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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2008

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: 001-33517

Data Domain, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 94-3412175                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|2421 Mission College Blvd., Santa Clara, CA                    |  | 95054                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

Registrants telephone number, including area code (408) 980-4800

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



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

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

The number of outstanding shares of the registrants common stock as of April 30, 2008 was 58,056,990.









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##### Table of Contents

Data Domain, Inc.

FORM 10-Q

FOR THE QUARTER ENDED

March 31, 2008

INDEX



|         |  |                                                                                                              |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                              |  | Page No.
|         |  | PART I. FINANCIAL INFORMATION                                                                                |  |         
|         |  |                                                                                                             
|Item 1.  |  | Financial Statements (unaudited)                                                                             |  |         
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007                             |  | 3       
|         |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and March 31, 2007 |  | 4       
|         |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and March 31, 2007 |  | 5       
|         |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 6       
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 13      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 18      
|Item 4.  |  | Controls and Procedures                                                                                      |  | 19      
|         |  |                                                                                                             
|         |  | PART II. OTHER INFORMATION                                                                                   |  |         
|         |  |                                                                                                             
|Item 1.  |  | Legal Proceedings                                                                                            |  | 19      
|Item 1A. |  | Risk Factors                                                                                                 |  | 20      
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 26      
|Item 3.  |  | Defaults Upon Senior Securities                                                                              |  | 27      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 27      
|Item 5.  |  | Other Information                                                                                            |  | 27      
|Item 6.  |  | Exhibits                                                                                                     |  | 27      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Data Domain, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



|                                                                   |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                   |  | March 31,2008 |         |   | December 31,2007 |  
|Current assets:                                                    |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                          |  | $             | 126,522 |   |                  | $ | 102,939 |  
|Short-term investments                                             |  |               | 65,775  |   |                  |   | 104,197 |  
|Accounts receivable (net of allowances of $4 and $0, respectively) |  |               | 30,371  |   |                  |   | 35,320  |  
|Inventories                                                        |  |               | 2,513   |   |                  |   | 2,341   |  
|Prepaid expenses and other current assets                          |  |               | 2,953   |   |                  |   | 1,711   |  
|                                                                   |  |               |         |   |                  |   |         |  
|Total current assets                                               |  |               | 228,134 |   |                  |   | 246,508 |  
|Long-term investments                                              |  |               | 29,704  |   |                  |   |        |  
|Intangible asset                                                   |  |               | 233     |   |                  |   | 267     |  
|Property, plant and equipment                                      |  |               | 21,771  |   |                  |   | 14,589  |  
|Total assets                                                       |  | $             | 279,842 |   |                  | $ | 261,364 |  
|                                                                   |  |               |         |   |                  |   |         |  
|Current liabilities:                                               |  |               |         |   |                  |   |         |  
|Accounts payable                                                   |  | $             | 8,813   |   |                  | $ | 7,251   |  
|Accrued compensation and related benefits                          |  |               | 8,900   |   |                  |   | 11,992  |  
|Other accrued liabilities                                          |  |               | 6,734   |   |                  |   | 6,731   |  
|Income taxes payable                                               |  |               | 1,939   |   |                  |   | 196     |  
|Deferred revenue, current                                          |  |               | 20,335  |   |                  |   | 16,650  |  
|                                                                   |  |               |         |   |                  |   |         |  
|Total current liabilities                                          |  |               | 46,721  |   |                  |   | 42,820  |  
|Deferred revenue, non-current                                      |  |               | 11,997  |   |                  |   | 9,322   |  
|Long-term exercised unvested stock options                         |  |               | 484     |   |                  |   | 766     |  
|Other liabilities                                                  |  |               | 1,186   |   |                  |   | 594     |  
|Stockholders equity:                                              |  |               |         |   |                  |   |         |  
|Common stock and additional paid-in capital                        |  |               | 258,241 |   |                  |   | 248,078 |  
|Accumulated other comprehensive income (loss)                      |  |               | (1,265  | ) |                  |   | 47      |  
|Accumulated deficit                                                |  |               | (37,522 | ) |                  |   | (40,263 | )
|                                                                   |  |               |         |   |                  |   |         |  
|Total stockholders equity                                         |  |               | 219,454 |   |                  |   | 207,862 |  
|                                                                   |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                         |  | $             | 279,842 |   |                  | $ | 261,364 |  
|                                                                   |  |               |         |   |                  |   |         |  

See Notes to Condensed Consolidated Financial Statements



3



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##### Table of Contents

Data Domain, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



|                                                              |  |                             |        |      |   |        |  
|------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                              |  | Three Months EndedMarch 31, |       
|                                                              |  | 2008                        |        | 2007 |  
|Revenue:                                                      |  |                             |        |      |   |        |  
|Product                                                       |  | $                           | 45,220 |      | $ | 17,880 |  
|Support and services                                          |  |                             | 7,368  |      |   | 2,137  |  
|Ratable product and related support and services              |  |                             | 27     |      |   | 192    |  
|                                                              |  |                             |        |      |   |        |  
|Total revenue                                                 |  |                             | 52,615 |      |   | 20,209 |  
|                                                              |  |                             |        |      |   |        |  
|Cost of revenue:                                              |  |                             |        |      |   |        |  
|Cost of product                                               |  |                             | 11,316 |      |   | 5,849  |  
|Cost of support and services                                  |  |                             | 2,489  |      |   | 798    |  
|Cost of ratable product and related support and services      |  |                             | 1      |      |   | 76     |  
|                                                              |  |                             |        |      |   |        |  
|Total cost of revenue                                         |  |                             | 13,806 |      |   | 6,723  |  
|                                                              |  |                             |        |      |   |        |  
|Gross profit                                                  |  |                             | 38,809 |      |   | 13,486 |  
|                                                              |  |                             |        |      |   |        |  
|Operating expenses:                                           |  |                             |        |      |   |        |  
|Sales and marketing                                           |  |                             | 23,232 |      |   | 8,683  |  
|Research and development                                      |  |                             | 8,736  |      |   | 4,503  |  
|General and administrative                                    |  |                             | 5,606  |      |   | 1,778  |  
|                                                              |  |                             |        |      |   |        |  
|Total operating expenses                                      |  |                             | 37,574 |      |   | 14,964 |  
|                                                              |  |                             |        |      |   |        |  
|Operating income (loss)                                       |  |                             | 1,235  |      |   | (1,478 | )
|                                                              |  |                             |        |      |   |        |  
|Other income (expense), net:                                  |  |                             |        |      |   |        |  
|Interest income                                               |  |                             | 2,163  |      |   | 156    |  
|Other income (expense), net                                   |  |                             | 1,243  |      |   | (96    | )
|                                                              |  |                             |        |      |   |        |  
|Total other income (expense), net                             |  |                             | 3,406  |      |   | 60     |  
|                                                              |  |                             |        |      |   |        |  
|Income (loss) before provision for income taxes               |  |                             | 4,641  |      |   | (1,418 | )
|Provision for income taxes                                    |  |                             | 1,900  |      |   | 55     |  
|                                                              |  |                             |        |      |   |        |  
|Net income (loss)                                             |  | $                           | 2,741  |      | $ | (1,473 | )
|                                                              |  |                             |        |      |   |        |  
|Net income (loss) per share, basic                            |  | $                           | 0.05   |      | $ | (0.18  | )
|                                                              |  |                             |        |      |   |        |  
|Net income (loss) per share, diluted                          |  | $                           | 0.04   |      | $ | (0.18  | )
|                                                              |  |                             |        |      |   |        |  
|Shares used in computing net income (loss) per share, basic   |  |                             | 56,414 |      |   | 8,038  |  
|                                                              |  |                             |        |      |   |        |  
|Shares used in computing net income (loss) per share, diluted |  |                             | 64,704 |      |   | 8,038  |  
|                                                              |  |                             |        |      |   |        |  

See Notes to Condensed Consolidated Financial Statements



4



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Data Domain, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                         |  |                             |         |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                         |  | 2008                        |         |   | 2007 |  
|Operating Activities:                                                                    |  |                             |         |   |      |   |        |  
|Net income (loss)                                                                        |  | $                           | 2,741   |   |      | $ | (1,473 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                             |         |   |      |   |        |  
|Depreciation and amortization                                                            |  |                             | 1,201   |   |      |   | 316    |  
|Stock-based compensation                                                                 |  |                             | 5,380   |   |      |   | 1,110  |  
|Provision for (release of) accounts receivable allowance                                 |  |                             | 4       |   |      |   | (8     | )
|Amortization of evaluation inventory                                                     |  |                             | 654     |   |      |   | 468    |  
|Changes in operating assets and liabilities:                                             |  |                             |         |   |      |   |        |  
|Decrease in accounts receivable                                                          |  |                             | 4,945   |   |      |   | 1,561  |  
|Increase in inventories                                                                  |  |                             | (826    | ) |      |   | (1,088 | )
|Increase in prepaid expenses and other current assets                                    |  |                             | (1,242  | ) |      |   | (436   | )
|Increase in prepaid offering costs                                                       |  |                             |        |   |      |   | (1,539 | )
|Increase in accounts payable                                                             |  |                             | 1,562   |   |      |   | 1,830  |  
|Decrease in accrued compensation and related benefits                                    |  |                             | (3,092  | ) |      |   | (573   | )
|Increase in other accrued liabilities                                                    |  |                             | 595     |   |      |   | 2,373  |  
|Increase (decrease) in income taxes payable                                              |  |                             | 1,743   |   |      |   | (91    | )
|Increase in deferred revenue                                                             |  |                             | 6,360   |   |      |   | 1,045  |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Net cash provided by operating activities                                                |  |                             | 20,025  |   |      |   | 3,495  |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Investing activities:                                                                    |  |                             |         |   |      |   |        |  
|Purchases of property, plant and equipment                                               |  |                             | (8,349  | ) |      |   | (1,511 | )
|Purchases of available-for-sale securities                                               |  |                             | (42,004 | ) |      |   |       |  
|Proceeds from maturities of available-for-sale securities                                |  |                             | 49,400  |   |      |   |       |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Net cash used in investing activities:                                                   |  |                             | (953    | ) |      |   | (1,511 | )
|                                                                                         |  |                             |         |   |      |   |        |  
|Financing activities:                                                                    |  |                             |         |   |      |   |        |  
|Proceeds from issuance of common stock, net of repurchases                               |  |                             | 4,501   |   |      |   | 526    |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Net cash provided by financing activities                                                |  |                             | 4,501   |   |      |   | 526    |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                             |  |                             | 10      |   |      |   | (3     | )
|                                                                                         |  |                             |         |   |      |   |        |  
|Net increase in cash and cash equivalents                                                |  |                             | 23,583  |   |      |   | 2,507  |  
|Cash and cash equivalents at beginning of period                                         |  |                             | 102,939 |   |      |   | 11,857 |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                               |  | $                           | 126,522 |   |      | $ | 14,364 |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Non-cash operating activity:                                                             |  |                             |         |   |      |   |        |  
|Issuance of common stock for Quantum settlement                                          |  | $                           |        |   |      | $ | 3,319  |  
|                                                                                         |  |                             |         |   |      |   |        |  
|Supplemental schedule of cash flow data:                                                 |  |                             |         |   |      |   |        |  
|Cash paid for income taxes                                                               |  | $                           | 248     |   |      | $ | 143    |  
|                                                                                         |  |                             |         |   |      |   |        |  

See Notes to Condensed Consolidated Financial Statements



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DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES

Organization and Description of Business

Data Domain, Inc. was incorporated in the State of Delaware in October 2001. Our appliances provide deduplication storage for disk-based backup and networkbased disaster recovery. We began selling our products
and services in February 2004. Our product sales generally include a software license, hardware, post-contract customer support and, in some cases, installation services.

Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated. The accompanying condensed consolidated balance sheet as of March 31, 2008, the condensed consolidated statements of operations for the three months ended March 31, 2008 and 2007, and the condensed
consolidated statements of cash flows for the three months ended March 31, 2008 and 2007 are unaudited. The condensed consolidated balance sheet data as of December 31, 2007 was derived from the audited consolidated financial statements
which are included in our current report on Form 10-K filed with the Securities and Exchange Commission, or SEC on February 29, 2008. The accompanying financial statements should be read in conjunction with the audited consolidated financial
statements and related notes contained in such Form 10-K.

The accompanying condensed consolidated financial statements have been prepared
in accordance with United States generally accepted accounting principles, or GAAP, pursuant to the rules and regulations of the SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial
statements. We believe the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our statement of financial
position as of March 31, 2008, our results of operations for the three months ended March 31, 2008 and 2007, and our cash flows for the three months ended March 31, 2008 and 2007. All such adjustments are of a normal recurring nature.
The results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2008.

Other than the adoption of the provisions of Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurements, as
discussed in Recent Accounting Pronouncements below, there were no significant changes in our accounting policies during the three months ended March 31, 2008.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us
to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods
presented. Significant estimates and assumptions made by management include the determination of the fair value of stock awards issued prior to our initial public offering in June 2007, the allowance for doubtful accounts, warranty reserve and
inventory valuation. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between
these estimates and actual results, our condensed consolidated financial statements will be affected.

Revenue Recognition

We derive our revenue from sales of our products and support services through third-party value added resellers and distributors, or channel partners, and
directly to customers. Product revenue primarily consists of revenue from sales of our appliances and expansion shelves. Shipping charges billed to customers are included in product revenue and the related shipping costs are included in cost of
product revenue.

