UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 000-12230

BAKBONE SOFTWARE INCORPORATED

(Exact name of registrant as specified in its charter)


Canada		Not applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9540 Towne Centre Drive, Suite 100 San Diego, CA		92121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 450-9009

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

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

Common Shares, no par value

(Title of Class)

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

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

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

Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 ¨
Non-accelerated filer ¨ (Do not check if smaller reporting company)		Smaller reporting company x

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

The aggregate market value of the registrant’s common shares held by non-affiliates of the registrant as of September 30, 2009, based upon the closing sale price of the registrant’s common shares on September 30, 2009 as reported on the OTC Bulletin Board was $37,108,015. This number excludes common shares held by executive officers and directors. This calculation does not reflect a determination that such persons are affiliates for any other purposes.

As of June 11, 2010, there were 77,686,824 shares of the registrant’s common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2010 Annual Meeting of Stockholders (the “Proxy Statement”) or portions of the registrant’s Form 10-K/A, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Proxy Statement or Form 10-K/A will be filed with the Commission no later than 120 days after the conclusion of the registrant’s fiscal year ended March 31, 2010.

BAKBONE SOFTWARE INCORPORATED

Form 10-K

For the Fiscal Year Ended March 31, 2010

Table of Contents


		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	(Reserved)	21

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
Item 9A.	Controls and Procedures	42
Item 9B.	Other Information	44

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	45
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions, and Director Independence	45
Item 14.	Principal Accountant Fees and Services	45

PART IV
Item 15.	Exhibits, Financial Statement Schedules	46

SIGNATURES

EXHIBIT INDEX

TRADEMARKS AND TRADE NAMES

BakBone^®, BakBone Software^®, NetVault^®, Application Plugin Module™, BakBone logo^®, Integrated Data Protection™, NetVault: SmartDisk™ and FASTRecover are our trademarks or registered trademarks, trade names or service marks. Each trademark, trade name or service mark of another company appearing in this Annual Report belongs to its holder, and does not belong to us.

CAUTIONARY STATEMENT

This Annual Report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” in Item 1A, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

In this annual report, “BakBone,” the “Company,” “we,” “our,” and “us” refer to BakBone Software Incorporated and its subsidiaries, unless the context requires otherwise.

PART I

Item 1.

BUSINESS

Overview

We are a leading provider of data protection, retention and availability technologies that reduce storage management complexity. We develop, market, sell and support a portfolio of products sold globally under the NetVault brand name. Our products include award-winning Linux solutions, application-focused solutions to protect the Windows environment, and unique solutions to leverage emerging disk-based and virtual environments. Our products provide protection for the applications that drive the business computing environments such as Microsoft SQL Server, Oracle, Microsoft Exchange, MySQL, Lotus Notes and others. The object-oriented design of our products allows them to be flexibly installed in complex, multi-platform environments, providing users with a consistent look-and-feel across all platforms. The current NetVault portfolio of products provides customers with:

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Enterprise data protection, including backup and recovery;

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Long-term data retention capabilities;

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Disaster recovery of data and systems as well as application failover;

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Global replication of data;

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Storage resource management and reporting; and

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Application resource reporting and discovery.

Organization

We are currently incorporated under the federal jurisdiction of Canada. We commenced operating as BakBone Software Incorporated in March 2000. Effective with the closing of our Message Management segment in May 2010, we operate in one reporting segment, Storage Management. We have operations in three primary geographic regions: North America; Asia-Pacific; and Europe, Middle East and Africa (“EMEA”). Our data protection, or NetVault, products are sold and marketed under the BakBone name with focused sales channels, marketing activities and development resources responsible for these solutions. Our message management solutions were marketed and sold under the ColdSpark name with focused resources to sell, market and develop messaging solutions. See additional information regarding segment reporting information in Note 11 “Segment Information” to our consolidated financial statements.

Our common shares are traded on the OTC Bulletin Board in the United States under the symbol “BKBO”. We operate and report using a fiscal year ending March 31. Our corporate headquarters are located at 9540 Towne Centre Drive, Suite 100, San Diego, CA, 92121, and our telephone number is 858-450-9009. Our internet address is www.bakbone.com. The contents of our website are not incorporated by reference into this Form 10-K, or in any other report, statement or document that we file with the SEC.

Industry Background and Market Trends

We believe the data protection market is large and growing, and that our software is appealing to a broad range of businesses and organizations. We believe that the growth in this market, driven by the expansion of data, will be augmented by the following factors:

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The convergence of data, voice and video in the telecommunications and cable industries driven by a need to rapidly expand their infrastructures and provide additional services to their customer base;

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Dependence on the availability and security of online systems;

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The increasing compliance and regulatory impact of government and industry regulations, such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Sarbanes-Oxley Act and numerous SEC regulations;

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The rapid growth of digital content created by Internet Service Providers including streaming videos, music, documents and other web-based content;

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The development of new manufacturing, testing and simulation technologies used to enhance manufacturing processes and create continuous streams of data that must have availability, protection and retention policies around its management; and

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The advent of systems-driven exploration and development technologies to find new natural resource reserves and to extract more from existing reserves creating efficiencies of operations and large amounts of business-critical data.

Open source technologies continue to gain momentum as a viable backbone for core computing requirements, resulting in increased popularity of Linux worldwide. International Data Corporation (“IDC”) projects a compound annual growth rate (“CAGR”) of 22.3% in storage software spending for Linux and other open source platforms from 2008 to 2013, with the market in 2013 projected to be $1.17 billion worldwide. In its March 2009 survey titled Linux Adoption in a Global Recession, IDC found that 48% of respondents planned to accelerate their deployment of Linux due to the current economic climate. In addition, according to IDC, server virtualization adoption has helped drive increased adoption of Linux. Linux is rapidly becoming the operating system of choice for many cloud providers and independent software vendors and there is growing acceptance of open source technologies within enterprise environments. Robust data protection solutions that are designed for these environments continue to be a requirement of the new enterprises worldwide.

The proliferation of computing platforms and their associated applications has driven the expansion of multi-platform computing environments. These environments are designed to leverage the specific, best-of-breed capabilities of a platform. For example, a single company might select Windows to host its messaging systems, such as email, Solaris for its database environment, a distribution of Linux for its web server infrastructure, and Mac OS X for its imaging applications. The combination of multiple computing environments and multiple applications running on each creates further challenges to providing holistic data protection that can be centrally managed across the entire enterprise.

In addition to the rapid proliferation of data and applications and expansion of computing platforms, the storage paradigm has also transformed from a direct attached storage architecture to leverage advanced storage and networking technologies. Storage area networks and network-attached storage devices have changed how and where data is connected to applications. This adoption has also led to a more geographically distributed data set and more shared storage pools and devices. The distribution and access of these devices have created new challenges for organizations as they develop and deploy new data protection, retention and availability solutions. However, there are also new opportunities to leverage the increased utilization of disk-based technologies to provide improved recovery point objectives and recovery time objectives. Simply stated, solutions that best leverage disk technologies allow organizations to recover data and systems faster with less data loss.

Organizations are looking towards a new generation of solutions to help them better manage their data. Often times these new solutions blur the definition of the traditional products that they replace or extend. One example is the emergence of disk-based solutions that are designed to work in conjunction with tape-based systems. Solutions that can provide the reliability, speed and granular recovery from disk in conjunction with cost-effective, long-term tape capabilities in a single solution solve many customer challenges for better protecting and managing data.

Customer Challenges

The exponential growth of data has increased the challenges for organizations, small and large, relative to managing, protecting, retaining and securing one of their most valuable assets – data. The proliferation of new business applications has been one of the driving factors in the growth of data. Infrastructure applications such as messaging systems, databases, customer relationship management, enterprise resource planning and collaboration systems are layered on top of an increasing number of vertical business applications resulting in large data sets that need to be more effectively managed through its lifecycle.

However, in today’s environment, protection is just one aspect of managing data. New corporate compliance regulations, such as HIPPA and SEC regulations, place specific requirements on the availability, retention and security of data. The potential of penalties for non-compliance has driven many organizations to create dedicated groups focused on global compliance. One of the results is that more copies of data need to be created and retained in secure and immutable formats for future reference and use. Archiving and other data retention tools have emerged as critical products to help organizations better manage data retention requirements. With a market segment CAGR of over 16% (according to the Gartner Group) fueled by the high growth email archiving sector, the archiving market underscores the increased importance of email and messaging systems in the enterprise computing environment.

In the past, many customers looked at data protection as just the ability to keep a copy of files that could be recovered if data was lost. Market trends have forced today’s companies to become more sophisticated in developing and deploying their data protection strategies. Customers are more focused on minimizing the amount of time that it takes to recover lost data and the amount of data that could be potentially lost as part of a failure.

These factors, and others, have driven the adoption and deployment of many point solutions designed to resolve specific storage challenges in today’s computing environments. However, the rapid deployment of these individual point solutions has created new challenges relative to the operational costs of managing data. Compliance and regulatory demands have also created challenges that many of today’s point solutions are poorly equipped to address. Finally, this growth of individual point solutions has placed further operational cost pressures on IT organizations with thin resources having to manage increased solutions.

Our Business Strategy: Integrated Data Protection

Organizations continue to face challenges related to the increasing operational costs of managing their data. Although point solutions have been introduced to help users manage their data more effectively, the resources required to manage these products have increased overall storage costs. The objective of integrated data protection is to provide users with the ability to manage data protection environments globally while reducing the associated administrative and operational costs.

We are building our integrated data protection solutions around The NetVault: SmartDisk data protection platform. The NetVault: SmartDisk platform has been designed to provide a centralized repository for data generated by a multitude of applications, from which the data can be more effectively and efficiently managed throughout its lifecycle. We plan to integrate our current NetVault product portfolio with NetVault: SmartDisk to populate and extract data views from the platform via a series of application receiver and presentation modules. We expect this integration to enable the application of a set of common services, such as data de-duplication, data compression, encryption and policy management, to the data that resides in the NetVault: SmartDisk platform.

Additionally, we expect that the integrated NetVault: SmartDisk platform will provide application receiver and presentation modules for select third party data protection applications. This would allow users to leverage NetVault: SmartDisk’s common services on data generated from these applications alongside the data generated by their BakBone applications. This common repository would provide a centralized storage repository from

which users will be able to manage data. The first of the new “SmartDisk enabled” products was made available in the fall of 2009.

The integrated data protection and “SmartDisk enabled” product offerings are being designed to provide the following benefits for our customers:

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Centralized data protection operations. The NetVault: SmartDisk platform is designed to enable a centralized point of data management through a common set of services and policies that can be applied to data that is generated from BakBone and select third party applications, greatly improving users’ ability to manage data for compliance, availability and retention globally. We believe this approach will enable users to manage data more centrally, significantly reducing operational costs.

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Integrated portfolio of data protection applications. The NetVault product portfolio is expected to be integrated via the NetVault: SmartDisk platform to allow users to view data protection globally from a centralized location. We believe this portfolio of integrated applications will provide users with a significant operational cost benefit over the point solution approach offered by larger competitors. Users may purchase NetVault: SmartDisk enabled applications individually over time or as a suite.

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Enterprise disk-based protection capabilities. Market conditions and data protection requirements have driven the adoption of disk-based data protection technologies. We have continued to invest in disk-based solutions, such as the NetVault: SmartDisk platform, our integrated Virtual Tape Library (“VTL”) and NetVault: FASTRecover to provide a wide set of capabilities to meet new disk adoption. The current NetVault portfolio provides users with the ability to backup to both disk and tape and incorporates a multi-tier backup and recovery strategy.

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Extensive support for enterprise computing platforms and applications. Our solutions, several of which are an object-oriented architecture, are designed to be hosted on Linux, Windows, UNIX and Mac OS X servers, or on any combination as a single system. Our solutions are designed to provide extensive support for the applications that drive business operations and data growth. This includes support for messaging systems, such as Microsoft Exchange and Lotus Domino and Notes, extensive database support, including Oracle, Microsoft SQL Server, MySQL, Informix, PostgreSQL and DB2, and select enterprise applications.

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Simple to deploy and use, with enterprise features and scalability. Complexity is the enemy when companies need to protect the security and reliability of vital data. Diverse data must coexist in ever-expanding infrastructures. The IT environment is increasingly heterogeneous, and any significant data loss could have catastrophic consequences to the business. These factors make managing data protection a continuing problem. By providing a consolidated view of multiple platforms, applications and topologies, the NetVault product portfolio reduces the complexity associated with managing disparate data availability and protection services. Our integrated data protection approach is capable of lowering total cost of ownership by reducing administrative and software licensing costs, as well as significantly shortening the learning curve associated with managing multiple systems. Our products are designed to be simple to deploy and use, with enterprise features and scalability. Unlike products ported from UNIX applications, our products are designed for today’s Windows/Linux administrator. Users can download and evaluate many of our products directly from our website.

