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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
    From          to   Commission file number 1-13317
     DOT HILL SYSTEMS
    CORP.
 (Exact name of registrant as
    specified in its charter)
  Delaware

13-3460176(State of
    Incorporation)

(I.R.S. Employer
    Identification No.)2200 Faraday Ave, Suite 100
    Carlsbad, CA(Address of principal
    executive offices)

92008(Zip Code)   Registrants telephone number, including area code:
 (760) 931-5500
      Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, $0.001 par value

The Nasdaq Stock Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ
  Regulation S-K 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer þ

Non-accelerated
    filer o

Smaller reporting
    company o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
       Form 10-K.




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##### 





DOT HILL
    SYSTEMS CORP.
  INDEX TO
    ANNUAL REPORT ON
    FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2007
   
 PagePART IItem 1.


Business


2Item 1A.


Risk Factors


16Item 1B.


Unresolved Staff Comments


32Item 2.


Properties


32Item 3.


Legal Proceedings


32Item 4.


Submission of Matters to a Vote of Security
    Holders


34PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


35Item 6.


Selected Financial Data


37Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


38Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


53Item 8.


Financial Statements and Supplementary Data


54Item 9.


Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


54Item 9A.


Controls and Procedures


54Item 9B.


Other Information


56PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


56Item 11.


Executive Compensation


56Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


56Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


57Item 14.


Principal Accounting Fees and Services


57PART IVItem 15.


Exhibits and Financial Statement Schedules


57EXHIBIT 10.50EXHIBIT 10.51EXHIBIT 10.52EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Forward-Looking
    Statements
  Form 10-K.
   PART I  Item 1.
    Business  tm and/or
       2




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http://www.dothill.com. Form 10-K. Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330.
  Industry
    Background
  Growth
    of Data Storage
    
    the proliferation of different types of data and data forms such
    as digital graphics, video, text and audio;
    the emergence of Internet-based communication protocols which
    enable users to rapidly duplicate, change and re-communicate
    data;
    new regulations and corporate policies requiring additional
    storage, such as compliance with the Sarbanes-Oxley Act of 2002,
    requirements imposed on healthcare companies and evolving
    regulatory requirements for financial services companies;
    the implementation of enterprise-wide databases containing
    business management information;
    gains in network bandwidth and the technology for managing and
    classifying large volumes of data; and 3




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
    the development of the information lifecycle management and the
    growing use of RAID systems in the
    back-up
    market in place of, or in addition to, automated tape libraries,
    due to new applications of technologies that offer improved
    alternatives in the trade-off between performance and cost of
    ownership.      Entry-level.
  Midrange.
  High-end.
    Migration to Network Computing.
  
    increased connectivity capabilities;
    greater capacity;
    higher performance;
    the ability to share data among different platforms;
    greater reliability; and
    greater protection.    Increasing Focus on Total Cost of Ownership and Return on
    Investment.
 4




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Storage
    Area Networks
          Demand
    for High Performance, Affordable Network Storage
    Solutions
    Reliability
    Our
    Solutions
   5




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Low Total Cost of Ownership and High Return on
    Investment. plug-and-play
  Modular Scalability.
  Reliability.
  High-end performance attributes and
    features.
  Open Systems, Multi-Platform
    Support.
  Manageability. tm ®
  Data Management Software. tm tm
 6




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Our
    Strategy
    Utilize indirect sales
    channels.
  Outsource manufacturing and service
    operations.
  Focus on existing customers and develop new
    customer relationships.
  Grow and extend technology
    leadership.
  Leverage our R/Evolution
    architecture.
  Pursue strategic alliances, partnerships and
    acquisitions.
  Our
    Products
     7




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GeneralProduct Line

Description

Availability

Capacity

Target Market

FeaturesHardware2730

2 unit high, 12-56 SAS or SATA drives, 4Gb FC DAS and SAN
    storage

3Q06

876 GB-56TB using 1TB SATA drives

Entry-level

Complete SAN solution in a single enclosure, scalable
    performance and capacity for general purpose applications.2730T

2 unit high, 12-56 SAS or SATA drives, 4Gb FC DAS and SAN
    storage

2Q07

9 TB-56TB using 1TB SATA drives

Entry-level

Complete SAN solution with enhanced performance in a single
    enclosure, scalable performance and capacity for general purpose
    applications.2330

2 unit high, 12-56 SAS or SATA drives, 1Gb iSCSI DAS and
    SAN storage

3Q07

9 TB-56TB using 1TB SATA drives

Entry-level

Complete iSCSI solution in a single enclosure, scalable
    performance and capacity for general purpose applications.5730

2 unit high, 12-108 SAS or SATA drives, 4Gb FC DAS and SAN
    storage

4Q07

12 TB108TB using 1TB SATA drives

Midrange

Complete SAN solution in a single enclosure, scalable
    performance and capacity for general purpose applications.SANnet II SCSI

2 unit high, 12 to 36 drives, Ultra320 SCSI DAS storage

4Q02

146 GB to 10 TB using 300 GB SCSI drives

Entry-level and Midrange

Compact 3.5 inch high enclosures, fully redundant arrays of
    independent disks, or RAID, using SCSI connections, expandable
    storage capacitySANnet II Blade

2 unit high, 12 to 108 drives, 2 Gigabit Fibre Channel DAS
    and SAN storage

1Q03

146 GB to 32 TB using 300 GB FC drives

Entry-level and Midrange

Complete SAN solution in a single enclosure, scalable
    performance and capacity without interruptionsSANnet II FC

1 unit high, 4 drives, Ultra320 SCSI DAS

1Q04

146 GB to 1.2 TB using 300 GB SCSI drives

Entry-level

Highly rack- optimized design, connects to low- cost server SCSI
    ports 8




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GeneralProduct Line

Description

Availability

Capacity

Target Market

FeaturesSoftwareAssuredSnap

Data Management Services (DMS)

3Q06

N/A

Entry-level and Midrange

Snapshot technology for Backup, Data Mining and Disaster RecoveryAssuredCopy

Data Management Services (DMS)

3Q06

N/A

Entry-level and Midrange

Create volume copies or backups of disk volumes to prevent data
    loss or corruptionRAIDar & SANscape

Storage management software

1Q00

N/A

Entry-level and Midrange

Graphical and command line consoles with diagnostics, monitoring
    and reporting   R/Evolution Modular Storage
    Architecture.
  2730.
  2730T.
  2330
  5730
  SANnet II Family of Storage Solutions.
  SANnet II SATA.
 9




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SANnet II Blade.
  SANnet II FC.
  SANnet II SCSI.
  Software.
  SANscape.
  AssuredSnap. point-in-time
  AssuredCopy.
  RAIDar
  Sales and
    Marketing
   10




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OEMs
    Indirect
    Channels
    Marketing
    Our
    Relationships with Key OEMs
       11




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Customer
    Service and Support
  24-hour, seven-day four-hour on-site
      
    Encouraged our channel partners to provide support and service
    directly to end-users. For example, Sun, FSC and NetApp provide
    all but the final level of support and service to its end-users
    and we provide that final level of support and service.
    Focused on providing the higher levels of support for a fee.
    Established authorized service providers.
    Entered into an agreement with Glasshouse, to provide warranty
    and non-warranty services for customers who purchase new
    maintenance agreements for our prior generation SANnet product
    family as well as our new R/Evolution platform.    Research
    and Development
   12




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Manufacturing
    and Suppliers
      Intellectual
    Property
  ® ® ® ® ® ®
   13




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Competition
        
    product performance, features, scalability and reliability;
    price;
    product breadth;
    timeliness of new product introductions; and
    Interoperability and ease of management.    Employees
   14




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Executive
    Officers and Key Employees of the Registrant
  Officer orName

Age

Position

Key Employee SinceDana W. Kammersgard


52


Chief Executive Officer and President

August 1984(1)Hanif I. Jamal


47


Senior Vice President, Chief Financial Officer, Treasurer and
    Corporate Secretary

July 2006Philip A. Davis


40


Executive Vice President of Worldwide Field Operations

March 2006James Kuenzel(2)


54


Senior Vice President of Engineering

February 2006Robert Finley(2)


58


Vice President of Manufacturing Operations

March 2006     (1)
    
    In 1999, Artecon and Box Hill merged to form Dot Hill.
    Artecon was founded in 1984 and Mr. Kammersgard was an
    officer of Artecon from its inception until the merger, and has
    been an officer of Dot Hill since that date.(2)
    
