The following discussion and analysis should be read in conjunction with our financial statements and notes thereto.

We design, develop, manufacture and sell automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. We currently offer tape libraries for two tape drive technologies, LTO and AIT.

Many enterprises now routinely manage very large databases, in addition to storing information on local desktop computers. This, coupled with the growth in the amount of data from new sources and applications, is increasing the need for managing and storing data efficiently. We have developed tape libraries spanning a range of tape formats, prices, capacity and performance. We expect our products to continue to evolve in the future in response to emerging tape technologies and changing customer preferences.

We have developed a network of value added resellers who specialize in delivering complete storage solutions to end users. End users of our products range from small businesses requiring simple automated backup solutions to large organizations needing complex storage management solutions. We also sell our products to original equipment manufacturers who bundle our products with their own and sell them as part of a complete system or solution. We assist our customers with marketing, sales and technical support.

Our international sales efforts are currently directed from our corporate offices in Simi Valley, California. All of our international sales are denominated in U.S. dollars. Net revenues from customers outside of North America were approximately $4.7 million, or 26.4% of revenues for fiscal 2009, $5.8 million, or 27.2% of revenues for fiscal 2008, and approximately $5.0 million, or 24.4% of revenues in fiscal 2007.

We also design, develop and sell high-efficiency switching power supplies used in telecommunications equipment, servers, routers, switches, RAIDs, high-efficiency lighting and similar applications. Our power supplies are sold under the N2Power brand name through independent sales representatives and distributors. The primary customers are original equipment manufacturers and contract manufacturers. We also utilize these power supplies in our tape libraries.

Net revenues include revenues from the sale of tape libraries, tape drives, tape cartridges, ancillary products, and power supplies. Ancillary revenues include service, repair, and on-site service agreements net of the cost of any third party service contracts. Automated tape libraries and related products, such as tape drives and tape media, represented approximately 49.3% of revenues in fiscal 2009, 62.9% of revenues in fiscal 2008, and approximately 66.6% of revenues in fiscal 2007. Sales of power supplies represented approximately 31.0% of revenues in fiscal 2009, 18.8% of revenues in fiscal 2008, and approximately 14.6% of revenues in fiscal 2007. Sales of ancillary products and services accounted for the balance of our revenues.

Gross margins depend on several factors, including the cost of manufacturing, product mix and the level of competition. Larger tape libraries generally provide higher gross margins than do smaller tape libraries primarily because the competition is less intense in this market segment.

Research and development activities include the design and development of new products, as well as enhancements to existing products.

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer promotional offers, sales returns, bad debts, inventories, warranty costs, investments, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue is recognized upon shipment of product to our customers, less estimated returns, for which provision is made at the time of sale. Title and risk of loss transfer to the customer when the product leaves our dock in Simi Valley, California, or another shipping location designated by us. In general, these customers are allowed to return the product, free of penalty, within thirty days of shipment, if the product does not meet the end user's requirements.

We record an allowance for estimated sales returns based on past experience and current knowledge of our customer base. Our experience has been such that only a very small percentage of products are returned. Should our experience change, however, we may require additional allowances for sales returns.

Marketable securities consist primarily of high-quality U.S. corporate securities and U.S. federal government debt securities. Our marketable securities portfolio consists of short-term securities with original maturities of greater than three months from the date of purchase and remaining maturities of less than one year and long-term securities with original maturities of greater than one year and less than five years. Marketable securities are classified as available for sale and are recorded at fair value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income until realized; realized gains and losses are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. If the credit ratings of the security issuers deteriorate or if normal market conditions do not return in the near future, we may be required to reduce the value of our investments through an impairment charge and reflect them as long-term investments.

We adopted SFAS No. 157 on July 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.