Our software is integrated with our industry standard appliance hardware and is essential to the functionality of the
integrated system product. We provide unspecified software updates and enhancements related to our products through support and services contracts. Accordingly, we recognize revenue in accordance with the guidance provided under the American
Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP, No. 97-2,Software Revenue Recognition, or SOP 97-2, and SOP No. 98-9,Modification of SOP No. 97-2 Software Revenue Recognition, with
Respect to Certain Transactions, or SOP 98-9. Product revenue is recognized when all of the following have occurred: (1) we have entered into a legally binding arrangement with a customer; (2) delivery has occurred, which is when the
product title has transferred to the customer; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable. Our fees are considered fixed or determinable upon
the establishment of an arrangement that contains the final terms of sale including the description, quantity and price of each product purchased. Our customer arrangements do not include rights of return or acceptance provisions. We assess the
ability to collect from our customers based on a number of factors, including creditworthiness and past transaction history of the customer. If the customer is deemed not creditworthy, all revenue from the arrangement is deferred until payment is
received and all other revenue recognition criteria have been met.

Substantially all of our products have been sold in combination with
support and services, which primarily consist of hardware and software support. Hardware support includes repair or replacement in the event of breakage or failure, and telephone and Internet access to technical information and support personnel
during the term of the support period. Software support provides customers with rights to unspecified software updates and to maintenance releases and patches released during the term of the support period. Installation services, when provided, are
also included in support and services revenue. We have established vendor specific objective evidence, or VSOE, of fair value of our support and services as measured by the renewal prices offered to and paid by our customers. Accordingly, we use the
residual method, as allowed by SOP 98-9, to determine the amount of product revenue to be recognized. Under the residual method, the fair value of the undelivered support and services, which is a specified dollar amount, is deferred and the
remaining portion of the arrangement is recognized as product revenue. This product revenue is generally recognized upon shipment, except for certain customers whose terms are FOB destination point wherein the revenue is recognized upon delivery,
based on freight terms of FOB shipping point or FCA (Incoterms 2000) shipping point, assuming all other criteria for revenue recognition discussed above have been met and, in the case of all indirect channel sales, persuasive evidence of the
identity of the customer has been obtained. In all cases of direct or indirect channel sales, we recognize revenue once a customer is identified and shipment has occurred, assuming all other criteria for revenue recognition discussed above have been
met. The fair value of the support and services is recognized as support and services revenue on a straight-line basis over the term of the related support period, which is typically one to three years.



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DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Product sales sometimes include installation services. Installation revenue is deferred and
recognized upon the earlier of customer notice that the installation is complete or sixty days after shipment. We have established VSOE of fair value for our installation services based on the price separately charged to our customers. Revenue from
installation, which is included in support and services revenue, was $851,000 and $259,000 for the three months ended March 31, 2008 and 2007, respectively.

Stock-Based Compensation

Stock-based compensation included in our condensed consolidated statements of operations
for the three months ended March 31, 2008 and 2007 was as follows:



|                                       |  |                             |       |      |   |      
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                       |  | Three Months EndedMarch 31,
|(in thousands)                         |  | 2008                        |       | 2007
|Cost of product                        |  | $                           | 134   |      | $ | 16   
|Cost of support and services           |  |                             | 121   |      |   | 88   
|Sales and marketing                    |  |                             | 2,792 |      |   | 477  
|Research and development               |  |                             | 1,320 |      |   | 308  
|General and administrative             |  |                             | 1,013 |      |   | 221  
|                                       |  |                             |       |      |   |      
|Total stock-based compensation expense |  | $                           | 5,380 |      | $ | 1,110
|                                       |  |                             |       |      |   |      

We account for share-based payments under the fair value recognition provisions of SFAS
No. 123(R),Share-Based Payment , or SFAS 123(R). We estimate the grant date fair value of stock option awards using the Black-Scholes option valuation model, which requires, among other inputs, an estimate of the fair value of the
underlying common stock on the date of grant and the expected volatility of the stock over the expected term of the related grants. We recognize this expense on a straight-line basis over the optionees requisite service period which is
generally the same as the vesting schedule of the options.

On June 27, 2007, we implemented our 2007 Employee Stock Purchase Plan, or
ESPP. Under the ESPP, employees may purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of our common stock as of the beginning or the end of six-month purchase periods. The ESPP is compensatory
and has resulted in compensation expense amortized on a straight-line basis. The expense recognized in the three months ended March 31, 2008 was $1.0 million.

The fair value of options granted under our stock plans and the shares purchased under the ESPP were determined using the following assumptions:



|                                |  |                             |   |  |              |  
|------------------------------- |  | --------------------------- | - |  | ------------ | -
|                                |  | Three Months EndedMarch 31, |  
|Options Granted                 |  | 2008                        |   |  | 2007         |  
|Average expected life in years  |  | 5.8                         |   |  | 4.0          |  
|Weighted-average volatility     |  | 58                          | % |  | 70           | %
|Risk-free interest rate         |  | 2.78                        | % |  | 4.47% - 4.75 | %
|                                |  |                            
|ESPP                            |  |                             |   |  |              |  
|Average expected life in months |  | 6.0                         |   |  |              |  
|Weighted-average volatility     |  | 58                          | % |  |              |  
|Risk-free interest rate         |  | 2.78                        | % |  |              |  

The expected term represents the period that stock-based awards are expected to be outstanding,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of our stock-based awards. For the three months ended March 31, 2008
the expected term was based on historical exercise activity. For the three months ended March 31, 2007, we elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletin 107. The computation
of expected volatility for the three months ended March 31, 2008 and 2007 was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization data. As required by
SFAS 123(R), management estimates expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At March 31, 2008, the total compensation cost related to stock-based awards granted under SFAS 123(R) to employees and directors but not yet recognized was approximately $59.9 million, net of estimated forfeitures. This cost will be
amortized on a straight-line basis over a weighted average period of approximately 3.1 years.

On June 20, 2007, we granted 383,998
shares of restricted stock awards at fair value, 10,000 of which shares vested on June 27, 2007, with the remaining shares vesting over a four-year period commencing on June 27, 2007. As of March 31, 2008, 373,998 shares remained
unvested.

The aggregate intrinsic value of outstanding stock options is calculated as the difference between the exercise price of the
stock option awards and the closing price of our common stock on the Nasdaq Global Market. During the three months ended March 31, 2008, the aggregate intrinsic value of stock option awards exercised was $19.5 million, determined at the date of
option exercise.

The weighted-average exercise price of options granted in the three months ended March 31, 2008 was $21.57 per
share, and the weighted-average exercise price of options exercised in the three months ended March 31, 2008 was $0.90 per share.

At
March 31, 2008 and December 31, 2007, there were 1,038,000 and 1,219,000 shares, respectively, subject to repurchase under all common stock repurchase agreements upon forfeiture or early termination of employment. The cash received from
the sale of these shares was initially recorded as a liability and is subsequently reclassified to common stock as the shares vest. At March 31, 2008 and December 31, 2007, there was $484,000 and $766,000, respectively, recorded in
long-term liabilities related to the issuance of these shares.



7



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##### Table of Contents

DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Foreign Currency Translation

The majority of our sales arrangements are denominated in United States dollars or Euros, while a smaller portion of our sales agreements are denominated
in Canadian dollars and British sterling. In addition, we incur operating expenses in local foreign currencies in those countries where we have sales and marketing and administrative personnel. The functional currency of our foreign operations is
the local countrys currency. Consequently, expenses of operations outside the United States are translated into United States dollars using average exchange rates for the period reported while assets and liabilities of operations outside the
United States are translated into United States dollars using end-of-period exchange rates. The effects of foreign currency translation of the financial statements of our foreign operations are included in stockholders equity as a component of
accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets. The effects of foreign currency re-measurement for non-U.S. currency denominated assets and liabilities related to our domestic operations are
recognized in our consolidated statement of operations, and amounted to a net gain of $1.2 million for the three months ended March 31, 2008 and a loss of $96,000 for the three months ended March 31, 2007.

Allowance for Doubtful Accounts

We perform
credit evaluations of our customers financial condition and generally do not require collateral from our customers. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current
economic trends, historical payments, bad debt write-off experience, and financial review of the customer.

We maintain an allowance for
doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. When we become aware that a specific customer is unable or unwilling to meet its financial obligations, we record a
specific allowance to reflect the level of credit risk in the customers outstanding receivable balance. In addition, we record additional allowances based on certain percentages of aged receivable balances. We classify bad debt expenses as
general and administrative expenses. For the three months ended March 31, 2008 and 2007, we did not have any write offs of accounts receivable.

Inventory Valuation

Inventories consist of hardware and related component parts and are stated at the lower of cost
(on a first-in, first-out basis) or market value. Finished goods constitute a large portion of our inventory and include customer evaluation units which are carried at cost less accumulated amortization. We amortize the cost of these evaluation
units on a straight-line basis over twelve months upon the initial transfer of a unit into the evaluation pool. The cost of the amortization of evaluation units is included in costs of product revenue. If an evaluation unit is purchased, we record a
sale pursuant to our revenue recognition policy. We assess the valuation of our inventory on a quarterly basis and write down the value for estimated excess and obsolete inventory based upon estimates of future demand, including warranty
requirements. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products.

Inventory write-downs are included in cost of product and have not been material. Spares are expensed to cost of product as purchased. We do not allocate
indirect overhead costs to finished goods inventory as these amounts are not material.

We outsource the assembly of our products to a
third-party manufacturing facility under an annual contract which renews automatically but may be terminated by either party with 90 days written notice. We also purchase some finished products from a single source supplier under a three-year
agreement that expires in March 2010. At March 31, 2008, we had $6.5 million of non-cancellable purchase commitments with this third-party supplier and $361,000 from our single source supplier. In addition, we had an additional $5.2 million of
other non-cancellable purchase commitments with other third-party vendors.

Warranty Reserve

Upon shipment of products to our customers, we provide for the estimated cost to repair or replace products that may be returned under warranty. Our
warranty period is typically 12 months from the date of shipment to the customer for hardware and 90 days for software. For existing products, the warranty reserve is based on actual historical experience. For new products, the warranty reserve is
based on historical experience of similar products until such time as sufficient historical data has been collected for the new product.

During the three months ended March 31, 2007, we recorded an estimated charge of $1.2 million associated with a field replacement program that was initiated in April 2007 to replace a
circuit board used in some of our appliances. During the three months ended September 30, 2007, we recorded an additional charge of $450,000 to expand this replacement program for additional circuit boards used in some of our appliances. To
date, these circuit boards have experienced failures in less than 1% of the appliances that we believe are potentially affected. Through the replacement program, we are offering to exchange the circuit boards in all of the appliances that we believe
are potentially affected with circuit boards manufactured by a particular fabricator. We believe our estimates and judgments for the replacement program continue to be reasonable based upon information available at this time. Our estimated charge
associated with the replacement program is based on the number of circuit boards we expect to replace under the program, the anticipated cost of replacement and refurbishment and other associated costs. This warranty charge does not assume any
recovery from our supplier because any recovery is uncertain at this time. As of March 31, 2008, we had incurred approximately $1.3 million of costs associated with these field replacement programs and $330,000 remained in accrued liabilities
to cover future costs for the units potentially affected. To the extent there are differences between our estimates and actual results, our consolidated financial statements will be affected. The following table is a summary of our warranty activity
for the three months ended March 31, 2008:



|                                   |  |   |      |  
|---------------------------------- |  | - | ---- | -
|(in thousands)                     |  |   |     
|Warranty reserveDecember 31, 2007 |  | $ | 596  |  
|Warranty expense                   |  |   | 229  |  
|Warranty usage                     |  |   | (263 | )
|                                   |  |   |      |  
|Warranty reserveMarch 31, 2008    |  | $ | 562  |  
|                                   |  |   |      |  

Income Taxes

We account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax bases
of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be
realized.



8



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##### Table of Contents

DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) was ($1,265,000) at March 31, 2008. The loss at March 31, 2008 resulted from unrealized losses on
our investments in auction-rate securities of $1.4 million, which were partially offset by cumulative foreign currency translation gains and unrealized gains on our short-term investment portfolio. Accumulated other comprehensive income was $47,000
at December 31, 2007 resulting from cumulative foreign currency translation gains and unrealized gains on our short-term investment portfolio.

Recent Accounting Pronouncements

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value
Measurements,or SFAS 157. In February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with
respect to our financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first
two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



| |  |  | Level 1 - Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition.

In February 2007, the FASB issued FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement No. 115, or SFAS 159. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We elected not to adopt the fair value option on
existing eligible financial instruments as of January 1, 2008. However, because the SFAS 159 election is based on an instrument-by-instrument election at the time the Company first recognizes an eligible item or enters into an eligible firm
commitment, we may decide to exercise the option on new items when business reason support doing so in the future. The adoption of FAS No. 159 did not have a significant impact on our consolidated results of operations and financial condition.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and income taxes payable approximate their fair values due to the short-term maturity of these instruments.