    Key employees.    Dana W. Kammersgard
  Hanif I. Jamal
  Philip A. Davis
  James Kuenzel
 15




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Robert Finley
  Item 1A.
    Risk
    Factors  The following sets forth our current knowledge of material
    risk factors that may affect our future results. Our business,
    results of operations and financial condition may be materially
    affected due to any of the following risks. We face risks
    described but not limited to those detailed below. Additional
    risks we are not presently aware of or that we currently believe
    are immaterial may also impair our business operations. The
    trading price of our common stock could decline due to any of
    these risks. In assessing these risks, you should also refer to
    the other information contained or incorporated by reference in
    this Annual Report on
    Form 10-K,
    including our financial statements and related notes.
  We are
    dependent on sales to a relatively small number of customers and
    a disruption in sales to any one of these customers could
    materially harm our financial results.
    
    our ability to maintain our products at prices that are
    competitive with those of other storage system suppliers;
    our ability to maintain quality levels for our products
    sufficient to meet the expectations of our OEM customers;
    our ability to produce, ship and deliver a sufficient quantity
    of our products in a timely manner to meet the needs of our OEM
    customers;
    our ability to continue to develop and launch new products that
    our OEM customers feel meet their needs and requirements, with
    respect to cost, timeliness, features, performance and other
    factors;
    our ability to provide timely, responsive and accurate customer
    support to our OEM customers; and
    the ability of Sun, NetApp, HP, Fujitsu Siemens or our other OEM
    customers to effectively launch, ramp, ship, sell and market
    their own solutions based on our products.  The
    market for our products is subject to substantial pricing
    pressure that may harm our net revenues, gross margins and
    operating results.
   16




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Our
    OEM customers may have very aggressive product launch and ramp
    schedules and our efforts to accommodate these schedules may
    divert our managements attention, cause component
    shortages and force us to allocate products across many
    customers, all of which could harm our customer
    relations.
    Our
    contracts with our OEM customers do not include minimum purchase
    requirements and are not exclusive, and we cannot assure you
    that our relationship with these major customers will not be
    terminated or will generate significant sales.
   17




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The
    requirement of a few of our larger OEM customers to locate
    finished goods inventory in vendor managed hubs
    could result in a reduction in working capital and
    cash.
    Our
    revenues may be affected by changes in IT spending
    levels.
    We may
    continue to experience losses in the future, and may require
    additional capital.
      
    the increased inventory requirements due to contractual
    requirements with NetApp, HP and Fujitsu Siemens;
    we expect to utilize $10-$20 million in cash over prior
    projections to support additional finished goods inventory in HP
    designated locations and to make incremental investments in
    organizational capabilities and test infrastructure;
    our ability to meet product delivery schedules for HP and other
    customers which could result in increased air freight, expedite
    and overtime charges;
    our plans to maintain and enhance our engineering, research,
    development and product testing programs;
    our need for additional tooling to support increased volumes or
    in support of disaster recovery plans;
    our ability to achieve targeted gross profit margins and cost
    reduction objectives;
    our ability to contain operating expenses and manufacturing
    variances;
    our ability to reach break-even or profitability;
    the extent to which we rationalize our facilities or
    organization;
    the success of our manufacturing strategy; 18




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
    the success of our sales and marketing efforts;
    the amount of field failures resulting in product replacements
    or recalls;
    the extent and terms of any development, marketing or other
    arrangements;
    changes in economic, regulatory or competitive conditions;
    costs of filing, prosecuting, defending and enforcing
    intellectual property rights; and
    costs of litigating and defending law suits.    A
    significant percentage of our expenses are fixed, and if we fail
    to generate targeted revenues or margins in associated periods,
    our operating results will be harmed.
    
    significant pricing pressures that occur because of declines in
    selling prices over the life of a product or because of
    increased competition;
    sudden shortages of raw materials or fabrication, test or
    assembly capacity constraints that lead our suppliers and
    manufacturers to allocate available supplies or capacity to
    others, which, in turn, may harm our ability to meet our sales
    obligations or we may have to incur additional charges to
    expedite product shipments to customers;
    product supply shortages due to increased demands of our OEM
    customers, which could also harm our relationships with our
    customers;
    the reduction, rescheduling or cancellation of customer orders;
    our inability to drive down component costs or adequately manage
    price variances on components;
    our inability to market products with competitive features, or
    the inability to market certain products in any form, due to the
    patents or other intellectual property rights of third
    parties; and
    product defects or quality issues that may result in higher
    product return rates and failure rates.   19




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The
    transition of manufacturing of our products and potentially
    other products to MiTAC and SYNNEX could impact our operating
    results.
  and/or
      Our
    inability to lower product costs or changes in the mix of
    products we sell may significantly impact our gross margins and
    operating results.
    
    changes in the mix of products we sell to our customers;
    increased price competition;
    introduction of new products by us or our competitors, including
    products with price performance advantages;
    our inability to reduce production or component costs;
    entry into new markets or the acquisition of new customers;
    sales discounts and marketing development funds;
    ongoing revaluation of the Chinese RMB compared to the US dollar;
    increases in material or labor costs;
    excess inventory, inventory shrinkages and losses and inventory
    holding charges;
    reductions in component costs purchased on our behalf by our
    contract manufacturers or owned by us in inventory resulting in
    purchase price variances;
    increased warranty costs and costs associated with any potential
    future product quality and product defect issues; 20




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
    our inability to sell our higher performance Series 5000
    and Series 2000 products and our data management services
    software;
    component shortages which can result in expedite fees, overtime
    or increased use of air freight;
    increased freight costs resulting from the need to expedite
    shipments of components to our contract manufacturer or finished
    goods to some of our customers and their hub locations; and
    increases in headcount and expenses required to support our new
    customers.    
    shifting our manufacturing to lower cost suppliers, such as
    MiTAC and SYNNEX, as we did with our Series 2000 and 5000
    products and transitioning the manufacturing of other products
    to MiTAC and SYNNEX;
    leveraging our volumes created by our new design wins to secure
    additional component cost and manufacturing transformation cost
    reductions;
    bundling our data management services software into our
    products; and
    increasing adoption of our higher performance Series 5000
    and Series 2000 Turbo products.    Our
    financial condition will be materially harmed if we do not
    maintain competitiveness and gain acceptance of our
    products.
    
    enhance our current products and develop and introduce in a
    timely manner new products that keep pace with technological
    developments and industry standards;
    compete effectively on the basis of price and
    performance; and
    adequately address OEM and end-user customer requirements and
    achieve market acceptance.    Liquidity
    problems or bankruptcy of some our small OEM customers could
    increase exposure to losses from bad debts, increase accounts
    receivable and could have a material adverse effect on our
    business, financial condition and results of
    operations.
   21




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Product
    recalls, epidemic failures, post-manufacture repairs of our
    products liability claims, absence or cost of insurance, and
    associated costs could harm our reputation, divert resources,
    reduce sales and increase costs and could have a material
    adverse effect on our financial condition.
    and/or
  Our
    operating results are subject to substantial quarterly and
    annual fluctuations, and our period-to- period comparisons are
    not necessarily meaningful and we may not meet the expectations
    of public market analysts and investors.
   22




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Quarter

Net Revenue


Net Income (Loss)First Quarter 2004

$
47.9


$
(2.6
)Second Quarter 2004


69.0



6.7Third Quarter 2004


57.0



3.5Fourth Quarter 2004


65.5



4.0First Quarter 2005


58.0



2.1Second Quarter 2005


65.9



3.3Third Quarter 2005


53.6



(1.3
)Fourth Quarter 2005*


56.3



22.5First Quarter 2006


58.7



(5.0
)Second Quarter 2006


66.3



(6.6
)Third Quarter 2006**


54.8



(60.1
)Fourth Quarter 2006


59.4



(9.1
)First Quarter 2007


53.4



(6.0
)Second Quarter 2007


56.2



(3.7
)Third Quarter 2007


45.7



(4.1
)Fourth Quarter 2007***


51.8



(46.4
)     *
    
    Includes deferred tax benefit from reversal of valuation
    allowance of $25.3 million.**
    
    Includes income tax expense related to reestablishing valuation
    allowance of $47.1 million.***
    
    Includes write off of $40.7 in goodwill    We may
    have difficulty predicting future operating results due to both
    internal and external factors affecting our business and
    operations, which could cause our stock price to
    decline.
    
