|       | 
|4.8    |  | Form of Registration Rights Agreement dated March 21, 2011 (incorporated by reference to the Companys Form 8-K filed March 22, 2011).                                                                                                                                          
|       | 
|10.1   |  | San Diego Headquarters Facility Lease dated October 12, 2000 between the Company and LBA-VIF One, LLC (incorporated by reference to the Companys Form 10-Q filed
February 14, 2001).                                                                                           
|       | 
|10.2   |  | First Amendment to Lease dated January 18, 2001 between the Company and LBA Overland, LLC, as successor-in-interest to LBA-VIF One, LLC (incorporated by reference to the
Companys Form 10-K filed September 28, 2001).                                                        
|       | 
|10.3   |  | Second Amendment to Lease dated March 8, 2001 between the Company and LBA Overland, LLC (incorporated by reference to the Companys Form 10-K filed September 28,
2001).                                                                                                        
|       | 
|10.4   |  | Third Amendment to Lease dated June 30, 2010 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF
One, LLC). (incorporated by reference to the Companys Form 10-K filed September 24, 2010).
|       | 
|10.5   |  | Product Purchase Agreement No. 1585-042103 dated July 31, 2003 between the Company and Hewlett-Packard Company (incorporated by reference to the Companys
Form 10-Q filed February 10, 2004). +                                                                                
|       | 
|10.6   |  | Addendum to Product Purchase Agreement No. 1585-042103 effective July 30, 2006 between the Company and Hewlett-Packard Company (incorporated by reference to the
Companys Form 10-K filed September 15, 2006).                                                                 
|       | 
|10.7   |  | Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated December 15, 2007 (incorporated by reference to the Companys Form 10-Q
filed May 1, 2008). +                                                                                      
|       | 
|10.8   |  | Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated October 29, 2008 (incorporated by reference to the Companys Form 10-K filed
September 9, 2009).                                                                                   
|       | 
|10.9   |  | Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated April 6, 2009 (incorporated by reference to the Companys Form 10-K filed September
9, 2009).                                                                                      
|       | 
|10.10* |  | Form of Indemnification Agreement entered into between the Company and each of its directors and officers (incorporated by reference to the Companys Form 10-Q filed
February 13, 2002).                                                                                       
|       | 
|10.11* |  | Retention Agreement between the Company and Eric Kelly dated June 24, 2009 (incorporated by reference to the Companys Form 10-Q filed February 10, 2010).                                                                                                                      
|       | 
|10.12* |  | Retention Agreement between the Company and Jillian Mansolf dated July 13, 2009 (incorporated by reference to the Companys Form 10-K filed September 9, 2009).                                                                                                                 
|       | 
|10.13* |  | Employment letter between the Company and Jillian Mansolf dated June 23, 2009 (incorporated by reference to the Companys Form 10-K filed September 9, 2009).                                                                                                                   
|       | 
|10.14* |  | Employment Agreement between the Company and Eric Kelly dated August 3, 2011 (incorporated by reference to the Companys Form 8-K filed August 4, 2011).                                                                                                                        
|       | 
|10.15* |  | Employment and Severance Agreement between the Company and Kurt L. Kalbfleisch dated August 3, 2011 (incorporated by reference to the Companys Form 8-K filed August 4,
2011).                                                                                                 



32



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                      
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.16* |  | Amended and Restated 2003 Equity Incentive Plan (incorporated by reference to the Companys Form 8-K filed November 16, 2007).                                                                                                                                       
|       | 
|10.17* |  | Amendment to 2003 Equity Incentive Plan effective as of January 27, 2009 (incorporated by reference to the Companys Form 10-K filed September 9, 2009).                                                                                                             
|       | 
|10.18* |  | Form of Stock Option Agreement for options granted to senior officers under the 2003 Equity Incentive Plan (incorporated by reference to the Companys Form 10-Q filed
February 10, 2004).                                                                           
|       | 
|10.19* |  | Form of Stock Option Agreement for options granted to outside directors under the 2003 Equity Incentive Plan (incorporated by reference to the Companys Form 10-Q
filed February 10, 2004).                                                                         
|       | 
|10.20* |  | Form of Standard Stock Option Agreement for options granted under the 2003 Equity Incentive Plan (incorporated by reference to the Companys Form 10-Q filed
February 10, 2004).                                                                                     
|       | 
|10.21* |  | Form of Stock Option Agreement for Inducement Options granted to executive officers (incorporated by reference to the Companys Form 10-K filed September 9,
2009).                                                                                                  
|       | 
|10.22* |  | 2006 Employee Stock Purchase Plan, as amended (incorporated by reference to the Companys Form 10-K filed September 14, 2011).                                                                                                                                       
|       | 
|10.23* |  | 2009 Equity Incentive Plan, as amended (incorporated by reference to the Companys Form 10-K filed September 14, 2011).                                                                                                                                              
|       | 
|10.24* |  | Form of Notice of Stock Option Grant and Stock Option Agreement for options granted to senior officers under the 2009 Equity Incentive Plan (incorporated by reference to the
Companys Form 10-Q filed February 2, 2010).                                           
|       | 
|10.25* |  | Form of Notice of Stock Option Grant and Stock Option Agreement for options granted to outside directors under the 2009 Equity Incentive Plan (incorporated by reference to the
Companys Form 10-Q filed February 2, 2010).                                         
|       | 
|10.26* |  | Form of Notice of Restricted Stock Award and Restricted Stock Agreement for restricted stock granted to senior officers or outside directors under the 2009 Equity Incentive Plan
(incorporated by reference to the Companys Form 10-Q filed February 2, 2010).     
|       | 
|10.27* |  | 2000 Stock Option Plan, as amended and restated (incorporated by reference to the Companys Form 10-K filed September 27, 2002).                                                                                                                                     
|       | 
|10.28* |  | Form of Notice of Stock Option Award and Stock Option Award Agreement for options granted under 2000 Stock Option Plan (incorporated by reference to the Companys Form 10-Q
filed May 15, 2001).                                                                    
|       | 
|10.29* |  | Standard Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for restricted stock units granted under the 2009 Equity Incentive Plan (incorporated by
reference to the Companys Form 10-K filed September 14, 2011).                  
|       | 
|10.30* |  | Special Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for restricted stock units granted under the 2009 Equity Incentive Plan dated June 29,
2011(incorporated by reference to the Companys Form 10-K filed September 14, 2011).
|       | 
|10.31* |  | Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement between the Company and Scott McClendon dated June 29, 2011(incorporated by reference to the Companys
Form 10-K filed September 14, 2011).                                                
|       | 
|10.32* |  | Form of Stock Appreciation Rights Award Agreement dated June 29, 2011(incorporated by reference to the Companys Form 10-K filed September 14, 2011).                                                                                                                
|       | 
|10.33* |  | Executive Bonus Plan (incorporated by reference to the Companys Form 10-K filed September 24, 2010).                                                                                                                                                                
|       | 
|10.34* |  | Form of Purchase Agreement dated February 18, 2010 (incorporated by reference to the Companys Form 8-K filed February 24, 2010).                                                                                                                                    



33



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                      
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.35  |  | Form of Subscription Agreement dated November 12, 2010 (incorporated by reference to the Companys Form 8-K filed November 17, 2010).                                                                                                                                
|       | 
|10.36  |  | Financial Advisory Agreement, dated November 12, 2010, between Overland and Roth Capital Partners, LLC. (incorporated by reference to the Companys Form 8-K filed November 17,
2010).                                                                               
|       | 
|10.37  |  | Form of Purchase Agreement dated March 16, 2011 (incorporated by reference to the Companys Form 8-K filed March 22, 2011).                                                                                                                                          
|       | 
|10.38  |  | Underwriting Agreement, dated March 23, 2012, between the Company and Needham & Company, LLC (incorporated by reference to the Companys Form 8-K filed March 23,
2012).                                                                                             
|       | 
|10.39  |  | Loan and Security Agreement between the Company and Silicon Valley Bank (incorporated by reference to the Companys Form 10-K filed September 14, 2011).                                                                                                             
|       | 
|10.40  |  | Settlement Agreement, by and between the Company and International Business Machines Corporation, dated November 16, 2011 (incorporated by reference to the Companys
Form 10-Q filed February 15, 2012). +                                                          
|       | 
|21.1** |  | Subsidiaries of the Company.                                                                                                                                                                                                                                         
|       | 
|23.1** |  | Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                            
|       | 
|24.1   |  | Power of Attorney (incorporated by reference to the Companys Form 10-K filed September 13, 2012).                                                                                                                                                                   
|       | 
|31.1** |  | Certification of Eric L. Kelly, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.                                                            
|       | 
|31.2** |  | Certification of Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                          
|       | 
|32.1** |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Eric L. Kelly, President and Chief
Executive Officer, and Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer.
|       | 
|101*** |  | Financial information from the Companys Annual Report on Form 10-K for the period ended July 1, 2012 formatted in eXtensible Business Reporting Language
(XBRL).                                                                                                    



|+ | Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the SEC.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|++ | Certain schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of the omitted schedules and similar attachments
will be provided supplementally to the SEC upon request.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Management contract or compensation plan or arrangement.
|- | --------------------------------------------------------

|** | Filed herewith.
|-- | ---------------

|*** | This exhibit was previously filed as an exhibit to the Annual Report on Form 10-K for the year ended July 1, 2012, filed with the Securities and Exchange
Commission on September 13, 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.



|       |  |                   |  |                        |  |                                                    
|------ |  | ----------------- |  | ---------------------- |  | ---------------------------------------------------
|       |  |                   |  | OVERLAND STORAGE, INC.
|       |  |                   | 
|Dated: |  | February 12, 2013 |  | By:                    |  | /s/    ERIC L.
KELLY                               
|       |  |                   |  |                        |  | Eric L. Kelly President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                   |  |                                                                                                |  |                  
|---------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | -----------------
|Signature                          |  | Title                                                                                          |  | Date             
|                                   |  |                                                                                               
|/S/    ERIC L.
KELLY Eric L. Kelly |  | President, Chief Executive Officer and Director
(Principal Executive Officer)                  |  | February 12, 2013
|                                   |  |                                                                                               
|*
Kurt L. Kalbfleisch              |  | Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |  | February 12, 2013
|                                   |  |                                                                                               
|*
Robert A. Degan                  |  | Director                                                                                       |  | February 12, 2013
|                                   |  |                                                                                               
|*
Joseph De Perio                  |  | Director                                                                                       |  | February 12, 2013
|                                   |  |                                                                                               
|Vivekanand Mahadevan               |  | Director                                                                                       |  | February 12, 2013
|                                   |  |                                                                                               
|*
Scott McClendon                  |  | Executive Chairperson of the Board of Directors                                                |  | February 12, 2013



|     |  |                     
|---- |  | --------------------
|*By: |  | /s/    ERIC L.
KELLY
|     |  | Eric L. Kelly       
|     |  | Attorney-In-Fact    



35



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Overland Storage, Inc.