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Global customer support capabilities. We offer our customers different levels of customer support, including a 24/7 option that they can select, based upon their specific needs. Our worldwide customer support organization provides comprehensive local and remote customer care to effectively address issues in today’s complex storage environments. With major support centers in every operating geography, we can provide users with 24/7 global support, or customers can chose to interact with local resources.

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Lower Total Cost of Ownership. We believe the NetVault portfolio of solutions, along with the NetVault: SmartDisk platform will provide end users with a lower total cost of ownership than competitive point solutions or loosely integrated solutions. NetVault’s advanced architecture allows for quick and easy installation and administration. NetVault speeds initial implementation and configuration due to auto-discovery, self-configuration and self-installation features. These features allow more rapid support of new applications, databases, devices and operating systems. This generally results in lower ongoing internal administration and support costs than competing products. These attributes provide scalability of our solutions as an organization grows in size and its computing and storage environments evolve. As a result of these factors, we believe that we offer our end users data protection at an attractive price over the lifecycle of the product.

Our Products

The NetVault product portfolio is comprised of four product families that help deliver holistic data protection capabilities. We believe our future success will depend on our ability to continue to enhance our current product offerings and to develop and introduce new products and offerings within our Integrated Data Protection strategy that keep pace with competitive and technological advances.

Backup and Recovery

NetVault: Backup Family

NetVault^®: Backup (NVBU). For data protection, disaster recovery and business continuity, the NetVault: Backup product line provides enterprise-class data protection for complex heterogeneous IT environments, regardless of size. NetVault: Backup’s flexible, modular architecture delivers proven reliability and high-performance, with a multitude of features designed to meet current and future data protection needs. This unique flexibility reduces deployment costs and total cost of ownership, by enabling customers to implement a NetVault: Backup solution that matches their current system and network resources. The NetVault: Backup optional components include NetVault: Backup Application Plugin Modules, NetVault: Backup Shared Virtual Disk and NetVault: Backup SmartClients™.

NetVault: Backup Application Plugin Modules. For data protection, disaster recovery and business continuity, NetVault: Backup’s Application Plugin Modules provide online protection capabilities for critical applications including: Oracle, Microsoft SQL Server, Microsoft Exchange, MySQL, Lotus Notes, PostgreSQL, DB2, and Informix.

Virtual Tape Library/Shared Virtual Tape Library. For disaster recovery and business continuity, NetVault: Backup’s VTL and Shared Virtual Tape Library (“SVTL”) options provide enhanced backup and recovery performance by creating a virtual tape library on disk. NetVault: Backup’s disk-to-disk technology allows for flexible configuration of customized virtual libraries, each with its own specific number of tape drives, slots and capacity to fit the situation at hand.

NetVault: Bare Metal Recovery. For disaster recovery and business continuity, the NetVault: Bare Metal Recovery option to NetVault: Backup automates the recovery of systems and devices to reduce potential downtime created by unplanned service interruptions.

SmartDisk

NetVault: SmartDisk (NVSD) offers tight integration with NetVault: Backup to take disk-based backup and data deduplication to new levels of cost savings with a state of the art capability to squeeze more data on disk while driving expenses down further by not requiring specific types of storage drives or appliances. NVSD has a powerful software data deduplication option which reduces storage costs by packing up to 12 times more protected data into the same storage area for a 92% reduction in storage footprint. NVSD post process deduplication can be scheduled outside the backup window to shrink backup

windows with no additional impact on protected server resources. Integration with NetVault: Backup’s job-level deduplication and encryption allows users to separate deduplicated from non-deduplicated data to improve performance. This also means primary copies may be deduplicated for cost savings, while secondary copies may be encrypted for compliance.

Real-time Data Protection and High Availability

NetVault: FASTRecover (NVFR). For increased system availability, NetVault: FASTRecover provides 30-second application-aware recovery for Exchange, SQL Server and Windows file system data, significantly reducing downtime and its associated impact. Users can recover a complete Exchange Server, individual Storage Group, entire SQL Server Instance, individual database or specific files to any-point-in-time, providing near-zero data loss and peace of mind for those who cannot afford the gaps in protection created by traditional backup policies. NVFR’s integration with traditional backup technologies (including NetVault: Backup) gives users the confidence that the recovery data for business-critical applications stored in the online storage is protected and safe offsite, ensuring business continuity.

NetVault: FASTRecover Appliance Customers looking for a turnkey solution for implementing real-time, disk-to-disk backup with 30-second application-aware recovery for Exchange, SQL Server and Windows file system data can select from a family of appliances that are pre-loaded with NetVault: FASTRecover. This minimizes set up and configuration time while providing all of the robust capabilities delivered with NetVault: FASTRecover.

Data Replication

NetVault: Replicator (NVR). For the highest levels of availability, disaster recovery and business continuity, the NetVault: Replicator product line provides continuous, cross-platform data replication for heterogeneous IT environments over standard IP networks. With NVR, customers can centrally manage both real-time and scheduled replication across multiple sites for a wide variety of server platforms, storage devices and applications. This flexibility reduces deployment costs and total cost of ownership by enabling customers to create a tiered solution that matches system and network resources to the value of the data. NetVault: Replicator’s optional components include NetVault: Replicator Plugin Modules and NetVault: Replicator Cluster Support.

Storage and Application Resource Management and Reporting

NetVault: Report Manager for Backup (NRMB). For improved operational efficiency, NetVault: Report Manager for Backup consolidates information from one or more NetVault: Backup servers to create an integrated data protection and storage management reporting framework. The NRMB storage dashboard enhances NetVault: Backup reporting by providing a centralized, single console to visualize and communicate backup performance. The system improves data availability by identifying potential problems and quickly communicating data protection results to key constituents. NRMB improves operational efficiency by reducing administrative time, helping to centralize operations and lowering media cost. NRMB’s single view into storage operations allow users to proactively manage today’s growing heterogeneous storage and data protection environments as a whole.

NetVault: Report Manager for Disk Space (NRMD). For users who require a heterogeneous solution to centralize administration, increase staff productivity, and improve operational efficiencies with enterprise-class monitoring and reporting, NetVault: Report Manager for Disk Space provides file system reporting for single or multi-server environments from one common interface. NRMD analyzes file system data across Windows™, Solaris and Linux servers for more efficient use of storage resources. NRMD identifies key information such as unneeded data, archive candidates, reclaimable disk space, unprotected data, inappropriate files and duplicate records. NRMD offers visual monitoring, alerting and more than 25

comprehensive file system reports. NRMD helps IT administrators catch potential problems early, identify the causes of data growth and reduce the rate at which data expands.

NetVault: Report Manager Pro for Exchange (NRME). For users who require additional visibility into critical messaging operations, NetVault: Report Manager Pro for Exchange enables Microsoft Exchange Server storage and management reporting to give administrators a single view of storage with a centralized GUI to schedule email server scans, create reports, and automate report distribution. NRME scans Exchange Server databases when usage is low and stores metadata in the NetVault: Report Manager database. These reports can then be run at any time, with no impact on the Exchange Server. NRME provides a detailed analysis on email disk space consumption, and email traffic flow.

Services

A comprehensive offering of customer support and other professional services is a valuable component to the successful marketing, sale and deployment of our solutions. From planning to deployment to operations, we offer a complete set of technical services, training and support options that allow users to maximize the benefits of our portfolio of software.

Our global customer support organization built specifically to handle our worldwide customer base. We offer multiple levels of customer support that can be tailored to the customer’s response needs and business sensitivities. Our support provides our customers with:

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Telephone Support. Customers can select from several real-time telephone support offerings that best match their needs. Our support staff is available 24/7 by telephone to provide first response and manage the resolution of customer issues.

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Online Support. In addition to phone support, our customers have access to an online product support database for help with troubleshooting and operational questions via our innovative customer self-service portal.

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Technical Expertise. Our support engineers have a comprehensive working knowledge of complex applications, storage architectures and devices and networks. We have also developed, maintain and make available to customers an online knowledge repository to further enable our support organization and improve the overall experience that customers receive.

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Global coverage. Our support infrastructure includes support centers in San Diego, California, Poole, United Kingdom and Tokyo, Japan. From these centers, local support resources can provide our customers with around the clock global support. We have designed our support infrastructure to automate the communications and handoffs seamlessly between support centers and are able to scale with the global requirements of our customers.

We also provide a wide range of other professional services that consist of:

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Installation and Post-deployment Services. Our professional services resources help customers efficiently configure, install and deploy their solution based on their specific business objectives.

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Assessment and Design Services. Our assessment and design services assist customers in determining data and storage management requirements, designing solutions to meet those requirements and planning for successful implementation and deployment.

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Training Services. We provide global onsite and offsite training for our solutions. Packaged or customized customer training courses are available in instructor-led or computer-based formats. BakBone offers in-depth training and certification for our resellers in pre- and post-sales support methodologies.

Strategic Relationships

We believe that strategic and distribution relationships with industry leaders are critical to our continued success. An important element of our strategy is to establish relationships with these third parties to assist us in developing, marketing, selling and implementing our solutions. This approach enhances our ability to expand our product offerings and customer base and to enter new markets. We have established the following types of strategic relationships:

Distributors, Value-Added Resellers and Systems Integrators. We distribute our products to end users primarily through a multi-tiered global network of resellers that include value-added resellers and value-added distributors. We have an extensive network of resellers and distributors in North America, Asia-Pacific and EMEA. Our partnerships with resellers and distributors allow our products to reach end users that we would not otherwise have the resources to identify. The reseller and distributor partnerships are the primary means by which our products are sold, and the majority of our revenue is derived from our relationships with these resellers and distributors. We continually seek to partner with the premier resellers and distributors available in our three geographic regions; our strategy going forward is to expand and improve the quality of our reseller and distributor partnerships. As of March 31, 2010, we had over 600 reseller partners and systems integrators distributing our software worldwide.

Original Equipment Manufacturers (OEMs). We focus on the development and growth of our major OEM and strategic partner relationships. We work closely with our OEM and strategic partners to define product needs, conduct on-site testing and provide engineering and field application engineering support. We have derived, and believe we will continue to derive, a significant portion of our revenues from a limited number of customers. We believe that our solutions complement and expand the solutions provided by our OEMs and strategic partners. In addition to maintaining and expanding our existing relationships, our strategy is to grow our business by adding new partners.

Sales and Marketing

Our sales and marketing strategy is focused on licensing our products and providing services to enterprise businesses and organizations through a combination of software, post-contract support and professional services. We generally offer non-exclusive, perpetual software licenses through our channel partners to end users. Maintenance contracts generally cover a period of one year. After contract expiration, our customers have the ability to purchase maintenance contract renewals, which generally cover a period of one year. Our product is used by end user customers in a wide variety of industries, businesses, governments and applications. Our end user customers include, among others, financial service providers, retailers, insurance companies, Internet service providers, law firms, educational institutions, science and biotech organizations, healthcare institutions, and domestic and international government agencies.

As a global provider of solutions, we have an established worldwide distribution network to sell our data protection and availability solutions to large enterprises, small and mid-tier enterprises, government agencies and service providers, both directly through our sales teams and indirectly through our global network of more than 600 value added resellers and system integrators. Our global sales force and focused channel marketing activities enable and assist partners in the marketing and sales of our solutions. We also sell our solutions through our OEM and strategic partners, which include Teradata (formerly NCR), Apple, Fujitsu and Hitachi Ltd.

Research and Development

Our industry is subject to rapid technological advancements, changes in customer requirements, developing industry standards and new product introductions and enhancements. As a result, our success depends, in part, on our ability to continue to improve our software solution in a cost-effective and timely manner to address emerging customer and market needs. Product development activities occur primarily in our San Diego,

California, Santa Clara, California, Poole, UK and Novosibirsk, Russia locations. We also conduct development activities in Tokyo, Japan that are focused on adapting our software for use in the Asia-Pacific region.

Our research and development expenditures in fiscal 2010 and 2009 totaled $13.2 million and $11.2 million, respectively. We focus our current research and development efforts on new features and functionality for our entire line of products to address new market opportunities and to meet changing customer needs. These projects include the continued introduction of new application plugin modules, improvements in performance and functionality product adaptations to meet the needs of new hardware offerings entering the market and the integration of new technologies to address the evolving data protection marketplace. As of June 11, 2010 we directly employed 58 in-house research and development resources. We anticipate we will have significant future research and development expenses in order to continue to provide high quality products that enable us to maintain and enhance our competitive position while increasing market share.