    the size, timing, cancellation or rescheduling of significant
    customer orders;
    our ability to reduce fixed expenses;
    our customer policies pertaining to desired inventory levels of
    our products and the levels of inventory our customers require
    us to maintain in their designated inventory hub locations;
    changes in the mix or average selling prices of our products;
    market acceptance of our new products and product enhancements
    and new product announcements or introductions by our
    competitors;
    product configuration, mix and quality issues;
    changes in pricing by us or our competitors;
    the cost of litigation and settlements involving intellectual
    property and other issues;
    deferrals of customer orders in anticipation of new products or
    product enhancements; 23




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
    our ability to ramp our manufacturing to keep up with demand
    from our customers;
    our ability to develop, introduce and market new products and
    product enhancements on a timely basis;
    hardware component costs and availability, particularly with
    respect to hardware components obtained from sole-source
    providers and major component suppliers such as disk drives,
    memory, sole source semiconductors and legacy RAID controllers;
    our success in creating brand awareness and in expanding our
    sales and marketing programs;
    the level of competition;
    gain or loss of customers;
    potential increases or reductions in inventories held by OEM
    customers;
    slowing sales of the products of our OEM customers;
    technological changes in the open systems storage market, some
    of which could potentially be breakthrough technologies that may
    provide competitors cost or performance advantages;
    levels of expenditures on research, engineering and product
    development;
    levels of expenditures in our manufacturing and support
    organization and our ability to manage variances in component
    costs and inventory levels of components held by our
    manufacturing partners;
    longer than anticipated product integration cycles for our
    products;
    the quality and timeliness of products being manufactured by
    Flextronics, MiTAC and SYNNEX and compliance with environmental
    regulations or related requirements of our OEM customers;
    changes in our business strategies;
    actual events, circumstances, outcomes and amounts differing
    from judgments, assumptions and estimates used in determining
    the value of certain assets (including the amounts of related
    valuation allowances and valuation of goodwill), liabilities and
    other items reflected in our consolidated financial statements;
    changes in accounting rules or changes in our accounting
    policies;
    changes in effective income tax rates, including those resulting
    from changes in tax laws;
    personnel changes; and
    general economic and other conditions affecting the timing of
    customer orders and capital spending or conditions in the global
    economy that impact IT spending.    Our
    sales cycle varies substantially and future net revenue in any
    period may be lower than our historical revenues or
    forecasts.
      
    the amount of time needed for technical evaluations by customers; 24




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
    customers budget constraints and changes to
    customers budgets during the course of the sales cycle;
    customers internal review and testing procedures;
    our engineering work necessary to integrate a storage solution
    with a customers system;
    the complexity of technical challenges that need to be overcome
    during the development, testing
    and/or
    qualification process for new products
    and/or new
    customers;
    meeting unique customer specifications and requirements; and
    difficulties by our customers in integrating our products and
    technologies into their own products.    Manufacturing
    and supplier disruptions could harm our business.
        The
    loss of one or more suppliers could slow or interrupt the
    production and sales of our products.
   25




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Any
    shortage of disk drives, memory or other components could
    increase our costs or harm our ability to manufacture and
    deliver our storage products to our customers in a timely
    manner.
    The
    market for storage systems is intensely competitive and our
    results of operations, pricing and business could be harmed if
    we fail to maintain or expand our market position.
           26




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
    performance, features, scalability and reliability;
    price;
    product breadth;
    product availability and quality;
    timeliness of new product introductions; and
    interoperability and ease of management.    The
    open systems storage market is rapidly changing and we may be
    unable to keep pace with or properly prepare for the effects of
    those changes.
    Our
    success depends significantly upon our ability to protect our
    intellectual property and to avoid infringing the intellectual
    property of third parties, which has already resulted in costly,
    time-consuming litigation and could result in the inability to
    offer certain products.
     27




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Environmental
    compliance costs could adversely affect our net
    income.
        Our
    success depends on our ability to attract and retain key
    personnel.
   28




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Our
    executive officers and directors and their affiliates own a
    significant percentage of our outstanding shares, which could
    prevent us from being acquired and adversely affect our stock
    price.
    Protective
    provisions in our charter and bylaws and the existence of our
    stockholder rights plan could prevent a takeover which could
    harm our stockholders.
    Unanticipated
    changes in our tax provisions or adverse outcomes resulting from
    examination of our income tax returns could adversely affect our
    net income.
     29




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The
    exercise of outstanding warrants may result in dilution to our
    stockholders.
      Our
    stock price may be highly volatile and could decline
    substantially and unexpectedly, which has resulted in
    litigation.
    
    differences between our actual operating results and the
    published expectations of analysts;
    quarterly fluctuations in our operating results;
    introduction of new products or changes in product pricing
    policies by our competitors or us;
    conditions in the markets in which we operate;
    changes in market projections by industry forecasters;
    changes in estimates of our earnings by industry analysts;
    overall market conditions for high technology equities;
    rumors or dissemination of false information; and
    general economic and geopolitical conditions.   30




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Future
    sales of our common stock may hurt our market
    price.
    Geopolitical
    conditions, including military action, terrorist attacks and
    other acts of war, political risks, civil unrest widespread
    pandemics, and elongated interruptions of transoceanic
    telecommunications lines, may materially and adversely affect
    the markets on which our common stock trades, the markets in
    which we operate, our operations and our
    profitability.
    Compliance
    with Sarbanes-Oxley Act of 2002.
    Computer
    viruses and other forms of tampering with our computer systems
    or servers may disrupt our operations and adversely affect net
    income.
    Our
    facilities and the facilities of our suppliers and customers are
    located in regions that are subject to natural
    disasters.
   31




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings  Crossroads
    Systems Litigation
       32




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Chaparral
    Securities Class Action
      Dot
    Hill Securities Class Actions and Derivative
    Suits
     33




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Chaparral
    Network Storage Shareholders Escrow Fund
    Other
    Litigation
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   34




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities      Low


HighYear Ended December 31, 2006First Quarter

$
6.11


$
7.91Second Quarter


3.00



7.06Third Quarter


3.03



3.96Fourth Quarter


3.18



4.40Year Ended December 31, 2007First Quarter


3.34



3.96Second Quarter


3.37



4.27Third Quarter


2.91



3.97Fourth Quarter


2.20



3.33     Securities Authorized for Issuance
    Under Equity Compensation Plans, Form 10-K.
 35




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##### Table of Contents



PERFORMANCE
    MEASUREMENT COMPARISON
  5-year 12/31/2002 12/31/2007.
  COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN* Among
    Dot Hill Systems Corp., The S&P 500 Index,
    The NASDAQ Composite Index And A Peer Group
  
      ©
  36




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Form 10-K.
  2003


2004(2)


2005


2006


2007Statement of Operations Data:Net revenue

$
187,448


$
239,376


$
233,799


$
239,217


$
207,095Cost of goods sold


142,550



179,875



180,196



202,561



180,662Gross profit


44,898



59,501



53,603



36,656



26,433Operating expenses:Sales and marketing


14,086



16,839



19,120



15,996



15,939Research and development


11,950



17,993



23,628



36,529



22,564General and administrative


7,418



9,992



12,933



18,119



12,606Legal settlement(1)














3,395



In-process research and development(2)






4,700











Goodwill impairment charge(3)


















40,725Merger and restructuring expenses






(434
)










Operating income (loss)


11,444



10,411



(2,078
)


(37,383
)


(65,401
)Other income, net


775



1,458



3,478



5,496



4,996Income tax expense (benefit)(4)


88



272



(25,197
)


48,885



(177
)Net income (loss)

$
12,131


$
11,597


$
26,597


$
(80,772
)

$
(60,228
)Net income (loss) attributable to common stockholders

$
11,990


$
11,597


$
26,597


$
(80,772
)

$
(60,228
)Net income (loss) per share:Basic

$
0.35


$
0.27


$
0.61


$
(1.80
)

$
(1.32
)Diluted

$
0.31


$
0.25


$
0.58


$
(1.80
)

$
(1.32
)Weighted average shares outstanding:Basic


33,856



43,460



43,903



44,757



45,534Diluted


38,164



46,395



45,639



44,757



45,534   2003


2004


2005


2006


2007Balance Sheet Data:Cash, cash equivalents, and short-term investments

$
191,545


$
126,186


$
122,234


$
99,663


$
82,358Working capital


177,650



123,384



135,293



102,941



88,418Total assets


218,443



246,657



267,294



201,651



139,927Total long-term debt


247















Total stockholders equity


184,133



196,827



232,051



155,912



96,429     (1)
    
    See discussion of our legal settlement Note 12 to our 2007
    consolidated financial statements. 37