In accordance with SFAS 157, the following table represents our fair value hierarchy for our financial assets (cash equivalents and short-term and
long-term investments) measured at fair value on a recurring basis as of March 31, 2008 (in thousands):



|                         |  |         |        |         |   |         |  |       |        |  |   |        
|------------------------ |  | ------- | ------ | ------- | - | ------- |  | ----- | ------ |  | - | -------
|                         |  | Level 1 |        | Level 2 |   | Level 3 |  | Total
|Money market funds       |  | $       | 69,067 |         | $ |        |  | $     |       |  | $ | 69,067 
|Commercial paper         |  |         |       |         |   | 37,908  |  |       |       |  |   | 37,908 
|Municipal bonds          |  |         |       |         |   |        |  |       | 29,704 |  |   | 29,704 
|Corporate bonds          |  |         |       |         |   | 18,057  |  |       |       |  |   | 18,057 
|U.S. government agencies |  |         |       |         |   | 23,999  |  |       |       |  |   | 23,999 
|                         |  |         |        |         |   |         |  |       |        |  |   |        
|Total                    |  | $       | 69,067 |         | $ | 79,964  |  | $     | 29,704 |  | $ | 178,735
|                         |  |         |        |         |   |         |  |       |        |  |   |        

Level 3 assets consist of municipal bonds with an auction reset feature (auction-rate securities)
whose underlying assets are generally student loans which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed. An auction failure means that the
parties wishing to sell securities could not. As a result, our ability to liquidate these investments and fully recover the carrying value of our investments in the near term may be limited or not exist. All of our auction-rate securities, including
those subject to the failure, are currently AAA-rated taxable municipal debt obligations, the highest rating by a rating agency. Based on the overall failure rate of these auctions, the frequency of the failures, and the underlying maturities of the
securities, a portion of which are up to 40 years, we have classified auction-rate securities as long-term investments on our balance sheet. These investments were valued at fair value as of March 31, 2008. The following table provides a
summary of changes in fair value of our Level 3 financial assets as of March 31, 2008 (in thousands):



|                                                       |  |                        |         |  
|------------------------------------------------------ |  | ---------------------- | ------- | -
|                                                       |  | Auction-rateSecurities |        
|Balance at December 31, 2007                           |  | $                      | 29,577  |  
|Unrealized loss included in other comprehensive income |  |                        | (1,383  | )
|Purchases of auction-rate securities                   |  |                        | 15,660  |  
|Proceeds from sale of auction-rate securities          |  |                        | (14,150 | )
|                                                       |  |                        |         |  
|Balance at March 31, 2008                              |  | $                      | 29,704  |  
|                                                       |  |                        |         |  



9



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##### Table of Contents

DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Cash and cash equivalents and short- and long-term investments

The following table summarizes our cash and investment portfolio (in thousands):



|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|------------------------------------------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | -------
|                                                                    |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|March 31, 2008                                                      |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Cash and cash equivalents:                                          |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Cash                                                                |  | $             | 43,267  |                      | $ |                      |  | $ |          |   |  | $ | 43,267 
|Money market funds                                                  |  |               | 69,067  |                      |   |                      |  |   |          |   |  |   | 69,067 
|Commercial paper                                                    |  |               | 5,207   |                      |   |                      |  |   | (1        | ) |  |   | 5,206  
|U.S. government agencies                                            |  |               | 8,980   |                      |   | 2                     |  |   |          |   |  |   | 8,982  
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total cash and cash equivalents                                     |  | $             | 126,521 |                      | $ | 2                     |  | $ | (1        | ) |  | $ | 126,522
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Short-term investments:                                             |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Commercial paper                                                    |  | $             | 32,656  |                      | $ | 63                    |  | $ | (17       | ) |  | $ | 32,702 
|Corporate bonds                                                     |  |               | 18,049  |                      |   | 29                    |  |   | (21       | ) |  |   | 18,057 
|U.S. government agencies                                            |  |               | 14,988  |                      |   | 28                    |  |   |          |   |  |   | 15,016 
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total short-term investments                                        |  | $             | 65,693  |                      | $ | 120                   |  | $ | (38       | ) |  | $ | 65,775 
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Long-term investments:                                              |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Municipal bonds                                                     |  | $             | 31,087  |                      | $ |                      |  | $ | (1,383    | ) |  | $ | 29,704 
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total long-term investments                                         |  | $             | 31,087  |                      | $ |                      |  | $ | (1,383    | ) |  | $ | 29,704 
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total cash and cash equivalents and short and long-term investments |  | $             | 223,301 |                      | $ | 122                   |  | $ | (1,422    | ) |  | $ | 222,001
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|                                                                    |  |               |         |                     
|December 31, 2007                                                   |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Cash and cash equivalents:                                          |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Cash                                                                |  | $             | 29,005  |                      | $ |                      |  | $ |          |   |  | $ | 29,005 
|Money market funds                                                  |  |               | 66,543  |                      |   |                      |  |   |          |   |  |   | 66,543 
|Commercial paper                                                    |  |               | 7,392   |                      |   |                      |  |   | (1        | ) |  |   | 7,391  
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total cash and cash equivalents                                     |  | $             | 102,940 |                      | $ |                      |  | $ | (1        | ) |  | $ | 102,939
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Short-term investments:                                             |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Commercial paper                                                    |  | $             | 46,642  |                      | $ | 23                    |  | $ | (4        | ) |  | $ | 46,661 
|Corporate bonds                                                     |  |               | 17,426  |                      |   | 11                    |  |   | (15       | ) |  |   | 17,422 
|Municipal bonds                                                     |  |               | 29,577  |                      |   |                      |  |   |          |   |  |   | 29,577 
|U.S. government agencies                                            |  |               | 10,529  |                      |   | 8                     |  |   |          |   |  |   | 10,537 
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total short-term investments                                        |  | $             | 104,174 |                      | $ | 42                    |  | $ | (19       | ) |  | $ | 104,197
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        
|Total cash and cash equivalents and short-term investments          |  | $             | 207,114 |                      | $ | 42                    |  | $ | (20       | ) |  | $ | 207,136
|                                                                    |  |               |         |                      |   |                       |  |   |           |   |  |   |        

We consider all highly liquid investments purchased with an original maturity of 90 days or less
to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. We have restricted cash from a letter of credit on our corporate headquarters lease for $209,000 that is part of our cash balance at March 31,
2008.

Cash and cash equivalents consist primarily of highly liquid investments in time deposits held at major banks, commercial paper,
United States government agency securities and other money market securities with original maturities of 90 days or less. The carrying value of cash and cash equivalents at March 31, 2008 and December 31, 2007 was approximately $126.6
million and $102.9 million, respectively, and the weighted average interest rates were 3.3% and 4.79%, respectively.

We classify our portfolio of short-term investments as available for sale. Short-term investments consist of corporate bonds and commercial paper with original maturities of 90 to 365 days. At
March 31, 2008, municipal bonds, which are auction-rate securities, are classified as long-term investments. At March 31, 2008 and December 31, 2007, the value of long-term investments was $29.7 million and zero dollars, respectively.
As of March 31, 2008 and December 31, 2007, net unrealized losses on available-for-sale securities of $1.3 million and net unrealized gains on available-for-sale securities of $22,000, respectively, were included in accumulated other
comprehensive income.

2. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of vested shares of common stock outstanding during the period. Diluted net income (loss) per share is
computed by giving effect to all potential dilutive shares of common stock, including options and common stock subject to repurchase.

The
following table sets forth the computation of net income (loss) per share:



|                                                            |  |                             |        |      |   |        |  
|----------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                            |  | Three Months EndedMarch 31, |       
|(in thousands, except per share amounts)                    |  | 2008                        |        | 2007 |  
|Net income (loss)                                           |  | $                           | 2,741  |      | $ | (1,473 | )
|                                                            |  |                             |        |      |   |        |  
|Shares used in computing net income (loss) per share, basic |  |                             | 56,414 |      |   | 8,038  |  
|Dilutive potential common shares:                           |  |                             |        |      |   |        |  
|Stock options                                               |  |                             | 8,290  |      |   |       |  
|                                                            |  |                             |        |      |   |        |  
|Shares used to compute net income (loss) per share, diluted |  |                             | 64,704 |      |   | 8,038  |  
|                                                            |  |                             |        |      |   |        |  
|Net income (loss) per share, basic                          |  | $                           | 0.05   |      | $ | (0.18  | )
|                                                            |  |                             |        |      |   |        |  
|Net income (loss) per share, diluted                        |  | $                           | 0.04   |      | $ | (0.18  | )
|                                                            |  |                             |        |      |   |        |  



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DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



The following weighted average outstanding options, common stock subject to repurchase and
convertible preferred stock were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect:



|                                                 |  |                             |  |       
|------------------------------------------------ |  | --------------------------- |  | ------
|                                                 |  | Three Months EndedMarch 31,
|(in thousands)                                   |  | 2008                        |  | 2007  
|Options to purchase common stock                 |  | 925                         |  | 12,566
|Common stock subject to repurchase               |  | 1,038                       |  | 1,522 
|Convertible preferred stock (as converted basis) |  |                            |  | 34,781

3. INVENTORIES

Inventories consisted of the following:



|                              |  |               |       |                  |   |      
|----------------------------- |  | ------------- | ----- | ---------------- | - | -----
|(in thousands)                |  | March 31,2008 |       | December 31,2007
|Finished goods                |  | $             | 434   |                  | $ | 481  
|Evaluation units              |  |               | 1,526 |                  |   | 1,289
|Raw materials and accessories |  |               | 553   |                  |   | 571  
|                              |  |               |       |                  |   |      
|Total                         |  | $             | 2,513 |                  | $ | 2,341
|                              |  |               |       |                  |   |      

Amortization of evaluation units was approximately $654,000 and $468,000 for the three months
ended March 31, 2008 and 2007, respectively.

4. DEFERRED REVENUE

Deferred revenue consisted of the following:



|                                                                   |  |               |        |   |                  |   |        |  
|------------------------------------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(in thousands)                                                     |  | March 31,2008 |        |   | December 31,2007 |  
|Product  current                                                  |  | $             | 436    |   |                  | $ | 555    |  
|Support and services                                               |  |               | 19,948 |   |                  |   | 16,152 |  
|Ratable product and related support and services                   |  |               | 56     |   |                  |   | 83     |  
|Less: deferred cost of ratable product revenue and product revenue |  |               | (105   | ) |                  |   | (140   | )
|                                                                   |  |               |        |   |                  |   |        |  
|Deferred revenue, current                                          |  | $             | 20,335 |   |                  | $ | 16,650 |  
|                                                                   |  |               |        |   |                  |   |        |  
|Support and services, non-current                                  |  | $             | 11,997 |   |                  | $ | 9,322  |  
|                                                                   |  |               |        |   |                  |   |        |  
|Deferred revenue, non-current                                      |  | $             | 11,997 |   |                  | $ | 9,322  |  
|                                                                   |  |               |        |   |                  |   |        |  

Deferred product revenue relates to arrangements where not all revenue recognition criteria have
been met. Deferred support and services revenue represents customer payments made in advance for annual support and services contracts. Support and services contracts are typically billed in advance on a per annum basis and revenue is recognized
ratably over the support period. Deferred ratable product and related support and services revenue consists of revenue on transactions prior to 2006 where VSOE of fair value of support and services had not been established and, as a result, the
entire arrangement was being recognized ratably over the related support period. All customers are known to us upon sale of our appliances.

5.
GUARANTEES

Our agreements with our channel partners and, less frequently, our customers, generally include certain provisions for
indemnifying the channel partners and customers against liabilities if our products infringe a third partys intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and have
not accrued any liabilities related to such obligations in our consolidated financial statements.

Under the terms of our lease for our
former corporate headquarters, we are obligated to provide a letter of credit for $136,000. To date, this letter of credit is not in place, and has not been required by our sub-lessor. Under the terms of our lease for our new corporate headquarters,
which commenced on November 1, 2007, we provided a letter of credit for $209,000. Under the terms of the lease for future rental space next our current corporate headquarters, we are obligated to provide a letter of credit for $1.2 million. To
date, this letter of credit has not been put in place.

As permitted or required under Delaware law and to the maximum extent allowable
under that law, we have certain obligations to indemnify our officers, directors and certain key employees for certain events or occurrences while the officer, director or employee is or was serving at our request in such capacity. These
indemnification obligations are valid as long as the director, officer or employee acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a director and
officer insurance policy that mitigates our exposure and generally enables us to recover a portion of any future amounts paid.



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DATA DOMAIN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



6. INCOME TAXES

We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized based on the differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and carryforwards of net operating losses and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

The effective tax rate for the three months ended March 31, 2008 was 41% compared with (4%) for the three months ended
March 31, 2007. This change in the effective rate was primarily due to our conversion from a pre-tax loss for the quarter ended March 31, 2007 to pre-tax income for the quarter ended March 31, 2008. The effective tax rate for the
first quarter of 2008 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of non-deductible stock-based compensation and increases in foreign taxes based on our expansion into new foreign markets. The
effective tax rate for the first quarter of 2007 differs from the U.S. federal statutory rate of 35% primarily due to the fact that we had no regular tax expense for Federal and California provision due to utilization of net operating losses.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, or FIN 48. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a companys income tax return, and also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of FIN 48, we recognized no change in the liability for unrecognized tax benefits related to tax positions taken in prior periods, and no
corresponding change in retained earnings. Additionally, FIN 48 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term liabilities. We made no reclassifications between current
taxes payable and long term taxes payable upon adoption of FIN 48. There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2007. We do not anticipate any material changes to the unrecognized tax
benefits over the next twelve months.

Upon adoption of FIN 48, our policy to include interest and penalties related to unrecognized tax
benefits within our provision for income taxes did not change. The tax years 2002 through 2007 remain open to examination by the major domestic taxing jurisdictions to which we are subject, and for the international jurisdictions the tax years open
to examination vary depending on the local tax laws.