Intellectual Property

Our software products rely on our internally-developed intellectual property and other proprietary rights. We rely primarily on a combination of our patents, trademarks and copyrights together with trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property and other proprietary rights. In addition, we have filed for patent protection in several jurisdictions including the United States, the European Union and Japan. As of June 11, 2010, we have 28 patents pending, 13 issued patents and registered trademarks for the marks BakBone^®, BakBone Software^®, NetVault, BakBone Logo, Asempra, ColdSpark, ColdSpark MTR, and SparkEngine^®. We license our software products primarily under shrink wrap licenses that are included as part of the product packaging. Shrink wrap licenses are not negotiated with or signed by individual customers, and purport to take effect upon the opening of the product package or use of the software license key. The legal enforceability of shrink wrap licenses is uncertain in many jurisdictions, including some of the foreign countries in which we sell our products. We also enter into confidentiality agreements with our employees and technical consultants. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing the unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of our software products exists. In addition, the laws of some foreign countries, including those in which we sell our products, do not protect our proprietary rights as fully as do the laws of the United States.

Competition

As a company, we face a broad number of competitors that vary from opportunity to opportunity, often times driven by specific requirements.

The storage management and data protection software market is intensely competitive. This market is characterized by rapidly changing technology and evolving standards. We have a number of competitors that vary in size and scope and breadth of products offered. Many of our competitors have greater financial resources than we do in the areas of sales, marketing, branding and product development and we expect to face additional competition from these competitors in the future. Our current competitors include, but are not limited to, Symantec Corporation, EMC Corporation, IBM’s Tivoli division, CA, Inc. (formerly Computer Associates) and CommVault Systems, Inc. Some of these companies compete against us by offering a full suite of storage management tools, including software that addresses data protection. We also face competition from a number of smaller companies who, like us, focus solely or primarily on the data protection software market. Furthermore, our OEM partners, who do not currently compete with us, could decide to compete with us by offering their own data protection solutions that exclude our software. In addition, other storage equipment vendors may enter our market either through acquisition of competing technologies or products, or through development of their own data protection software solutions. Although many of our competitors have significantly more financial and technical resources than we do, we believe we compete favorably based on the technical strengths of our product offering relative to our competitors.

Seasonality

Historically our business results have generally been weakest in our first fiscal quarter and the strongest in our third fiscal quarter. Our other two fiscal quarters have not shown any consistent performance trends relative to one another.

Employees

As of June 11, 2010, we had 241 employees, including 58 in research and development, 108 in sales and marketing, 45 in customer support, and 30 in general administration. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Additional Information

We provide our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports free of charge under “Investor Relations” on our web site at www.bakbone.com as soon as reasonably practicable after we electronically file this material with or furnish this material to the SEC. The information contained on our website is not part of this Annual Report.

We are required to file reports and other information with the Securities Commission in each of the provinces of Ontario, Alberta and British Columbia, Canada. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) (www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system, as well as on our web site at www.bakbone.com under “Investor Relations”.

Item 1A.

Risk Factors

Our business could continue to be harmed by the weak general economic and market conditions that lead to reduced spending on information technology products.

As our business has expanded globally, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. General economic conditions during the calendar years 2008 and 2009 caused our customers to delay or reduce information technology purchases. If economic activity in the United States and other countries remains slow, customers may continue to delay or further reduce information technology purchases. This could result in additional reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end user market could negatively affect the cash flow of our resellers and customers who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure and cause a decrease in operating cash flows. Also, if our resellers experience excessive financial difficulties and/or insolvency, and we are unable to successfully transition end users to purchase our product from other resellers or directly from us, our sales could decline significantly. Any of these events would likely harm our business, results of operations and financial condition.

We have incurred substantial net losses since inception, and we may not be able to achieve or maintain profitability or positive cash flow.

We have incurred operating and net losses since the inception of our operations in March 2000. Our net losses were $9.8 million and $5.5 million for the years ended March 31, 2010 and 2009, respectively. As of March 31, 2010, our accumulated deficit was $242.4 million. We may not be able to achieve positive cash flow from operations in future periods. If we cannot achieve and sustain operating profitability, we may not be able to meet our working capital requirements, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our future capital needs are uncertain and our ability to access additional financing may be negatively impacted by the volatility and disruption of the capital and credit markets and adverse changes in the global economy.

Our capital requirements in the future will depend on many factors, including:

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acceptance of and demand for our software products;

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the costs associated with integrating and developing acquired products and businesses;

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the extent to which we invest in new technology and product development;

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the costs of developing new products, services or technologies; and

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the costs associated with the growth of our business, if any.

We intend to finance our operations and any growth of our business with existing cash and any cash flow from operations. We expect our cash balance to vary based on our bookings, disposal costs related to ColdSpark, core operating costs and the timing of any payments related to the ColdSpark transaction. We believe that our existing cash and anticipated net cash flows from operations will be sufficient to meet our operating and capital requirements through at least the next 12 months from the date of the filing of this Annual Report. However, if the costs associated with closing our ColdSpark operations exceed our current projections, we are faced with unexpected legal costs associated with exiting the ColdSpark business or adverse global economic conditions persist or worsen, we could experience an additional decrease in cash from operations and we may be required to obtain additional financing in order to fund our continued operations. Due to the existing uncertainty in the equity markets including debt, private equity and venture capital and traditional bank lending markets, access to additional debt or equity may not be available to us on acceptable terms or at all. If we cannot raise funds on acceptable terms when necessary, we may not be able to develop or enhance our products and services, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Furthermore, if we issue equity or convertible debt securities to raise additional funds, our existing shareholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing shareholders. If we incur additional debt, it would increase our leverage relative to our results of operations or to our equity capitalization.

Our acquisition of ColdSpark and subsequent exiting of the ColdSpark Message Management business have had and could continue to have an adverse affect on our financial condition.

In May 2010, we announced that we intended to exit our ColdSpark Message Management business, which we acquired in connection with our acquisition of ColdSpark, Inc. in May 2009. We have incurred significant costs in connection with acquiring, integrating and further developing the ColdSpark Message Management business, which, among other things, has resulted in a decrease in our cash balance since the completion of the acquisition. We have recorded an impairment charge in the fourth quarter of fiscal 2010 of approximately $12.6 million, which reduces the current carrying value of the business to its estimated fair value as of March 31, 2010. We expect to make cash payments of approximately $0.5 million in connection with the closing of the Message Management business. However, these costs could be higher than estimated if we were to incur unexpected costs related to the transition of our existing Message Management customers or legal or other costs. In addition, the closing of our Message Management business has required, and may continue to require, significant attention from senior management.

We may also continue to incur significant costs related to our acquisition of ColdSpark. We are currently disputing our obligation to make certain future cash and share payments to the former stockholders of ColdSpark pursuant to the terms of the merger agreement with the ColdSpark stockholders. However, if it were determined that we are obligated to make all of such payments under the provisions of the merger agreement, the agreement requires us to make cash payments of (i) $815,000 in June 2010 for a previously deferred initial cash payment, (ii) $1.5 million due in June 2010, (iii) $1.5 million due in June 2011, and (iv) $3.6 million due in June 2012. Under the terms of the merger agreement payments of a portion of the amounts identified in (ii) and (iii) above

may be deferred by issuing our common shares equal to the deferred amount plus interest on any deferred payment and we have in fact elected to defer the payment in (ii) above, as further described in the liquidity and capital resources section of Item 7 of this Annual Report. However, under the terms of the merger agreement, we are still obligated to make these cash payments to the former ColdSpark stockholders on a deferred basis. We would also be required to issue approximately 9.1 million common shares to the former ColdSpark stockholders. Making the above cash payments would have a significant impact on our cash balances and working capital. We may not have sufficient cash available to make the cash payments and additional financing may not be available to us on favorable terms or at all. In addition, any share issuances would result in significant dilution to our shareholders. Our dispute with the former ColdSpark stockholders could also result in significant legal and other expenses and cause diversion of management attention and resources from the operation of our business.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be misstated, our reputation may be harmed and the trading price of our common shares could be negatively affected. In connection with the audits of our financial statements for the fiscal years ended March 31, 2006, 2007, 2008 and 2009, we identified material weaknesses in our internal controls as further described in our Annual Reports on Form 10-K for those fiscal years. We have implemented actions to address these weaknesses and to enhance the reliability and effectiveness of our internal controls and operations, and our management has concluded that there are no material weaknesses in our internal control over financial reporting as of March 31, 2010. However, our internal control over financial reporting is not required to be and has not been audited by our independent registered public accounting firm. In addition, our controls over financial processes and reporting may not be effective in the future and additional material weaknesses or significant deficiencies in our internal controls may not be discovered or remediated in the future. Any failure to remediate any future material weaknesses or implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Competition in our target markets could reduce our sales.

We operate in a segment of the intensely competitive storage management software market. This market is characterized by rapidly changing technology and evolving standards. We have a number of competitors that vary in size and scope and breadth of products offered. Many of our competitors have greater financial resources than we do in the areas of sales, marketing, branding and product development, and we expect to face additional competition from these competitors in the future. Our current competitors include, among others, Symantec Corporation, EMC Corporation, IBM’s Tivoli division, CA Inc. and CommVault Systems, Inc. Some of these companies compete against us by offering a full suite of storage management tools, including software that addresses data protection. We also face competition from a number of smaller companies who, like us, focus solely or primarily on the data protection software market. Furthermore, our OEM partners, who do not currently compete with us, could decide to compete with us by offering their own data protection solutions that exclude our software, and other storage equipment vendors may enter our market either through acquisition of competing technologies or products, or through development of their own data protection software solutions.

Our existing and future competitors could introduce products with superior features, scalability and functionality at lower prices than our product. Most of our competitors provide broad suites of storage management software solutions and thus could gain market share by bundling existing or new data protection products with other more established storage products or by acquiring or forming strategic alliances with our other competitors. If our competitors are successful in gaining market share, our business, results of operations, financial condition and cash flows could be adversely affected.

Our future revenues depend upon continued market acceptance of our NetVault product portfolio.

Currently we derive substantially all of our revenues from our NetVault product portfolio, and we expect this will continue for the foreseeable future. If the market does not continue to accept these products, our revenues will decline significantly, and this would negatively affect our results of operations, financial condition and cash flows. Factors that may affect the market acceptance of our NetVault products include the performance, price and total cost of ownership of our products, and the availability, functionality and price of competing products and technologies. Many of these factors are beyond our control.

Our bookings, revenues and operating results may fluctuate significantly, which could cause the market price of our stock to fall.

Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future. We may experience a shortfall in bookings or revenues in any given quarter in relation to our plans or investor expectations. In addition, if we have a shortfall in bookings or revenues, our efforts to reduce operating expenses in response will likely lag behind such shortfall. Our revenues and bookings, and our licensing revenues and bookings in particular, are difficult to forecast and are likely to fluctuate significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control. Factors that may cause fluctuations in our revenues and bookings include the following:

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timing and magnitude of sales;

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historical sales patterns in the IT industry which often involve customer purchase decisions being made at or near the end of each calendar quarter;

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timing of large enterprise transactions which are typified by long solicitation and decision periods and often remain highly uncertain until the sale is actually completed;

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introduction, timing and market acceptance of new products by us and our competitors;

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rate of growth of Network Attached Storage and Storage Area Network technology deployment;

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rate of adoption and associated growth of the Linux operating system;

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changes in our pricing policies and distribution terms;

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possibility that our customers may defer purchases in anticipation of new products or product updates by us or by our competitors; and

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changes in market demand for IT products in general.

Any deterioration in our operating results, including fluctuations based on any shortfalls in bookings or revenues, could cause the market price of our stock to fall substantially. If our operating results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.

We are dependent on certain key customers.

During the year ended March 31, 2010, we had no customers that comprised 10% or more of our consolidated revenues. However, we have derived, and may continue to derive, a significant portion of our revenues from a limited number of OEM customers. If any of our largest OEM customers were to reduce purchases from us or we are unable to attract new OEM customers, our business would be adversely affected. For example, during fiscal 2009, several of our OEM arrangements terminated, resulting in a significant decline in OEM bookings for fiscal 2010. In addition, we do not have contracts with our key customers that require such customers to make any minimum purchases from us. Therefore, we cannot be sure that these customers will continue to purchase our product at current levels, or at all. As a result, a significant customer in one period may decide not to purchase our product in a subsequent period, which would have an adverse impact on our revenues, results of operations, financial condition and cash flows.

We rely on indirect sales channels such as value-added resellers, distributors and OEMs, and this makes it difficult for us to predict our revenues.

We rely, and will continue to rely, on our indirect sales channel for the marketing and distribution of our products. Our agreements with value-added resellers and distributors do not contain exclusivity provisions and in most cases may be terminated by either party without cause and with limited or no notice. Many of our resellers also carry other product lines that are competitive with ours. These resellers may not give a high priority to the marketing of our products. They may give a higher priority to other products, including the products of competitors, or may decide not to continue to carry our products. In addition, we may not be able to retain our current resellers or successfully recruit new resellers. Any such changes in our distribution channels could seriously harm our business, operating results and financial condition.