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##### Table of Contents



(2)
    
    The results of operations of Chaparral have been included in our
    results prospectively from February 23, 2004.(3)
    
    See discussion of our goodwill impairment in Note 1 to our
    2007 consolidated financial statements.(4)
    
    See discussion of income taxes in Note 8 to our 2007
    consolidated financial statements.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Cautionary
    Statement for Forward-Looking Information
  Certain statements contained in this report, including,
    statements regarding the development, growth and expansion of
    our business, our intent, belief or current expectations,
    primarily with respect to our future operating performance and
    the products we expect to offer, and other statements regarding
    matters that are not historical facts, are forward-looking
    statements within the meaning of Section 27A of the
    Securities Act and Section 21E of the Exchange Act and are
    subject to the safe harbor created by these
    sections. Because such forward-looking statements are subject to
    risks and uncertainties, many of which are beyond our control,
    actual results may differ materially from those expressed or
    implied by such forward-looking statements. Some of the factors
    that could cause actual results to differ materially from those
    expressed or implied by such forward-looking statements can be
    found in Item 1A Risk Factors and elsewhere in
    this Annual Report on
    Form 10-K.
    Readers are cautioned not to place undue reliance on
    forward-looking statements. The forward- looking statements
    speak only as of the date on which they are made, and we
    undertake no obligation to update such statements to reflect
    events that occur or circumstances that exist after the date on
    which they are made.
  The following discussion of our financial condition and
    results of operations should be read in conjunction with our
    consolidated financial statements and notes thereto included
    elsewhere in this Annual Report on
    Form 10-K.
  Overview
           38




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##### Table of Contents



39




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
      Revenue
    Recognition
  and/or
      Valuation
    of Inventories
  first-in,
 40




---



##### Table of Contents



Valuation
    of Goodwill
  Goodwill and Other Intangible Assets.
    Deferred
    Taxes
   41




---



##### Table of Contents



Accounting for Uncertainty in Income
    Taxes  An Interpretation of FASB Statement
    No. 109
    Stock-Based
    Compensation
  Accounting for Stock Issued to Employees.
    Share-Based Payment Accounting for
    Stock Issued to Employees. Share-Based Payment
   42




---



##### Table of Contents



Contingencies
  and/or
 43




---



##### Table of Contents



Results
    of Operations
    Year Ended December 31,2005


2006


2007Net revenue


100.0
%


100.0
%


100.0
%Cost of goods sold


77.1



84.7



87.2Gross profit


22.9



15.3



12.8Operating expenses:Sales and marketing


8.2



6.7



7.7Research and development


10.1



15.3



10.9General and administrative


5.5



7.6



6.1Legal settlement






1.4



Goodwill impairment charges










19.7Operating loss


(0.9
)


(15.6
)


(31.6
)Other income, net


1.5



2.3



2.4Income (loss) before income taxes


0.6



(13.3
)


(29.2
)Income tax expense (benefit)


(10.8
)


20.4



(0.1
)Net income (loss)


11.4
%


(33.6
)%


(29.1
)%       Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
       44




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##### Table of Contents



Cost of
    Goods Sold
        Gross
    Profit
    Sales and
    Marketing Expenses
   45




---



##### Table of Contents



Research
    and Development Expenses
    General
    and Administrative Expenses
    Legal
    Settlement Expense
    Goodwill
    Impairment Charge
   46




---



##### Table of Contents



Other
    Income
    Income
    Taxes
              Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Net
    Revenue
   47




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##### Table of Contents



Cost of
    Goods Sold
    Gross
    Profit
      Sales and
    Marketing Expenses
    Research
    and Development Expenses
   48




---



##### Table of Contents



General
    and Administrative Expenses
    Legal
    Settlement Expense
    Other
    Income
    Income
    Taxes
         49




---



##### Table of Contents



Liquidity
    and Capital Resources
       50




---



##### Table of Contents



51




---



##### Table of Contents



Payments Due2013 andContractual Obligations

Total


2008


2009-2010


2011-2012


ThereafterOperating Lease Obligations

$
7,888


$
1,622


$
2,923


$
2,973


$
370Settlement payments


490



4908,378



2,112



2,923



2,973



370             Recent
    Accounting Pronouncements
  Fair
    Value Measurement FAS 157-1 No. FAS 157-2,
  The Fair Option for Financial Assets and Financial
    Liabilities  including an amendment of FASB Statement
    No. 115
  No. 07-3, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities EITF 07-3
 52




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##### Table of Contents



EITF 07-3
  Business Combinations
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest
    Rate and Credit Risk
      2007Cash equivalents

$
78,157Average interest rate


4.8
%Short-term investments

$
Average interest rate


Total portfolio

$
78,157Average interest rate


4.8
%     Foreign
    Currency Exchange Rate Risk
   53




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  page F-1 Form 10-K.
  Item 9.
    Changes
    In and Disagreements With Accountants On Accounting and
    Financial Disclosure   Item 9A.  Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(e)) Form 10-K,
  Changes
    in Internal Control over Financial Reporting
    Dot Hill
    Systems Corp.s Report on Internal Control Over Financial
    Reporting
  13a-15(f) 15d-15(f).
  Internal Control  Integrated
    Framework.
   54




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
  Accounting
    for Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109 Share-Based Payment,
  DELOITTE &
    TOUCHE LLP
    55




---



##### Table of Contents



Item 9B.
    Other
    Information    AnnualStockExecutive Officer

OptionsDana Kammersgard


100,000Hanif Jamal


75,000Philip Davis


100,000       PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Form 10-K
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   56




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##### Table of Contents



Number of Securities to


Weighted Averagebe Issued Upon


Exercise Price of


Number of SecuritiesExercise of Outstanding


Outstanding Options


Remaining AvailableStock Plan

Options and Rights


and Rights


for Future Issuance2000 EIP(1)


6,172,092


$
5.32



978,5322000 ESPP(2)


Not Applicable



Not Applicable



1,449,7292000 NEDSOP


500,000


$
5.88



413,124Total


6,672,092


$
5.36



2,841,385     (1)
    
    The 2000 EIP provides for an annual increase to the share
    reserve, to be added on the date of each of our annual meetings
    of stockholders, equal to the lesser of (i) 1 million
    shares; (ii) 2% of our outstanding shares on such date,
    calculated on a fully diluted basis and assuming the conversion
    of all outstanding convertible securities and the exercise of
    all outstanding options and warrants; or (iii) an amount to
    be determined by our board of directors.(2)
    
    The 2000 ESPP provides for an annual increase to the share
    reserve, to be added on the date of each of our annual meetings
    of stockholders, equal to the lesser of:
    (i) 100,000 shares; or (ii) an amount to be
    determined by our board of directors.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules      Form 10-K
    Form 10-K
   57




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##### Table of Contents



ExhibitNumber

Description2
.1

Agreement and Plan of Merger dated as of February 23, 2004,
    by and among Dot Hill Systems Corp., DHSA Corp., Chaparral
    Network Storage, Inc., and C. Timothy Smoot, as
    Stockholders Representative.(1)3
.1

Certificate of Incorporation of Dot Hill Systems Corp.(2)3
.2

Amended and Restated By-laws of Dot Hill Systems Corp.(27)4
.1

Certificate of Incorporation Dot Hill Systems Corp.(2)4
.2

By-laws of Dot Hill Systems Corp.(2)4
.3

Form of Common Stock Certificate.(3)4
.4

Certificate of Designation of Series A Junior Participating
    Preferred Stock, as filed with the Secretary of State of
    Delaware on May 19, 2003.(4)4
.5

Form of Rights Certificate.(4)4
.6

Warrant to Purchase Shares of Common Stock dated June 22,
    2006.(25)4
.7

Common Stock Warrant dated December 19, 2002.(5)4
.8

Warrant to Purchase Shares of Common Stock dated June 26,
    2006.(25)4
.9

Common Stock Warrant dated March 14, 2003.(5)10
.1

Product Purchase Agreement between Dot Hill Systems Corp. and
    Sun Microsystems, Inc. dated May 24, 2002.(6)10
.2

Product Supplement/Award Letter for Blade Product under
    agreement with Sun Microsystems, Inc. dated May 24,
    2002.(6)*10
.3

Product Supplement/Award Letter for SCSI Product under agreement
    with Sun Microsystems, Inc. dated May 24, 2002.(6)*10
.4

Product Supplement/Award Letter for FC Product under agreement
    with Sun Microsystems, Inc. dated May 24, 2002.(6)*10
.5