In addition to defining fair value, SFAS No. 157 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value is observable in the market. Each fair value measurement is reported in one of the three levels that are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

• Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

• Level 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

In general, and where applicable, we use quoted prices in active markets for identical assets to determine fair value. This pricing methodology applies to our Level 1 investments such as U.S. treasuries and agency securities and exchange-traded mutual funds. If quoted prices in active markets for identical assets are not available to determine fair value, then we use quoted prices for similar assets or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 and consist primarily of corporate bonds, mortgage-backed securities, and certain agency securities. While we own certain mortgage-backed fixed income securities, our portfolio as of June 30, 2009 does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral. Our mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value
on a recurring basis at June 30, 2009 (in thousands):

                                             Level 1      Level 2       Net balance

     Assets
     Cash                                    $    898     $      -     $         898
     Money Market Mutual fund                   2,851            -             2,851
     U.S. government and agency securities     13,092        7,643            20,735
     Mortgage-backed securities                     -        2,423             2,423
     Corporate bonds                                -          754               754
     Total                                   $ 16,840     $ 10,821     $      27,661

We estimate our allowance for doubtful accounts based on an assessment of the collectability of specific accounts and the overall condition of accounts receivable. In evaluating the adequacy of the allowance for doubtful accounts, we analyze specific trade receivables, historical bad debts, customer credits, customer credit-worthiness and changes in customers' payment terms and patterns. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make additional payments, then we may need to make additional allowances. Likewise, if we determine that we could realize more of our receivables in the future than previously estimated, we would adjust the allowance to increase income in the period we made this determination.

We record inventories at the lower of cost or market value. We assess the value of our inventories periodically based upon numerous factors including expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, we write down our inventory for estimated obsolescence, potential shrinkage, or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If technology changes more rapidly than expected, or market conditions become less favorable than those projected by management, additional inventory write-downs may be required.

We provide for the estimated cost of product warranties at the time revenue is recognized. We engage in extensive product quality programs and processes, including active monitoring and evaluation of product failure rates, material usage and estimation of service delivery costs incurred in correcting a product failure. However, should actual product failure rates, material usage, or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. Historically our warranty costs have not been significant.

Share-based compensation is accounted for in accordance with SFAS 123R, "Share-Based Payment." We use the Black-Scholes option pricing model to determine fair value of the award at the date of grant and recognize compensation expense over the vesting period. The inputs we use for the model require the use of judgment, estimates and assumptions regarding the expected volatility of the stock, the expected term the average employee will hold the option prior to the date of exercise, expected future dividends, and the amount of share-based awards that are expected to be forfeited. Changes in these inputs and assumptions could occur and actual results could differ from these estimates, and our results of operations could be materially impacted.

We estimate our tax liability based on current tax laws in the statutory jurisdictions in which we operate in accordance with SFAS 109, "Accounting for Income Taxes." These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. Accruals for uncertain tax positions are accounted for in accordance with FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.

We maintain a valuation allowance to reduce our deferred tax assets due to the uncertainty surrounding the timing of realizing the benefits of net deferred tax assets in future years. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event we were to determine that we would be able to realize all or part of our net deferred tax asset in the future, the valuation allowance would be decreased accordingly.

We may periodically undergo examinations by the federal and state regulatory authorities and the Internal Revenue Service. We may be assessed additional taxes and or penalties contingent on the outcome of these examinations. Our previous examinations have not resulted in any unfavorable or significant assessments.

We have net operating losses, capital losses, research and development credit and other carryforwards for tax purposes of $13.8 million at June 30, 2009 which expire between fiscal years 2013 and 2029, except for the state research and development credit, which has no limit on the carryforward period.

RESULTS OF OPERATIONS

The following table reflects, as a percentage of net revenues, statements of operations data for the periods indicated:

                                               Years Ended June 30,
                                          2009         2008         2007
Net revenues                               100.0 %      100.0 %      100.0 %
Cost of goods sold                          68.1         65.4         68.4
Gross margin                                31.9         34.6         31.6
Operating expenses:
Research and development                    18.2         14.4         15.2
Sales and marketing                         15.5         14.8         15.1
General and administrative                  17.6         15.8         15.4
Loss from operations                       (19.4 )      (10.4 )      (14.1 )
Investment income                            5.1          7.1          7.2
Loss before provision for income taxes     (14.3 )       (3.3 )       (6.9 )
Provision for income taxes                   0.0          0.1          0.1
Net loss                                   (14.3 )%      (3.4 )%      (7.0 )%