Our strategy also involves developing significant partnerships with key hardware and software providers to integrate NetVault products into their offerings to support more robust data protection solutions. We may fail to implement this strategy successfully. We are currently investing, and will continue to invest, resources to develop this channel. Such investments, if not successful, could seriously harm our operating margins. Before we can sell our products to an OEM, generally we must engage in a lengthy sales cycle and develop a version of our software customized for and integrated with the hardware or software product of the OEM. This process, which can take up to 12 months or more, requires the commitment of OEM personnel and resources, and we compete with other suppliers for these resources. Any delays in completing this process or any failure to timely develop a customized and integrated version of our software for an OEM would adversely affect our ability to sell our products.

Sales of our products through our OEMs depend on the success of our OEMs in developing and effectively marketing new products, applications and product enhancements on a timely and cost-effective basis that meet changing customer needs and respond to emerging industry standards and other technological changes. Our reliance on OEMs exposes us to additional risks. If our OEMs do not meet these challenges our revenues may suffer. The OEMs we partner with may incorporate the technologies of other companies in addition to, or to the exclusion of, our technologies, and are not obligated to purchase our product from us, and they may not continue to include our products with their products. In addition, we have no control over the shipping dates or volumes of products the OEMs ship. Our OEM customers may compete with one another. If one of our OEM customers views the products we have developed for another OEM as competing with its products, it might decide to stop doing business with us, which could adversely affect our business, results of operations, financial condition and cash flows. The inability to recruit, or the loss of, important OEMs could seriously harm our business, operating results and financial condition. Finally, should one of our OEM partners create or acquire competitive products to ours, our OEM revenues would likely decline.

Because our intellectual property is critical to the success of our business, our results of operations may suffer if we are unable to adequately protect or enforce our intellectual property rights.

Our proprietary technologies are crucial to our success and ability to compete. We rely primarily on a combination of patents, copyrights, trade secret laws, contractual provisions and trademarks to establish and protect our intellectual property rights in our proprietary technologies. Sometimes our products are licensed under “shrink wrap” license agreements that do not require a physical signature by the end user licensee and therefore may be unenforceable under the laws of some jurisdictions. We presently have five patents issued and we continually invest resources to gain additional patent protection for our proprietary technology. We may not be issued additional patents in the future, and the benefit we may derive from any patents, if and when issued, may equal or exceed the costs of obtaining such patents.

Our general practice is to enter into confidentiality or license agreements with employees, consultants and customers and seek to control access to and distribution of our source code, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our product or to obtain and use information that we regard as proprietary. Policing unauthorized use

of our proprietary information is difficult. Other parties also may independently develop or otherwise acquire equivalent or superior technology. In addition, the laws in some countries in which our product is or may be developed, manufactured or sold may not protect our intellectual property rights to the same extent as the laws of the United States, or at all. Our failure to protect our intellectual property rights could result in increased competition and therefore reduce our market share, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.

We may become involved in costly and lengthy patent infringement or intellectual property litigation which could seriously harm our business.

In recent years, there has been significant litigation in the United States and in foreign countries involving patents and other intellectual property rights. We may become party to litigation in the future as a result of an alleged infringement of others’ intellectual property. From time to time, we receive inquiries from other companies concerning whether we used their proprietary information or technology. It also is possible that patent holders will assert patent rights which apply broadly to our industry, and that such patent rights, if valid, may apply to our product or technology. Any claims that we improperly use another party’s proprietary information or technology or that we infringe another party’s intellectual property, with or without merit, could adversely affect or delay sales of our product, result in costly and time-consuming litigation, divert our technical and management personnel, or require us to develop non-infringing technology or enter into royalty or licensing arrangements, any of which could adversely affect our business. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner or on reasonable terms, our business, results of operations, financial condition and cash flows could be materially adversely affected.

Our foreign operations create special challenges that could adversely affect our results of operations.

We have significant operations outside of the United States, including a significant portion of our engineering and sales operations, and we generate a significant portion of our revenues from sales outside the United States. It is our intention to expand our international operations in order to increase our revenues from sales outside the United States and to continue to take advantage of lower costs associated with software development outside the United States. As of June 11, 2010, we had 80 employees in Europe, the Middle East and Africa (“EMEA”) and 66 employees in the Asia-Pacific region out of 241 total employees. Our foreign operations and revenues are subject to a number of risks, including:

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potential loss of proprietary information due to piracy, misappropriation, or weaker intellectual property protection laws or weaker enforcement of such laws;

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imposition of foreign laws and other governmental controls, including trade restrictions, as well as the burdens of complying with a wide variety of multiple local, country and regional laws;

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unexpected domestic and international political or regulatory changes;

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fluctuations in currency exchange rates and general economic instability;

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lack of acceptance of localized products, if any, in foreign countries;

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longer negotiation and accounts receivable payment cycles;

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potentially adverse tax consequences;

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difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations; and

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difficulties in ensuring that our subsidiaries maintain sufficient internal control over financial reporting in order to produce financial statements in compliance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Our continued growth will require further expansion of our international operations. To expand international operations successfully, we must establish additional foreign operations, hire and retain additional personnel and recruit additional international resellers, all of which will require significant management attention and financial resources. If we fail to further expand our international operations and revenues, we may not achieve our anticipated growth.

A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we may experience currency losses. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities. As a result, our results of operations, financial condition and cash flows could be adversely affected by such exchange rate fluctuations.

Our success depends on our ability to keep pace with rapid technological developments in the storage industry.

Our future success depends, in part, on our ability to address the rapidly changing needs of organizations by developing and introducing new product updates and features on a timely basis. To achieve this objective we must extend the operation of our products to new platforms and keep pace with technological developments and emerging industry standards. To achieve broad acceptance of our software, we must obtain certifications from hardware vendors approving our software for use as a data protection solution on their platforms. This process requires continual testing and development, and we must invest significant technical resources in adapting our products to the changing hardware specifications. If we are unsuccessful in obtaining new certifications, the market for our software may be limited. Moreover, software products typically have a limited life cycle, and it is difficult to estimate when they will become obsolete. We must therefore continually develop and introduce innovative products and/or upgraded versions of our existing products before the current software has completed its life cycle. Our failure to do so may result in our inability to achieve and maintain profitability.

Our products may contain significant defects, which may result in liability and/or decreased sales.

Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Despite our efforts to test our products, we may experience significant errors or failures in our products, or software may not work with other hardware or software as expected, which could delay the development or release of new products or new versions of our products and adversely affect market acceptance of our products. End user customers use our products for applications that are critical to their businesses, and they have a greater sensitivity to product defects than the market for other software products generally. Our end users and distribution partners may claim that we are responsible for damages to the extent they are harmed by any failure of our products.

If we were to experience significant delays in the release of new products or new versions of our products, or if customers were dissatisfied with product functionality or performance, we could lose revenue or be subject to liability for service or warranty costs, and our business, results of operations, financial condition and cash flows could be adversely affected.

Our success depends on hiring and retaining key personnel, including our executive officers and other qualified employees.

We have experienced significant changes in our senior management team within the past few months. James Johnson, our former Chief Executive Officer, and Ken Horner, our former Senior Vice President, Corporate Development and Strategy, are no longer employed by us, and our Chief Financial Officer, Steve Martin, is currently operating as our Interim Chief Executive Officer. These management transitions and uncertainties have resulted, and could continue to result, in further disruption of our business.

Our future growth and success depends on the continued contributions of our senior management, as well as our ability to hire and retain key management, engineering, sales and marketing and operations personnel as needed. If we are unable to hire and retain qualified employees, our business and operating results may be adversely affected. We need to hire and retain qualified personnel to meet customer demand for our products and services and develop new products and services, and we may not be able to do so. All of our employees are free to terminate their employment with us at any time. Competition for people with the skills we require is intense, particularly in the San Diego area where our headquarters are located, and the high cost of living in this area makes our recruiting and compensation costs higher. As a result, we expect to continue to experience increases in compensation costs.

We rely upon software licensed from third parties, and if it became unavailable to us, we could be required to modify our software or to acquire a license or right to use alternative technology.

We license and use software owned by third parties in our business, some of which is incorporated into our products. These third party software licenses may not continue to be available to us on acceptable terms. Also, these third parties may from time to time receive claims that they have infringed the intellectual property rights of others, including patent and copyright infringement claims, which may affect our ability to continue licensing this software. Our inability to use any of this third party software could result in shipment delays or other disruptions in our business, which could adversely affect our business, results of operations, financial condition and cash flows.

Potential future acquisitions could adversely affect our ongoing operations.

Although we do not have any current plans to make material acquisitions, we may in the future make further acquisitions or investments in companies, products or technologies that we believe complement or expand our existing business and assist us in quickly bringing new products to market. However, we have limited experience in making acquisitions and investments. As a result, our ability to identify and evaluate prospects, complete acquisitions and properly manage the integration of businesses is relatively unproven. Failure to properly evaluate and execute acquisitions or investments or to integrate completed acquisitions may have a material adverse effect on our business, results of operations, financial condition and cash flows.

In making or attempting to make acquisitions or investments, we face a number of risks, including risks related to:

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identifying suitable candidates, performing appropriate due diligence, identifying potential liabilities and negotiating acceptable terms;

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reducing our working capital and hindering our ability to expand or maintain our business, if we make acquisitions using cash;

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the potential distraction of our management, diversion of our resources and disruption of our business;

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retaining and motivating key employees of the acquired companies;

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managing operations that are distant from our current headquarters and operation locations;

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competing for acquisition opportunities with competitors that are larger than we are or have greater financial and other resources than we have;

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accurately forecasting the financial impact of a transaction;

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assuming liabilities of acquired companies, including existing or potential litigation related to the operation of the business prior to the acquisition;

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maintaining good relations with the customers and suppliers of the acquired company;

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effectively integrating acquired companies and assets and achieving expected synergies; and

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maintaining sufficient cash to build the acquired business operations until they generate positive cash flow.

Any acquired businesses, products or technologies may not generate sufficient revenue and cash flows to offset the associated costs of such acquisitions. In addition, such acquisitions could result in other adverse effects. For example, if the acquisition resulted in goodwill, the company is subject to annual review for goodwill impairment. If impairment testing indicates that the carrying value of a reporting unit exceeds its fair value, the goodwill of the reporting unit is deemed impaired. Accordingly, an impairment charge would be recognized for that reporting unit in the period identified, which could have a material adverse effect on our operating results. Moreover, from time to time, we may enter into negotiations for the acquisition of businesses, products or technologies but be unable or unwilling to consummate the acquisitions under consideration. This could cause significant diversion of managerial attention and resources.

Because we are a Canadian corporation, certain civil liabilities and judgments against us or our directors by U.S. investors may be unenforceable.

We are incorporated under the laws of Canada and some of our directors are residents of Canada. As a result, it may be difficult for our U.S.-based shareholders to initiate a lawsuit within the United States. It may also be difficult for shareholders to enforce a U.S. judgment in Canada or elsewhere or to succeed in a lawsuit in Canada or elsewhere based only on violations of U.S. securities laws.

Litigation may harm our business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For example, we may in the future be subject to class actions, other securities litigation or other proceedings or actions arising in relation to the restatement of our prior period financial statements or related to our past or future acquisition activities. Litigation and any potential regulatory proceeding or action may be time consuming, expensive and distracting from the conduct of our business, and the outcome of litigation and any potential regulatory proceeding or action is difficult to predict. The adverse resolution of any specific lawsuit or any potential regulatory proceeding or action could have a material adverse effect on our business, results of operations and financial condition. To the extent expenses incurred in connection with litigation or any potential regulatory proceeding or action (which may include substantial fees of attorneys and other professional advisers and potential obligations to indemnify officers and directors who may be parties to such actions) are not covered by available insurance, such expenses could adversely affect our business, results of operations, financial condition and cash flows.

There is a limited market for our common shares and selling our shares may be difficult.

Our common shares have been quoted on the OTCBB since May 2009. From February 2005 until May 27, 2009, trading of our common shares was conducted on the “Pink Sheets” due to our failure to keep current in filing our periodic reports with the SEC. In addition, our common shares have not traded on the TSX since December 2004, when the Canadian jurisdictions of Ontario, Alberta and British Columbia issued cease trade

orders due to delays in the filing of our financial statements. Our common shares were subsequently de-listed from the TSX in May 2006. In April 2009, the cease trade orders in all of the Canadian jurisdictions were lifted. The trading market for our common shares is limited and an active trading market may not develop. Selling our common shares may be difficult because the limited trading market for our shares on the OTCBB could result in lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume.

In addition, our stock may be defined as a “penny stock” under Rule 3a51-1 under the Exchange Act. “Penny stocks” are subject to Rule 15g-9, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our common stock is subject to the penny stock regulations, the market liquidity for the shares will be adversely affected.

Our share price is volatile and your investment could decline in value.