Second Amendment to Product Purchase Agreement, dated as of
    January 26, 2004 by and among Sun Microsystems, Inc., Sun
    Microsystems International B.V., Dot Hill Systems Corp. and Dot
    Hill Systems B.V.(13)*10
.6

Third Amendment to Product Purchase Agreement, dated as of
    March 22, 2004, by and among Sun Microsystems, Inc., Sun
    Microsystems International B.V., Dot Hill Systems Corp. and Dot
    Hill Systems B.V.(13)*10
.7

Product Supplement/Award Letter (SATA) by and between Sun
    Microsystems, Inc. and Dot Hill Systems Corp. dated as of
    March 22, 2004.(13)*10
.8

Rights Agreement dated as of May 19, 2003 by and between
    Dot Hill Systems Corp. and American Stock Transfer and
    Trust Company.(4)10
.9

Employment letter agreement dated August 2, 1999 between
    Dot Hill Systems Corp. and Dana W Kammersgard.(7)10
.10

2000 Amended and Restated Equity Incentive Plan.(8)10
.11

Form of Stock Option Agreement (Incentive and Non-statutory
    Stock Options) used in connection with the 2000 Amended and
    Restated Equity Incentive Plan.(8)10
.12

Form of Stock Option Grant Notice used in connection with the
    2000 Amended and Restated Equity Incentive Plan.(8)10
.13

2000 Amended and Restated Employee Stock Purchase Plan.(9)10
.14

2000 Non-Employee Directors Stock Option Plan.(28)10
.15

Form of Stock Option Agreement used in connection with the 2000
    Non-Employee Directors Stock Option Plan.(10)10
.16

Credit Agreement dated July 1, 2004 by and between Dot Hill
    Systems Corp. and Wells Fargo Bank, National Association.(11)10
.17

Revolving Line of Credit Note dated July 1, 2004 issued by
    Dot Hill Systems Corp. to Wells Fargo Bank, National
    Association.(11) 58




---



##### Table of Contents



ExhibitNumber

Description10
.18

Security Agreement and Addendum dated July 1, 2004 by and
    between Dot Hill Systems Corp. and Wells Fargo Bank, National
    Association.(11)10
.19

Manufacturing Agreement between Dot Hill Systems Corp. and
    Flextronics Corporation dated May 20, 2002.(12)*10
.20

OEM Agreement between Dot Hill Systems Corp. and Infortrend
    Technology, Inc. dated May 20, 2002.(12)*10
.21

Amended and Restated Change of Control Agreement dated
    April 6, 2006 between Dot Hill Systems Corp. and Dana
    Kammersgard.(23)10
.22

Change of Control Agreement dated April 6, 2006 between Dot
    Hill Systems Corp. and Philip A. Davis.(23)10
.23

Offer letter agreement dated July 5, 2006 between Dot Hill
    Systems Corp. and Hanif I. Jamal.(24)10
.24

Change of Control Agreement dated July 14, 2006 between Dot
    Hill Systems Corp. and Hanif I. Jamal.(24)10
.25

Amendment to Manufacturing Agreement between Dot Hill Systems
    Corp. and Solectron Corporation dated April 5, 2005.(14)*10
.26

Description of Amended and Restated Policy for Director
    Compensation.(15)10
.27

Lease Agreement by and between Dot Hill Systems Corp. and
    Equastone 2200 Faraday, LLC effective as of September 1,
    2005 and dated as of September 16, 2005.(16)10
.28

Fourth Amendment to Product Purchase Agreement dated
    September 26, 2005 by and among Sun Microsystems, Inc., Sun
    Microsystems International B.V., Dot Hill Systems Corp. and Dot
    Hill Systems B.V.(17)*10
.29

Product Supplement/Award Letter dated September 27, 2005 by
    and among Sun Microsystems, Inc., Sun Microsystems International
    B.V., Dot Hill Systems Corp. and Dot Hill Systems B.V.(17)*10
.30

Second Amendment to Manufacturing Agreement dated
    September 16, 2005 between Dot Hill Systems Corp. and
    Solectron Corporation.(17)*10
.31

Second Award Letter dated September 16, 2005 between Dot
    Hill Systems Corp. and Solectron Corporation.(17)*10
.32

Development and OEM Supply Agreement dated July 26, 2005 by
    and among Dot Hill Systems Corp., Dot Hill Systems B.V., Network
    Appliance, Inc. and Network Appliance B.V.(17)*10
.33

Product Supplement/Award Letter dated October 20, 2005 by
    and among Sun Microsystems, Inc., Sun Microsystems International
    B.V., Dot Hill Systems Corp. and Dot Hill Systems B.V.(18)*10
.34

Form of Indemnity Agreement.(19)10
.35

Patent Cross License dated December 29, 2005 between Dot
    Hill Systems Corp. and International Business Machines
    Corporation.(18)*10
.36

Consulting letter agreement effective March 1, 2006 and
    dated March 2, 2006 between Dot Hill Systems Corp. and
    James L. Lambert.(21)10
.37

Master Purchase Agreement effective January 13, 2006 by and
    among Dot Hill Systems Corp., Dot Hill Systems B.V., Fujitsu
    Siemens Computers GmbH and Fujitsu Siemens Computers (Holding)
    B.V.(22)*10
.38

Amended Settlement and License Agreement dated October 5,
    2006 by and between Dot Hill Systems Corp. and Crossroads,
    Inc.(23)*10
.39

Agreement between Dot Hill Systems and Infortrend Re Settlement
    of Crossroads Lawsuit dated June 28, 2006 by and between
    Dot Hill Systems Corp. and Infortrend Technology Inc.(23)*10
.40

First Amendment to Credit Agreement dated July 1, 2006 by
    and between Dot Hill Systems Corp. and Wells Fargo Bank,
    National Association.(25)*10
.41

Second Amendment to Credit Agreement dated September 14,
    2006 by and between Dot Hill Systems Corp. and Wells Fargo Bank,
    National Association.(25)*10
.42

Revolving Line of Credit Note dated July 1, 2006 issued by
    Dot Hill Systems Corp. to Wells Fargo Bank, National
    Association.(25)*10
.43

Security Agreement and Addendum dated July 1, 2006 by and
    between Dot Hill Systems Corp. and Wells Fargo Bank, National
    Association.(25)* 59




---



##### Table of Contents



ExhibitNumber

Description10
.44

First Amendment dated August 3, 2006 to Development and OEM
    Supply Agreement dated July 26, 2005 by and among Dot Hill
    Systems Corp., Dot Hill Systems B.V., Network Appliance, Inc.,
    Network Appliance Holding and Manufacturing B.V.(25)*10
.45

Description of 2007 Executive Compensation Plan(26)10
.47

Manufacturing Agreement by and among Dot Hill Systems Corp.,
    MiTAC International Corporation and SYNNEX Corporation dated
    February 20, 2007.(29)*10
.48

Lease Agreement by and between Dot Hill Systems Corp. and Circle
    Capital Longmont LLC as of April 12, 2007.(30)10
.49

Revolving Line of Credit Note dated July 1, 2007 issued by
    Dot Hill Systems Corp. to Wells Fargo Bank, National
    Association.(31)10
.50

Second Amendment to the Development and OEM Supply Agreement,
    dated as of October 1, 2007, between Network Appliance,
    Inc. and Network Appliance Holding and Manufacturing, B.V.,
    formerly known as Network Appliance B.V., Dot Hill Systems Corp.
    and Dot Hill Systems B.V.*10
.51

Third Amendment to the Development and OEM Supply Agreement,
    dated as of November 2, 2007, between Network Appliance,
    Inc. and Network Appliance Holding and Manufacturing, B.V.,
    formerly known as Network Appliance B.V., Dot Hill Systems Corp.
    and Dot Hill Systems B.V.*10
.52

Technology License Agreement, dated as of October 1, 2007
    between Network Appliance, Inc. and the Dot Hill Systems Corp.*21
.1

Subsidiaries of Dot Hill Systems Corp.(5)23
.1

Consent of Deloitte & Touche LLP24
.1

Power of Attorney. Reference is made to the signature page
    hereto.31
.1

Certification pursuant to 17 CFR 240.13a-14(a) or
    17 CFR 240.15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification pursuant to 17 CFR 240.13a-14(a) or
    17 CFR 240.15d-14(a), 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.     
    