We have audited the accompanying consolidated balance sheets of Overland Storage, Inc. (the Company) as of July 1, 2012,
and July 3, 2011, and the related consolidated statements of operations, comprehensive loss, shareholders equity, and cash flows for the periods then ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Overland
Storage, Inc. as of July 1, 2012 and July 3, 2011, and the results of its operations and its cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Companys recurring losses and negative operating cash flows raise substantial doubt about the Companys ability to continue as a going concern. Managements plans
concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Moss Adams LLP

San Diego, California

September 13, 2012



F-1



---

##### Table of Contents

OVERLAND STORAGE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                 |  |              |          |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ------------ | - | ------- | -
|                                                                                                                                                 |  | June 30,2012 |          |   | June 30,2011 |  
|Assets                                                                                                                                           |  |              |          |   |              |   |         |  
|Current assets:                                                                                                                                  |  |              |          |   |              |   |         |  
|Cash and cash equivalents                                                                                                                        |  | $            | 10,522   |   |              | $ | 10,168  |  
|Accounts receivable, net of allowance for doubtful accounts of $222 and $277, as of June 30, 2012 and 2011,
respectively                         |  |              | 9,193    |   |              |   | 10,992  |  
|Inventories                                                                                                                                      |  |              | 10,658   |   |              |   | 9,437   |  
|Other current assets                                                                                                                             |  |              | 3,779    |   |              |   | 5,631   |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total current assets                                                                                                                             |  |              | 34,152   |   |              |   | 36,228  |  
|Property and equipment, net                                                                                                                      |  |              | 1,446    |   |              |   | 659     |  
|Intangible assets, net                                                                                                                           |  |              | 1,349    |   |              |   | 2,498   |  
|Other assets                                                                                                                                     |  |              | 1,313    |   |              |   | 1,540   |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total assets                                                                                                                                     |  | $            | 38,260   |   |              | $ | 40,925  |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Liabilities and Shareholders Equity                                                                                                             |  |              |          |   |              |   |         |  
|Current liabilities:                                                                                                                             |  |              |          |   |              |   |         |  
|Accounts payable                                                                                                                                 |  | $            | 7,012    |   |              | $ | 8,328   |  
|Accrued liabilities                                                                                                                              |  |              | 15,341   |   |              |   | 13,787  |  
|Accrued payroll and employee compensation                                                                                                        |  |              | 2,948    |   |              |   | 3,941   |  
|Income taxes payable                                                                                                                             |  |              | 172      |   |              |   | 111     |  
|Accrued warranty                                                                                                                                 |  |              | 1,286    |   |              |   | 1,398   |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total current liabilities                                                                                                                        |  |              | 26,759   |   |              |   | 27,565  |  
|Long-term debt                                                                                                                                   |  |              | 3,500    |   |              |   |        |  
|Other long-term liabilities                                                                                                                      |  |              | 4,960    |   |              |   | 6,225   |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total liabilities                                                                                                                                |  |              | 35,219   |   |              |   | 33,790  |  
|Commitments and contingencies                                                                                                                    |  |              |          |   |              |   |         |  
|Shareholders equity:                                                                                                                            |  |              |          |   |              |   |         |  
|Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of June 30, 2012 and
2011                            |  |              |         |   |              |   |        |  
|Common stock, no par value, 90,200 shares authorized; 27,737 and 22,993 shares issued and outstanding as of June 30, 2012
and 2011, respectively |  |              | 116,682  |   |              |   | 104,382 |  
|Accumulated other comprehensive loss                                                                                                             |  |              | (918     | ) |              |   | (685    | )
|Accumulated deficit                                                                                                                              |  |              | (112,723 | ) |              |   | (96,562 | )
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total shareholders equity                                                                                                                       |  |              | 3,041    |   |              |   | 7,135   |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  
|Total liabilities and shareholders equity                                                                                                       |  | $            | 38,260   |   |              | $ | 40,925  |  
|                                                                                                                                                 |  |              |          |   |              |   |         |  

See accompanying notes to consolidated financial statements.



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OVERLAND STORAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                             |  |             |         |   |      |   |         |  
|-------------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                             |  | Fiscal Year |        
|                                             |  | 2012        |         |   | 2011 |  
|Net revenue:                                 |  |             |         |   |      |   |         |  
|Product revenue                              |  | $           | 35,209  |   |      | $ | 45,659  |  
|Service revenue                              |  |             | 24,252  |   |      |   | 24,213  |  
|Royalty fees                                 |  |             | 171     |   |      |   | 325     |  
|                                             |  |             |         |   |      |   |         |  
|                                             |  |             | 59,632  |   |      |   | 70,197  |  
|Cost of product revenue                      |  |             | 30,328  |   |      |   | 38,119  |  
|Cost of service revenue                      |  |             | 10,144  |   |      |   | 10,864  |  
|                                             |  |             |         |   |      |   |         |  
|Gross profit                                 |  |             | 19,160  |   |      |   | 21,214  |  
|Operating expenses:                          |  |             |         |   |      |   |         |  
|Sales and marketing                          |  |             | 16,178  |   |      |   | 16,419  |  
|Research and development                     |  |             | 8,148   |   |      |   | 7,653   |  
|General and administrative                   |  |             | 11,848  |   |      |   | 12,741  |  
|                                             |  |             |         |   |      |   |         |  
|                                             |  |             | 36,174  |   |      |   | 36,813  |  
|                                             |  |             |         |   |      |   |         |  
|Loss from operations                         |  |             | (17,014 | ) |      |   | (15,599 | )
|Other income (expense):                      |  |             |         |   |      |   |         |  
|Interest income                              |  |             | 377     |   |      |   |        |  
|Interest expense                             |  |             | (100    | ) |      |   | (1,092  | )
|Other income (expense), net                  |  |             | 655     |   |      |   | 2,477   |  
|                                             |  |             |         |   |      |   |         |  
|Loss before income taxes                     |  |             | (16,082 | ) |      |   | (14,214 | )
|Provision for (benefit from) income taxes    |  |             | 79      |   |      |   | 285     |  
|                                             |  |             |         |   |      |   |         |  
|Net loss                                     |  | $           | (16,161 | ) |      | $ | (14,499 | )
|                                             |  |             |         |   |      |   |         |  
|Net loss per share:                          |  |             |         |   |      |   |         |  
|Basic and diluted                            |  | $           | (0.66   | ) |      | $ | (0.94   | )
|                                             |  |             |         |   |      |   |         |  
|Shares used in computing net loss per share: |  |             |         |   |      |   |         |  
|Basic and diluted                            |  |             | 24,487  |   |      |   | 15,452  |  
|                                             |  |             |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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OVERLAND STORAGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)



|                                   |  |             |         |   |      |   |         |  
|---------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                   |  | Fiscal Year |        
|                                   |  | 2012        |         |   | 2011 |  
|Net loss                           |  | $           | (16,161 | ) |      | $ | (14,499 | )
|Other comprehensive income (loss): |  |             |         |   |      |   |         |  
|Foreign currency translation       |  |             | (233    | ) |      |   | 295     |  
|                                   |  |             |         |   |      |   |         |  
|Comprehensive loss                 |  | $           | (16,394 | ) |      | $ | (14,204 | )
|                                   |  |             |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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OVERLAND STORAGE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(in thousands)