Our stock price has fluctuated significantly in the past and is likely to continue to fluctuate significantly, making it difficult to resell shares when investors want to at prices they find attractive. General economic, political and stock market conditions may affect the market price of our common shares, and may cause our share price to fluctuate in ways unrelated or disproportionate to our operating performance. Factors affecting the trading price of our common shares could include:

•

variations in our financial results;

•

our restatement of previously reported financial information and delayed filings for subsequent years;

•

announcements of innovations, new solutions, strategic alliances or significant agreements by us or by our competitors;

•

recruitment or departure of key personnel;

•

changes in estimates of our financial results;

•

changes in the recommendations of any securities analysts that elect to follow our common stock;

•

market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;

•

any significant litigation brought against us;

•

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

•

sales of substantial amounts of our common shares, or the perception that substantial amounts of our common shares will be sold, by our existing stockholders in the public.

The stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high technology companies in particular, which are often unrelated to the operating performance of these companies. In addition, in the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities, and we may be subject to a heightened risk of securities class action litigation and due to our restatement of previously published financial information.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We currently lease 22,600 square feet in San Diego, California, for our corporate headquarters and our North American sales and development facility. We also lease 5,900 square feet in Poole, United Kingdom, for our EMEA development facility, 6,465 square feet in Reading, United Kingdom, for our EMEA sales and operations facility and 6,400 square feet in Tokyo, Japan, for our Asia-Pacific sales and operations facility. In addition to these facilities, we also lease several small sales offices throughout the world. We believe that our current facilities are suitable and adequate to meet our needs for the foreseeable future. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

Item 3.

Legal Proceedings

At June 11, 2010, there were no material pending legal proceedings to which we were a party or any of our property was subject. From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, operating results or cash flows.

Item 4.

(Reserved)

PART II

Item 5.

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

Market Information

On May 27, 2009, our common shares began to trade on the Over-the-Counter Bulletin Board, or OTCBB. Beginning in February 2005, our common shares were traded on the Pink Sheets, following our delisting from the OTCBB for failure to timely file our periodic reports with the SEC.

In December 2004, the Canadian jurisdictions of Ontario, Alberta and British Columbia issued cease trade orders due to delays in the filing of our financial statements. As a result of these cease trade orders, our common shares have not been traded on the TSX since December 2004. Our common shares were subsequently de-listed from the TSX in May 2006. On April 27, 2009, the cease trade orders were lifted.

The following table sets forth the high and low sales prices of our common shares during the years ended March 31:


		(U.S. $)
		High		Low
2010	Fourth Quarter	$	0.45	$	0.32
	Third Quarter		0.57		0.32
	Second Quarter		0.55		0.29
	First Quarter		0.52		0.36

2009	Fourth Quarter	$	0.70	$	0.21
	Third Quarter		0.57		0.16
	Second Quarter		0.90		0.52
	First Quarter		1.00		0.70

As of June 11, 2010, there were approximately 320 holders of record of our common shares. On June 11, 2010, the last reported sales price of our common shares on the OTC Bulletin Board was $0.22.

Dividends

We have never declared or paid any cash dividends on our common shares and do not anticipate paying such cash dividends in the foreseeable future. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition and other factors as the board of directors, in its discretion, deems relevant.

Canadian Tax Matters

The discussion below is a general summary of the principal Canadian federal income tax considerations relating to an investment in our common shares. The discussion does not take into account the individual circumstances of a particular investor and is not intended to be, nor should it be relied upon or construed to be, legal or tax advice to any investor or potential investor in our shares. Investors and potential investors in our common shares should consult their tax advisers for advice concerning the tax consequences of an investment in our common shares arising under state, provincial or local tax laws or the tax laws of any jurisdiction other than Canada. The following summary is generally applicable to persons who, at all relevant times, are not, or are not deemed to be, a resident of Canada.

Dividends

Dividends (including share dividends) paid or credited, or deemed to be paid or credited, to a non-resident of Canada are subject to Canadian withholding tax at a rate of 25% of the gross amount of such dividends, subject to reduction under the provisions of any applicable income tax treaty. The Canada-U.S. Income Tax Convention (1980) (the “Convention”) generally reduces the rate of withholding tax to 15% for U.S. residents who are the beneficial owners of our common shares, or 5% in the case of corporate U.S. shareholders who are the beneficial owners of at least 10% of our voting shares. Persons who are subject to the U.S. federal income tax on dividends may be entitled, subject to certain limitations, to either a credit or deduction for Canadian income taxes withheld with respect to dividends paid or credited on our common shares.

Disposition of Shares

Capital gains realized on the disposition of our common shares by a non-resident of Canada will generally not be subject to Canadian income tax, unless the shareholder realizes the gains in connection with a business carried on in Canada with respect to such shares. Where the common shares are disposed of by way of an acquisition of common shares by the Company, other than by a purchase in the open market in a manner consistent with the purchase by any other member of the public, the amount paid by us in excess of the paid-up capital of such common shares will be treated as a dividend and will be subject to non-resident withholding tax as described above.

Item 7.

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

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including (without limitation) the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 1A under the caption “Risk Factors,” and in the audited consolidated financial statements and related notes included in this Annual Report on Form 10-K. Risk factors that could cause actual results to differ from those contained in the forward-looking statements include, but are not limited to: weak economic and market conditions that could result in further reductions in spending on information technology products; costs and distractions associated with our exiting of the ColdSpark business; effects of the transition of our senior management team; competition in our target markets; potential capital needs; management of future growth and expansion; the development, implementation and execution of our Integrated Data Protection strategic vision; customer acceptance of our existing and newly introduced products and fee structures; the success of our brand development efforts; and other risks identified elsewhere in this Annual Report and in our most recent reports on Forms 10-Q and 8-K. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made, other than as required under applicable securities laws.

Overview

We are a global provider of software-based, data protection solutions that enable the effective backup, recovery and overall availability of business critical data and information. Our NetVault portfolio of products allows organizations to efficiently and cost-effectively protect data within heterogeneous computing and storage environments. Our products are designed to be flexible and easy to install, use, maintain and support, while providing our end users with what we believe is a substantially lower overall total cost of ownership than competitive products. We have also designed our products to be modular and to work within an open standards environment, allowing the NetVault product portfolio to integrate easily with our end users’ information technology infrastructure and scales as our end users’ data protection requirements evolve. We believe the NetVault solutions are well positioned to satisfy the needs of organizations seeking affordable enterprise, multi-platform data protection and availability solutions.

We primarily market and sell the complete NetVault product portfolio through an indirect global sales channel comprised of storage-focused resellers, distributors and original equipment manufacturers, or OEMs. Our sales teams engage in the selling of solutions with end user customers and provide them with multiple channels to most efficiently facilitate purchase of the required solution. Our end users consist of domestic and international businesses and organizations of all sizes and across numerous industries, as well as foreign and domestic government agencies and educational institutions. During the year ended March 31, 2010, we operated in two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells ColdSpark’s SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. We have operations in three primary geographic regions: North America, Asia-Pacific, and EMEA, through three of our respective wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, and BakBone Software Ltd.

In May 2009 we acquired ColdSpark, a provider of enterprise email infrastructure solutions through the SparkEngine Mail Transport Platform, including the SparkEngine, MailFusion and Compliance Catalyst families of products. During fiscal 2010, the ColdSpark products were sold through our Message Management division. On May 21, 2010, we decided to realign our corporate strategy and focus on our storage and data protection business. As a result, we closed our Message Management division and no longer offer these product families. The historical results of our Message Management division will be presented as discontinued operations in our future SEC reports.

The following table summarizes consolidated revenues and revenues of each region on an absolute dollar basis and as a percentage of total consolidated revenues (in thousands):


	Year ended March 31,
	2010			2009
Consolidated revenues, net	$	61,868		$	56,020
North America revenues, net		22,312			21,414
As a percentage of consolidated revenues		36	%		38	%
Asia-Pacific revenues, net		23,077			20,283
As a percentage of consolidated revenues		37	%		36	%
EMEA revenues, net		16,479			14,323
As a percentage of consolidated revenues		27	%		26	%

In addition, we had consolidated deferred revenue balances as follows (in thousands):

The following table summarizes the change in our consolidated deferred revenue balances for the years ended March 31, 2010 and 2009:


Deferred revenue balance at March 31, 2008	$	96,700
Current year consolidated bookings		57,738
Current year consolidated revenue		(56,020	)
Foreign exchange impact		(6,653	)

Deferred revenue balance at March 31, 2009	$	91,765
Current year consolidated bookings		56,502
Current year consolidated revenue		(61,868	)
Foreign exchange impact		2,778

Deferred revenue balance at March 31, 2010	$	89,177

We generate revenues primarily through a combination of software licenses and related maintenance contracts. We generally offer non-exclusive, perpetual software licenses through our channel partners to end users. Maintenance contracts generally cover a period of one year, and after contract expiration, our customers have the right to purchase maintenance contract renewals, which generally cover a period of one year.

We license our software to customers through our channel partners in arrangements under which they purchase a combination of software, post-contract support and/or professional services, which we refer to as multiple-element arrangements. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services related to implementation of our software as well as training. While not provided for in our licensing arrangements, we have historically provided our end customers with platform transfer rights (“PTRs”), which allow the customer to exchange an original product for a different product or to exchange an original product operating on one platform for the same product operating on a different platform. We have also historically provided our customers with a range of product concessions and other services which are not explicitly provided for in our sales arrangements. Accordingly, for all multiple-element arrangements, we defer the arrangement fees and recognize the fees ratably over the estimated economic useful life of the software product, which has been determined to be four years. We also provide maintenance contract renewals and professional services on a separate, stand-alone basis. Under these arrangements, maintenance contract renewal fees are recognized ratably over the maintenance period, which is generally one year, and professional services fees are recognized at the time the service is rendered.

We have also entered into multiple-element arrangements with certain OEM customers under which, in addition to providing software licenses and maintenance services, we make a commitment to the customer to provide unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are initially deferred and subsequently recognized ratably over the arrangement period.

The following table identifies the revenue expected to be recorded in subsequent fiscal years related to deferred revenue as of March 31, 2010 (in thousands):


	Fiscal year ending March 31,
2011	$	44,337
2012		25,318
2013		14,975
2014		4,197
2015 and thereafter		350

	$	89,177

Although generally our resellers are not permitted to return our products, one of our OEM customers has a contractually permitted right of return. Also, under certain other limited circumstances we do accept returns. We use historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our product more expensive and, therefore, potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses. Due to the volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results and we could experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities.

Cost of revenues consists of the direct cost of providing customer support, including payroll and other benefits of staff working in our customer support departments, as well as associated costs of computer equipment, telephone and other general costs necessary to maintain support for our end users. Also included in cost of revenues are third party software license royalties and the direct costs of products delivered to customers.

Sales and marketing expenses consist primarily of employee payroll and other benefits, commissions, trade show costs, web advertising and travel costs for our worldwide sales and marketing staff. Commissions are part of our sales personnel compensation package, which is based on the procurement of sales orders and subsequent collection of customer receivables. As we expand our sales and marketing force, we expect sales and marketing expenses to increase.

Research and development expenses consist primarily of salary and related costs for our worldwide engineering staff. We have engineering personnel in our Poole, United Kingdom, Santa Clara, California and San Diego, California, offices who are responsible for the development effort of NetVault products and our application plug-in modules. We also conduct development activities in Tokyo, Japan that are focused on adapting our software for use in the Asia-Pacific region.

General and administrative expenses include salaries and benefits for our corporate personnel and other expenses, such as facilities costs and professional services.

As part of the process of preparing our consolidated financial statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we do business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and financial accounting purposes. These temporary differences result in the establishment of deferred tax assets and liabilities, which are presented on a net basis. We assess on a periodic basis the probability that our net deferred tax assets will be recovered. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, our ability to deduct tax loss carryforwards against future taxable income, and tax planning strategies among the various tax jurisdictions that we do business in when making this assessment. To the extent we believe that recovery is not probable, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized.

Our provision for income taxes is comprised of two primary components: royalty withholding taxes; and federal, state, and foreign income taxes.

Overview of Operating Results by Operating Segment

Our total revenues increased by $5.9 million, or 10%, to $61.9 million for the year ended March 31, 2010, from $56.0 million for the year ended March 31, 2009. The increase in revenue during the year ended March 31, 2010 can be attributed to a $1.5 million arrangement with one of our OEM partners and to the amortization of prior period bookings, partially off-set by a decrease in amortization from current period bookings. During the year ended March 31, 2010, our consolidated bookings decreased $1.2 million, or 2%, to $56.5 million for the year ended March 31, 2010, from $57.7 million for the year ended March 31, 2009. The decrease in bookings during the year ended March 31, 2010 is primarily due to a decrease in bookings in our North America region as a result of a decrease in the volume of new license bookings sold through our existing distribution channel, particularly our OEM channel.