    Indicates management or compensatory plan or arrangement.*
    
    Confidential treatment has been granted by, or requested from,
    the SEC.(1)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on February 24, 2004 and incorporated
    herein by reference.(2)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on September 19, 2001 and incorporated
    herein by reference.(3)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on January 14, 2003 and incorporated
    herein by reference.(4)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on May 19, 2003 and incorporated herein
    by reference.(5)
    
    Filed as an exhibit to our Annual Report on
    Form 10-K
    for the year ended December 31, 2002 and incorporated
    herein by reference.(6)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2002 and incorporated herein
    by reference.(7)
    
    Filed as an exhibit to our Annual Report on
    Form 10-K
    for the year ended December 31, 1999 and incorporated
    herein by reference.(8)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    dated August 23, 2000 and incorporated herein by reference.(9)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2004 and incorporated herein
    by reference 60




---



##### Table of Contents



(10)
    
    Filed as an exhibit to our Registration Statement on
    Form S-8
    (No. 333-43834)
    and incorporated herein by reference.(11)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2004 and incorporated
    herein by reference.(12)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2002 and incorporated herein
    by reference.(13)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2004 and incorporated
    herein by reference.(14)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2005 and incorporated herein
    by reference.(15)
    
    Incorporated herein by reference to the description contained in
    our Current Report on
    Form 8-K
    filed with the SEC on July 29, 2005.(16)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on September 21, 2005 and incorporated
    herein by reference.(17)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2005 and incorporated
    herein by reference.(18)
    
    Filed as an exhibit to our Annual Report on
    Form 10-K
    for the year ended December 31, 2005 and incorporated
    herein by reference.(19)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on December 13, 2005 and incorporated
    herein by reference.(20)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on February 24, 2006 and incorporated
    herein by reference.(21)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on March 8, 2006 and incorporated herein
    by reference.(22)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2006 and incorporated
    herein by reference.(23)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2006 and incorporated herein
    by reference.(24)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on July 17, 2006 and incorporated herein
    by reference.(25)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2006 and incorporated
    herein by reference.(26)
    
    Filed as Item 5.02(e) of our Current Report on
    Form 8-K
    filed with the SEC on March 2, 2007 and incorporated herein
    by reference.(27)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on December 26, 2007 and incorporated
    herein by reference.(28)
    
    Filed as an exhibit to our Annual Report on
    Form 10-K
    for the year ended December 31, 2006 and incorporated
    herein by reference.(29)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended March 31, 2007 and incorporated
    herein by reference.(30)
    
    Filed as an exhibit to our Current Report on
    Form 8-K
    filed with the SEC on April 16, 2007 and incorporated
    herein by reference.(31)
    
    Filed as an exhibit to our Quarterly Report on
    Form 10-Q
    for the quarter ended September 30, 2007 and incorporated
    herein by reference. 61




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##### Table of Contents



SIGNATURES
      By:
    /s/  Dana
    W. Kammersgard   Chief Executive Officer and President
        Name

Title

Date/s/  Dana
    W. KammersgardDana
    W. Kammersgard

Chief Executive Officer, President and Director (Principal
    Executive Officer)

March 17, 2008/s/  Hanif
    I. JamalHanif
    I. Jamal

Chief Financial Officer, and Treasurer (Principal Financial and
    Accounting Officer)

March 17, 2008/s/  Charles
    ChristCharles
    Christ

Chairman of the Board of Directors

March 17, 2008/s/  Kimberly
    AlexyKimberly
    Alexy

Director

March 17, 2008/s/  Joseph
    D. MarkeeJoseph
    D. Markee

Director

March 17, 2008/s/  W.R.
    SaueyW.R.
    Sauey

Director

March 17, 2008/s/  Roderick
    M. Sherwood IIIRoderick
    M. Sherwood III

Director

March 17, 2008  62




---



##### 



INDEX TO
    FINANCIAL STATEMENTS
   
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM


F-1FINANCIAL STATEMENTS:Consolidated balance sheets as of
    December 31, 2006 and 2007


F-2Consolidated statements of operations and
    comprehensive income (loss) for the years ended
    December 31, 2005, 2006 and 2007


F-3Consolidated statements of stockholders
    equity for the years ended December 31, 2005, 2006 and
    2007


F-4Consolidated statements of cash flows for the
    years ended December 31, 2005, 2006 and 2007


F-5Notes to consolidated financial statements for
    the years ended December 31, 2005, 2006 and 2007


F-6FINANCIAL STATEMENT SCHEDULES:Schedule II  Valuation and
    Qualifying Accounts


F-30   63




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109 Share-Based
    Payment,
  Internal Control  Integrated Framework
      F-1




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2006 AND 2007
    (In thousands, except per share amounts)
  2006


2007ASSETSCurrent Assets:Cash and cash equivalents

$
99,663


$
82,358Accounts receivable, net of allowance of $629 and $302


39,758



32,445Inventories


2,210



9,013Prepaid expenses and other


5,039



3,968Total current assets


146,670



127,784Property and equipment, net


9,738



9,599Goodwill


40,725



Intangible assets, net


4,382



2,280Other assets


136



264Total assets

$
201,651


$
139,927LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
31,099


$
28,472Accrued compensation


3,231



3,115Accrued expenses


8,652



6,227Deferred revenue


521



1,409Income taxes payable


226



143Total current liabilities


43,729



39,366Other long-term liabilities


2,010



4,132Total liabilities


45,739



43,498Commitments and Contingencies (Note 12)Stockholders Equity:Preferred stock, $.001 par value, 10,000 shares
    authorized, no shares issued and outstanding at
    December 31, 2006 and 2007, respectively






Common stock, $.001 par value, 100,000 shares
    authorized, 45,009 and 45,785 shares issued and outstanding
    at December 31, 2006 and 2007, respectively


45



46Additional paid-in capital


290,705



294,193Accumulated other comprehensive loss


(814
)


(3,100
)Accumulated deficit


(134,024
)


(194,710
)Total stockholders equity


155,912



96,429Total liabilities and stockholders equity

$
201,651


$
139,927    F-2




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND
    COMPREHENSIVE INCOME (LOSS)FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    (In thousands, except per share amounts)
  2005


2006


2007NET REVENUE

$
233,799


$
239,217


$
207,095COST OF GOODS SOLD


180,196



202,561



180,662GROSS PROFIT


53,603



36,656



26,433OPERATING EXPENSES:Sales and marketing


19,120



15,996



15,939Research and development


23,628



36,529



22,564General and administrative


12,933



18,119



12,606Legal settlement






3,395



Goodwill impairment charge










40,725Total operating expenses


55,681



74,039



91,834OPERATING LOSS


(2,078
)


(37,383
)


(65,401
)OTHER INCOME:Interest income, net


3,394



5,505



4,787Other income (expense), net


84



(9
)


209Total other income, net


3,478



5,496



4,996INCOME (LOSS) BEFORE INCOME TAXES

$
1,400


$
(31,887
)

$
(60,405
)INCOME TAX EXPENSE (BENEFIT)


(25,197
)


48,885



(177
)NET INCOME (LOSS)

$
26,597


$
(80,772
)

$
(60,228
)NET INCOME (LOSS) PER SHARE:Basic

$
0.61


$
(1.80
)

$
(1.32
)Diluted

$
0.58


$
(1.80
)

$
(1.32
)WEIGHTED AVERAGE SHARES USED TO CALCULATE NET INCOME (LOSS) PER
    SHARE:Basic


43,903



44,757



45,534Diluted


45,639



44,757



45,534COMPREHENSIVE INCOME (LOSS):Net income (loss)

$
26,597


$
(80,772
)

$
(60,228
)Foreign currency translation adjustments


255



(736
)


(2,286
)Net unrealized gain on short-term investments


89



40



Comprehensive income (loss)

$
26,941


$
(81,468
)

$
(62,514
)    F-3




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITYFOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    (In thousands)
  AccumulatedAdditional





Other





TotalPreferred Stock


Common Stock


Paid-In


Deferred


Comprehensive


Accumulated


StockholdersShares


Amount


Shares


Amount


Capital


Compensation


Loss


Deficit


EquityBalance, January 1, 2005





$




43,656


$
44


$
277,102


$
(8
)

$
(462
)

$
(79,849
)

$
196,827Amortization of deferred compensation






















8











8Exercise of stock options and warrants










561







1,780















1,780Sale of common stock under ESPP










200







1,040















1,040Tax benefit for disqualifying dispositions of stock options


















5,455















5,455Foreign currency translation adjustment


























255







255Net unrealized loss on short- term investments


























89







89Net income






























26,597



26,597Balance, December 31, 2005










44,417



44



285,377







(118
)


(53,252
)