We file federal, state, and foreign income tax returns in many jurisdictions in the
United States and abroad. For U.S. federal and California income tax purposes, the statute of limitations currently remains open for all years since our inception due to utilization of net operating losses and research and development credit
generated in prior years.

7. SEGMENT INFORMATION

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of
an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief
operating decision maker is our Chief Executive Officer. Our Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources
and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we
consider ourselves to be in a single reporting segment and operating unit structure.

Revenue by geography is based on the billing address
of the end-user customer. The following table sets forth revenue and long-lived assets by geographic area:

Revenue



|                               |  |                             |        |                  |   |       
|------------------------------ |  | --------------------------- | ------ | ---------------- | - | ------
|                               |  | Three Months EndedMarch 31,
|(in thousands)                 |  | 2008                        |        | 2007            
|North America                  |  | $                           | 38,646 |                  | $ | 14,645
|Europe, Africa and Middle East |  |                             | 10,417 |                  |   | 3,156 
|Japan and Asia                 |  |                             | 3,552  |                  |   | 2,408 
|                               |  |                             |        |                  |   |       
|Total                          |  | $                           | 52,615 |                  | $ | 20,209
|                               |  |                             |        |                  |   |       
|                               |  |                            
|Long-lived assets              |  |                             |        |                  |   |       
|                               |  |                            
|(in thousands)                 |  | March 31,2008               |        | December, 312007
|North America                  |  | $                           | 21,612 |                  | $ | 14,456
|International                  |  |                             | 159    |                  |   | 133   
|                               |  |                             |        |                  |   |       
|Total                          |  | $                           | 21,771 |                  | $ | 14,589
|                               |  |                             |        |                  |   |       

8. LEGAL MATTERS

From time to time, we may be involved in various legal proceedings arising in the ordinary course of business. There are no matters at March 31, 2008 that, in the opinion of management, might have a material
adverse effect on our financial position, results of operations or cash flows.



12



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##### Table of Contents

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words
such as may, will, should, estimates, predicts, potential, continue, strategy, believes, anticipates, plans,
expects, intends and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this Form 10-Q in the section titled Risk Factors. Except as required by law, we undertake no
obligation to publicly release any revisions to the forward-looking statements after the date of this Form 10-Q.

Overview

We were founded in October 2001 with a mission to develop breakthrough compression technology for disk-based deduplication storage. We began shipping our
appliances in February 2004 to address the backup and network-based disaster recovery needs of enterprises. We sell our appliances to enterprises worldwide in a variety of industries, including defense, education, entertainment, finance, government,
healthcare, technology, legal, media and retail. As of March 31, 2008, our appliances had been purchased by approximately 1,800 customers worldwide.

We are headquartered in Santa Clara, California. Our personnel are located throughout the United States and in numerous countries worldwide. We expect to continue to add personnel in the United States and
internationally to provide additional geographic sales and technical support coverage.

Our single product line of storage appliances is
sold in different configurations depending on a customers requirements for storage capacity and performance. Variations in storage capacity and performance are delivered through the use of a variety of interchangeable component parts such as
internal disk drives and central processing units. All of our appliances use our Global Compression technology to deduplicate data and, therefore, reduce the storage capacity required for backup and disaster recovery. When purchasing our appliances,
customers may license one or more of our software technologies embedded in our appliances, including software that enables customers to utilize wide area network, or WAN vaulting to replicate backup data offsite.

Substantially all of our appliances have been sold in combination with support and services contracts. Our support and services contracts are typically
offered for periods of one to three years.

We sell our appliances through a network of channel partners and through our direct sales
force. In the three months ended March 31, 2008 and the year ended December 31, 2007, approximately 83% and 86%, respectively, of our revenue was generated by sales through indirect channels. As of March 31, 2008, we had over 350
channel partners, and we expect that we will continue to sell a substantial majority of our appliances through our channel partners. We consider the development of indirect sales channels in domestic and international markets to be important to
future revenue growth and widespread acceptance of our products.

Growth of our product revenue will depend on our ability to attract new
customers and on additional sales to existing customers. Our growth will also depend on our ability to introduce, and the market acceptance of, new products with higher capacity and performance and new products designed to serve other sectors of the
storage market beyond protection storage that we believe will benefit from deduplication storage systems. We expect growth in international markets to be a significant factor contributing to our revenue growth in future periods. International
revenue accounted for approximately 27% and 28% of our total revenue in the three months ended March 31, 2008 and 2007, respectively. However, over time, we expect international revenue to increase in absolute dollars and as a percentage of our
total revenue. Our growth in support and services revenue will depend upon increasing the number of systems under support and services contracts. Any such increases will depend on a growing customer base and renewal of existing support and services
contracts. To date, no individual customer has accounted for greater than 10% of our total revenue in any quarter or year.

Our ability to
achieve and sustain profitability will also be affected by the extent to which we incur additional expenses to expand our sales, marketing, product development and general and administrative capabilities. Personnel costs constitute the largest
component of our operating expenses. Personnel costs consist of salaries, benefits, incentive compensation, including commissions for sales personnel, and stock-based compensation expense. As we expand internationally, we may incur additional costs
to conform our products to comply with local laws or local product specifications and to ship our products to our international customers.

We believe our operations are more efficient and flexible because we outsource manufacturing of our products, and because we subcontract with third parties to provide onsite hardware repair and replacement services for our appliances,
except in those instances where channel partners provide these services directly to our customers.

As a consequence of the rapidly
evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and operating results, including gross margin and operating expenses as a percentage of total revenue, are not necessarily
meaningful and should not be relied upon as indications of future performance. Although we have experienced significant growth in our total revenue, you should not assume that our historical growth rates are indicative of future growth. Details of
the items which revenue, cost of revenue and operating expenses consist of can be found in our filing of our Annual Report on Form 10-K for the year ended December 31, 2007 with the SEC on February 29, 2008.

Critical Accounting Policies and Estimates

Our
condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts
of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates and judgments upon which we rely are
reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our condensed consolidated financial statements will
be affected. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition,
stock-based compensation, inventory valuation, warranty reserve, short-term and long-term investments and allowance for doubtful accounts. Other than the adoption of SFAS No. 157, Fair Value Measurements, as discussed in further detail
in Note 1 to the Notes to our Condensed Consolidated Financial Statements, there were no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007 with the
SEC on February 29, 2008.



13



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##### Table of Contents

Results of Operations

Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007:

Revenue

The following table sets forth each of our sources of revenue for the specified periods and as a percentage of our total revenue for those periods.



|                                                 |  |                             |        |   |      |   |        |  
|------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | Three Months EndedMarch 31, |       
|(dollars in thousands)                           |  | 2008                        |        |   | 2007 |  
|Total revenue                                    |  | $                           | 52,615 |   |      | $ | 20,209 |  
|Total revenue by type:                           |  |                             |        |   |      |   |        |  
|Product                                          |  | $                           | 45,220 |   |      | $ | 17,880 |  
|Support and services                             |  |                             | 7,368  |   |      |   | 2,137  |  
|Ratable product and related support and services |  |                             | 27     |   |      |   | 192    |  
|% of revenue by type:                            |  |                             |        |   |      |   |        |  
|Product                                          |  |                             | 86     | % |      |   | 88     | %
|Support and services                             |  |                             | 14     | % |      |   | 11     | %
|Ratable product and related support and services |  |                             |       | % |      |   | 1      | %
|Total revenue by geography:                      |  |                             |        |   |      |   |        |  
|North America                                    |  | $                           | 38,646 |   |      | $ | 14,645 |  
|Europe, Africa, Middle East                      |  |                             | 10,417 |   |      |   | 3,156  |  
|Japan and Asia                                   |  |                             | 3,552  |   |      |   | 2,408  |  
|% of revenue by geography:                       |  |                             |        |   |      |   |        |  
|North America                                    |  |                             | 73     | % |      |   | 72     | %
|Europe, Africa, Middle East                      |  |                             | 20     | % |      |   | 16     | %
|Japan and Asia                                   |  |                             | 7      | % |      |   | 12     | %

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, product revenue increased $27.3 million to $45.2 million from $17.9 million. This increase was due to an increase in the number of units sold to new and existing customers, facilitated by an increase in the number of sales
personnel, an increase in the number of our channel partners and the introduction of new products. These products, which have higher capacity and higher performance, were sold at higher average sales prices. We expect to continue to release new
products with higher capacity, higher performance and higher average selling prices.

For the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007, support and services revenue increased $5.3 million to $7.4 million from $2.1 million. This increase was the result of increased product sales and, to a lesser extent, the renewal of support
and services contracts by existing customers. Substantially all of our customers purchase support and services contracts when they purchase our appliances. As our customer base grows, we expect the proportion of revenue generated from support and
services to increase over time, from both new contracts and renewals of existing contracts.

International revenue was 27% and 28% of total
revenue for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, respectively. Although revenue outside North America increased in the three months ended March 31, 2008 in absolute amounts, the
percentage of total revenue it represented in such period declined compared with the same period in 2007 due to the higher growth rate of sales in North America as new sales personnel were added more rapidly and became productive more quickly in
North America than elsewhere, and due to seasonality in Europe. Revenue from Japan and Asia grew in total dollars, but declined as a percentage of total revenue due to the higher growth of sales in North America. As we continue to expand into
international locations and introduce our products in new markets, we expect international revenue to increase in absolute dollars and as a percentage of revenue.

Cost of Revenue, Gross Profit and Gross Margin

The following table sets forth each of our costs of revenue, gross
profit and gross margin for the specified periods.



|                                                         |  |                             |        |   |      |   |        |  
|-------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                         |  | Three Months EndedMarch 31, |       
|(dollars in thousands)                                   |  | 2008                        |        |   | 2007 |  
|Total revenue                                            |  | $                           | 52,615 |   |      | $ | 20,209 |  
|                                                         |  |                             |        |   |      |   |        |  
|Cost of product                                          |  |                             | 11,316 |   |      |   | 5,849  |  
|Cost of support and services                             |  |                             | 2,489  |   |      |   | 798    |  
|Cost of ratable product and related support and services |  |                             | 1      |   |      |   | 76     |  
|                                                         |  |                             |        |   |      |   |        |  
|Total cost of revenue                                    |  |                             | 13,806 |   |      |   | 6,723  |  
|                                                         |  |                             |        |   |      |   |        |  
|Gross profit                                             |  | $                           | 38,809 |   |      | $ | 13,486 |  
|                                                         |  |                             |        |   |      |   |        |  
|Gross margin                                             |  |                             | 74     | % |      |   | 67     | %

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, cost of product revenue increased $5.5 million to $11.3 million from $5.8 million. This increase was due to increased hardware costs associated with an increased number of shipments of appliances to our customers. Salaries and
employee related benefits accounted for $282,000 of the increase and stock-based compensation accounted for $118,000 of the increase. We expect the cost of product revenue to continue to increase for the remainder of 2008.

For the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, cost of support and services revenue increased
$1.7 million to $2.5 million from $798,000. This increase was due to increases in our support personnel headcount from 11 at March 31, 2007 to 30 at March 31, 2008, which increased our salary expense and employee-related benefits by
$531,000. Included in the overall increase is stock-based compensation which accounted for $33,000 of the increase and increased outside service costs of $554,000 related to support of our products from increased sales. We expect the cost of support
and services revenue to continue to increase for the remainder of 2008.



14



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##### Table of Contents

Sales and Marketing Expenses



|                             |  |                             |        |   |      |   |       |  
|---------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                             |  | Three Months EndedMarch 31, |       
|(dollars in thousands,)      |  | 2008                        |        |   | 2007 |  
|Sales and marketing expenses |  | $                           | 23,232 |   |      | $ | 8,683 |  
|Percent of total revenue     |  |                             | 44     | % |      |   | 43    | %
|Headcount at period end      |  |                             | 301    |   |      |   | 127   |  

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, sales and marketing expenses increased $14.5 million to $23.2 million from $8.7 million. This increase was due to the increase in the number of sales and marketing employees, including the addition of approximately 60 employees
associated with our international operations. The increase in employees resulted in higher salary expense, employee-related benefits and fees for recruitment of new employees. In addition, commission expenses increased due to the substantial
increase in our total revenue and the higher number of employees on commission plans. The total of the increase from the above factors was $8.4 million. Stock-based compensation accounted for $2.3 million of the increase and the remainder was the
result of increased costs from travel, tradeshow and promotional activities.

We anticipate that sales and marketing expenses will increase
in absolute dollars during the remainder of 2008, but be relatively stable as a percentage of our total revenue as we intend to continue to expand our sales force, both domestically and internationally.

Research and Development Expenses



|                                  |  |                             |       |   |      |   |       |  
|--------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                  |  | Three Months EndedMarch 31, |      
|(dollars in thousands,)           |  | 2008                        |       |   | 2007 |  
|Research and development expenses |  | $                           | 8,736 |   |      | $ | 4,503 |  
|Percent of total revenue          |  |                             | 17    | % |      |   | 22    | %
|Headcount at period end           |  |                             | 133   |   |      |   | 81    |  

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, research and development expenses increased $4.2 million to $8.7 million from $4.5 million. Salaries, employee-related benefits and fees for recruitments accounted for $2.3 million of the increase as the result of increased
headcount. Also contributing to the increase were increases in stock-based compensation of $1.0 million, and facility related costs for equipment and depreciation on capitalized equipment of $836,000. These increases were the direct result of hiring
additional personnel to drive new product introductions and broaden our product line.