The following table represents our operating results, by reporting segment, for the year ended March 31, 2010:


	Storage Management			Message Management			Total
Total revenues	$	60,824		$	1,044		$	61,868
Cost of revenues		5,774			796			6,570

Gross profit		55,050			248			55,298

Operating expenses:
Sales and marketing		24,786			1,607			26,393
Research and development		11,418			1,741			13,159
General and administrative		11,234			1,168			12,402
Impairment of goodwill and intangible assets		—			12,450			12,450

Total operating expenses		47,438			16,966			64,404

Operating income (loss)		7,612			(16,718	)		(9,106	)

Other non-operating expense		(808	)		(9	)		(817	)

Income (loss) before income taxes		6,804			(16,727	)		(9,923	)
(Benefit from) provision for income taxes		(176	)		5			(171	)

Net income (loss)	$	6,980		$	(16,732	)	$	(9,752	)

Our Storage Management revenues increased $4.8 million, or 9%, to $60.8 million for year ended March 31, 2010 as compared to $56.0 million for the year ended March 31, 2009. The increase in revenue during the year ended March 31, 2010 can be attributed to a $1.5 million arrangement with one of our OEM partners and to the amortization of prior period bookings, partially off-set by a decrease in amortization from current period bookings. Net income attributable to our Storage Management division was $7.0 million for the year ended March 31, 2010 compared to a net loss of $5.5 million for the year ended March 31, 2009. The increase in income can be attributed to a 14% decrease in operating expenses as compared to the prior year, as well as the increase in revenues during fiscal 2010.

During the year ended March 31, 2010, our Message Management division experienced a net loss of $16.7 million, which was primarily the result of lower than expected revenues and a $12.5 million, non-cash, impairment charge. On May 21, 2010, we decided to realign our corporate strategy and focus on our storage and data protection business. As a result, we closed our ColdSpark operations, or Message Management division. We believe that exiting our message management business and focusing on our core storage and data protection markets, provides us with the best opportunity for BakBone to gain consistent profitability and generate returns to our shareholders.

While we expect the near term market conditions to be challenging, we believe the need for organizations to protect, recover, maintain and manage their data will require our current customers, as well as new customers, to invest in their infrastructure. As a result, we intend to continue to prudently invest in our business, through continued product development and sales and marketing efforts. The predictability of bookings for existing products remains uncertain due to the economic environment.

Application of Critical Accounting Policies

The preparation of our financial statements in accordance with U.S. GAAP 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 revenue recognition, valuation allowance for deferred tax assets, valuation of goodwill, long-lived assets and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe there are several accounting policies that are critical to understanding our historical and future performance. These policies affect the reported amounts of revenue and other significant areas that involve management’s judgments and estimates. These significant accounting policies are:

•

revenue recognition;

•

valuation allowance for deferred tax assets;

•

business combinations;

•

valuation of goodwill and long-lived assets; and

•

stock-based compensation expense.

These policies, and our procedures related to these policies, are described below.

Revenue Recognition

We derive revenues from software licenses, maintenance services, and professional services from three distinct groups of customers: resellers, OEMs, and direct end users.

We commence recognizing revenue under these arrangements when all of the following are met:

•

Persuasive Evidence of an Arrangement Exists. It is our practice to require a contract signed by both the partner and BakBone and/or a customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.

•

Delivery Has Occurred. We deliver software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of our arrangements contain customer acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.

•

The Vendor’s Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within our standard credit terms.

•

Collectability is Probable. Customers must meet collectability requirements pursuant to our credit policy. For contracts that do not meet our collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.

Our customers are not contractually permitted to return products, but we accept returns under certain circumstances. We account for potential returns from our customers using historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales incentives or other consideration given by BakBone to our customers are considered adjustments of the selling price of our products, such as rebates, and are generally reflected as reductions to revenue.

Storage Management Division

We license our software to our reseller customers under multiple-element arrangements involving a combination of software, post-contract support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services related to implementation of our software as well as training. Software license arrangements with resellers include implicit platform transfer rights, which allow end users to exchange an original product for a different product or to exchange an original product on one platform for the same product operating on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the customer has to exercise this right. We have also historically provided our customers with a range of product concessions and other services which are not explicitly provided for in our sales arrangements. As no contract period exists under these arrangements, software-related revenue is recognized ratably over the estimated economic useful life of the software product of four years.

The economic useful life of the software product is estimated to be four years based upon our version release and end of life data as well as our practice with respect to supporting the product. We weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful life of the software product.

Maintenance renewal fees are recognized ratably over the arrangement period, which is typically one year. Professional services may also be sold separately and all fees generated from stand-alone sales of professional services are recognized when the service is complete.

We have multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, we have a commitment to provide unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over the arrangement period.

Message Management Division

Beginning May 13, 2009, our revenues include sales transactions of ColdSpark, which became a wholly-owned subsidiary of BakBone on this date. The revenues generated by ColdSpark are primarily from the sale of software licenses and professional services to large enterprise users. Revenues also include support services to our customers. We have established vendor specific objective evidence (“VSOE”) for the maintenance element of our contracts and as a result the fair value of the maintenance element is deferred and recognized ratably over the maintenance period. VSOE of fair value of the maintenance element of the arrangement is based upon the normal pricing and discounting practices for those services when sold separately. The remaining portion of the arrangement fee, which generally includes license and professional services, is recognized on a percent complete basis over the period the services are performed, generally two to nine months. We calculate the percentage of professional services completed at each reporting period, based upon the actual hours incurred to date as compared to the total estimated hours to complete the agreed upon professional services. Our arrangements generally include customer acceptance provisions, and as such, we assess whether revenue recognition should be deferred pending customer acceptance. In May 2010, we closed our Message Management division and are no longer selling the related products. See further discussion in Note 12, Subsequent Events, of our consolidated financial statements.

Valuation Allowance for Deferred Tax Assets

In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to reduce our valuation allowance, which could materially impact our financial position and results of operations.

Business Combinations

We account for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies.

Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired company and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

•

future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents; and

•

discount rates.

date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations and financial position in the period of the change in estimate.

Valuation of Goodwill and Long-Lived Assets

We have recorded goodwill and indefinite-lived intangible assets in connection with the acquisitions we have completed in prior and current periods. We review our goodwill and indefinite-lived intangible assets for impairment as of April 1^stof each fiscal year or when an event or a change in facts and circumstances indicates the fair value of a reporting unit may be below its carrying amount. Significant management judgment is required in assessing the impairment of our goodwill.

A reporting unit is an operating segment, or one unit below. In fiscal 2009 we operated in one reporting segment. Effective with the acquisition of ColdSpark in May 2009, we operated in two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells the ColdSpark SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. Effective with the closing of our Message Management segment in May 2010, we operate in one reporting segment, Storage Management.

Events or changes in facts and circumstances that we consider as impairment indicators include but are not limited to the following:

•

significant underperformance of our business relative to expected operating results;

•

significant adverse economic and industry trends;

•

significant decline in our market capitalization for an extended period of time relative to net book value; and

•

expectations that a reporting unit will be sold or otherwise disposed.

The annual goodwill impairment test consists of a two-step process as follows:

Step 1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying value of each reporting unit is determined by specifically identifying and allocating the assets and liabilities of BakBone to each reporting unit based on headcount, relative revenues, or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.

Step 2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet, if material.

Stock-Based Compensation Expense

Stock-based compensation expense is estimated at the grant date based upon the fair-value of the award and is recognized as expense using the straight-line amortization method over the requisite service period of the award, which is normally the vesting period. We estimate the fair value of stock options using the Black-Scholes option pricing model, which requires the input of certain highly subjective assumptions, including expected stock price volatility, expected term and expected forfeiture rates. A small change in the estimates used can result in a relatively large change in the estimated fair-value. We established the assumption for expected stock price volatility based on our historical stock price volatility. We estimated the expected term assumption for stock options using the Simplified Method. We estimate forward-looking forfeiture rates based upon our historical employee termination experience.

Results of Operations

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this Annual Report.

Comparison of Results for Fiscal Years Ended March 31, 2010 and March 31, 2009

The following summarizes consolidated revenues and consolidated bookings and their percentage changes over the same period of the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
Consolidated revenues, net	$	61,868		$	56,020
Increase over same period of prior year		10	%
License and service revenues	$	60,368		$	56,020
Increase over same period of prior year		8	%
Other revenues	$	1,500			—

Consolidated bookings, net	$	56,502		$	57,738
(Decrease) over same period of prior year		(2	)%

REVENUES—LICENSE AND SERVICE

We define bookings as the gross dollars invoiced through the sale of software licenses, maintenance contracts and professional services. We utilize bookings information as an operations measure, but it is not intended to replace U.S. GAAP accounting. Under the ratable revenue recognition method, license bookings are recognized as revenue over the appropriate period (generally three to five years). In general, variations in revenues period-over-period are affected by the amortization of current and prior period license bookings. Accordingly, we believe that trends in current and historical bookings are key factors in analyzing our operating results.

On a worldwide basis, we categorize the sales from our Storage Management segment into two different channel categories: (i) VAR, which includes sales through value-added resellers, or VAR’s, and sales of non-customized software to direct customers; and (ii) OEM, which includes sales to original equipment manufacturers, or OEM’s, and sales of customized software to large direct customers. VAR revenues are sourced from the sale of software licenses, related maintenance contracts and professional services through the resellers and direct customers. Software licenses sold through the resellers do not generally involve customer-specific customization. OEM revenues are sourced from the sale of software licenses, related maintenance contracts and professional services sold through our OEM partners and to large direct customers. Software licenses sold through the OEM channel generally involve customer-specific customization and are governed by specifically-negotiated contracts. OEM bookings and revenues are billed and collected centrally in North America in U.S. dollars and presented for each of our three regions based upon the region in which the direct customer is located. As such, OEM bookings and revenues are not impacted by foreign exchange movements to the degree that our VAR bookings and revenues are impacted.

The following summarizes license and service revenues by operating segment and their percentage changes over the same period of the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
Total License and Service revenues	$	61,868		$	56,020
Increase over same period of prior year		10	%
Storage Management revenues	$	60,824		$	56,020
Increase over same period of prior year		9	%
Message Management revenues	$	1,044		$	—

Storage Management

VAR revenues. The following table summarizes VAR revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
North America	$	14,827		$	15,200
(Decrease) over same period of prior year		(2	)%
Asia-Pacific	$	21,438		$	18,639
Increase over same period of prior year		15	%
EMEA	$	14,983		$	12,391
Increase over same period of prior year		21	%
Consolidated	$	51,248		$	46,230
Increase over same period of prior year		11	%

VAR revenues in North America decreased by $0.4 million, or 2%, to $14.8 million for the year ended March 31, 2010 compared to $15.2 million for the year ended March 31, 2009. Of the total VAR revenues recognized in the year ended March 31, 2010, 79% of the revenues were sourced from prior period bookings, with the remaining 21% sourced from current period bookings. The decrease in revenues during the year ended March 31, 2010 was primarily due to a decrease in license and maintenance bookings in the current period and prior periods, and to a decrease in maintenance renewal bookings during the current period.

VAR revenues in the Asia-Pacific region increased $2.8 million, or 15%, to $21.4 million for the year ended March 31, 2010 compared to $18.6 million for the year ended March 31, 2009. Of the total VAR revenues recognized in the year ended March 31, 2010, 78% of the revenues were sourced from prior period bookings, with the remaining 22% sourced from current period bookings. The increase in revenues during the year ended March 31, 2010 was due to increased license and maintenance, and maintenance renewal bookings in Japan in both the current and prior periods, and to the strengthening of the Japanese yen against the U.S. dollar during fiscal 2010. During fiscal 2010, the average Japanese yen to U.S. dollar exchange rate increased 8% as compared to fiscal 2009, causing an approximate increase of $1.4 million in our Asia-Pacific revenues as reported in U.S. dollars.

VAR revenues in EMEA increased $2.6 million, or 21%, to $15.0 million for the year ended March 31, 2010 compared to $12.4 million for the year ended March 31, 2009. Of the total VAR revenues recognized in the year ended March 31, 2010, 71% of the revenues were sourced from prior period bookings, with the remaining 29% sourced from current period bookings. During fiscal 2010, EMEA’s functional currency revenues increased due to increased license and maintenance bookings in prior periods and to increased maintenance renewal bookings in both current and prior periods. However, during fiscal 2010 the average British pound to U.S. dollar exchange rate decreased 7% as compared to fiscal 2009, causing an approximate decrease of $0.7 million in our EMEA revenues as reported in U.S. dollars.

VAR bookings. As discussed above, revenues are impacted by both current and prior period bookings. The information below summarizes VAR bookings by geographic region and their percentage changes over the same period in the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
North America	$	12,032		$	15,109
(Decrease) over same period of prior year		(20	)%
Asia-Pacific	$	19,721		$	18,391
Increase over same period of prior year		7	%
EMEA	$	16,866		$	16,281
Increase over same period of prior year		4	%
Consolidated	$	48,619		$	49,781
(Decrease) over same period of prior year		(2	)%

VAR bookings in North America decreased $3.1 million, or 20%, to $12.0 million for the year ended March 31, 2010 from $15.1 million for the year ended March 31, 2009, primarily due to a decrease in the volume of new license bookings sold through our existing distribution channels.