|                                             |  |              |        |  |                                   |   |         |                    |  |   |                          |   |  |   |          |   |  |   |         |  
|-------------------------------------------- |  | ------------ | ------ |  | --------------------------------- | - | ------- | ------------------ |  | - | ------------------------ | - |  | - | -------- | - |  | - | ------- | -
|                                             |  | Common Stock |        |  | AccumulatedOtherComprehensiveLoss |   |         | AccumulatedDeficit |  |   | TotalShareholdersEquity |  
|                                             |  | Shares       |        |  | Amount                            |   |         |                    | 
|Balance at June 30, 2010                     |  |              | 10,886 |  |                                   | $ | 85,709  |                    |  | $ | (980                     | ) |  | $ | (82,063  | ) |  | $ | 2,666   |  
|Issuance of common stock                     |  |              | 12,078 |  |                                   |   | 17,795  |                    |  |   |                         |   |  |   |         |   |  |   | 17,795  |  
|Exercise of stock options and ESPP purchases |  |              | 29     |  |                                   |   | 30      |                    |  |   |                         |   |  |   |         |   |  |   | 30      |  
|Share-based compensation                     |  |              |       |  |                                   |   | 3,073   |                    |  |   |                         |   |  |   |         |   |  |   | 3,073   |  
|Stock appreciation rights                    |  |              |       |  |                                   |   | (2,225  | )                  |  |   |                         |   |  |   |         |   |  |   | (2,225  | )
|Net loss                                     |  |              |       |  |                                   |   |        |                    |  |   |                         |   |  |   | (14,499  | ) |  |   | (14,499 | )
|Foreign currency translation                 |  |              |       |  |                                   |   |        |                    |  |   | 295                      |   |  |   |         |   |  |   | 295     |  
|                                             |  |              |        |  |                                   |   |         |                    |  |   |                          |   |  |   |          |   |  |   |         |  
|Balance at June 30, 2011                     |  |              | 22,993 |  |                                   |   | 104,382 |                    |  |   | (685                     | ) |  |   | (96,562  | ) |  |   | 7,135   |  
|Issuance of common stock                     |  |              | 3,723  |  |                                   |   | 6,739   |                    |  |   |                         |   |  |   |         |   |  |   | 6,739   |  
|Exercise of stock options and ESPP purchases |  |              | 293    |  |                                   |   | 523     |                    |  |   |                         |   |  |   |         |   |  |   | 523     |  
|Issuance of restricted stock                 |  |              | 728    |  |                                   |   | (831    | )                  |  |   |                         |   |  |   |         |   |  |   | (831    | )
|Share-based compensation                     |  |              |       |  |                                   |   | 4,994   |                    |  |   |                         |   |  |   |         |   |  |   | 4,994   |  
|Stock appreciation rights                    |  |              |       |  |                                   |   | 875     |                    |  |   |                         |   |  |   |         |   |  |   | 875     |  
|Net loss                                     |  |              |       |  |                                   |   |        |                    |  |   |                         |   |  |   | (16,161  | ) |  |   | (16,161 | )
|Foreign currency translation                 |  |              |       |  |                                   |   |        |                    |  |   | (233                     | ) |  |   |         |   |  |   | (233    | )
|                                             |  |              |        |  |                                   |   |         |                    |  |   |                          |   |  |   |          |   |  |   |         |  
|Balance at June 30, 2012                     |  |              | 27,737 |  |                                   | $ | 116,682 |                    |  | $ | (918                     | ) |  | $ | (112,723 | ) |  | $ | 3,041   |  
|                                             |  |              |        |  |                                   |   |         |                    |  |   |                          |   |  |   |          |   |  |   |         |  

See accompanying notes to consolidated financial statements.



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OVERLAND STORAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                  |  |             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Fiscal Year |        
|                                                                                  |  | 2012        |         |   | 2011 |  
|Operating activities:                                                             |  |             |         |   |      |   |         |  
|Net loss                                                                          |  | $           | (16,161 | ) |      | $ | (14,499 | )
|Adjustments to reconcile net loss to cash used in operating activities:           |  |             |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |             | 1,610   |   |      |   | 1,538   |  
|Provision for losses on accounts receivable                                       |  |             | 54      |   |      |   | 134     |  
|Share-based compensation                                                          |  |             | 4,994   |   |      |   | 3,073   |  
|Loss on disposal of property and equipment                                        |  |             | 22      |   |      |   | 87      |  
|Changes in operating assets and liabilities:                                      |  |             |         |   |      |   |         |  
|Accounts receivable                                                               |  |             | 1,744   |   |      |   | (4,065  | )
|Accounts receivable pledged as collateral                                         |  |             |        |   |      |   | 6,195   |  
|Inventories                                                                       |  |             | (1,222  | ) |      |   | 504     |  
|Accounts payable and accrued liabilities                                          |  |             | 188     |   |      |   | (5,690  | )
|Accrued payroll and employee compensation                                         |  |             | (76     | ) |      |   | (203    | )
|Other assets and liabilities, net                                                 |  |             | 149     |   |      |   | 1,982   |  
|                                                                                  |  |             |         |   |      |   |         |  
|Net cash used in operating activities                                             |  |             | (8,698  | ) |      |   | (10,944 | )
|Investing activities:                                                             |  |             |         |   |      |   |         |  
|Purchase of fixed assets                                                          |  |             | (868    | ) |      |   | (320    | )
|Purchase of intangible assets                                                     |  |             |        |   |      |   | (150    | )
|                                                                                  |  |             |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |             | (868    | ) |      |   | (470    | )
|Financing activities:                                                             |  |             |         |   |      |   |         |  
|Proceeds from issuance of common stock, net of issuance costs                     |  |             | 6,579   |   |      |   | 17,795  |  
|Payment for restricted stock tax liability on net settlement                      |  |             | (831    | ) |      |   |        |  
|Proceeds from exercise of outstanding warrants                                    |  |             | 160     |   |      |   |        |  
|Proceeds from exercise of stock options and ESPP purchases                        |  |             | 523     |   |      |   | 30      |  
|Proceeds from borrowings, net                                                     |  |             | 3,500   |   |      |   |        |  
|Repayment of accounts receivable pledged as collateral, net                       |  |             |        |   |      |   | (4,427  | )
|Repayment of principal on long-term debt                                          |  |             |        |   |      |   | (693    | )
|                                                                                  |  |             |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |             | 9,931   |   |      |   | 12,705  |  
|Effect of exchange rate changes on cash                                           |  |             | (11     | ) |      |   | 25      |  
|                                                                                  |  |             |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |             | 354     |   |      |   | 1,316   |  
|Cash and cash equivalents, beginning of period                                    |  |             | 10,168  |   |      |   | 8,852   |  
|                                                                                  |  |             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $           | 10,522  |   |      | $ | 10,168  |  
|                                                                                  |  |             |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |             |         |   |      |   |         |  
|Cash paid for income taxes                                                        |  | $           | 123     |   |      | $ | 240     |  
|                                                                                  |  |             |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $           | 97      |   |      | $ | 1,083   |  
|                                                                                  |  |             |         |   |      |   |         |  
|Non-cash activities  Investing  Leasehold improvements under landlord allowance |  | $           | 159     |   |      | $ |        |  
|                                                                                  |  |             |         |   |      |   |         |  
|Non-cash activities  Financing  Equity award fair value adjustment to liability |  | $           | 875     |   |      | $ | (2,225  | )
|                                                                                  |  |             |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

OVERLAND STORAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Overland Storage, Inc. (Overland or the Company) was incorporated on September 8, 1980
under the laws of the State of California. For more than 30 years, Overland has delivered data protection solutions designed for backup and recovery to ensure business continuity. The Company has a portfolio of tape-based data protection solutions,
including tape and virtual tape library systems, as well as disk-based data protection solutions, including network attached storage (NAS) and storage area network (SAN) products and solutions, designed for small and
medium-sized business computing environments.

The Company operates and reports using a 52-53 week fiscal year with each
quarter ending on the Sunday closest to the calendar quarter. For ease of presentation, the Companys fiscal years are considered to end on June 30. For example, references to fiscal 2012 and 2011 refer to the fiscal years ended
July 1, 2012 and July 3, 2011, respectively. Fiscal 2012 and 2011 each contained 52 weeks.

The Company has incurred
losses for its last seven fiscal years and negative cash flows from operating activities for its last six fiscal years. As of June 30, 2012 , the Company had an accumulated deficit of $112.7 million . During fiscal 2012, the Company incurred a
net loss of $16.2 million . Through calendar 2012, the Company expects to incur a net loss as it continues to change its business model and improve operational efficiencies.

The Company has projected that cash on hand, combined with available borrowings under its credit facility, will be sufficient to allow the Company to continue operations for the next 12 months.
Significant changes from the Companys current forecast, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or
(iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on the Companys liquidity. This could force the Company to make further reductions in spending, extend payment terms with
suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Companys business, results of operations, and future prospects.

The Companys recurring losses and negative cash flows from operations raise substantial doubt about its ability to continue as a
going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Overland Storage (Europe) Ltd., Overland Storage SARL, and Overland Storage GmbH.
All significant intercompany accounts and transactions have been eliminated in consolidation.

Management Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and
expenses during the reporting period. 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

Revenue from sales of products is recognized when
persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales, excluding sales to distributors, is recognized upon
shipment of products to customers. These customers are not entitled to any specific right of return or price protection, except for any defective product that may be returned under the Companys warranty policy.

Generally, title and risk of loss transfer to the customer when the product leaves the Companys dock. Product sales to distribution
customers are subject to certain rights of return, stock rotation privileges and price protection. Because the Company is unable to estimate its exposure for returned product or price adjustments, revenue from shipments to these customers is not
recognized until the related products are in turn sold to the ultimate customer by the distributor. For products for which software is more than an incidental component, the Company recognizes revenue in accordance with current authoritative
guidance for software revenue recognition.

The Company has various royalty arrangements with independent service providers
that sell its product and also sell and provide service on that product. These independent service providers pay a royalty fee for service contracts on the Companys product. The royalty fee is calculated by Overland for the units covered in
the quarter, and agreed to by the service provider, based upon the monthly fee for each unit covered by the independent service provider.



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##### Table of Contents

The Company has various licensing agreements relating to its Variable
Rate Randomizer (VR 2®) technology with third parties. The licensees pay a royalty fee for sales of
their products which incorporate the VR 2® technology. The licensees provide the Company with periodic reports
which include the number of units, subject to royalty, sold to their end users. The Company records the royalty when reported to it by the licensee, generally in the period during which the licensee ships the products containing VR 2® technology.

Warranty and Extended Warranty

The Company records a provision for
estimated future warranty costs for both return-to-factory and on-site warranties. If future actual costs to repair were to differ significantly from estimates, the impact of these unforeseen costs or cost reductions would be recorded in subsequent
periods.

Separately priced extended on-site warranties and service contracts are offered for sale to customers on all product
lines. The Company contracts with third-party service providers to provide service relating to on-site warranties and service contracts. Extended warranty and service contract revenue and amounts paid in advance to outside service organizations are
deferred and recognized as service revenue and cost of service, respectively, over the period of the service agreement. The Company had $3.9 million and $5.5 million in deferred costs related to deferred service revenue at June 30, 2012 and
2011, respectively. In addition, the Company had $0.4 million and $0.8 million in deferred software revenue at June 30, 2012 and 2011, respectively, which is not included in the table below.