232,051Exercise of stock options and warrants










303



1



947















948Sale of common stock under ESPP










289







1,055















1,055Share-based compensation expense from stock options


















2,835















2,835Share-based compensation expense from ESPP


















397















397Share-based compensation expense from historical grant practices


















94















94Foreign currency translation adjustment


























(736
)






(736
)Net unrealized gain on short- term investments


























40







40Net income






























(80,772
)


(80,772
)Balance, December 31, 2006










45,009



45



290,705







(814
)


(134,024
)


155,912Cumulative effect to prior year accumulated deficit related to
    the adoption of FIN 48






























(458
)


(458
)Exercise of stock options and warrants










414







170















170Sale of common stock under ESPP










362



1



967















968Share-based compensation expense from stock options


















1,938















1,938Share-based compensation expense from ESPP


















413















413Foreign currency translation adjustment


























(2,286
)






(2,286
)Net loss






























(60,228
)


(60,228
)Balance, December 31, 2007





$




45,785


$
46


$
294,193


$



$
(3,100
)

$
(194,710
)

$
96,429    F-4




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    (In thousands)
  2005


2006


2007Cash Flows Related to Operating Activities:Net income (loss)

$
26,597


$
(80,772
)

$
(60,228
)Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:Depreciation and amortization


7,504



7,200



6,573Goodwill impairment charge










40,725Loss on disposal of property and equipment


892



148



268Provision for doubtful accounts


(560
)


188



(216
)Share-based compensation expense






3,326



2,351Deferred taxes


(25,300
)


47,141



(16
)Other


(67
)






Changes in operating assets and liabilities :Accounts receivable


6,422



(5,234
)


5,745Inventories


785



612



(6,777
)Prepaid expenses and other assets


(1,598
)


(344
)


1,005Accounts payable


(14,398
)


4,259



(5,890
)Accrued compensation and other expenses


(231
)


4,757



(261
)Deferred revenue


680



(961
)


802Income taxes payable


(470
)


166



(84
)Restructuring accrual


(133
)


(45
)


Other liabilities


600



1,145



1,723Net cash provided by (used in) operating activities


723



(18,414
)


(14,280
)Cash Flows Related to Investing Activities:Purchases of property and equipment


(4,733
)


(6,548
)


(4,447
)Sales of short-term investments


71,852



23,824



5,425Purchases of short-term investments


(26,500
)


(10,337
)


(5,425
)Purchase of patent license portfolio


(2,500
)






Net cash provided by (used in) investing activities


38,119



6,939



(4,447
)Cash Flows Related to Financing Activities:Proceeds from exercise of stock options and warrants


1,781



948



170Proceeds from sale of stock to employees


1,040



1,055



968Net cash provided by financing activities


2,821



2,003



1,138Effect of Exchange Rate Changes on Cash


(356
)


332



284Net Increase (Decrease) in Cash and Cash Equivalents


41,307



(9,140
)


(17,305
)Cash and Cash Equivalents, beginning of year


67,496



108,803



99,663Cash and Cash Equivalents, end of year

$
108,803


$
99,663


$
82,358Supplemental Disclosures of Cash Flow Information:Construction in progress costs incurred but not paid

$
885


$
418


$
563Deferred tax asset for stock-based compensation credited to
    equity

$
5,455


$



$
Reduction of goodwill resulting from the recognition of deferred
    tax assets

$
16,386


$



$
Cash paid for income taxes

$
499


$
1,482


$
245    F-5




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 and 2007
   1.
    Background
    and Summary of Significant Accounting Policies  Background
  Dot Hill Systems Corp.
    Basis
    of Presentation
    Principles
    of Consolidation
    Use of
    Accounting Estimates
    Cash
    and Cash Equivalents
    Allowance
    for Doubtful Accounts
    Valuation
    of Inventories
  (first-in,
 F-6




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property
    and Equipment
    Fair
    Value of Financial Instruments
    Valuation
    of Goodwill
  Goodwill and Other Intangible Assets.
   F-7




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Long-Lived
    Assets
  Accounting for the Impairment or
    Disposal of Long-Lived Assets.
  Revenue
    Recognition
  Revenue
    Recognition in Financial Statements, Revenue Recognition,
  Product
    Warranties
    Balance at








Deductions forBeginning of


Charged to


Deductions for


Change in


Balance atAccrued Warranty Costs

Year


Operations


Costs Incurred


Estimates


End of Year2005

$
1,104


$
2,445


$
(2,803
)

$



$
7462006

$
746


$
2,363


$
(2,446
)

$



$
6632007

$
663


$
3,570


$
(2,852
)

$



$
1,381  F-8




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance atBeginning of


New Warranty


Revenue


Balance atDeferred Product Maintenance Revenue

Year


Revenue Contracts


Recognized


End of Year2005

$
779


$
3,332


$
(2,713
)

$
1,3982006

$
1,398


$
3,003


$
(3,820
)

$
5812007

$
581


$
7,093


$
(6,980
)

$
694   Advertising
    Costs
    Research
    and Development
  Accounting for the Costs of Computer Software to Be Sold,
    Leased, or Otherwise Marketed
  Change
    in Accounting for Share-Based Compensation
  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
    No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
 F-9




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2005Net income

$
26,597Stock-based employee compensation expense included in reported
    net income attributable to common stockholders


8Stock-based employee compensation expense determined under fair
    value based method for all awards


(6,374
)Pro forma net income

$
20,231Basic net income per share:As reported

$
0.61Pro forma

$
0.46Diluted net income per share:As reported

$
0.58Pro forma

$
0.44   Foreign
    Currency Transactions and Translation
      Income
    Taxes
    Accounting for Uncertainty in Income
    Taxes  An Interpretation of FASB Statement
    No. 109,
 F-10




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Net
    Income (Loss) Per Share
        2005


2006


2007Weighted average shares used to calculate basic net income
    (loss) per share


43,903



44,757



45,534Dilutive effect of stock options and stock warrants


1,736







Weighted average shares used to calculate diluted net income
    (loss) per share


45,639



44,757



45,534         Recent
    Accounting Pronouncements
  Fair Value Measurements No. FAS 157-1 No. FAS 157-2,
 F-11




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  The Fair Value Option for Financial Assets and Financial
    Liabilities  including an amendment of FASB Statement
    No. 115,
  No. 07-3, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities EITF 07-3 EITF 07-3
  Business Combinations
  2.
    Risks and
    Uncertainties  Concentration
    of Credit Risk
      Cash,
    Cash Equivalents, and Concentrations
   F-12




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Foreign
    Sales
      2005


2006


2007Europe


4.6
%


6.6
%


10.0
%Asia


2.4



2.2



2.5Total foreign sales


7.0
%


8.8
%


12.5
%     Dependence
    on Suppliers
          3.
    Accumulated
    Other Comprehensive Loss      2006

2007Foreign currency translation adjustments

$
(814
)

$
(3,100
)$
(814
)

$
(3,100
)  F-13




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    Inventories    2006


2007Purchased parts and materials

$
612


$
1,187Finished goods


1,598



7,826Total inventory

$
2,210


$
9,013   5.
    Property
    and Equipment    2006


2007Machinery and equipment

$
11,620


$
13,097Furniture, fixtures, and computer software


3,862



4,235Leasehold improvements


2,042



3,026Construction in progress


77



596Total property and equipment, at cost


17,601



20,954Less accumulated depreciation


(7,863
)


(11,355
)Total property and equipment, net

$
9,738


$
9,599     6.
    Goodwill
    and Intangible Assets         F-14




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31, 2006AccumulatedGross


Amortization


NetCore technology

$
5,000


$
(3,148
)

$
1,852Customer relationships


2,500



(2,023
)


477Licensed Patent Portfolio


2,570



(517
)


2,053Total intangible assets

$
10,070


$
(5,688
)

$
4,382   December 31, 2007AccumulatedGross


Amortization


NetCore technology

$
5,000


$
(4,260
)

$
740Customer relationships


2,500



(2,500
)


Licensed Patent Portfolio


2,570



(1,030
)


1,540Total intangible assets

$
10,070


$
(7,790
)

$
2,280       2008

$
1,2552009


5142010


511Total

$
2,280   7.
    Credit
    Facilities  Line
    of Credit
   F-15




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    Income
    Taxes    2005


2006


2007Current:Federal

$
624


$



$
State, local and foreign


41



1,744



(177
)665



1,744



(177
)Deferred:Federal


(18,697
)


39,914



State, local and foreign


(7,165
)