VAR bookings in Asia-Pacific increased $1.3 million, or 7%, to $19.7 million for the year ended March 31, 2010 from $18.4 million for the year ended March 31, 2009. The increase in bookings during the year ended March 31, 2010, is primarily related to the strengthening of the Japanese yen against the U.S. dollar as compared to the year ended March 31, 2009. During the year ended March 31, 2010, the average Japanese yen to U.S. dollar exchange rate increased 8% as compared to the year ended March 31, 2009, causing an approximate increase of $1.0 million in our Asia-Pacific bookings as reporting in U.S. dollars. During the year ended March 31, 2010, our functional currency license and maintenance bookings increased $0.3 million, due to an increase in bookings in Japan, which were partially off-set by a decrease in bookings in Korea, Australia and Malaysia.

VAR bookings in EMEA increased $0.6 million, or 4%, to $16.9 million for the year ended March 31, 2010 from $16.3 million for the year ended March 31, 2009. During the year ended March 31, 2010, our functional currency bookings transactions increased by $1.5 million due to an increase in license and maintenance bookings as a result of strong growth in the United Kingdom. The increase in bookings was off-set partially by the weakening of the British pound against the U.S. dollar in fiscal 2010. During fiscal 2010, the average British pound to U.S. dollar exchange rate decreased 7% as compared to fiscal 2009, causing an approximate decrease of $0.8 million in our EMEA bookings as reported in U.S. dollars.

OEM revenues. The following table summarizes OEM revenues by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
North America	$	4,939		$	6,214
(Decrease) over same period of prior year		(21	)%
Asia-Pacific	$	1,640		$	1,644
(Decrease) over same period of prior year		—	%
EMEA	$	1,497		$	1,932
(Decrease) over same period of prior year		(23	)%
Consolidated	$	8,076		$	9,790
(Decrease) over same period of prior year		(18	)%

North America OEM revenues decreased $1.3 million, or 21%, to $4.9 million for the year ended March 31, 2010, from $6.2 million for the year ended March 31, 2009. The decrease in revenues is primarily due to a significant decrease in current and prior period bookings as a result of the termination of several of our OEM arrangements in fiscal 2009 as well as a decrease in bookings from a majority of our remaining OEM partners.

OEM revenues in the Asia-Pacific region remained consistent at $1.6 million for both the years ended March 31, 2010 and 2009. During fiscal 2010, we experienced a decrease in bookings from two of our main OEM partners, due in part to the termination of one of our OEM arrangements in fiscal 2009. This decrease was off-set by the amortization of prior period bookings, causing revenues to remain consistent during fiscal 2010.

EMEA OEM revenues decreased $0.4 million, or 23%, to $1.5 million for the year ended March 31, 2010 from $1.9 million in the year ended March 31, 2009. During fiscal 2010, we experienced a significant decrease in bookings from three of our main OEM partners, due in part to the termination of one of our OEM arrangements in fiscal 2009. This decrease was partially off-set by the amortization from prior period bookings.

Certain of our OEM sales contracts include significant upfront payments for licenses which are recognized over the arrangement period. As these upfront payments are typically not recurring or are not expected to recur in the near term, we expect to experience a decrease in OEM bookings for the foreseeable future.

OEM bookings. As discussed above, revenues are impacted by both current and prior period bookings. Included below is a summary of OEM bookings by geographic region and their percentage changes over the same period of the prior year (dollars in thousands):


	Year ended March 31,
	2010			2009
North America	$	2,418		$	3,973
(Decrease) over same period of prior year		(39	)%
Asia-Pacific	$	1,183		$	1,898
(Decrease) over same period of prior year		(38	)%
EMEA	$	1,130		$	2,086
(Decrease) over same period of prior year		(46	)%
Consolidated	$	4,731		$	7,957
(Decrease) over same period of prior year		(41	)%

North America OEM bookings decreased $1.6 million, or 39%, to $2.4 million for the year ended March 31, 2010, from $4.0 million for the year ended March 31, 2009. During fiscal 2009, several of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for fiscal 2010. Additionally, we experienced a decrease in bookings from four of our OEM partners, which was partially off-set by an increase in bookings from one of our other OEM partners.

Asia-Pacific OEM bookings decreased $0.7 million, or 38%, to $1.2 million for the year ended March 31, 2010 from $1.9 million for the year ended March 31, 2009. During fiscal 2009, one of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for fiscal 2010. Additionally, during fiscal 2010 bookings from two of our OEM partners decreased a total of $0.6 million.

EMEA OEM bookings decreased $1.0 million, or 46%, to $1.1 million for the year ended March 31, 2010 from $2.1 million for the year ended March 31, 2009. During fiscal 2009, one of our OEM arrangements terminated, thus resulting in a decline in OEM bookings for fiscal 2010. Additionally, we experienced a decrease in bookings related to three of our OEM partners.

Included below is a reconciliation of the total bookings to the total revenues recognized for the years ended March 31, 2010 and 2009 (in thousands):


For the year ended March 31, 2010	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the year ended March 31, 2010	$	48,619		$	4,731		$	53,350
Bookings deferred into subsequent periods		(36,456	)		(3,621	)		(40,077	)

Revenues from fiscal 2010 bookings	$	12,163		$	1,110		$	13,273

Revenues sourced from prior period bookings:
Period ending March 31, 2003	$	115		$	0		$	115
Period ending March 31, 2004		65			0			65
Period ending March 31, 2005		610			47			657
Period ending March 31, 2006		4,324			143			4,467
Period ending March 31, 2007		7,865			1,215			9,080
Period ending March 31, 2008		8,794			3,624			12,418
Period ending March 31, 2009		17,312			1,937			19,249

Total revenues recognized in the year ended March 31, 2010	$	51,248		$	8,076		$	59,324


For the year ended March 31, 2009	VAR			OEM			Total
Revenues sourced from current period bookings:
Total bookings for the year ended March 31, 2009	$	49,781		$	7,957		$	57,738
Bookings deferred into subsequent periods		(38,172	)		(5,289	)		(43,461	)

Revenues from fiscal 2009 bookings	$	11,609		$	2,668		$	14,277

Revenues sourced from prior period bookings:
Period ending March 31, 2003	$	126		$	0		$	126
Period ending March 31, 2004		84			293			377
Period ending March 31, 2005		3,647			234			3,881
Period ending March 31, 2006		7,301			1,056			8,357
Period ending March 31, 2007		7,852			1,671			9,523
Period ending March 31, 2008		15,611			3,868			19,479

Total revenues recognized in the year ended March 31, 2009	$	46,230		$	9,790		$	56,020

Message Management

On May 13, 2009 we acquired ColdSpark and from that date the wholly-owned subsidiary operated as our Message Management segment. From the acquisition date through March 31, 2010, the Message Management segment generated $1.0 million in revenue and $1.7 million in bookings, both of which related primarily to license, service and maintenance. In May 2010, we closed our ColdSpark operations.

REVENUES—OTHER

During the year ended March 31, 2010, we entered into an intellectual property transfer and license agreement with one of our OEM partners. Under the terms of this agreement we sold certain non-core intellectual property rights to this partner for $1.5 million. As our support commitment, as specified by the arrangement, was insignificant and no other obligation exists, the full contract amount was recognized as revenue during fiscal 2010.

COST OF REVENUES

Cost of revenues for the year ended March 31, 2010 totaled $6.6 million compared with cost of revenues of $7.1 million for the year ended March 31, 2009. During the year ended March 31, 2010 and 2009, we allocated $1.5 million and $0.2 million, respectively, of payroll-related costs associated with our customer service group to research and development expense, thus causing a decrease in our costs of revenues as certain of our customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants. The decrease in customer support expenses was partially off-set by an increase in amortization expense as a result of the acquisition of ColdSpark and certain assets of Asempra. Gross margin increased to 89% for the year ended March 31, 2010, from 87% for the year ended March 31, 2009, primarily due to our ability to support a growing customer base with lower customer support expenses. During the year ended March 31, 2010, costs of revenues attributable to our Message Management division totaled approximately $0.8 million.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by $0.6 million, or 2%, to $26.4 million for the year ended March 31, 2010, from $27.0 million for the year ended March 31, 2009. During the year ended March 31, 2010, we experienced a decrease in payroll-related expenses of $1.4 million and a decrease in travel-related costs of $0.3 million as a result of a reduction in personnel. Additionally, during the year ended March 31, 2010, we experienced a decrease in professional service-related expenses of $0.3 million and a decrease of facility related expenses of $0.2 million. During the year ended March 31, 2010, the Japanese yen to U.S dollar exchange rate increased 8% while the British pound to U.S dollar exchange rate decreased 7%, resulting in an approximate $0.3 million net decrease in our sales and marketing expenses as reporting in U.S dollars, which is included in the fluctuations discussed above. During the year ended March 31, 2010, sales and marketing expenses attributable to our Message Management division totaled approximately $1.6 million and related primarily to payroll-related costs.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased by $1.9 million, or 17%, to $13.2 million for the year ended March 31, 2010, from $11.2 million for the year ended March 31, 2009. The increase was primarily attributable to a $2.0 million increase in payroll-related expenses related to increased personnel and to the allocation of the customer service group costs which were previously reported in costs of revenues. During fiscal 2010, certain customer service employees performed quality assurance work which was previously performed by our outsourced research and development consultants during fiscal 2009. The increase in payroll-related costs was partially off-set by a $1.2 million decrease in outsourced research and development costs, as a result of the elimination of our outsourced research and development consultants during the fourth quarter of fiscal 2009, and a $0.3 million decrease in travel and sundry-related expenses. During the year ended March 31, 2010, the Japanese yen to U.S dollar exchange rate increased 8% while the British pound to U.S dollar exchange rate decreased 7%, resulting in an approximate $0.3 million net decrease in our research and development expenses as reporting in U.S dollars, which is included in the fluctuations discussed above. During the year ended March 31, 2010, research and development expenses attributable to our Message Management division totaled approximately $1.7 million and related primarily to payroll-related costs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased by $4.3 million, or 26%, to $12.4 million for the year ended March 31, 2010, from $16.8 million for the year ended March 31, 2009. The decrease was primarily attributable to a decrease of $3.4 million in professional service-related expenses as we incurred significant legal and accounting fees associated with the restatement of our historical financial statements and the preparation and audits of our fiscal 2007 and 2008 financial statements during the year ended March 31, 2009. Additionally, we

had fewer general and administrative personnel which resulted in a decrease in payroll and employee-related expenses of $1.6 million. During fiscal 2009 we recorded a $1.2 million charge in connection with a settlement agreement with one of our OEM customers related to their reporting and overpayment of prior years maintenance bookings, which did not recur in fiscal 2010. These decreases were partially off-set by $0.7 million in acquisition-related costs associated with the acquisition of ColdSpark and certain assets of Asempra. During the year ended March 31, 2010, general and administrative expenses attributable to our Message Management division totaled approximately $1.0 million and related primarily to payroll and payroll-related costs.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

In May 2010, we decided to realign our business strategy and shut down our Message Management division. In connection with this decision, we updated our future cash flow projections which are used in determining the fair value of our reporting units. Based upon the updated cash flow projections, we concluded that the fair value of our Message Management reporting segment was zero as of March 31, 2010. As a result, during fiscal 2010, we recorded an impairment charge of $12.5 million related to the carrying value of the goodwill, trademarks and intangible assets associated with our Message Management reporting segment.

INTEREST EXPENSE

During the year ended March 31, 2010, we incurred $0.8 million in interest expense, which primarily related to the ColdSpark acquisition and the fiscal 2009 settlement agreement with one of our OEM partners. As the consideration given to the ColdSpark shareholders will be paid over three years, we calculated the present value of the consideration payable to the ColdSpark shareholders as of the acquisition date, for both the cash payments and common shares to be issued, and recorded the applicable interest expense using the effective interest method. We anticipate the following amounts of non-cash interest expense will be charged to earnings in each of the fiscal years related to the ColdSpark acquisition, until the acquisition consideration is paid in full in fiscal 2013:


Year ended March 31,		Non-cash Interest Expense (in Thousands)
2011		586
2012		355
2013		64

During the year ended March 31, 2009, we reversed prior years interest expense of $0.2 million related to a payroll tax accrual which was determined to no longer be necessary. Excluding this reversal, interest expense totaled $0.1 million for the year ended March 31, 2009 and primarily related to interest expense on our debt and capital lease balances.