We anticipate that research and development expenses
as a percentage of our total revenue will remain relatively stable for the remainder of 2008, but expect that the absolute dollar amount will increase as we continue to invest in research, new product development and enhancements to our existing
appliances.

General and Administrative Expenses



|                                    |  |                             |       |   |      |   |       |  
|----------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                    |  | Three Months EndedMarch 31, |      
|(dollars in thousands,)             |  | 2008                        |       |   | 2007 |  
|General and administrative expenses |  | $                           | 5,606 |   |      | $ | 1,778 |  
|Percent of total revenue            |  |                             | 11    | % |      |   | 9     | %
|Headcount at period end             |  |                             | 48    |   |      |   | 19    |  

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, general and administrative expenses increased $3.8 million to $5.6 million from $1.8 million. This increase was the result of increases in personnel costs, associated with increased headcount, which accounted for $1.0 million of
the increase. Professional service fees accounted for $1.2 million of the increase and stock-based compensation accounted for $792,000.

For both periods, the additional personnel and professional service fees were the result of our ongoing efforts to build our legal, finance, human resources, recruiting and information technology functions. We expect the absolute amount of
general and administrative expenses to increase in the future as we expand our finance function to manage our expected growth and as we incur additional costs associated with being a public company, but remain relatively stable as a percentage of
our total revenue.

Other Income (Expense), Net



|                                  |  |                             |       |      |   |     |  
|--------------------------------- |  | --------------------------- | ----- | ---- | - | --- | -
|                                  |  | Three Months EndedMarch 31, |      
|(in thousands)                    |  | 2008                        |       | 2007 |  
|Interest income                   |  | $                           | 2,163 |      | $ | 156 |  
|Other income (expense), net       |  |                             | 1,243 |      |   | (96 | )
|                                  |  |                             |       |      |   |     |  
|Total other income (expense), net |  | $                           | 3,406 |      | $ | 60  |  
|                                  |  |                             |       |      |   |     |  

For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, total other income (expense), net increased $3.3 million to $3.4 million, from $60,000. This increase was the result of income earned from the investment of our net initial public offering, or IPO, and secondary offering
proceeds and other funds as well as favorable increases in our revaluation of Euro denominated cash balances.

Foreign currency net gains
for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 increased $1.2 million due to increases in our favorable revaluation of Euro denominated cash balances. We are presently evaluating the
desirability of entering into foreign currency hedging contracts, primarily Euro-based revenue contracts, to reduce our exposure to fluctuations in currency exchange rates.



15



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##### Table of Contents

Provision for Income Taxes

Our provision for income taxes increased $1.8 million to $1.9 million from $55,000 for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. This increase was due to our
increased international activities resulting in increased foreign taxes, as well as state income taxes and our shift to profitability.

The
effective tax rate for the three months ended March 31, 2008 was 41 % compared with (4 %) for the comparable period ended March 31, 2007. This change in the effective rate was primarily due to our conversion from a pre-tax loss for
the quarter ended March 31, 2007 to a pre-tax income for the quarter ended March 31, 2008. The effective tax rate for the first quarter of 2008 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of
stock-based compensation and increases in foreign taxes based on our expansion into new foreign markets. The effective tax rate for the first quarter of 2007 differs from the U.S. federal statutory rate of 35% primarily due to the fact that we
had no regular tax expense for Federal and California provision due to Net Operating Loss utilization except for foreign taxes for our overseas taxable activities in various jurisdictions.

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2007. We do not anticipate any material
changes to the unrecognized tax benefits over the next twelve months.

Liquidity and Capital Resources



|                          |  |               |         |                  |   |        
|------------------------- |  | ------------- | ------- | ---------------- | - | -------
|(in thousands)            |  | March 31,2008 |         | December, 312007
|Working capital           |  | $             | 181,413 |                  | $ | 203,688
|Cash and cash equivalents |  | $             | 126,522 |                  | $ | 102,939
|Short-term investments    |  | $             | 65,775  |                  | $ | 104,197

Working capital consists principally of cash and cash equivalents, short-term investments,
accounts receivable, inventories, prepaid expenses and other current assets, net of accounts payable, accrued compensation and related benefits, other accrued liabilities, income taxes payable and current deferred revenue. Working capital at
March 31, 2008 decreased $22.3 million from December 31, 2007 due primarily to reclassifying $29.7 million of our investments in auction-rate securities as long-term investments. Other changes of note are:



| |  |  | The increase in cash was the result of improved collections from accounts receivable reflected in our decrease in days sales outstanding from an average of 71
days as of December 31, 2007 to an average of 52 days as of March 31, 2008, computed based on the respective revenue from the immediately preceding quarter. We anticipate that accounts receivable will comprise a significant portion of
working capital as we continue to grow revenue because a substantial portion of our sales, and therefore our shipping and billing, occurs near the end of each quarter.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-term investments decreased due to the reclassification of investments in auction-rate securities to a long-term investment due to the overall failure rate of
these auctions, the frequency of the failures, and the underlying maturities of the securities, a portion of which are up to 40 years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventory increased due to a net increase in the number of units held in the evaluation inventory pool.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Prepaid expenses and other current assets increased for prepaid maintenance contracts, insurance, rent and other deposits.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounts payable and other accrued liabilities increased from increased purchases of inventory and property, plant and equipment to support increased headcount and
research and development spending, and accrued consulting costs from increased projects.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Current deferred revenue increased from higher product revenue and the related support that is recognized over the maintenance and support life.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accrued compensation decreased due to the purchase of shares from our 2007 Employee Stock Purchase Plan and due to a reduction in accrued commissions from net
bookings offset by increasing accrued vacation from the increase in employees and accrued payroll.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We commenced our IPO
of common stock on June 27, 2007, and the offering was completed on July 2, 2007. We sold and issued 8,108,500 shares of our common stock in our IPO, including 1,108,500 shares sold by us pursuant to the underwriters full exercise of
their option to purchase additional shares, at an issue price of $15.00 per share. We raised approximately $109.2 million in net proceeds after deducting underwriting discounts and commissions of $8.5 million and other offering costs of $3.9
million, which were received on July 2, 2007. Upon the closing of the IPO, all shares of our mandatorily redeemable convertible preferred stock outstanding automatically converted into 34,780,625 shares of common stock.

We completed a follow-on offering of common stock on December 3, 2007. We sold and issued 3,051,114 shares of our common stock, including 251,114
shares sold by us pursuant to the underwriters partial exercise of their option to purchase additional shares, at an issue price of $27.00 per share. We raised approximately $77.8 million in net proceeds after deducting underwriting discounts
and commissions of $3.4 million and other offering costs of $1.2 million, which were received on November 21, 2007 and December 3, 2007.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments in time deposits held at
major banks, commercial paper, United States government agency discount notes, money market mutual funds and other money market securities with original maturities of 90 days or less.

Since 2005, we have expanded our operations internationally. Our sales contracts are mainly denominated in United States dollars for Asia and Japan, and
denominated in Euros and British pounds in Europe and Canadian dollars for Canada on certain transactions. We are presently evaluating the desirability of entering into foreign currency hedging contracts, primarily Euro-based revenue contracts, to
reduce our exposure to fluctuations in currency exchange rates. We currently do not hedge the operating expenses that are primarily denominated in foreign currency in countries where we have sales or operating personnel because we believe those
situations create natural hedges. We may begin to sell our products in local currency in other locations. As we fund our international operations, our cash and cash equivalents are affected by changes in exchange rates for those expenses we will not
hedge. To date, the foreign currency effect on our cash and cash equivalents and working capital was a gain of $1.2 million and a loss of $96,000 for the three months ended March 31, 2008 and 2007, respectively.



16



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##### Table of Contents

Short-term and Long-term Investments

Short-term investments consist of commercial paper, corporate bonds, and investments in U.S. government agencies with original maturities of 90 to 365
days.

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, or SFAS 157, with respect to our
financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined
under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



| |  |  | Level 1 - Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Level 3 assets consist of municipal bonds with an auction reset feature (auction-rate securities) whose
underlying assets are generally student loans which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed. An auction failure means that the parties
wishing to sell securities could not. As a result, our ability to liquidate these investments and fully recover the carrying value of our investment in the near term may be limited or not exist. All of our auction-rate securities, including those
subject to the failure, are currently AAA-rated taxable municipal debt obligations, the highest rating by a rating agency. Based on the overall failure rate of these auctions, the frequency of the failures, and the underlying maturities of the
securities, a portion of which are up to 40 years, we have classified auction-rate securities as long-term assets on our balance sheet. At March 31, 2008, we had $29.7 million classified as a long-term asset on the balance sheet. At
December 31, 2007, our investment in auction-rate securities was $29.6 million and was classified as short-term investments because there existed an active market for auction-rate securities at that time.

Cash Flows



|                                          |  |                             |        |   |      |   |        |  
|----------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months EndedMarch 31, |       
|(in thousands)                            |  | 2008                        |        |   | 2007 |  
|Net cash provided by operating activities |  | $                           | 20,025 |   |      | $ | 3,495  |  
|Net cash used in investing activities     |  | $                           | (953   | ) |      | $ | (1,511 | )
|Net cash provided by financing activities |  | $                           | 4,501  |   |      | $ | 526    |  

Cash Flows from Operating Activities

Our cash flows from operating activities will continue to be affected principally by the extent to which we spend on increasing personnel, primarily in
sales and marketing and research and development, in order to grow our business. The timing of hiring sales personnel in particular affects cash flows as there is a lag between the hiring of sales personnel and the generation of revenue and cash
flows from such recently hired sales personnel. Our largest source of cash flows from operating activities is cash collections from our customers. Our primary uses of cash from operating activities are for personnel-related expenditures, rent
payments, inventory purchases to support our revenue growth and research and development costs.

Cash provided by operating activities
increased in the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 due to increased sales activity, improved collections from accounts receivable as a result of an increased effort in our collection
process, and an increase in deferred revenue resulting from payments on support and services contracts. We believe we will be able to continue to generate positive cash flows from operating activities in the near term even as we continue to add
personnel, increase inventory purchases and invest in functions associated with being a public company.

Cash Flows from Investing Activities

Cash flows from investing activities primarily relate to capital expenditures to support employee headcount growth, and net
proceeds from the purchase and sale of investment securities. Cash used in investing activities was $953,000 in the three months ended March 31, 2008 as compared to cash used of $1.5 million for the three months ended March 31, 2007. Cash
used in investing activities in the three months ended March 31, 2008 included the maturities net of purchases from investments of some of our IPO and secondary offering net proceeds in short-term investments of $7.4 million, offset by $8.3
million for purchases of property, plant and equipment, reflecting our increase in headcount of 92 in the period, and investments in computer equipment, lab equipment for research and development and new system infrastructure. Cash used in investing
activities of $1.5 million for the three months ended March 31, 2007 related to capital purchases primarily relating to research and development, including lab equipment, and increased computer equipment for new employees and office space.

Cash Flows from Financing Activities

Cash flow provided by financing activities in the three months ended March 31, 2008 of $4.5 million resulted from the proceeds of the cash exercise of stock options to purchase 964,000 shares of our common stock by our employees as
well as the purchase of 285,000 shares of our common stock by our employees through our employee stock purchase plan. Cash provided by financing activities in the three months ended March 31, 2007 of $526,000 resulted from the proceeds of the
cash exercise of stock options to purchase 304,000 shares, offset by 88,000 shares repurchased by us, of our common stock.

Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2008:



|                              |  |       |        |                   |   |          |  |          |       |                  |   |       |  |   |       
|----------------------------- |  | ----- | ------ | ----------------- | - | -------- |  | -------- | ----- | ---------------- | - | ----- |  | - | ------
|(in thousands)                |  | Total |        | Less ThanOne Year |   | 1-3Years |  | 3-5Years |       | More Than5 Years
|Operating leases(1)           |  | $     | 48,555 |                   | $ | 4,266    |  | $        | 8,955 |                  | $ | 9,500 |  | $ | 25,834
|Purchase obligations(2)       |  |       | 12,036 |                   |   | 12,036   |  |          |      |                  |   |      |  |   |      
|                              |  |       |        |                   |   |          |  |          |       |                  |   |       |  |   |       
|Total contractual obligations |  | $     | 60,591 |                   | $ | 16,302   |  | $        | 8,955 |                  | $ | 9,500 |  | $ | 25,834
|                              |  |       |        |                   |   |          |  |          |       |                  |   |       |  |   |       



|(1) | In July 2007, we entered into a new operating lease for our corporate headquarters. In January 2008, we entered in to an agreement to lease office space adjacent to our existing
corporate facility.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of payment. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We purchase all of our appliances from our contract manufacturer, Solectron, which was acquired by Flextronics. We provide Solectron with a rolling
six-month forecast for planning purposes and place firm purchase orders for 30 days of expected purchases which we are contractually committed to purchase. As of March 31, 2008, we had $6.5 million in aggregate, non-cancellable purchase
commitments placed with Solectron which are included in the table above. In addition, as of March 31, 2008, we had an additional $5.5 million of other non-cancellable purchase commitments with other third-party vendors which are included in the
table above.

Under the terms of the lease for our former corporate headquarters, we are obligated to provide a letter of credit for
$136,000. To date, this letter of credit is not in place and has not been required by our sub-lessor.

On July 10, 2007, we entered
into a lease for office space for our corporate headquarters. The term of the lease runs from November 1, 2007 to October 31, 2017 and the approximate aggregate rent due over the term of the lease is $23.0 million. Under the terms of the
lease, we are obligated to provide a letter of credit for $209,000, which we have funded. We have spent up approximately $13.1 million in leasehold improvements, equipment and furniture for the building through March 31, 2008. All of our
Santa Clara based employees have relocated to the new facility.