We have two operating segments for financial disclosure purposes: tape libraries and power supplies, as discussed in Footnote 11 to our consolidated financial statements. The following table summarizes our revenue by major product line and by operating segment:

                               Years Ended June 30,
                           2009        2008        2007
Tape Library revenues:
TLS                          22.3 %      30.5 %      35.9 %
RLS                           6.8 %       9.2 %       8.6 %
XLS                           8.3 %       7.0 %       8.5 %
                             37.4 %      46.7 %      53.0 %
Other library revenues:
Service                      15.3 %      12.7 %      14.2 %
Media                        11.9 %      16.2 %      13.6 %
Upgrades, Spares              4.4 %       5.6 %       4.6 %
Total library revenues       69.0 %      81.2 %      85.4 %
Power Supply revenues        31.0 %      18.8 %      14.6 %
                            100.0 %     100.0 %     100.0 %

Net Revenues. Net revenues were $17.9 million in fiscal 2009 as compared to $21.5 million in fiscal 2008. The decrease of approximately $3.6 million, or 16.6% is attributed primarily to a decrease of $5.1 million in sales of tape libraries, partially offset by an increase of $1.5 million in sales of power supplies.

Tape Library Segment
Revenues attributed to our tape library segment were $12.3 million, or 69.0% of revenues in fiscal 2009, as compared $17.4 million, or 81.2% of revenues in fiscal 2008. This decline in tape library revenues was due primarily to lower sales of our tape library products in the TLS and RLS product lines, in conjunction with decreased sales of tape media and miscellaneous products. We expect sales from our XLS product line to increase in fiscal 2010 as this newest of our tape library families gains market acceptance. However, we expect sales from our TLS and RLS product lines, as well as tape media, to decrease in fiscal 2010.

Power Supply Segment
Revenues attributed to our power supply segment were $5.6 million, or 31.0% of revenues, in fiscal 2009 as compared to $4.0 million, or 18.8% of revenues, in fiscal 2008. The increase of $1.5 million, or 37.6%, was due to increased sales to original equipment manufacturers and distributors of an expanded power supply product line. We expect continued growth as a percentage of sales in our power supply revenues during fiscal 2010.

Gross Profit. Gross profit was $5.7 million in fiscal 2009 as compared to $7.4 million in fiscal 2008. The decrease of approximately $1.7 million, or 23.2%, is attributed to a decrease in revenues, an increase in scrap and inventory adjustments, and lower absorption of labor and overhead.

Research and Development. Research and development expenses were $3.3 million in fiscal 2009, comparable with $3.1 million in fiscal 2008.

Sales and Marketing. Sales and marketing expenses were $2.8 million in fiscal 2009 as compared to $3.2 million in fiscal 2008. The decrease of approximately $0.4 million, or 13.1%, is attributed primarily to decreases in commissions, travel and entertainment and advertising and promotion expenses.

General and Administrative. General and administrative expenses were $3.2 million in fiscal 2009 as compared to $3.4 million in fiscal 2008. The decrease of approximately $0.2 million, or 6.9%, is primarily due to a decrease in accounting and audit expenses, partially offset by an increase in compensation related expenses.

Investment Income. Investment income was $0.9 million in fiscal 2009, compared to $1.5 million in fiscal 2008. The decrease of approximately $0.6 million is attributed to lower rates in the current economic environment and the shift of securities into shorter term U.S. treasuries, in addition to a $4.9 million decrease in the principal balance of our marketable securities.

Provision for Income Taxes. Provision for income taxes was $3,000 in fiscal 2009 as compared to a provision for income taxes of $17,000 in fiscal 2008.

Net Revenues. Net revenues were $21.5 million in fiscal 2008 as compared to $20.6 million in fiscal 2007. The increase of approximately $852,000, or 4.1% is attributed primarily to an increase of $1.0 million in sales of power supplies, partially offset by lower revenues from tape libraries.