Changes in the liability for product warranty and deferred revenue associated with extended warranties and service contracts were as
follows (in thousands):



|                                                            |  |                  |       |   |                  |   |         |  
|----------------------------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ------- | -
|                                                            |  | Product Warranty |       |   | Deferred Revenue |  
|Liability at June 30, 2010                                  |  | $                | 2,098 |   |                  | $ | 14,274  |  
|Settlements made during the period                          |  |                  | (697  | ) |                  |   | (17,379 | )
|Change in liability for warranties issued during the period |  |                  | 733   |   |                  |   | 15,881  |  
|Change in liability for preexisting warranties              |  |                  | (736  | ) |                  |   |        |  
|                                                            |  |                  |       |   |                  |   |         |  
|Liability at June 30, 2011                                  |  |                  | 1,398 |   |                  |   | 12,776  |  
|Settlements made during the period                          |  |                  | (872  | ) |                  |   | (14,807 | )
|Change in liability for warranties issued during the period |  |                  | 658   |   |                  |   | 13,770  |  
|Change in liability for preexisting warranties              |  |                  | 102   |   |                  |   |        |  
|                                                            |  |                  |       |   |                  |   |         |  
|Liability at June 30, 2012                                  |  | $                | 1,286 |   |                  | $ | 11,739  |  
|                                                            |  |                  |       |   |                  |   |         |  

Shipping and Handling

Amounts billed to customers for shipping and handling are included in product revenue, and costs incurred related to shipping and handling are included in cost of product.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses were $0.4 million and $0.6 million for fiscal years 2012 and 2011,
respectively.

Research and Development Costs

Research and development costs are expensed as incurred. Software development costs are expensed until technological feasibility has been established, at which time any additional costs are capitalized.
Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, which occurs upon the completion of a working model, no costs were capitalized during
fiscal 2012 or 2011.

Segment Data

The Company reports segment data based on the management approach. The management approach designates the internal reporting that is used by management for making operating and investment decisions and
evaluating performance as the source of the Companys reportable segments. The Company uses one measurement of profitability and does not disaggregate its business for internal reporting. The Company has determined that it operates in one
segment providing data storage solutions for small and medium businesses and distributed enterprises. The Company discloses information about products and services, geographic areas and major customers.



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##### Table of Contents

Information about Products and Services

The following table summarizes net revenue by product (in thousands):



|                      |  |             |        |  |      |   |        | 
|--------------------- |  | ----------- | ------ |  | ---- | - | ------ | 
|                      |  | Fiscal Year |       
|                      |  | 2012        |        |  | 2011 |  
|Tape-based products:  |  |             |        |  |      |   |        | 
|NEO SERIES
®          |  | $           | 18,732 |  |      | $ | 26,363 | 
|ARCvault
® family     |  |             |       |  |      |   | 51     | 
|                      |  |             |        |  |      |   |        | 
|                      |  |             | 18,732 |  |      |   | 26,414 | 
|Disk-based products:  |  |             |        |  |      |   |        | 
|REO SERIES
®          |  |             | 1,094  |  |      |   | 1,529  | 
|SnapServer
®          |  |             | 9,916  |  |      |   | 11,128 | 
|                      |  |             |        |  |      |   |        | 
|                      |  |             | 11,010 |  |      |   | 12,657 | 
|Service               |  |             | 24,252 |  |      |   | 24,213 | 
|Spare parts and other |  |             | 5,555  |  |      |   | 6,744  | 
|VR
2®                 |  |             | 83     |  |      |   | 169    | 
|                      |  |             |        |  |      |   |        | 
|                      |  | $           | 59,632 |  |      | $ | 70,197 | 
|                      |  |             |        |  |      |   |        | 

Information about Geographic Areas

The Company markets its products domestically and internationally, with its principal international market being Europe. Revenue is attributed to the location to which the product was shipped. Long-lived
assets are based on location of domicile.

The following table summarizes net revenue and long-lived assets by geographic area
(in thousands):



|                                                        |  |             |        |  |                   |   |       | 
|------------------------------------------------------- |  | ----------- | ------ |  | ----------------- | - | ----- | 
|                                                        |  | Net Revenue |        |  | Long-lived Assets |  
|Fiscal 2012                                             |  |             |        |  |                   |   |       | 
|United States                                           |  | $           | 27,544 |  |                   | $ | 1,390 | 
|France                                                  |  |             | 7,458  |  |                   |   | 11    | 
|Netherlands                                             |  |             | 4,867  |  |                   |   |      | 
|United Kingdom                                          |  |             | 4,201  |  |                   |   | 12    | 
|Germany                                                 |  |             | 3,741  |  |                   |   | 33    | 
|Europe (other than UK, France, Germany and Netherlands) |  |             | 3,636  |  |                   |   |      | 
|Singapore                                               |  |             | 2,074  |  |                   |   |      | 
|Other foreign countries                                 |  |             | 6,111  |  |                   |   |      | 
|                                                        |  |             |        |  |                   |   |       | 
|                                                        |  | $           | 59,632 |  |                   | $ | 1,446 | 
|                                                        |  |             |        |  |                   |   |       | 
|Fiscal 2011                                             |  |             |        |  |                   |   |       | 
|United States                                           |  | $           | 34,601 |  |                   | $ | 562   | 
|France                                                  |  |             | 6,971  |  |                   |   | 13    | 
|Netherlands                                             |  |             | 3,918  |  |                   |   |      | 
|United Kingdom                                          |  |             | 4,991  |  |                   |   | 29    | 
|Germany                                                 |  |             | 4,599  |  |                   |   | 55    | 
|Europe (other than UK, France, Germany and Netherlands) |  |             | 6,009  |  |                   |   |      | 
|Singapore                                               |  |             | 2,924  |  |                   |   |      | 
|Other foreign countries                                 |  |             | 6,184  |  |                   |   |      | 
|                                                        |  |             |        |  |                   |   |       | 
|                                                        |  | $           | 70,197 |  |                   | $ | 659   | 
|                                                        |  |             |        |  |                   |   |       | 

Cash and Cash Equivalents

Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. Cash equivalents are composed of money
market funds. The carrying amounts approximate fair value due to the short maturities of these instruments.



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Accounts Receivable and Allowance for Doubtful Accounts

The Company records accounts receivable at the invoice amount and does not charge interest thereon. The Company estimates its allowance
for doubtful accounts based on an assessment of the collectibility of specific accounts and the overall condition of the accounts receivable portfolio. When evaluating the adequacy of the allowance for doubtful accounts, the Company analyzes
specific trade and other receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customers payment terms and/or patterns. The Company reviews the
allowance for doubtful accounts on a quarterly basis and records adjustments as considered necessary. Customer accounts are written-off against the allowance for doubtful accounts when an account is considered uncollectible.

The following table summarizes the changes in allowance for doubtful accounts (in thousands):



|            |  |                            |     |  |                   |   |     |                             |  |   |                      |   |  |   |     | 
|----------- |  | -------------------------- | --- |  | ----------------- | - | --- | --------------------------- |  | - | -------------------- | - |  | - | --- | 
|Fiscal year |  | Balance atBeginning ofYear |     |  | Charged toExpense |   |     | Write-offs,Net ofRecoveries |  |   | Balanceat Endof Year |  
|2012        |  | $                          | 277 |  |                   | $ | (23 | )                           |  | $ | (32                  | ) |  | $ | 222 | 
|2011        |  | $                          | 411 |  |                   | $ | 133 |                             |  | $ | (267                 | ) |  | $ | 277 | 

Inventories

Inventories are stated at the lower of cost or market using the first-in-first-out method. The Company assesses the value of its inventories periodically based upon numerous factors including, among
others, expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, the Company adjusts its inventory for obsolete or unmarketable inventory by an amount equal to
the difference between the cost of the inventory and the estimated market value.

Property and Equipment

Property and equipment are recorded at cost. The Company also capitalizes qualifying internal use software costs incurred during the
application development stage. Depreciation expense is computed using the straight-line method. Leasehold improvements are depreciated over the shorter of the remaining estimated useful life of the asset or the term of the lease .

Estimated useful lives are as follows:



|                                |  |  |           | 
|------------------------------- |  |  | --------- | 
|Machinery and equipment         |  |  | 3-5 years | 
|Furniture and fixtures          |  |  | 5 years   | 
|Computer equipment and software |  |  | 1-5 years | 

Expenditures for normal maintenance and repair are charged to expense as incurred, and improvements are
capitalized. Upon the sale or retirement of property or equipment, the asset cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in the results of operations.

Long-lived Assets

The
Company evaluates the recoverability of long-lived assets, including property and equipment and certain identifiable intangible assets, in accordance with current accounting rules. The Company tests for recoverability whenever events or changes in
circumstances indicate the carrying value may not be recoverable. The Companys consideration includes, but is not limited to, the following events or changes as potential indicators of non-recoverability:



| |  |  | Significant underperformance relative to historical or projected future operating results.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Significant changes in the manner of use of the assets or the strategy for the Companys overall business.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Significant decrease in the market value of the assets.
| | - |  | -------------------------------------------------------



| |  |  | Significant negative industry or economic trends.
| | - |  | -------------------------------------------------

When the carrying value is not considered recoverable, an impairment loss for the amount by which the carrying value of a long-lived asset exceeds its fair value is recognized, with an offsetting
reduction in the carrying value of the related asset. If the Companys future results are significantly different than forecasted, the Company may be required to further evaluate its long-lived assets for recoverability and such analysis could
result in an impairment charge in a future period. In fiscal 2012 and 2011, there were no impairments recognized.

Deferred Rent

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and
amounts paid under the lease agreements is recorded in other liabilities in the accompanying consolidated balance sheet.



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##### Table of Contents

Foreign Currency Translation

The financial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and
liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders equity. Gains or losses from foreign
currency transactions are recognized in income. Such transactions resulted in a gain of $0.2 million for fiscal 2012 and a loss of $0.5 million for fiscal 2011.