In January 2008, we signed an agreement to lease approximately 100,000
square feet of office space adjacent to our existing corporate facility. The new lease takes effect on January 1, 2009. Future minimum lease payments will be $24.3 million, commencing in January 2009 and continuing through June 2018. As part of
signing the lease, we were required to provide a letter of credit, which has not been funded.

The lease for our former corporate
headquarters in Santa Clara expires in February 2009. We have entered in to an agreement to sub-lease this space through November 30, 2008 with an option to extend the sub-lease to the end of the lease term.

Our agreements with our channel partners and, less frequently, our customers, generally include certain provisions for indemnifying the channel partners
and customers against liabilities if our products infringe a third partys intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and have not accrued any liabilities
related to such obligations in our consolidated financial statements.

Also, as discussed in Note 6 of the Notes to our Condensed
Consolidated Financial Statements, effective January 1, 2007, we adopted the provisions of SFAS Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of SFAS Statement No. 109. At
March 31, 2008, we had a liability for unrecognized tax benefits on an accrual for the payment of related interest totaling $1.8 million, of which none is expected to be paid within one year. Due to uncertainties related to these tax matters,
we are unable to make a reasonably reliable estimate when cash settlements with the taxing authority will occur.

Off-Balance Sheet Arrangements

At March 31, 2008 and December 31, 2007, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

See
Note 1 of the Notes to our Condensed Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.



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

Foreign Currency Risk

Our European revenue is denominated in Euros and British sterling. As a result, our European
revenue is subject to foreign currency risk due to fluctuations in the value of the Euro and British sterling compared to the U.S. dollar. We had Euro-denominated revenue of approximately $9.4 million and $3.1 million for the three months ended
March 31, 2008 and 2007, respectively. We had British sterling denominated revenue of $1.0 million and zero dollars for the three months ended March 31, 2008 and 2007, respectively.

We also have revenue dominated in the Canadian dollar, which subjects us to foreign currency risk due to fluctuations in the value of the Canadaian
dollar compared to the U.S. dollar. We had $379,000 and zero dollars in Canadian dollar denominated revenue for the three months ended March 31, 2008 and 2007, respectively.

Our international sales and marketing operations incur expenses that are denominated in foreign currencies. As a result, our operating expenses and cash
flows are subject to fluctuations in the value of the U.S. dollar compared to the British sterling, Euro, Canadian dollar and, to a lesser extent, the Australian and Singapore dollar, and Danish, Chinese, Korea and Swedish currencies. We had foreign
currency denominated expenses of approximately $6.8 million and $2.1 million for the three months ended March 31, 2008 and 2007, respectively.

As of March 31, 2008, we had approximately $7.1 million and $1.2 million in accounts receivable denominated in Euros and British pounds, respectively. As of March 31, 2008, we had approximately $14.5 million in cash denominated in
foreign currencies, primarily in Euros. Changes in currency exchange rates could adversely affect our revenue and profitability, and require us to reduce our prices to remain competitive in foreign markets, which could also have a material adverse
effect on our results of operations. We are presently evaluating the desirability of entering into foreign currency hedging contracts, primarily Euro-based revenue contracts, to reduce our exposure to fluctuations in currency exchange rates. Other
income (expense), net for the three months ended March 31, 2008 included $1.2 million of net gain resulting from the revaluation of cash held in Euros of $881,000 and the remaining $365,000 net gain was a result of the revaluation of
Euro-denominated accounts receivable and other accounts. We have transferred some Euro-denominated cash to U.S. dollars to address the risk of foreign currency fluctuation.

Interest Rate Sensitivity

We had cash and cash equivalents totaling $126.5 million and $14.4
million as of March 31, 2008 and 2007, respectively. These amounts were invested primarily in money market funds, and at March 31, 2008 were also invested in commercial paper. We have invested the funds from our IPO and follow-on offering



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according to our investment policy. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for
trading or speculative purposes. We believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest
rates fell by 10% in the three months ended March 31, 2008 and 2007, our interest income would have declined approximately $216,000 and $16,000, respectively, assuming consistent investment levels.

We had short-term investments of $65.8 million as of March 31, 2008. The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, these amounts were invested primarily in auction-rate securities, corporate bonds, government agency
securities and commercial paper. These investments are classified as available for sale and held for working capital purposes. On March 31, 2008, we had $29.7 million of auction-rate securities. On February 14, 2008, the majority of these
auction-rate securities failed to auction, causing access to these funds to be restricted, and each auction since then has failed. An auction failure means that the parties wishing to sell securities could not. As a result, our ability to liquidate
these investments and fully recover the carrying value of our investment in the near term may be limited or not exist. All of our auction-rate securities, including those subject to the failure, are currently AAA-rated taxable municipal debt
obligations, the highest rating by a rating agency. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. It could
take until the final maturity of the underlying notes (up to 40 years) to realize our investments recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity
on these investments will affect our ability to execute our current business plan.



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

Evaluation of Disclosure Controls and
Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that those disclosure controls and procedures were effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms and (ii) accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control
over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION



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

We are subject to various
claims, complaints and legal actions in the normal course of business from time to time. We do not believe we are party to any currently pending legal proceedings the outcome of which will have a material adverse effect on our operations or
financial position. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of
operations or cash flow.



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

Set forth below and elsewhere in
this quarterly report on Form 10-Q, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this
quarterly report on Form 10-Q. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should
not use historical trends to anticipate results or trends in future periods.

Risks Related to Our Business and Industry

We derive all of our revenue from sales of a single line of systems and related customer support and services, and if demand for these systems does not continue to
grow, our business, results of operations and financial condition would be harmed.

We derive all of our revenue from sales of a
single line of deduplication storage systems and associated customer support and services. As a result, we are vulnerable to fluctuations in demand for these systems, whether as a result of competing technologies and products, weakening economic
conditions, decreases or delays in corporate spending for information technologies, product obsolescence, lack of customer acceptance, technological change, customer budgetary constraints or other factors. If demand for our systems does not continue
to grow, our business, results of operations and financial condition would be harmed.

Our business could be harmed as a result of deteriorating
general economic and market conditions that lead to reduced spending on information technology products.

Our business depends on
the overall demand for information technology, in particular for deduplication storage appliances for backup storage and network-based disaster recovery. Information technology spending has historically declined as general economic and market
conditions have worsened, and if the domestic or global economy undergoes a downturn, or if our customers believe such a downturn is imminent, our customers would likely reduce their information technology budgets. We may be particularly susceptible
to reductions in information technology spending because the purchase of our appliances is often discretionary and may involve a significant commitment of capital and other resources. Many of our target customers have not purchased products similar
to ours and might not have a specific budget for the purchase of our appliances. Delays in or a reduction in information technology spending, domestically or internationally, would harm our business, results of operations and financial condition in
a number of ways, including by leading to longer sales cycles, lower prices for our appliances and reduced unit sales.

With the recent volatility in
the capital markets, there is a risk that we could suffer a loss of principal in our cash and cash equivalents and short-term investments and suffer a reduction in our interest or return on investments.

We invest our cash and cash equivalents and short-term investments pursuant to our investment policy in cash, auction-rate securities, money market funds,
commercial paper, corporate bonds and government agency certificates, and we actively manage our portfolio with an objective of capital preservation. Certain of these investments are subject to general credit, liquidity, market and interest rate
risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. To date, we have determined that any declines in the market value of our
investments have been temporary. There could be future declines in the value of these investments, which we may determine to be other-than-temporary. These market risks associated with our investment portfolio may have a negative adverse effect on
our results of operations, liquidity and financial condition.

At December 31, 2007 and March 31, 2008, we had $29.6 million and
$31.0 million of principal in auction-rate securities, respectively. In January 2008, these securities, which consist of AAA-rated, taxable municipal debt obligations, had auctioned successfully. On February 14, 2008, the majority of these
auction-rate securities failed to auction, causing access to these funds to be restricted, and each auction since then has failed. An auction failure means that the parties wishing to sell securities could not. If the issuers are unable to
successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. Determining whether there has been an other-than-temporary impairment of our short-term
investments requires significant judgment. At this time, we believe the interest is collectable, and we do not believe that there has been an otherthan-temporary impairment of these investments. With the recent volatility in the capital
markets, there is a risk that we could suffer a loss of principal and suffer a reduction in our interest or return on these and other investments, which could harm our operating results and financial condition. In addition, we may suffer a potential
lack of liquidity of these investments and it could take until the final maturity of the underlying notes (up to 40 years) to realize our investments recorded value.

We experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or
our guidance.

Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control.
As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of
investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock could decline substantially.

In addition to other risk factors listed in this Risk Factors section, factors that may affect our quarterly operating results include:



| |  |  | fluctuations in demand for our appliances;
| | - |  | ------------------------------------------



| |  |  | fluctuations in sales cycles and prices for our appliances;
| | - |  | -----------------------------------------------------------



| |  |  | reductions in customers budgets for information technology purchases and delays in their purchasing cycles;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the timing of recognizing revenue in any given quarter as a result of revenue recognition rules;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of product releases or upgrades by us or by our competitors;
| | - |  | -----------------------------------------------------------------------



| |  |  | our ability to hire additional sales personnel and the length of time required for any such additional personnel to generate significant revenue;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any lack of availability of, delay in the availability of, or quality problems with, any components we acquire from third-party suppliers, particularly any
components we acquire from a third-party that is our sole source of supply for the components;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any significant changes in the competitive dynamics of our market, including new entrants or substantial discounting of products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to control costs, including our operating expenses and the costs of the components we purchase;
| | - |  | -----------------------------------------------------------------------------------------------------------



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| |  |  | our experience with warranty claims; and
| | - |  | ----------------------------------------



| |  |  | general economic conditions in our domestic and international markets.
| | - |  | ----------------------------------------------------------------------

In addition, we may experience seasonality in the sales of our appliances. We believe our rapid growth and limited operating history may have masked the
nature or magnitude of seasonal or cyclical factors that might have influenced our business to date. Seasonal variations in our sales may lead to significant fluctuations in our quarterly operating results.

We face significant competition and expect this competition to intensify, which could prevent us from increasing our revenue, reduce our gross margins and result
in the loss of market share.

The market for our products is highly competitive and we expect competition to intensify in the
future. Other companies have introduced and may in the future introduce new products in the same markets we serve or intend to enter, and we anticipate new competitive offerings to be introduced in our marketplace in 2008 by our competitors EMC
Corporation, IBM Corporation and Network Appliance, Inc. among others. Competition in the past has resulted in pricing pressure on our products and services, and we anticipate that pricing pressure will increase in the future. Competition has in
some instances resulted in a negative impact on the length of our sales cycle, and we may experience longer sales cycles in future periods due to increased competition. In particular, if a large number of orders, or a large dollar value order, is
delayed or cancelled, our financial results may be harmed. Competition may result in reduced gross margins for our appliances, increased sales and marketing expenses and a failure to increase, or the loss of, market share.

Competitive products may have better performance, lower prices and broader acceptance than our appliances. Many of our current or potential competitors
have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing
vendors rather than a new vendor regardless of product performance or features. In addition, our competitors may be able to bundle products and services that we do not offer together with products that compete with ours at a combined price that is
more attractive than the price we charge for our appliances. Currently, we face competition from traditional providers of tape-based storage systems such as Sun Microsystems, Inc. and Quantum Corporation as well as a number of established storage
companies that offer a variety of different disk-based storage products, including EMC Corporation and Network Appliance, Inc. and, to a lesser extent, Hitachi Data Systems Corporation, Hewlett-Packard Company and International Business Machines
Corporation. Some of our competitors sell, or have announced plans to sell, deduplication storage products that compete directly with our appliances, and additional competitors may introduce deduplication storage products in the future. Pursuant to
a cross-license agreement with Quantum, we have licensed our current, and certain future, patents relating to data storage or data transmission, which could assist Quantum in competing with us. We also compete with a number of emerging hardware and
software companies that may become more significant competitors in the future. In addition, at the low-end of our product line, we may compete with WAN acceleration and backup software providers that incorporate deduplication capabilities in their
products.

We expect increased competition from other established and emerging companies if our market continues to develop and expand.
Some of our channel partners currently market products and services that compete with our appliances. If these channel partners cease to distribute our appliances for competitive reasons, our sales may decrease or not grow as quickly. In addition,
some of our competitors have made acquisitions or entered into partnerships or other strategic relationships with one another to offer a more comprehensive solution than they individually are able to offer. We believe additional consolidation or
partnerships are likely to occur in the future as companies attempt to strengthen or maintain their market positions in an evolving industry. The companies resulting from these consolidations or partnerships could significantly change the
competitive landscape and adversely affect our ability to compete effectively. Some of our competitors have also entered into relationships with original equipment manufacturers, or OEMs, that could provide those competitors with sales, marketing,
distribution and other advantages.

Our international sales and operations subject us to additional risks that may harm our operating results.