Tape Library Segment
Revenues attributed to our tape library segment were $17.4 million, or 81.2% of revenues in fiscal 2008, as compared to $17.6 million, or 85.4% of revenues in fiscal 2007. This decline in tape library revenues was due to lower sales of our tape library products in the TLS and XLS product lines, in conjunction with lower service revenue, partially offset by increased revenue from our RLS tape library product line and increased sales of tape media and miscellaneous products.

Power Supply Segment
Revenues attributed to our power supply segment were $4.0 million, or 18.8% of revenues, in fiscal 2008 as compared to $3.0 million, or 14.6% of revenues in fiscal 2007. This increase was due to increased sales to original equipment manufacturers and distributors of an expanded power supply product line.

Gross Profit. Gross profit was $7.4 million in fiscal 2008 as compared to $6.5 million in fiscal 2007. The increase of approximately $0.9 million, or 13.8%, is attributed to increased revenues, a change in product mix and efficiencies achieved in material and labor management.

Research and Development. Research and development expenses were $3.1 million in fiscal 2008, comparable with $3.1 million in fiscal 2007.

Sales and Marketing. Sales and marketing expenses were $3.2 million in fiscal 2008 as compared to $3.1 million in fiscal 2007. The increase of approximately $0.1 million, or 3.1%, is attributed primarily to an increase in travel and entertainment, commissions and compensation related expenses partially offset by the closure of our United Kingdom branch office.

General and Administrative. General and administrative expenses were $3.4 million in fiscal 2008 as compared to $3.2 million in fiscal 2007. The increase of approximately $0.2 million, or 7.0%, is due to an increase in accounting and audit expenses related to Sarbanes Oxley compliance efforts and compensation related expenses partially offset by decreases in bad debt and depreciation and amortization expenses.

Investment Income. Investment income was $1.5 million in fiscal 2008, comparable with $1.5 million in fiscal 2007.

Provision for Income Taxes. Provision for income taxes was $17,000 in fiscal 2008 as compared to a provision for income taxes of $30,000 in fiscal 2007

Cash used by operating activities was $2.0 million in fiscal 2009. Cash provided by operating activities was $0.8 million in fiscal 2008 and cash used by operating activities was $0.7 million in fiscal 2007. Cash used by operating activities in fiscal 2009 relates primarily to our net loss for the year and a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in receivables and inventories. Cash provided by operating activities in fiscal 2008 relates primarily to an increase in accounts payable and a decrease in accounts receivable. Cash used by operating activities in fiscal 2007 relates primarily to our net loss for the year adjusted for non-cash items, an increase in accounts receivable and a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in inventories.

Cash provided by investing activities was $2.0 million in fiscal 2009. Cash used by investing activities was $0.3 million in fiscal 2008 and cash provided by investing activities was $1.5 million in fiscal 2007. Cash provided by investing activities in fiscal 2009 relates primarily to proceeds from the sale of marketable securities, partially offset by purchases of marketable securities and equipment. Cash used in investing activities in fiscal 2008 relates primarily to the purchase of marketable securities and equipment partially offset by sales of marketable securities. Cash provided by investing activities in fiscal 2007 relates primarily to proceeds from the sale of marketable securities, partially offset by purchases of marketable securities.

Cash used in financing activities was $2.9 million in fiscal 2009. Cash used in financing activities was $1.5 million for fiscal 2008. Cash used in financing activities in fiscal 2009 relates to cash dividends declared on shares of our common stock. Cash used in financing activities in fiscal 2008 relates to cash dividends declared on shares of our common stock.

As of June 30, 2009, we had $3.7 million in cash and cash equivalents and $23.9 million in marketable securities. We believe that our existing cash and cash equivalents and funds available from the sale of our marketable securities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We may utilize cash to invest in businesses, products or technologies that we believe are strategic. We regularly evaluate other companies and technologies for possible investment by us. In addition, we have made and may in the future make investments in companies with whom we have identified potential synergies. However, we have no present commitments or agreements with respect to any material acquisition of other businesses or technologies.

               SUMMARY OF CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following is a summary of our future payments due under contractual
obligations as of June 30, 2009:
. . .