Income Taxes

The Company provides for income taxes utilizing the asset and
liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes
generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Companys assets and liabilities and are
adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when a judgment is made that it is considered more likely than not that a tax benefit will not be realized. A
decision to record a valuation allowance results in an increase in income tax expense or a decrease in income tax benefit. If the valuation allowance is released in a future period, income tax expense will be reduced accordingly.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The impact
of an uncertain income tax position is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than
a 50% likelihood of being sustained. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Comprehensive Loss

Comprehensive loss and its components encompasses all
changes in equity other than those with stockholders, includes net loss and foreign currency translation adjustments, and are disclosed as a separate statement of comprehensive loss.

Concentration of Credit Risks

Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of trade accounts receivable, which are generally not collateralized. To reduce credit risk, the Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses and sales returns.

A significant portion of revenue is concentrated with a limited
number of customers. Revenues from one customer comprised 17.0% and 18.8% of total consolidated revenues in fiscal 2012 and 2011, respectively. Aggregated accounts receivable from two customers comprised 27.7% of accounts receivable at the end of
fiscal 2012. Accounts receivable from one customer comprised 13.5% of accounts receivable at the end of fiscal 2011.

Net Loss per Share

Basic net loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Diluted net loss per share is computed based on the weighted-average number of shares of common stock outstanding during the period increased by the weighted-average number of dilutive common
stock equivalents outstanding during the period, using the treasury stock method. Dilutive common stock equivalents are comprised of options granted under the Companys stock option plans, employee stock purchase plan (ESPP) share
purchase rights and common stock purchase warrants. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Companys net loss position.

Anti-dilutive common stock equivalents excluded from the computation of diluted net loss per share were as follows (in thousands):



|                                                   |  |             |        |  |      |  |        | 
|-------------------------------------------------- |  | ----------- | ------ |  | ---- |  | ------ | 
|                                                   |  | Fiscal Year |       
|                                                   |  | 2012        |        |  | 2011 | 
|Options outstanding and ESPP share purchase rights |  |             | 978    |  |      |  | 3,176  | 
|Common stock purchase warrants                     |  |             | 12,637 |  |      |  | 12,719 | 

Share-based Compensation

The Company accounts for share-based awards, and similar equity instruments, granted to employees and non-employee directors under the fair value method. Share-based compensation award types include stock
options, restricted stock, and stock appreciation rights (SAR) awards. The Company typically uses the Black-Scholes option pricing model to estimate the fair value of its option awards on the measurement date, which generally is the date
of grant. The cost is recognized over the requisite service period (usually the vesting period) for the estimated number of instruments for which service is expected to be rendered.



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##### Table of Contents

Compensation expense associated with options with graded vesting is recognized pursuant to
an accelerated method. Compensation expense associated with restricted stock is recognized over the vesting period using the straight-line method.

The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to share-based compensation cost as a result of the full valuation allowance of the
Companys net deferred tax assets and its net operating loss carryforwards.

The Company recorded the following
compensation expense related to its share-based compensation awards (in thousands):



|                           |  |             |       |  |      |   |       | 
|-------------------------- |  | ----------- | ----- |  | ---- | - | ----- | 
|                           |  | Fiscal Year |      
|                           |  | 2012        |       |  | 2011 |  
|Cost of product sales      |  | $           | 89    |  |      | $ | 16    | 
|Sales and marketing        |  |             | 782   |  |      |   | 610   | 
|Research and development   |  |             | 476   |  |      |   | 400   | 
|General and administrative |  |             | 3,647 |  |      |   | 2,047 | 
|                           |  |             |       |  |      |   |       | 
|                           |  | $           | 4,994 |  |      | $ | 3,073 | 
|                           |  |             |       |  |      |   |       | 

Fair Value of Financial Instruments

Financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value because of
the short-term maturity of these instruments. The carrying amount of the Companys borrowings under its credit facility approximates its fair value as the interest rate of the credit facility is substantially comparable to rates offered for
similar debt instruments.

Recently Issued Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU
No. 2011-05 provides two options for presenting other comprehensive income (OCI), which previously has typically been placed near the statement of equity. The amendments require an OCI statement to be included with the income
statement, which together will make a statement of total comprehensive income or separate from the income statement, but the two statements will have to appear consecutively within a financial report. The Company adopted the amended presentation
guidance as of March 31, 2012, and such adoption did not impact the consolidated results of the Company.

NOTE 2  COMPOSITION
OF CERTAIN FINANCIAL STATEMENT CAPTIONS

The following table summarizes inventories (in thousands):



|                |  |          |        |  |      |   |       | 
|--------------- |  | -------- | ------ |  | ---- | - | ----- | 
|                |  | June 30, |       
|                |  | 2012     |        |  | 2011 |  
|Raw materials   |  | $        | 3,661  |  |      | $ | 3,834 | 
|Work in process |  |          | 1,519  |  |      |   | 674   | 
|Finished goods  |  |          | 5,478  |  |      |   | 4,929 | 
|                |  |          |        |  |      |   |       | 
|                |  | $        | 10,658 |  |      | $ | 9,437 | 
|                |  |          |        |  |      |   |       | 

The following table summarizes other current assets (in thousands):



|                                      |  |          |       |  |      |   |       | 
|------------------------------------- |  | -------- | ----- |  | ---- | - | ----- | 
|                                      |  | June 30, |      
|                                      |  | 2012     |       |  | 2011 |  
|Prepaid third-party service contracts |  | $        | 2,694 |  |      | $ | 4,138 | 
|Short-term deposits                   |  |          | 361   |  |      |   | 536   | 
|Prepaid insurance and services        |  |          | 395   |  |      |   | 352   | 
|VAT receivable                        |  |          | 268   |  |      |   | 268   | 
|Other                                 |  |          | 61    |  |      |   | 337   | 
|                                      |  |          |       |  |      |   |       | 
|                                      |  | $        | 3,779 |  |      | $ | 5,631 | 
|                                      |  |          |       |  |      |   |       | 



F-12



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##### Table of Contents

The following table summarizes property and equipment (in thousands):



|                                          |  |          |        |   |      |   |        |  
|----------------------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                                          |  | June 30, |       
|                                          |  | 2012     |        |   | 2011 |  
|Computer equipment                        |  | $        | 1,551  |   |      | $ | 1,110  |  
|Machinery and equipment                   |  |          | 797    |   |      |   | 422    |  
|Leasehold improvements                    |  |          | 501    |   |      |   | 91     |  
|Furniture and fixtures                    |  |          | 75     |   |      |   | 84     |  
|                                          |  |          |        |   |      |   |        |  
|                                          |  |          | 2,924  |   |      |   | 1,707  |  
|Accumulated depreciation and amortization |  |          | (1,478 | ) |      |   | (1,048 | )
|                                          |  |          |        |   |      |   |        |  
|                                          |  | $        | 1,446  |   |      | $ | 659    |  
|                                          |  |          |        |   |      |   |        |  

Depreciation and amortization expense for property and equipment was $0.5 million and $0.4 million in
fiscal 2012 and 2011, respectively.

The following table summarizes other assets (in thousands):



|                                  |  |          |       |  |      |   |       | 
|--------------------------------- |  | -------- | ----- |  | ---- | - | ----- | 
|                                  |  | June 30, |      
|                                  |  | 2012     |       |  | 2011 |  
|Deferred cost  service contracts |  | $        | 1,186 |  |      | $ | 1,383 | 
|Other                             |  |          | 127   |  |      |   | 157   | 
|                                  |  |          |       |  |      |   |       | 
|                                  |  | $        | 1,313 |  |      | $ | 1,540 | 
|                                  |  |          |       |  |      |   |       | 

The following table summarizes accrued liabilities (in thousands):



|                                      |  |          |        |  |      |   |        | 
|------------------------------------- |  | -------- | ------ |  | ---- | - | ------ | 
|                                      |  | June 30, |       
|                                      |  | 2012     |        |  | 2011 |  
|Deferred revenue  service contracts  |  | $        | 8,613  |  |      | $ | 9,163  | 
|Accrued expenses                      |  |          | 4,156  |  |      |   | 2,103  | 
|Third-party service contracts payable |  |          | 2,085  |  |      |   | 1,989  | 
|Deferred revenue  distributors       |  |          | 487    |  |      |   | 532    | 
|                                      |  |          |        |  |      |   |        | 
|                                      |  | $        | 15,341 |  |      | $ | 13,787 | 
|                                      |  |          |        |  |      |   |        | 

The following table summarizes other long-term liabilities (in thousands):



|                                      |  |          |       |  |      |   |       | 
|------------------------------------- |  | -------- | ----- |  | ---- | - | ----- | 
|                                      |  | June 30, |      
|                                      |  | 2012     |       |  | 2011 |  
|Deferred revenue  service contracts  |  | $        | 3,569 |  |      | $ | 4,421 | 
|Deferred rent                         |  |          | 1,203 |  |      |   | 1,268 | 
|Third-party service contracts payable |  |          | 185   |  |      |   | 415   | 
|Other                                 |  |          | 3     |  |      |   | 121   | 
|                                      |  |          |       |  |      |   |       | 
|                                      |  | $        | 4,960 |  |      | $ | 6,225 | 
|                                      |  |          |       |  |      |   |       | 

NOTE 3  INTANGIBLE ASSETS

Intangible assets, net, primarily consists of customer contracts and trade names acquired in the June 2008 acquisition
of SnapServer, which have been assigned an estimated useful life of 6 years . The i ntangible assets are being amortized on a straight-line basis over their estimated useful lives.

