Analyst Conference Summary

conference date: November 8, 2007 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2007 (3rd quarter 2007)

Forward-looking statements

Overview: Still struggling with decreasing revenues from Sun. A pretty bad quarter, but in line with guidance given in October. Cash flow positive in quarter.

Basic data:

Revenue was $45.7 million, down 19% sequentially from $56.2 million and 17% from $54.8 million year-earlier.

Net loss was $4.1 million, sequentially down from a loss of $3.7 million, but well up from a loss of $60.1 million year-earlier.

EPS (earnings per share) was negative $0.09, down sequentially from negative $0.08 but up from a loss of $1.34 year-earlier.

Guidance:

Q4 revenues of $44 to $48 million with EPS loss of $0.10 to $0.15.

Conference Highlights:

Sales to largest OEM customer (Sun) declined. Second largest OEM customer sales increased, but more slowly than expected.

Cash and equivalents ended at $90.2 million, which is up sequentially from $88.4 million.

Encouraged that losses were contained despite lower revenues. Gross margin improved to 14.3% from 12.3% in Q2.

Series 2000 products are having better margins now that they have gone into mass production. More savings will be seen in future quarters. Manufacturing costs reduced by 25% year-over-year by moving to Mytek.

Product sales mix actually was negative because legacy Sun products had good margins. Margins going forward will be very sensative to product mix going forward. Products to second-largest OEM customer have lower margins.

$5.7 million R&D expense, a decrease y/y as less prototyping needs to be done.

Cost of goods sold were $39.2 million. S&M $3.7 million. G&A was $2.4 million. Total operating expense was $11.8 million.

SAN Net 2 Fibre channel had 35.2% of revenue, with 1453 units.

SAN Net 2 SCSI 22.7% with 1894 units.

SAN Net 2 SATA was 0.7% with 69 units.

SAN Net 2 Blade was 6.8% with 1592 units.

Series 2000 products 13.6% with 906 units.

Services and other products were about 21% of revenue.

58% of revenue was from largest customer (Sun). 15.6% of revenue was from 2nd largest customers.

22 new customers since Q3 2006.

Do not have good visibility on ramp rate for new products and customers. 5730 will start shipping later this year for the mid-range market. We have a new private-label distribution customer.

The win announced in Q2 to new tier 1 customer will see some initial shipments in Q4, and there is another product win with them. "We have the only truly unified architecture in the SAN market for introductory and midrange products." Looking to new products and customers in storage area networks in 2008.

Q&A:

New tier 1 customer? Too early to predict how much they will buy in 2008. They are very pleased with us so far.

NetApp ramp? Slope of ramp was slower than anticipated, and slower than what they had provided to us. It is difficult to forsee how it will ramp in the future.

Private label distribution product? Again, it is a major distribution company, but it is too early to talk about how it will ramp.

5730 availability? Some early access customers are evaluating it. Production shipment will begin maybe in early part of December. Should see good margins right away on this product. It will probably be a tier-2 customer product at first. Competition will have difficulty beating us on price in this category.

Backlogs? No longer providing that. They are higher than last quarter due to blanket orders, but don't know what timing will be on those.

Sun sales are hard to predict. The rate of decline is less than many projected, but the products are getting long of tooth. No new product to replace it has been announced. At some point new units will stop, but spares and field replacement of units will go up.

Q1 2008 seasonality? Hard to call at this stage because they are new OEMs to us and the products are new. Q4 series 2000 revenues are expected to improve over Q3. In Q1 we will start to have better visibility.

Buy backs? Like to see sales ramp and operating profitability before doing anything with our cash. We see some possible cash burn for the next few quarters.

Why are other iSCSI companies like EquiLogic priced so much higher? I think Dell paid too much for EquiLogic, but was valued as a storage virtualization play.

Reason for slow Network Appliance ramp? There were no technical difficulties. We are not in control of demand. We and they are bullish on product, but no visibility.

A significant percent of Series 2000 products are going into Europe, which always has slow summers.

5730 pricing? $50,000 range of typical system. Don't need to be price aggressive because of competition's own pricing issues.

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