7,227



(25,862
)


47,141



Total income tax provision (benefit)

$
(25,197
)

$
48,885


$
(177
)     2005


2006


2007Federal statutory rate

$
490


$
(11,160
)

$
(21,142
)State and local income taxes, net of federal benefit


(4,569
)


4,699



13Increase (decrease) in valuation allowance


(22,112
)


49,281



1,197Foreign tax differential


1,418



6,171



5,732Research and development credits


(393
)


(805
)


(189
)Goodwill impairment










13,846Other


(31
)


699



366Income tax provision (benefit)

$
(25,197
)

$
48,885


$
(177
)  F-16




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2007Deferred tax assets:Net operating loss and tax credit carry forwards

$
61,652


$
62,866Inventory reserve and uniform capitalization


734



962Stock options and warrants


2,279



2,657In-process research and development


390



336Allowance for bad debts


111



74Vacation accrual


389



388Deferred rent


931



1,147Warranty accrual


278



580Deferred revenue


25



Depreciation and amortization


183



788Other accruals and reserves


354



287Total deferred tax assets


67,326



70,085Deferred tax liabilities:State taxes


(3,196
)


(3,942
)Depreciation and amortization






Acquired intangibles


(872
)


(224
)Total deferred income tax liabilities


(4,068
)


(4,166
)Valuation allowance


(63,258
)


(65,903
)Net deferred tax assets

$



$
16     Total(In thousands)Balance, January 1, 2007

$
11,235Increase related to prior period positions


1,300Increase related to current year tax positions


66Settlements with foreign taxing authorities


(7,986
)Expiration of the statute of limitations for the assessment of
    taxes


(100
)Other


Balance, December 31, 2007

$
4,515    F-17




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                   F-18




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    Stockholders
    Equity  Increase
    in Authorized Common Shares
    Stockholders
    Rights Plan
    10.
    Stock
    Options and Warrants  Stock
    Incentive Plans
  2000 EIP.
  2000 NEDSOP.
  2000 ESPP.
   F-19




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended


Year EndedDecember 31,


December 31,2006


2007Cost of goods sold

$
327


$
372Sales and marketing


307



478Research and development


627



819General and administrative


1,972



682Share-based compensation expense before taxes


3,233



2,351Related deferred income tax benefits






Share-based compensation expense, net of income taxes

$
3,233


$
2,351Share-based compensation expense is derived from:Stock options

$
2,836


$
1,9382000 ESPP


397



413Total

$
3,233


$
2,351    F-20




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted averageWeighted


remaining


AggregateNumber of


average


contractual term


intrinsic valueshares


exercise price


(in years)


(in thousands)Outstanding at January 1, 2005


4,214,095


$
6.68Granted


1,328,000



5.78Exercised


(315,112
)


3.11Forfeited


(309,677
)


7.72Expired


(86,495
)


11.40Outstanding at December 31, 2005


4,830,811



6.52Granted


2,162,501



5.16Exercised


(278,855
)


3.11Forfeited


(900,262
)


6.16Expired


(378,265
)


7.88Outstanding at December 31, 2006


5,435,930



6.12Granted


1,853,696



3.40Exercised


(70,969
)


2.40Forfeited


(258,850
)


4.28Expired


(287,712
)


8.75Outstanding at December 31, 2007


6,672,095


$
5.36



6.96


$
247Vested and expected to vest at December 31, 2007


6,121,470


$
5.50



6.78


$
246Exercisable at December 31, 2007


3,920,901


$
6.32



5.65


$
239         out-of-the-money
 F-21




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          2000 EIP and 2000 NEDSOP


2000 EsppYears Ended


Years EndedDecember 31,


December 31,2005


2006


2007


2005


2006


2007Risk-free interest rate


3.86
%


4.89
%


4.48
%


4.08
%


4.98
%


4.75
%Expected dividend yield



%



%



%



%



%



%Volatility


78
%


68
%


68
%


75
%


68
%


68
%Expected life


4.1 years



5.5 years



5.2 years



0.5 years



0.5 years



0.5 years       Warrants
    11.
    Employee
    Benefit Plans  Dot
    Hill Retirement Savings Plan
    Employee
    Stock Purchase Plan
   F-22




---



##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    12.
    Commitments
    and Contingencies  Operating
    Leases
    New
    Longmont Research and Development Facility Lease
      2008

$
1,6222009


1,4932010


1,4302011


1,4692012


1,504Thereafter


370Total minimum lease payments

$
7,888     Employment
    Agreements
   F-23




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Consulting
    Agreements with Former Executive
    Crossroads
    Systems Litigation
   F-24




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    end-to-end,
      Chaparral
    Securities Class Action
   F-25




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Dot
    Hill Securities Class Actions and Derivative
    Suits
       F-26




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Chaparral
    Network Storage Shareholders Escrow Fund
    Other
    Litigation
    13.
    Subsequent
    Event    14.
    Segment
    and Geographic Information     F-27




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Legacy andSANnet Families


Other


Services


TotalYear ended December 31, 2005:Net revenue

$
225,705


$
5,388


$
2,706


$
233,799Gross profit

$
51,856


$
1,243


$
504


$
53,603Year ended December 31, 2006:Net revenue

$
232,298


$
3,100


$
3,819


$
239,217Gross profit

$
35,087


$
385


$
1,184


$
36,656Year ended December 31, 2007:Net revenue

$
199,222


$
893


$
6,980


$
207,095Gross profit

$
23,527


$
142


$
2,764


$
26,433     SANnet


Legacy andFamilies


Other


Services


TotalAs of:December 31, 2006

$
195,332


$
3,024


$
3,295


$
201,651December 31, 2007

$
132,599


$
1,022


$
6,306


$
139,927  F-28




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##### Table of Contents



DOT HILL
    SYSTEMS CORP.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    As of and for the Year EndedDecember 31,2005


2006


2007Net revenue:United States

$
217,469


$
218,009


$
181,312Europe


10,730



15,851



20,538Asia


5,600



5,357



5,245$
233,799


$
239,217


$
207,095Income (loss) before income taxes:United States

$
4,571


$
(18,306
)

$
(55,045
)Europe


(2,636
)


(13,220
)


(5,818
)Asia


(535
)


(361
)


458$
1,400


$
(31,887
)

$
(60,405
)Assets:United States

$
260,826


$
192,539


$
128,814Europe


3,997



6,358



9,546Asia


2,471



2,754



1,567$
267,294


$
201,651


$
139,927     15.
    Quarterly
    Financial Information (Unaudited)    First


Second


Third


FourthQuarter


Quarter


Quarter


QuarterYear Ended December 31, 2006:Net revenue

$
58,686


$
66,265


$
54,846


$
59,420Gross profit


11,161



13,770



7,033



4,692Loss before income taxes


(7,545
)


(8,415
)


(7,618
)


(8,309
)Net loss


(4,975
)


(6,626
)


(60,086
)(1)


(9,085
)Basic and diluted net loss per share


(0.11
)


(0.15
)


(1.34
)


(0.20
)Year Ended December 31, 2007:Net revenue

$
53,441


$
56,199


$
45,691


$
51,764Gross profit


6,674



6,924



6,525



6,310Loss before income taxes


(5,670
)


(3,835
)


(4,067
)


(46,833
)(2)Net loss


(5,962
)


(3,742
)


(4,123
)


(46,401
)(2)Basic and diluted net loss per share


(0.13
)


(0.08
)


(0.09
)


(1.01
)     (1)
    
    See discussion of income taxes in Note 8.(2)
    
    See discussion of our goodwill impairment in Note 1. F-29




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##### Table of Contents



DOT HILL
    SYSTEMS CORP. AND SUBSIDIARIES
 SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
    FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007  Balance at


Charged to





BalanceBeginning of


Costs and





at End ofYear


Expenses


Deductions


Year(In thousands)Allowance for doubtful accounts and sales returns:Year ended December 31, 2005

$
491


$
560


$
757
(1)

$
294Year ended December 31, 2006


294



335




(1)


629Year ended December 31, 2007


629



(216
)


111
(1)


302Reserve for excess and obsolete inventories:Year ended December 31, 2005

$
1,685


$
1,856


$
2,548
(2)

$
993Year ended December 31, 2006


993



1,082



333
(2)


1,743Year ended December 31, 2007


1,743



1,110



691
(2)


2,162     (1)
    
    Uncollectible receivables charged off and credit issued for
    product returns.(2)
    
    Consists primarily of the sale or disposal of excess/obsolete
    inventories. F-30