The following table summarizes intangible assets (in thousands):



|                                   |  |          |        |   |      |   |        |  
|---------------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                                   |  | June 30, |       
|                                   |  | 2012     |        |   | 2011 |  
|Acquired technology                |  | $        | 1,928  |   |      | $ | 1,928  |  
|Customer contracts and trade names |  |          | 3,853  |   |      |   | 3,853  |  
|                                   |  |          |        |   |      |   |        |  
|                                   |  |          | 5,781  |   |      |   | 5,781  |  
|Less: Accumulated amortization     |  |          | (4,432 | ) |      |   | (3,283 | )
|                                   |  |          |        |   |      |   |        |  
|                                   |  | $        | 1,349  |   |      | $ | 2,498  |  
|                                   |  |          |        |   |      |   |        |  



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##### Table of Contents

Amortization expense of intangible assets was $1.1 million during each of fiscal 2012 and
2011. Estimated amortization expense for intangible assets will be $0.7 million in each of fiscal 2013 and fiscal 2014.

NOTE 4  DEBT

In August 2011, the Company entered into a loan and security agreement, or credit facility, which allows for revolving
cash borrowings up to $8.0 million . The proceeds of the credit facility may be used to fund the Companys working capital and to fund its general business requirements. The obligations under the credit facility are secured by all assets of the
Company. Borrowings under the credit facility bear interest at the prime rate (as defined in the credit facility) plus a margin of either 1.00% or 1.25% , depending on the Companys liquidity coverage ratio. The Company is also obligated to pay
other customary facility fees and arrangement fees for a credit facility of this size and type. At June 30, 2012 , the interest rate on the credit facility was 4.25% .

The credit facility requires the Company to comply with a liquidity coverage ratio and contains customary covenants, including covenants that limit or restrict the Companys and its
subsidiaries ability to incur liens and indebtedness, make certain types of payments, merge or consolidate, and make dispositions of assets. The credit facility specifies customary events of default (some of which are subject to applicable
grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. Upon the occurrence of an event of
default under the credit facility, the lender may cease making loans, terminate the credit facility, and declare all amounts outstanding to be immediately due and deduct such amounts from the Companys lockbox account on deposit with the bank.
At June 30, 2012 , the Company was in compliance with all covenants of the credit facility.

At June 30, 2012 , $3.5
million was outstanding and recorded as long-term debt. No payments are due within the next 12 months. While the credit facility is recorded as long-term debt, it is a revolving line of credit and borrowings and payments are presented on a net basis
in the consolidated statement of cash flows. The credit facility is scheduled to mature August 8, 2013. There was no outstanding debt at June 30, 2011 .

NOTE 5  INCOME TAXES

The Company recognizes the impact of an uncertain income tax position on its income tax return at the largest amount
that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The following is a summary of the changes in the amount of unrecognized tax benefits (in thousands):



|                                                         |  |             |     |   |      |   |     | 
|-------------------------------------------------------- |  | ----------- | --- | - | ---- | - | --- | 
|                                                         |  | Fiscal Year |    
|                                                         |  | 2012        |     |   | 2011 |  
|Unrecognized tax benefits at the beginning of the period |  | $           | 383 |   |      | $ | 383 | 
|Decrease related to prior periods                        |  |             | (76 | ) |      |   |    | 
|Increase related to prior periods                        |  |             |    |   |      |   |    | 
|                                                         |  |             |     |   |      |   |     | 
|Unrecognized tax benefits                                |  | $           | 307 |   |      | $ | 383 | 
|                                                         |  |             |     |   |      |   |     | 

At June 30, 2012, there were no unrecognized tax benefits presented as a component of long-term
liabilities in the accompanying consolidated balance sheet. At June 30, 2012, there was $0.3 million presented as a reduction of the related deferred tax asset for which there is full valuation allowance. The entire amount of unrecognized tax
benefits at June 30, 2012 will affect the effective tax rate if recognized. However, the portion that would be recognized as an increase to deferred tax assets may result in a corresponding increase in the valuation allowance at the time of
recognition resulting in no net effect to the effective tax rate, depending upon the Companys assessment of the likelihood of realization of the tax benefits at the time they are recognized.

The Company believes it is reasonably possible that, within the next twelve months, the amount of unrecognized tax benefits may remain
unchanged. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had no material accrual for interest and penalties on its consolidated balance sheet at fiscal years ended
June 30, 2012 and 2011, and recognized no interest and/or penalties in the consolidated statement of operations for the fiscal years ended June 30, 2012 and 2011.

During fiscal 2012, the Companys liability for unrecognized tax benefits decreased by $0.1 million from the prior year. The full amount was recognized as a tax benefit in the Companys
consolidated financial statements.

The Company is subject to federal and state taxation in the United States and also in
certain foreign tax jurisdictions. Generally, the Companys tax returns for fiscal 2009 and forward are subject to examination by the U. S. federal tax authorities and fiscal 2008 and forward are subject to examination by state tax authorities.



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##### Table of Contents

The Companys ability to use its net operating loss and research and development credit
carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state
provisions. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a loss corporation under the definition of
Section 382. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.

The components of loss before income taxes were as follows (in thousands):



|         |  |             |         |   |      |   |         |  
|-------- |  | ----------- | ------- | - | ---- | - | ------- | -
|         |  | Fiscal Year |        
|         |  | 2012        |         |   | 2011 |  
|Domestic |  | $           | (16,677 | ) |      | $ | (14,691 | )
|Foreign  |  |             | 595     |   |      |   | 477     |  
|         |  |             |         |   |      |   |         |  
|         |  | $           | (16,082 | ) |      | $ | (14,214 | )
|         |  |             |         |   |      |   |         |  

The provision for income taxes includes the following (in thousands):



|              |  |             |     |   |      |   |     |  
|------------- |  | ----------- | --- | - | ---- | - | --- | -
|              |  | Fiscal Year |    
|              |  | 2012        |     |   | 2011 |  
|Current:      |  |             |     |   |      |   |     |  
|Federal       |  | $           | (15 | ) |      | $ | 108 |  
|State         |  |             | (57 | ) |      |   | (49 | )
|Foreign       |  |             | 151 |   |      |   | 226 |  
|              |  |             |     |   |      |   |     |  
|Total current |  | $           | 79  |   |      | $ | 285 |  
|              |  |             |     |   |      |   |     |  

A reconciliation of income taxes computed by applying the federal statutory income tax rate of 34.0% to
loss before income taxes to the total income tax provision reported in the accompanying consolidated statements of operations is as follows (in thousands):



|                                                |  |             |        |   |      |   |        |  
|----------------------------------------------- |  | ----------- | ------ | - | ---- | - | ------ | -
|                                                |  | Fiscal Year |       
|                                                |  | 2012        |        |   | 2011 |  
|U.S. federal income tax at statutory rate       |  | $           | (5,469 | ) |      | $ | (4,833 | )
|State income taxes, net of federal benefit      |  |             | (876   | ) |      |   | (695   | )
|Increase in valuation allowance                 |  |             | 6,159  |   |      |   | 5,057  |  
|Share-based compensation expense                |  |             | 103    |   |      |   | 236    |  
|Net operating loss carryback                    |  |             |       |   |      |   | 108    |  
|Foreign dividend                                |  |             |       |   |      |   | 271    |  
|Federal R&D tax credit                          |  |             | (129   | ) |      |   |       |  
|Permanent differences                           |  |             | 291    |   |      |   | 141    |  
|                                                |  |             |        |   |      |   |        |  
|Total provision for (benefit from) income taxes |  | $           | 79     |   |      | $ | 285    |  
|                                                |  |             |        |   |      |   |        |  

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are shown below. A full valuation allowance has been recorded, as
realization of such assets is uncertain. Deferred income taxes comprised (in thousands):



|                                            |  |          |         |   |      |   |         |  
|------------------------------------------- |  | -------- | ------- | - | ---- | - | ------- | -
|                                            |  | June 30, |        
|                                            |  | 2012     |         |   | 2011 |  
|Deferred tax assets:                        |  |          |         |   |      |   |         |  
|Net operating loss carryforward             |  | $        | 45,061  |   |      | $ | 40,039  |  
|Warranty and extended warranty              |  |          | 1,635   |   |      |   | 1,676   |  
|Property and equipment                      |  |          | 362     |   |      |   | 36      |  
|Capital loss carryforward                   |  |          | 1,162   |   |      |   | 1,260   |  
|Tax credits                                 |  |          | 3,243   |   |      |   | 2,568   |  
|Inventory                                   |  |          | 1,751   |   |      |   | 1,799   |  
|Share-based compensation                    |  |          | 1,999   |   |      |   | 1,260   |  
|Intangible assets                           |  |          | 1,612   |   |      |   | 1,365   |  
|Deferred compensation                       |  |          | 117     |   |      |   | 233     |  
|Allowance for doubtful accounts             |  |          | 84      |   |      |   | 104     |  
|Other                                       |  |          | 263     |   |      |   | 329     |  
|                                            |  |          |         |   |      |   |         |  
|Gross deferred tax asset                    |  |          | 57,289  |   |      |   | 50,669  |  
|                                            |  |          |         |   |      |   |         |  
|Valuation allowance for deferred tax assets |  |          | (57,289 | ) |      |   | (50,669 | )
|                                            |  |          |         |   |      |   |         |  
|Net deferred tax asset                      |  | $        |        |   |      | $ |        |  
|                                            |  |          |         |   |      |   |         |  



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At June 30, 2012, the Company has federal and state net operating loss carryforwards of
$120.3 million and $80.7 million , respectively. These amounts include share-based compensation deductions of $1.0 million that will be recorded to contributed capital when realized. The remaining federal net operating loss will begin expiring in
2023, unless previously utilized. State net operating loss carryforwards generally begin to expire in 2015, unless previously utilized.

At June 30, 2012, the Company had federal and California research and development tax credit carryforwards totaling $1.0 million and $2.9 million , respectively. The California research credit may be
carried forward indefinitely. The federal research credit will begin expiring in 2024, unless previously utilized. In addition, the Company has foreign tax credit carryforwards totaling $0.3 million , which will begin expiring in 2015, unless
previously utilized. The Company has federal alternative minimum tax credit carryforwards totaling $0.2 million which can be carried forward indefinitely.