In the year ended December 31, 2007, we derived approximately 28% of our revenue from international customers. In the quarter
ended March 31, 2008, we derived approximately 27% of our revenue from international customers. We have sales personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries. Our international
operations subject us to a variety of risks, including:



| |  |  | the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple
international locations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the management of our relationships with channel partners outside the United States, whose sales and lead generation activities are very important to our
international operations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | tariffs and trade barriers and other regulatory limitations on our ability to sell our appliances in certain foreign markets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | increased exposure to foreign currency exchange rate risk;
| | - |  | ----------------------------------------------------------



| |  |  | increased exposure to possible violations of, or non-compliance with, the Foreign Corrupt Practices Act;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | increased exposure to possible violations of U.S. laws regulating the export of our products, and to other U.S. and foreign laws affecting the conduct of business
globally such as product certification, environmental and waste management and data privacy laws;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries; and
| | - |  | --------------------------------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------

Sales to international customers may also result in greater shipping costs and additional expenses to conform our appliances to the requirements of local laws or local product specifications. As we continue to expand our business
internationally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our
international operations , reduce or delay our international sales, and result in fines and penalties.

We have a history of losses and we may not be
able to sustain profitability in the future.

Although we achieved a net profit of approximately $2.7 million for the three months
ended March 31, 2008, we have not yet achieved profitability for any fiscal year. As of March 31, 2008, our accumulated deficit was approximately $37.5 million and we may incur additional losses in the future. We expect to make significant
expenditures related to the development of our business, including expenditures to hire additional personnel relating to sales and marketing and product development. In addition, we will continue to incur significant legal, accounting and other
expenses that we did not incur as a private company. Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses are, and will continue to be, fixed in the short term. As a result, a delay in



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generating or recognizing revenue could cause significant variations in our operating results from quarter to quarter and annually and could result in
substantial operating losses. Our revenue growth trends in prior periods are not likely to be sustainable, and we may not generate sufficient revenue to maintain profitability. We may incur significant losses in the future for a number of reasons,
including those discussed in other risk factors and factors that we cannot foresee.

Our sales are difficult to predict, even in the near term, and a
substantial portion of our quarterly sales typically occurs during the last several weeks of the quarter.

A substantial portion of
our quarterly sales typically occurs during the last several weeks of the quarter, which we believe largely reflects customer buying patterns of products similar to ours and other products in the technology industry generally. In addition, a
significant portion of our sales in any quarter is not forecast at the start of the quarter and is generated by sales activity initiated within the quarter. Similarly, we have little visibility at the start of any quarter as to which existing
customers, if any, will make additional purchases and when any additional purchases may occur, if at all. As a result, our quarterly operating results are difficult to predict even in the near-term.

The market we serve is emerging and the purchase of our appliances by new customers may involve material changes to established purchasing patterns and
policies. Our sales efforts involve educating potential customers about the uses and benefits of our appliances, including their technical capabilities and potential cost savings. Potential customers may undertake a significant evaluation process
that has in the past resulted in a longer sales cycle. In addition, our sales cycle may be extended if potential customers decide to re-evaluate other aspects of their backup storage infrastructure at the same time they are considering a purchase of
our appliances. We spend substantial time, money and other resources in our sales process without any assurance that our efforts will produce any sales. In addition, customer purchases are frequently subject to budget constraints, multiple approvals
and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter, or at all, our business may suffer.

We have a limited operating history and compete in a new and rapidly evolving market, which makes our future operating results difficult to predict.

We were incorporated in October 2001 and first shipped our appliances in February 2004. We have a limited operating history in an
industry characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. As we encounter rapidly changing customer requirements and increasing competitive
pressures, we likely will be required to reposition our product and service offerings and introduce new products and services. We may not be successful in doing so in a timely and appropriately responsive manner, or at all. Furthermore, because we
compete in an early stage market, many of our target customers have not purchased products similar to ours and might not have a specific budget for the purchase of our appliances. Historically, enterprises have relied on non-deduplication,
tape-based technologies for backup and recovery, and we might not succeed in generating increased demand for our products. All of these factors make it difficult to predict our future operating results, which may impair our ability to manage our
business and investors ability to assess our prospects.

If we lose key personnel or are unable to attract and retain qualified personnel on a
cost-effective basis, our business would be harmed.

Our success is substantially dependent upon the performance of our senior
management and key technical and sales personnel. Our management and employees can terminate their employment at any time, and the loss of the services of one or more of our executive officers or other key employees could harm our business. Our
success also is substantially dependent upon our ability to attract additional personnel for all areas of our organization, particularly in our sales and research and development departments. Our dependence on attracting and retaining qualified
personnel is particularly significant as we attempt to grow our organization. Competition for qualified personnel in our industry is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive
terms, or at all. If we are unable to attract and retain the necessary technical, sales and other personnel on a cost-effective basis, our business would be harmed.

If we fail to manage future growth effectively, our business would be harmed.

We have
expanded our operations significantly since inception and anticipate that further significant expansion of our operations and headcount will be required. For example, our headcount increased from 246 employees as of March 31, 2007 to 527
employees as of March 31, 2008, and we have announced our intent to establish a new operations center in North Carolinas Research Triangle Park. The new facility is expected to house additional engineering, customer support and sales
personnel. Our growth has placed, and is expected to continue to place, significant demands on our management, infrastructure and other resources. To manage our expected growth, we will need to hire, train, integrate and retain a large number of
highly skilled and motivated employees. We will also need to continue to improve our financial and management controls and reporting systems and procedures. We implemented new enterprise resource planning software for our finance and inventory
management processes in October 2007, and we may in the future upgrade other finance, sales and inventory management systems. We could encounter delays or difficulties in implementing any of these systems. If we do not effectively hire, train,
integrate and retain sufficient highly qualified personnel to support and continue our growth, and if we do not effectively manage our expected growth and the associated increase in expenses, our business, results of operations and financial
condition would be harmed.

Our financial results would suffer if demand for deduplication storage appliances does not continue to grow.

Our products are disk-based deduplication storage appliances for backup and network-based disaster recovery. Deduplication is a new and
emerging technology. Historically, enterprises have relied on non-deduplication tape-based technologies for backup and recovery. A reduction in demand for deduplication storage appliances for backup storage or network-based disaster recovery could
be caused by, among other things, lack of customer acceptance, weakening economic conditions, competing technologies and products, or decreases in corporate spending. Our future financial results would suffer if the demand for deduplication storage
appliances does not continue to grow.

If we fail to predict accurately our manufacturing and component requirements, we could incur additional costs
or experience manufacturing delays which would harm our business.

Our agreement with our contract manufacturer, Solectron, which
has been acquired by Flextronics, does not provide for specific quantities or inventory levels for our appliances or the components used in our appliances. Instead, we provide purchase orders to Solectron on a monthly basis. If we overestimate our
manufacturing needs, Solectron may assess charges or we may have liabilities for excess or obsolete inventory. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific
supplier, contract terms and demand for the particular component at any given time, if we underestimate our requirements, Solectron may have inadequate materials and components required to produce our appliances. In that event, the manufacturing of
our appliances could be interrupted, shipments could be delayed and revenue could be deferred or lost. Solectron generally carries very little inventory of components for our appliances, and we rely on suppliers to deliver necessary components to
Solectron in a timely manner based on forecasts provided to the suppliers.

Any shortages in components used in our appliances could delay shipment
of our appliances or increase our product costs, which could harm our business.

We may experience shortages in components that we
use in our appliances, and we may not accurately predict the availability of and demand for such components. We rely on Solectron to procure a majority of the components used in our appliances. As a result, any disruption in Solectrons ability
to procure necessary components in the quantities required or at reasonable prices could result in a delay in the shipment of our appliances. Due to technological, pricing or business reasons, some of the components used in our appliances are
available only from a single or limited source of supply. For example, our capacity expansion shelves are currently supplied exclusively by a single vendor, Xyratex Technology Limited, our appliances depend on NVRAM cards that currently are only
available from a single vendor,



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Micro Memory, LLC, which was acquired by VMETRO, and we acquire the chassis used in our appliances from a single vendor. Our agreement with Xyratex has a
three-year term ending in March 2010, subject to early termination by either party under certain circumstances. Either we or Solectron order NVRAM cards under a standard purchase order arrangement with Micro Memory or its distributor, and either we
or Solectron order chassis under a standard purchase order arrangement with our chassis supplier or its distributor. Significant time and effort would be required to locate new vendors for any of these components, if available at all, to qualify
replacement components or to develop our appliances using an alternative technology. The unavailability of any of these or other necessary components could delay or prevent us from shipping our appliances. Component suppliers may be vulnerable to
pressure from large purchasers of their products, who may be competitors of ours, to allocate available component supplies to them. In addition, increased demand generally by third parties for the components we use in our appliances may lead to
decreased availability and higher prices for those components.

We are dependent on a single contract manufacturer and changes to that relationship
may result in delays or disruptions that could harm our business.

We rely on a single independent contract manufacturer, Solectron,
to manufacture and assemble our appliances. We currently have an agreement in place with Solectron that is subject to automatic extensions in one-year increments absent notice of termination by us or Solectron. However, either party can terminate
the agreement for any reason at any time with at least 90 days advance written notice. We may not be able to effectively manage our relationship with Solectron, and Solectron may not meet our future requirements for timely delivery. Our orders
represent only a small percentage of the overall orders received by Solectron from its customers. As a result, fulfilling our orders may not be considered a priority by Solectron in the event it is constrained in its ability to fulfill all of its
customer obligations in a timely manner. Although the services required to manufacture and assemble our appliances may be readily available from a number of other established contract manufacturers, it would be time consuming and costly to qualify
and implement a new contract manufacturer relationship. Although we have a contingency plan in place with Solectron in the event that its capacity at the location used to manufacture and assemble our appliances is reduced or temporarily eliminated,
any event that disrupts the manufacturing and assembly process could harm our business. If Solectron suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its manufacturing operations, or if we
have to change or add additional contract manufacturers, our ability to manufacture and ship appliances to our customers would be delayed and our business would suffer.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, our business will suffer.

The market in which we currently operate is rapidly developing. We may not be able to anticipate future market needs or be able to
develop new products or product enhancements to meet such needs, either in a timely manner or at all. We also may not be able to develop our products in a manner that enables us to successfully address the needs of other parts of the enterprise
storage market. For example, we have recently introduced products for classes of applications other than backup and disaster recovery. These nearline classes of applications, such as archival storage and fixed-content data storage, manage largely
static files and benefit from the fast storage and retrieval of disk-based systems, but do not require the performance characteristics of primary storage. Our failure to extend our deduplication technology into these nearline applications,
particularly if our competitors are able to do so, could harm our business. In addition, any new products or product enhancements that we introduce may not achieve any significant degree of market acceptance or be accepted into our sales channel by
our channel partners, which would harm our business.

If we fail to offer high quality customer support and services, our business would suffer.

Once our appliances are deployed within our customers networks, our customers depend on our support organization to resolve
any issues relating to our appliances. A high level of customer support and services is important for the successful marketing and sale of our appliances. If we or our channel partners do not help our customers quickly resolve post-deployment issues
and provide effective ongoing support, our ability to sell our appliances to existing customers would suffer and our reputation with potential customers would be harmed. Some of our international channel partners offer primary support for the
appliances they sell to customers, and we rely on third parties to provide onsite hardware repair and replacement services for most of our customers. If the third parties fail to provide timely and effective services, our business could be harmed.
As we expand our sales, we will be required to hire and train additional support personnel. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering
support, training and documentation in languages other than English. If we fail to maintain high quality customer support or to grow our support organization to match any future sales growth, our business will suffer.

If we elect to discount our support and services pricing to attract or retain customers, we may be required to defer a portion of our revenue to future periods.

If we elect to discount our support and services pricing or otherwise introduce significant variability in our support and services
arrangements, this variability may require us to defer the recognition of revenue from sales of our appliances. We recognize revenue for our appliances using the residual method as allowed by the American Institute of Certified Public Accountants,
or AICPA, Statement of Position, or SOP, No. 98-9,Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions , or SOP 98-9. Under this method, in order to recognize product revenue upon
shipment, we must establish sufficient evidence, which is referred to as vendor specific objective evidence, or VSOE, of the fair value of our undelivered support and services. We have established VSOE of fair value of our support and services based
on the price charged when support and services are sold separately. If we are required to change the pricing of support and services through discounting, or otherwise introduce variability in the pricing of support and services on certain
transactions to attract or retain customers, we may be unable to maintain VSOE of the fair value of support and services for similar types of transactions. As a result, we could be required to defer all revenue for these transactions and recognize
revenue ratably over the term of the related support and services contracts, which is typically one to three years. If this were to occur, our revenue would decline and our operating results would be negatively impacted.

Our appliances handle mission-critical data for our customers and are highly technical in nature. If customer data is lost or corrupted, or our appliances contain
software errors or hardware defects, we could have product liability exposure and our reputation and business could be harmed.

Our
appliances are involved in storing and replicating mission-critical data for our customers. The process of storing and replicating that data is highly technical and complex. If any data is lost or corrupted in connection with the use of our
appliances, our reputation could be seriously harmed and market acceptance of our appliances could suffer. In addition, our appliances have contained and may in the future contain software errors, hardware defects or security vulnerabilities. We
rely on our suppliers to deliver high quality components for use in our products and we have limited or no control over our suppliers product development and production processes. Some software errors or defects in the hardware components of
our appliances may only be discovered after an appliance has been installed and used by customers. In April 2007, we initiated a field replacement program to replace a circuit board used in some of our appliances. To date, these circuit boards have
experienced failures in less than 1% of the appliances that we believe are potentially affected. All of the circuit boards that have failed were manufactured by fabricators that are no longer supplying parts for use in our appliances. Through the
replacement program, we are offering to replace the potentially affected circuit boards with circuit boards manufactured by a particular fabricator. We accrued estimated warranty costs of $1.2 million in the first quarter of 2007 for this
replacement program. We accrued an additional $450,000 in the third quarter 2007 to expand this program for additional circuit boards used in some of our appliances. These estimates were based on the number of circuit boards we expect to replace
under the program, the anticipated cost of replacement and refurbishment and other associated costs. As of March 31, 2008, we had incurred approximately $1.3 million of costs associated with these field replacement programs and $330,000
remained in accrued liabilities to cover future costs for the units potentially affected. Although we believe our estimates and judgments for the replacement program are reasonable, if the problem is more extensive than we currently believe or the
actual costs of the program otherwise exceed our estimate, our operating results will be negatively impacted. Any such errors, defects or security vulnerabilities discovered in our appliances after commercial release could result in loss of revenue,
loss of customers, increased service and warranty cost, harm to our reputation and diversion of attention of our management and technical personnel, any of which could significantly harm our business. In addition, we could face claims for product
liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert managements attention and adversely affect the markets perception of us and our appliances.