NOTE 6  EQUITY

Sale of Common Stock

In March 2012, the Company sold an aggregate of 3,640,000 shares of its common stock at $2.00 per share for gross proceeds of approximately $7.3 million and net proceeds of approximately $6.6 million .

In March 2011, in a private placement transaction, the Company sold an aggregate of 8,653,045 shares of its common stock
along with warrants to purchase up to 3,807,331 shares of common stock for a total issuance price of approximately $15.3 million and net proceeds of approximately $13.8 million . The purchase price for one share of common stock and a warrant to
purchase 0.44 shares of common stock was $1.765 .

In November 2010, the Company sold an aggregate of 3,376,000 shares of its
common stock to certain institutional investors at $1.25 per share for gross proceeds of approximately $4.2 million and net proceeds of approximately $4.0 million .

Warrants

In connection with the Companys March 2011 private
placement, the Company issued warrants to purchase up to 3,807,331 shares of common stock. Each warrant has an exercise price of $1.71 per share of common stock. The warrants are immediately exercisable and have a five year term. In connection with
the offering and as partial compensation for the placement agents services, the Company issued to the placement agent a warrant initially exercisable to purchase up to 259,591 shares of common stock at an exercise price of $1.71 per share;
with other terms also substantially the same as the warrants issued to the purchasers. During fiscal 2012, the Company issued 12,464 shares of common stock upon exercise of certain of these outstanding warrants.

In connection with the Companys February 2010 private placement, the Company issued warrants to purchase up to 6,373,266 shares of
common stock with an exercise price of $2.583 per share. In connection with this transaction, the Company issued a warrant to purchase up to 180,865 shares of common stock at an exercise price of $2.952 per share to the placement agent. The warrants
are immediately exercisable, have a five year term, and provide for weighted-average anti-dilution protection in the event that the Company issues additional securities at a price less than the then-effective exercise price of the warrants. As part
of the November 2010 sale of common stock, the number of shares of common stock issuable upon exercise of the warrants issued in February 2010 was adjusted from 6,373,266 shares to 7,307,186 shares, and the per share strike price of such warrants
was proportionately decreased from $2.583 to $2.253 , each as a result of the weighted-average anti-dilution provisions in the warrants. As part of the March 2011 sale of common stock, the number of shares of common stock issuable upon exercise of
the warrants issued in February 2010 was further adjusted from 7,307,186 shares to 8,368,135 shares, and the per share strike price of such warrants was proportionately decreased from $2.253 to $1.967 , each as a result of the weighted-average
anti-dilution provisions in the warrants. During fiscal 2012, the Company issued 70,203 shares of common stock upon exercise of certain of these outstanding warrants.

In connection with the Companys November 2009 public offering, the Company issued a warrant for the purchase of 103,500 shares of the Companys common stock at $2.625 per share to the
underwriter of the offering. The warrant may be exercised at any time beginning on October 25, 2010 and ending on October 30, 2014. As of June 30, 2012, the warrant had not been exercised.

NOTE 7  SHARE-BASED COMPENSATION

Equity Compensation Plans

The Company has three active stock option plans administered by the Compensation Committee of the Board of Directors. In June 2011, the Board of Directors modified the Companys 2009 Equity Incentive
Plan to authorize an additional 3.2 million shares available for issuance.



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##### Table of Contents

As of June 30, 2012, the Company had reserved an aggregate of 7.4 million shares of common stock for issuance under its three active plans: 2000 Stock Option Plan (2000
Plan), 2003 Equity Incentive Plan (2003 Plan) and the 2009 Equity Incentive Plan (2009 Plan) (collectively, the Option Plans). The Option Plans provide for the granting of stock and option awards. Currently,
the Company may grant new awards only under the 2009 Plan. The 2009 Plan provides for the granting of restricted stock, stock units, stock options and stock appreciation rights. The Option Plans were approved by the Companys shareholders. The
Compensation Committee may also grant options outside of the Option Plans as an inducement to an employee commencing employment with the Company (Inducement Options). As of June 30, 2012, the Company had reserved an aggregate of
0.3 million shares of common stock for the issuance of Inducement Options.

Option and stock awards granted generally
vest over a three -year period. Option awards generally expire after a period not to exceed six years, except in the event of termination, whereupon vested shares must be exercised generally within three months under the 2009 Plan and 2003 Plan and
within 30 days under the 2000 Plan, or upon death or disability, in which case an extended six- or twelve-month exercise period is specified. As of June 30, 2012, approximately 2.0 million shares were available for grant in the future
under the Option Plans.

The fair value of each option is estimated on the date of grant using the Black-Scholes option
pricing model, which uses the weighted-average assumptions noted in the following table.



|                         |  |             |      |   |      |  |      |  
|------------------------ |  | ----------- | ---- | - | ---- |  | ---- | -
|                         |  | Fiscal Year |     
|                         |  | 2012        |      |   | 2011 | 
|Expected volatility      |  |             | 75.0 | % |      |  | 69.8 | %
|Risk-free interest rate  |  |             | 1.1  | % |      |  | 2.1  | %
|Dividend yield           |  |             |     |   |      |  |     |  
|Expected term (in years) |  |             | 6    |   |      |  | 6    |  

The Company utilizes a volatility study for expected volatility, which takes into account such factors as
the overall market conditions, the industry sector, and the expected and realistic pricing of equity instruments in the marketplace and is generally reflective of both historical and implied volatility. The Company applies a forfeiture rate based
upon historical pre-vesting option cancellations. The risk-free interest rate is determined based upon a constant maturity U.S. Treasury security with a contractual life approximating the expected term of the option. The expected term of options
granted is estimated based on a number of factors, including but not limited to the vesting term of the award, historical employee exercise behavior (for both options that have run their course and outstanding options), the expected volatility of
the Companys stock and an employees average length of service.

Option activity is summarized below (shares and
aggregate intrinsic value in thousands):



|                                         |  |        |        |   |                               |   |      |                                                  |  |  |                         |  |  |   |     | 
|---------------------------------------- |  | ------ | ------ | - | ----------------------------- | - | ---- | ------------------------------------------------ |  |  | ----------------------- |  |  | - | --- | 
|                                         |  | Shares |        |   | Weighted-AverageExercisePrice |   |      | Weighted-AverageRemainingContractualTerm (years) |  |  | AggregateIntrinsicValue | 
|Options outstanding at June 30, 2010     |  |        | 3,337  |   |                               | $ | 3.30 |                                                  |  |  |                         |  |  |   |     | 
|Granted                                  |  |        | 843    |   |                               |   | 1.73 |                                                  |  |  |                         |  |  |   |     | 
|Exercised                                |  |        | (27    | ) |                               |   | 1.00 |                                                  |  |  |                         |  |  |   |     | 
|Canceled, forfeited or modified          |  |        | (2,202 | ) |                               |   | 3.24 |                                                  |  |  |                         |  |  |   |     | 
|                                         |  |        |        |   |                               |   |      |                                                  |  |  |                         |  |  |   |     | 
|Options outstanding at June 30, 2011     |  |        | 1,951  |   |                               |   | 2.73 |                                                  |  |  |                         |  |  |   |     | 
|Granted                                  |  |        | 334    |   |                               |   | 2.30 |                                                  |  |  |                         |  |  |   |     | 
|Exercised                                |  |        | (213   | ) |                               |   | 1.76 |                                                  |  |  |                         |  |  |   |     | 
|Canceled, forfeited or modified          |  |        | (410   | ) |                               |   | 3.14 |                                                  |  |  |                         |  |  |   |     | 
|                                         |  |        |        |   |                               |   |      |                                                  |  |  |                         |  |  |   |     | 
|Options outstanding at June 30, 2012     |  |        | 1,662  |   |                               | $ | 2.66 |                                                  |  |  | 4.00                    |  |  | $ | 565 | 
|                                         |  |        |        |   |                               |   |      |                                                  |  |  |                         |  |  |   |     | 
|Exercisable outstanding at June 30, 2012 |  |        | 1,177  |   |                               | $ | 2.95 |                                                  |  |  | 3.67                    |  |  | $ | 488 | 
|                                         |  |        |        |   |                               |   |      |                                                  |  |  |                         |  |  |   |     | 

The following table summarizes information about stock options (in thousands, except per share amounts):



|                                                                                          |  |             |      |  |      |   |      | 
|----------------------------------------------------------------------------------------- |  | ----------- | ---- |  | ---- | - | ---- | 
|                                                                                          |  | Fiscal Year |     
|                                                                                          |  | 2012        |      |  | 2011 |  
|Weighted-average grant date fair value per share of options granted with exercise prices: |  |             |      |  |      |   |      | 
|Equal to fair value                                                                       |  | $           | 1.50 |  |      | $ | 1.10 | 
|Intrinsic value of stock options exercised                                                |  | $           | 138  |  |      | $ | 25   | 
|Cash received upon exercise of stock options                                              |  | $           | 374  |  |      | $ | 27   | 
|Actual tax benefit realized for the tax deductions from stock option exercise             |  | $           |     |  |      | $ |     | 
|Total income tax benefit recognized in the statement of operations                        |  | $           |     |  |      | $ |     | 



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Restricted Stock

The following table summarizes information about restricted stock unit and awards activity (in thousands, except per share amounts):



|                                 |  |                 |        |   |                                      |   |      | 
|-------------------------------- |  | --------------- | ------ | - | ------------------------------------ | - | ---- | 
|                                 |  | Number ofShares |        |   | Weighted-AverageGrant DateFair Value |  
|Outstanding:                     |  |                 |        |   |                                      |   |      | 
|Restricted stock  June 30, 2010 |  |                 |       |   |                                      | $ |     | 
|Granted                          |  |                 | 4,735  |   |                                      |   | 2.49 | 
|                                 |  |                 |        |   |                                      |   |      | 
|Restricted stock  June 30, 2011 |  |                 | 4,735  |   |                                      |   | 2.49 | 
|Grants and awards                |  |                 | 1,096  |   |                                      |   | 2.20 | 
|Vested and released              |  |                 | (1,089 | ) |                                      |   | 2.11 | 
|Canceled, forfeited or modified  |  |                 | (693   | ) |                                      |   | 2.53 | 
|                                 |  |                 |        |   |                                      |   |      | 
|Restricted stock June 30, 2012  |  |                 | 4,049  |   |                                      | $ | 2.51 | 
|                                 |  |                 |        |   |                                      |   |      | 

The fair value of each restricted stock unit or award is the market price of the Companys stock on
the date of grant and typically vests over three years. In fiscal 2012, the fair value of restricted stock that vested was $2.3 million . No restricted stock vested in fiscal 2011. The Company recognized $4.2 million and $0.6 million in fiscal 2012
and 2011, respectively, for share-based compensation expense related to these awards.

As of June 30, 2012, there was a
total of $8.8 million of unrecognized compensation expense related to unvested equity-based compensation awards under the Option Plans and the Inducement Options. The expense associated with non-vested stock and options awards granted prior to
June 30, 2012 is expected to be recognized over a weighted-average period of 1.5 years .

Stock Appreciation Rights

In June 2011, the Company modified options, which had been granted to three executives during fiscal 2010 to purchase 1.6 million
shares of the Companys common stock, and reissued the options as SAR awards. No other terms of the awards changed. The purpose of the amendment and reissuance was to provide that, upon exercise, the SAR would be settled in cash or stock, at
the discretion of the Company. Based on the SAR settlement provisions, and the Companys intentions, this modification changed these awards from equity-based instruments to liability-based instruments. As such, the fair value of the SAR awards
is recalculated at each subsequent reporting period until settlement. The Company uses a Black-Scholes valuation model to determine the fair value and recorded a current liability of $1.3 million and $2.2 million as of June 30, 2012 and 2011,
respectively.

Ongoing compensation expense is recorded based on the grant-date fair value and the proportionate amount of the
requisite service period that has been rendered to date. Changes in the fair value of the vested SAR awards is recorded as an adjustment to the liability until settlement of the SAR awards.

As of June 30, 2012, there were 1.3 million of SAR awards vested with an exercise price of $2.49 , a remaining contractual term
of 3.6 years , and no intrinsic value. No SAR awards were exercised during fiscal 2012 and 2011.

2006 Employee Stock Purchase Plan

In February 2007, the Company adopted the 2006 Employee Stock Purchase Plan (2006 ESPP). In June 2011,
the Board of Directors modified the Companys 2006 ESPP to authorize an additional 600,000 shares available for issuance. As of June 30, 2012, 674,000 shares of common stock were reserved for issuance under the 2006 ESPP.

Offerings under the 2006 ESPP are for a duration of six months and consist of one purchase interval. The 2006 ESPP limits stock purchases
to (i) no more than $25,000 worth of stock in any calendar year and (ii) no more than 2,500 shares per individual per offering. Beginning in fiscal 2012, shares are purchased at 85% of the lower of the beginning or end of the period price.
Prior to fiscal 2012, shares were purchased at 95% of the end of the period fair market value. During fiscal 2012 and 2011, the Company issued 80,675 and 1,368 shares, respectively, and recognized approximately $25,000 as share-based compensation in
fiscal 2012. No share-based compensation was recognized in fiscal 2011.

NOTE 8  401K PLAN

The Company maintains an employee savings and retirement plan (the 401(k) Plan) covering all of the
Companys employees. The 401(k) Plan permits but does not require matching contributions by the Company on behalf of participants. The Company does not make matching contributions.



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##### Table of Contents

NOTE 9  COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its office, production and sales facilities under non-cancelable operating leases that expire in various years through
fiscal year 2020. The leases provide for biennial or annual rent escalations intended to approximate increases in cost of living indices, and certain of the leases provide for rent abatement. The Company has a five -year option to renew its lease on
its San Diego headquarters facility and a five -year option to renew its lease on its San Jose facility. In July 2010, the Company modified its San Diego headquarters lease and reduced the facility by one buildin g, or 67,285 square feet, which
proportionally reduced the monthly base rent and share of facility expenses.

Future minimum lease payments under these
arrangements are as follows (in thousands):



|            |  |                      |       | 
|----------- |  | -------------------- | ----- | 
|            |  | MinimumLeasePayments |      
|Fiscal 2013 |  | $                    | 2,882 | 
|Fiscal 2014 |  |                      | 2,220 | 
|Fiscal 2015 |  |                      | 797   | 
|Fiscal 2016 |  |                      | 653   | 
|Fiscal 2017 |  |                      | 612   | 
|Thereafter  |  |                      | 92    | 
|            |  |                      |       | 
|            |  | $                    | 7,256 | 
|            |  |                      |       | 

Rental expense is recognized on a straight-line basis over the respective lease terms and was $2.6
million and $3.3 million in fiscal 2012 and 2011, respectively.

Litigation

From time to time, the Company may be involved in various lawsuits, legal proceedings or claims that arise in the ordinary course of
business. Management does not believe any legal proceedings or claims pending at June 30, 2012 will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position or results of operations.
Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Companys business.

In August and October 2010, the Company filed patent infringement lawsuits in the United States District Court for the Southern District
of California and United States International Trade Commission (ITC), respectively, against various parties. Both lawsuits claim infringement of two of the Companys United States patents, Nos. 6,328,766 and 6,353,581.

In November 2011, the Company entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which the Company
released all claims it had against Dell Inc. and IBM in the United States District Court for the Southern District of California and at the ITC. However, the Companys infringement case against BDT AG and its affiliates continues.

In July 2012, the ITC released the public version of the Initial Determination, which finds that the six asserted claims of U.S. Patent
No. 6,328,766 are valid. The Initial Determination finds no infringement of United States Patent No. 6,353,581. We petitioned the full Commission of the ITC for a review of some of the Initial Determination findings. The Commission has
decided to review in part the Initial Determination on its merits and the Commission is expected to issue its decision in a final determination by October 22, 2012.

In June 2012, the Company filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies.

In August 2012, Quantum Corporation filed counterclaims against the Company in the United States District Court for the Southern District
of California action, alleging trademark infringement and unfair competition claims, and infringement of United States Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by its products. Quantum is seeking monetary damages from the Company
and injunctive relief.



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##### Table of Contents

NOTE 10  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables present selected quarterly financial information (in thousands, except per share data) for the
periods indicated. This information has been derived from the Companys unaudited quarterly consolidated condensed financial statements, which in the opinion of management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such information. These operating results are not necessarily indicative of results for any future period.



|                         |  |             |        |   |    |   |        |    |  |   |        |   |  |       |        |   |  |   |         |  
|------------------------ |  | ----------- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------- | -
|                         |  | Fiscal 2012 |       
|                         |  | Q1          |        |   | Q2 |   |        | Q3 |  |   | Q4     |   |  | Total |       
|Net revenue              |  | $           | 14,075 |   |    | $ | 15,105 |    |  | $ | 15,152 |   |  | $     | 15,300 |   |  | $ | 59,632  |  
|Gross profit             |  |             | 4,587  |   |    |   | 5,022  |    |  |   | 4,710  |   |  |       | 4,841  |   |  |   | 19,160  |  
|Loss from operations     |  |             | (5,442 | ) |    |   | (4,250 | )  |  |   | (3,690 | ) |  |       | (3,632 | ) |  |   | (17,014 | )
|Loss before income taxes |  |             | (5,236 | ) |    |   | (4,284 | )  |  |   | (3,874 | ) |  |       | (2,688 | ) |  |   | (16,082 | )
|Net loss                 |  |             | (5,355 | ) |    |   | (4,292 | )  |  |   | (3,820 | ) |  |       | (2,694 | ) |  |   | (16,161 | )
|Net loss per share:      |  |             |        |   |    |   |        |    |  |   |        |   |  |       |        |   |  |   |         |  
|Basic and diluted (1)(2) |  | $           | (0.23  | ) |    | $ | (0.18  | )  |  | $ | (0.16  | ) |  | $     | (0.10  | ) |  | $ | (0.66   | )
|                         | 
|                         |  | Fiscal 2011 |       
|                         |  | Q1          |        |   | Q2 |   |        | Q3 |  |   | Q4     |   |  | Total |       
|Net revenue              |  | $           | 17,573 |   |    | $ | 17,930 |    |  | $ | 17,126 |   |  | $     | 17,568 |   |  | $ | 70,197  |  
|Gross profit             |  |             | 4,152  |   |    |   | 5,573  |    |  |   | 5,787  |   |  |       | 5,702  |   |  |   | 21,214  |  
|Loss from operations     |  |             | (5,758 | ) |    |   | (3,609 | )  |  |   | (2,766 | ) |  |       | (3,466 | ) |  |   | (15,599 | )
|Loss before income taxes |  |             | (6,480 | ) |    |   | (832   | )  |  |   | (3,257 | ) |  |       | (3,645 | ) |  |   | (14,214 | )
|Net loss                 |  |             | (6,498 | ) |    |   | (909   | )  |  |   | (3,366 | ) |  |       | (3,726 | ) |  |   | (14,499 | )
|Net loss per share:      |  |             |        |   |    |   |        |    |  |   |        |   |  |       |        |   |  |   |         |  
|Basic and diluted (1)(2) |  | $           | (0.59  | ) |    | $ | (0.07  | )  |  | $ | (0.22  | ) |  | $     | (0.16  | ) |  | $ | (0.94   | )



|(1) | Net loss per share is computed independently for each quarter and the full year based upon respective weighted-average shares outstanding. Therefore, the sum of the
quarterly earnings per share amounts may not equal the annual amounts reported.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Basic loss per share is computed by dividing net loss by the weighted-average number of common shares assumed to be outstanding during the periods of computation.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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