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Changes in existing technologies or the emergence of new products or technologies could reduce demand for our
appliances and significantly harm our business.

Changes in existing technologies could cause demand for our appliances to decline.
For example, if changes in technology result in a significant reduction in the price for hard disk drives, enterprises may not need to utilize deduplication storage in order to cost-effectively backup and protect their data. One or more new
technologies also could be introduced that compete favorably with our appliances or that cause our appliances to no longer be of significant benefit to our customers. In addition, because our appliances work with enterprise backup software
applications to transfer and store data in the protection storage environment, we are dependent on enterprises use of these applications for data protection and disaster recovery purposes. If enterprises adopt products or technologies that
enable them to protect and recover their data without the need for backup software, demand for our appliances would be reduced significantly.

The
inability of our appliances to interoperate with backup software applications would cause our business to suffer.

We have designed
our appliances to interoperate with the leading enterprise backup software applications available in the market. If our appliances are not compatible with the leading backup software applications, demand for our appliances will decline. Some backup
software providers currently offer products that compete with ours and other providers may do so in the future. Backup software providers may in the future make changes that would diminish the ability of our appliances to interoperate with their
applications. If this were to occur, we may need to spend significant time and effort to ensure the continued compatibility of our appliances, which may not be possible at all. Any of these developments could significantly harm our business.

Data formats may change in a way that reduces the value of our compression technologies.

Our compression technologies have been designed to work well for data formats commonly seen in customer data centers today. The format of data stored on
our appliances may change in ways that reduce the benefit of our compression technologies. Such format changes could result from changes in the applications that create or transmit the data, changes in the systems that store the data, or changes in
policies concerning data encryption, compression, or encoding. For example, some potential customers in the past have employed encryption or compression technologies that they were unable or unwilling to disable and therefore did not find the
benefits of our Global Compression technologies compelling. If the number of such potential customers were to increase significantly in the future, our business could suffer.

We rely on channel partners to sell our appliances, and disruptions to, or our failure to develop and manage our channel partners would harm our business.

Our future success is dependent upon establishing and maintaining successful relationships with a large number of channel partners. A substantial majority
of our revenue is generated by sales through our channel partners, and we expect channel sales to continue to make up a significant portion of our total revenue in the future, particularly outside the United States. In the three months ended
March 31, 2008 and the year ended December 31, 2007, approximately 83% and 86%, respectively, of our revenue was generated by sales through our channel partners. Accordingly, our revenue depends in large part on the effective sales and
lead generation activities of these channel partners.

Recruiting and retaining qualified channel partners and training them in our
technology and product offerings requires significant time and resources. In order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in
systems and training. Those processes and procedures may become increasingly complex and difficult to manage as we grow our organization. We have no minimum purchase commitments from any of our channel partners, and our contracts with these channel
partners do not prohibit them from offering products or services that compete with ours. Our competitors may provide incentives to existing and potential channel partners to favor their products or to prevent or reduce sales of our appliances. Our
channel partners may choose not to offer our appliances exclusively or at all. Establishing relationships with channel partners who have a history of selling our competitors products may also prove to be difficult. In addition, some of our
channel partners are also competitors. Our failure to establish and maintain successful relationships with channel partners would seriously harm our business and operating results.

The U.S. government has become an important customer for us, and if it or individual agencies within the U.S. government reduce or shift their capital spending pattern, our financial results may be harmed.

The U.S. government has become an important customer for us. Government agencies are subject to budgetary processes and
expenditure constraints that could lead to delays or decreased capital expenditures in information technology spending on infrastructures. If the U.S. government or individual agencies within the U.S. government reduce or shift their capital
spending pattern, our financial results may be harmed. Our sales to the U.S. government may involve longer sales cycles than is typical of our non-government customers, increasing the likelihood that an order may not occur in the quarter in which we
had anticipated the sale, if any all. In addition, our sales to the U.S. government require us to comply with U.S. laws applicable to enterprises and products that are offered for sale to the U.S. government. Any failure by us to comply with and
manage these obligations could result in a reduction or delay in sales to the U.S government, or result in fines and penalties.

If we fail to
establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we establish and maintain internal control over financial reporting and disclosure
controls and procedures. In particular, under the current rules of the SEC, beginning with the year ending December 31, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow
management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm will also be required to report on our internal
control over financing reporting. Our and our auditors testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reporting
ineffective. We expect to incur substantial accounting and auditing expense and expend significant management time in complying with the requirements of Section 404. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could
be subject to investigations or sanctions by the SEC, The NASDAQ Stock Market, or NASDAQ, or other regulatory authorities or subject to litigation. Our independent registered public accounting firm identified a material weakness in our financial
statement close process as of December 31, 2006, and we implemented additional formal policies, procedures and processes, hired additional accounting personnel and increased management review and oversight over the financial statement close and
reporting processes in order to remediate this material weakness. To the extent any material weaknesses in our internal control over financial reporting are identified in the future, we could be required to expend significant management time and
financial resources to correct such material weaknesses or to respond to any resulting regulatory investigations or proceedings.

If we are unable to
protect our intellectual property rights, our competitive position could be harmed, and we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only
limited protection. Despite our efforts, the steps we have taken to protect our proprietary rights may not be



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adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such
misappropriation or infringement is uncertain, particularly in countries outside of the United States. Further, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process
will require us to narrow our claims. Even issued patents may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any
technology, competitors may be able to develop similar or superior technologies to our own now or in the future. In addition, we have entered into a cross-license agreement with Quantum Corporation, a competitor of ours, that provides Quantum and
its controlled affiliates a license to our current and future patents that relate to or are useful with respect to data transmission or data storage and that are or may be issued or applied for (or otherwise entitled to a priority date) on or prior
to January 1, 2012. As a result of this agreement, we will not be able to assert our existing patent rights and many or all of our future patent rights against Quantum or its controlled affiliates for the foreseeable future, and Quantum has
certain rights to assign this license to an acquirer of Quantum. It is also possible that we may find it necessary or advantageous to enter into similar cross licenses in the future with other actual or potential competitors.

Protecting against the unauthorized use of our patents, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible.
Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could be costly and divert
management resources, either of which could harm our business. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do.
Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others that we infringe their proprietary technology could harm our business.

Third parties could claim
that our appliances or technology infringe their proprietary rights. We expect that infringement claims may increase as the number of products and competitors in our market increases and overlaps occur. In addition, to the extent that we gain
greater visibility and market exposure as a public company, we face a higher risk of being the subject of intellectual property infringement claims. Any claims of infringement by a third party, even those without merit, could cause us to incur
substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from offering our appliances. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms
or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events could seriously harm our business.

Third parties may also assert infringement claims relating to our appliances against our customers and channel partners. Any of these claims may require
us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally are obligated to indemnify our channel partners and, less frequently, our customers, from claims of
infringement of proprietary rights of third parties. If any of these claims succeed, we may be forced to pay damages to, or on behalf of, our customers or channel partners, which could seriously harm our business.

Our use of open source software could impose limitations on our ability to commercialize our appliances.

We incorporate open source software into our appliances. The terms of many open source licenses have not been interpreted by United States courts, and
there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our appliances. In that event, we could be required to seek licenses from third parties in
order to continue offering our appliances, to re-engineer our appliances, to discontinue the sale of our appliances in the event re-engineering cannot be accomplished on a timely basis or to litigate any disputes relating to our use of open source
software, any of which could harm our business.

Our business is subject to increasingly complex environmental legislation that has increased both
our costs and the risk of noncompliance and may continue to do so in the future.

We face increasing complexity in the design and
manufacture of our appliances as we adjust to new and upcoming requirements relating to the materials composition of many of our appliances. For example, the European Union, or EU, has adopted certain directives to facilitate the recycling of
electrical and electronic equipment sold in the EU, including the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, directive. The RoHS directive restricts the use of lead, mercury and certain
other substances in electrical and electronic products placed on the market in the EU. A companion EU directive, the Waste Electrical and Electronic Equipment Directive imposes responsibility for the collection, recycling and recovery for
certain electrical and electronic products on the manufacturers of such equipment.

We have incurred costs to comply with these regulations
in the past and could incur additional costs in the future. In addition, compliance with these regulations could disrupt our operations and logistics. We will need to ensure that we can design and manufacture compliant appliances and that we can be
assured a supply of compliant components from suppliers. Similar laws and regulations have been proposed or may be enacted in other regions, including the United States, Canada, China, Korea, Japan and Australia. These and other environmental
regulations may require us to reengineer our appliances to utilize new components that are compatible with these regulations, which may result in additional costs to us.

We may not generate positive returns on our research and development investments.

Developing
our products is expensive, and our investment in product development may involve a long investment return cycle. For the year ended December 31, 2007, our research and development expenses were $23.5 million, or approximately 19% of revenue.
For the three months ended March 31, 2008 and 2007, our research and development expenses were $8.7 million and $4.5 million, or approximately 17% and 22% of revenue, respectively. Our future plans include significant investments in research
and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. These investments may not generate
positive returns in the near term, or at all.

We may engage in future acquisitions that could disrupt our business, cause dilution to our
stockholders and harm our business, operating results and financial condition.

In the future we may acquire other businesses,
products or technologies. We have not made any acquisitions to date and, as a result, our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete
acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by customers, financial markets
or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt
our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and harm our business. Future acquisitions may also reduce our cash available for operations and other uses and could result in an increase in
amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt.



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We have incurred, and will continue to incur, significant costs as a result of operating as a public company, and
our management is required to devote substantial time to compliance efforts.

As a public company, we incur significant legal,
audit, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ, impose additional requirements on public companies, including enhanced
corporate governance practices. For example, the NASDAQ listing requirements require that listed companies satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim
reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of business conduct. Our management and other personnel are required to devote a substantial amount of time to
these requirements. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. These rules and regulations could also make it more difficult for us to
attract and retain qualified persons to serve on our board of directors and board committees or as executive officers.

Our business is subject to
the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as computer viruses or terrorism.

Our corporate headquarters and the operations of the contract manufacturer for our appliances are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an
earthquake, fire or a flood, could harm our business. In addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war could
cause disruptions in our or our customers business or the economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or delay the manufacture and shipment of our appliances, our business would
be harmed.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has been volatile and is likely to be volatile in the future.

The trading prices of our common stock as well as the securities of other technology companies have been highly volatile. Further, our common stock has a limited trading history. Factors affecting the trading price of our common stock could
include:



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



| |  |  | announcements of technological innovations, new products and services, strategic alliances or significant agreements by us or by our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | adoption or modification of regulations, policies, procedures or programs applicable to our business.
| | - |  | -----------------------------------------------------------------------------------------------------

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common
stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do
not directly affect us, or in reaction to reports from industry analysts about us or our competitors or others in the technology industry generally. Some companies that have had volatile market prices for their securities have had securities class
actions filed against them. A suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert managements attention.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in
control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing
stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of
incorporation and amended and restated bylaws:



| |  |  | authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of
election and qualification until the third annual meeting following their election;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require that directors only be removed from office for cause;
| | - |  | -------------------------------------------------------------



| |  |  | provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit who may call special meetings of stockholders;
| | - |  | ----------------------------------------------------



| |  |  | prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and amended and restated bylaws.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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

The effective date of the registration statement for our initial public offering was June 26, 2007. In the first quarter of 2008, we used none of the proceeds from our initial public offering for working capital purposes. None of the
payments were made, directly or indirectly, to our directors, officers or persons owning 10% or more of our common stock.



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

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

There were no matters submitted to a vote of security holders during the first quarter of 2008.



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

None.



|Item 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                       
|10.1        |  | Lease, dated as of January 9, 2008, between Sobrato Interests and Data Domain, Inc. (1)                                                           
|            | 
|10.2        |  | Data Domain, Inc. 2008 Bonus Plan (2)                                                                                                             
|            | 
|10.3        |  | Offer letter for Peter J. Rukavina (3)                                                                                                            
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form
10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Data Domain, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.



|(1) | Incorporated by reference to Exhibit 10.1 filed with the registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on January 14, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Exhibit 10.1 filed with the registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Exhibit 99.2 filed with the registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements 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.



|                  |  |  |  |                                                                        
|----------------- |  |  |  | -----------------------------------------------------------------------
|                  |  |  |  | Data Domain, Inc.                                                      
|                  |  | 
|Date: May 8, 2008 |  |  |  | /s/ Michael P. Scarpelli                                               
|                  |  |  |  | Michael P. Scarpelli, Senior Vice President and Chief Financial Officer
|                  |  |  |  | (Principal Financial and Accounting Officer)                           



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