FOREIGN EXCHANGE GAIN (LOSS), NET

During the year ended March 31, 2010, we recorded net foreign exchange losses of $18,000, as compared to net foreign exchange gains of $0.8 million during the year ended March 31, 2009. This activity relates to foreign exchange rate changes that impacted or are expected to impact cash flows. During the year ended March 31, 2010, our net foreign exchange losses consisted of $0.5 million of foreign exchange gains related primarily to the strengthening of the Japanese yen against the U.S. dollar and British pound on intercompany balances, off-set by $0.5 million of foreign exchange losses related primarily to foreign currency transactions in our Asia-Pacific and EMEA regions. During the year ended March 31, 2009, our net foreign exchange gains consisted of $0.3 million of foreign exchange gains related primarily to the strengthening of the Japanese yen against the British pound and the U.S. dollar on intercompany balances, and of $0.5 million of foreign exchange gains related to foreign currency transactions in our Asia-Pacific and EMEA regions.

PROVISION FOR INCOME TAXES

During the year ended March 31, 2010 we recorded a net benefit from income taxes of $0.2 million. We recorded a tax benefit of $0.4 million related to the reversal of certain tax accruals as a result of the expiration of the related statute of limitations. The tax benefit was partially off-set by tax expense of $0.2 million related primarily to taxes on income generated in certain foreign jurisdictions. During the year ended March 31, 2009, we recorded provisions for income taxes of $0.4 million, which related to $0.3 million of taxes on income generated in certain foreign jurisdictions and $24,000 of withholding taxes on certain transactions between our foreign subsidiaries.

Although we have generated consolidated pre-tax income during the year ended March 31, 2010, we have incurred operating losses in all annual periods prior to fiscal 2010. Management has determined that it is more likely than not that a tax benefit from such losses will not be realized. Accordingly, we did not record a benefit for income taxes for these periods.

Liquidity and Capital Resources

As of March 31, 2010, we had $4.9 million of cash and cash equivalents and $36.8 million in negative working capital, or $7.5 million in positive working capital after excluding the current portion of deferred revenue, as compared to $8.4 million of cash and cash equivalents and $34.2 million in negative working capital, or $9.9 million in positive working capital after excluding the current portion of deferred revenue, as of March 31, 2009. Working capital, defined as current assets minus current liabilities, is intended to measure our short-term liquidity, or our ability to pay off short-term liabilities with current assets. Because short-term deferred revenue does not require the future use of current assets, management has excluded the current portion of deferred revenue from the calculation of working capital as an indicator of short-term liquidity. Our cash, combined with our cash flow from operating activities, have been our principal sources of liquidity.

Operating Activities

We generate cash from operations primarily from cash collected on software license and software maintenance contract sales. Net cash used in operating activities was $2.1 million during the year ended March 31, 2010, compared to net cash provided by operating activities of $1.5 million during the year ended March 31, 2009. During the year ended March 31, 2010, we used significant resources for our acquisitions, including transaction costs of approximately $0.7 million for our acquisition of ColdSpark and certain assets from Asempra, as well as for the payroll and other operating costs associated with our acquired Message Management operations. The operating loss from Message Management operations acquired from ColdSpark was approximately $4.3 million during fiscal 2010, excluding the $12.5 million impairment charge recorded during the fourth quarter. As a result of the transaction costs and operating losses from ColdSpark, we experienced a decrease in cash during the year ended March 31, 2010.

Investing Activities

Net cash used in investing activities was $1.1 million and $0.6 million for the years ended March 31, 2010 and 2009, respectively. During fiscal 2010, we paid $1.0 million to acquire ColdSpark and certain assets from Asempra, net of cash acquired. Capital expenditures were $0.4 million during the year ended March 31, 2010 compared to $0.8 million during the year ended March 31, 2009. During the years ended March 31, 2010 and 2009, we had cash inflows of $0.3 million and $0.2 million, respectively, related to the release of certain portions of our restricted cash balance from the related escrow accounts.

Financing Activities

During the year ended March 31, 2010 and 2009, net cash used in financing activities of $0.8 million and $0.9 million, respectively, consisted of payments on capital lease and debt obligations. Our remaining balance in both long-term and short-term capital lease and debt obligations is approximately $0.1 million.

Currently our cash commitments include normal recurring trade payables, expense accruals, minimum royalty obligations, debt, and operating and capital leases, all of which are currently expected to be funded through existing working capital. We expect to incur approximately $0.5 million in capital expenditures during fiscal 2011.

In connection with the acquisition of ColdSpark in May of 2009, we are required to pay aggregate consideration of $8.1 million and issue up to 18.2 million common shares. The aggregate consideration included an initial cash payment of $1.5 million and issuance of 9.1 million common shares, and provided for $750,000 of the initial cash payment to be paid thirteen months after the closing date along with interest as specified in the merger agreement. At closing we paid $750,000 to the shareholders of ColdSpark and deferred the remaining $750,000.

As of March 31, 2010, we are obligated, under the terms of the merger agreement, to make cash payments totaling $7.4 million and issue up to 9.1 million shares to the shareholders of ColdSpark. The payments and share issuances scheduled below do not reflect any potential adjustments to the amounts due to the former ColdSpark shareholders under the indemnification and holdback provisions of the merger agreement:


(in thousands) Payment Type	Due Date	Cash		Common Shares
Deferred initial payment	June 2010	$	750	—
Interest on deferred payment	June 2010		65	—
Second payment(1)	June 2010		—	6,977
Third payment(2)	June 2011		2,108	2,075
Interest on deferred payment(2)	June 2011		49	—
Fourth payment(3)	June 2012		4,517	—
Interest on deferred payment(3)	June 2012		148	—

Total		$	7,637	9,052

(1)	Pursuant to the merger agreement, we elected to defer the $1.5 million cash payment due in June 2010 and issue an additional 3.5 million common shares. As a result of the deferral election, we are required to accrue and pay interest at a rate of 8% per year.

(2)

Our expected June 2011 payment consists of (i) the $1.5 million cash payment due pursuant to the merger agreement; (ii) $0.6 million cash related to the initial portion of the cash payment deferred in June 2010; and (iii) the remaining 2.1 million common shares due pursuant to the merger agreement. Additionally, we expect to pay approximately $49,000 of interest related to the portion of the deferred cash payment

(3)

Our expected June 2012 payment consists of (i) the $3.6 million cash payment due pursuant to the merger agreement; and (ii) $0.9 million cash related to the remaining portion of the cash payment deferred in June 2010. Additionally, we expect to pay approximately $148,000 of interest related to the portion of the June 2010 deferred cash payment.

During the year ended March 31, 2010, we experienced a decrease in bookings as a result of weak economic and industry conditions as well as other financial and business factors, many of which are beyond our control. In addition, our acquisition of ColdSpark and certain assets of Asempra resulted in additional costs associated with acquiring, integrating and developing the businesses and related products, which caused our cash balance to decrease during fiscal 2010. In May 2010, we decided to realign our corporate strategy and focus on our core storage and data protection business. As part of this strategy we closed our Message Management operations. By closing our Message Management operations and focusing on our Storage Management business we will eliminate the operating losses incurred by our Message Management division, which we believe will result in a

more profitable business, as our core Storage Management division generated approximately $7.6 million of operating income during fiscal 2010. We believe that our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from the date of the filing of this Annual Report and that we will have sufficient liquidity to fund our business and meet our contractual obligations over a period beyond the next 12 months. However, we may be required to obtain additional financing in order to fund our continued operations or make required payments pursuant to the merger agreement with ColdSpark. Due to the tightening that has occurred in the credit markets, general economic conditions, our previous SEC filing delinquencies, our previous material weaknesses in our internal controls over financial reporting and other economic and business factors, this financing may not be available to us on acceptable terms or at all. Although we cannot accurately anticipate the effect of inflation or foreign exchange markets on our operations, we do not believe these external economic forces have had, or are likely in the foreseeable future to have, a material impact on our results of operations.

Off-Balance Sheet Arrangements

At March 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As a result, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties except as disclosed elsewhere in this Quarterly Report and in our most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by FASB that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012, however, early adoption is allowed. We do not believe this will have a material impact on its consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products, with “more than incidental” software, were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance will include factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a vendor elects earlier application and the first reporting period of adoption is not the first reporting period in the vendor’s fiscal year, the guidance must be applied through retrospective application from the beginning of the vendor’s fiscal

year and the vendor must disclose the effect of the change to those previously reported periods. We do not believe this will have a material impact on its consolidated financial statements upon adoption.

Impact of Inflation

The primary inflationary factor affecting our operations is labor costs and we do not believe that inflation has materially affected earnings during the past four years. Substantial increases in costs and expenses, particularly labor and operating expenses, could have a significant impact on our operating results to the extent that such increases cannot be passed along to customers and end users.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our consolidated financial statements through adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in foreign exchange rates. We do not have a significant market risk exposure to fluctuations in interest rates. International revenues represented 64% and 62% of our total revenue for fiscal 2010 and 2009, respectively. Portions of our Asia-Pacific revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. We could experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities.

Item 8.

Financial Statements and Supplementary Data

Our consolidated financial statements as of and for the years ending March 31, 2010 and 2009, and the report of our independent registered public accounting firm are included in Item 15 of this Annual Report.

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T).

Controls and Procedures

a) Evaluation of Our Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, 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 of the fiscal years ended March 31, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.

b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and includes those policies and procedures that:

•

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized use or disposition of our assets that could have a material effect on our financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”).

Based on its assessment, management concluded that our internal control over financial reporting was effective as of March 31, 2010 based on the criteria established by COSO.

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

c) Changes in Internal Control Over Financial Reporting

Our fiscal 2009 Annual Report on Form 10-K filed in June 2009 identified material weaknesses related to our fiscal year ended March 31, 2009. During the quarter ended March 31, 2010 we completed our evaluation of our remediation efforts and concluded that the following material weaknesses have been remediated.

Inadequate communication of corporate and accounting policies

To address the need to improve controls over the communication, execution, and enforcement of corporate accounting policies, we:

•

designed and implemented global accounting policies and procedures that discuss our significant accounting and operational topics. These policies are available to all personnel worldwide, have been adequately communicated to our accounting and finance groups and are reviewed by corporate on an annual basis to assess the need for any updates or changes; and

•

conducted weekly meetings with our worldwide Finance & Accounting Group, the purpose of which is to discuss current issues and project status, as well as any existing, new, or future internal accounting policies and U.S. GAAP standards applicable to the Company.

Inadequate controls surrounding the review of key spreadsheets used to prepare journal entries

To address the need to improve controls over the review of key spreadsheets used to support journal entries, we:

•

identified all of our key spreadsheets;

•

designed and implemented controls over the review of key spreadsheets, including a review of the data integrity and formulas within the key spreadsheets; and

•

designed and implemented change management controls related to key spreadsheets.

Inadequate controls over the identification, billing, collecting and remitting of sales and use taxes on software license and maintenance transactions

To address the need to improve controls over the identification, billing, collecting and remitting of sales and use taxes, we have:

•

engaged a third-party sales tax consultant with specific experience in software transactions to provide guidance and support in our efforts to comply with domestic and foreign state sales tax regulations; and

•

designed and implemented controls to ensure that we properly identified, billed, collected and remitted all necessary sales and use taxes.

Except for the remediation of material weaknesses described above, there has been no change in our internal control over financial reporting during the fiscal year ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information

None

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by reference.

Item 11.

Executive Compensation

The information required by this Item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by reference.

Item 12.

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

The information required by this Item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services

The information required by this Item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by reference.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)

The following documents are filed as part of this annual report:


		Page Number
(1)	Report of Independent Registered Public Accounting Firm	F-1

	Consolidated Balance Sheets as of March 31, 2010 and 2009	F-2

	Consolidated Statements of Operations for the years ended March 31, 2010 and 2009	F-3

	Consolidated Statements of Shareholders’ Deficit and Comprehensive Loss for the years ended March 31, 2010 and 2009	F-4

	Consolidated Statements of Cash Flows for the years ended March 31, 2010 and 2009	F-5

	Notes to Consolidated Financial Statements	F-6

(2)	Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(3)	The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this annual report.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

BakBone Software Incorporated

We have audited the accompanying consolidated balance sheets of BakBone Software Incorporated (“the Company”), as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ deficit and comprehensive loss, and cash flows for each of the two years in the period ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. For the years ended March 31, 2010 and 2009, the Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits for the years ended March 31, 2010 and 2009, included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BakBone Software Incorporated as of March 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the two years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ MAYER HOFFMAN MCCANN P.C.

San Diego, California

June 24, 2010

F-1

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands)


	March 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	4,903		$	8,398
Restricted cash		51			264
Accounts receivable, net of allowances for doubtful accounts and sales returns of $78 and $218, respectively		10,582			9,646
Prepaid expenses		490			873
Other assets		249			286

Total current assets		16,275			19,467
Property and equipment, net		2,020			2,713
Intangible assets, net		1,814			824
Goodwill		7,615			7,615
Other assets		946			939

Total assets	$	28,670		$	31,558

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,841		$	2,291
Accrued liabilities		6,101			7,312
Current portion of acquisition consideration payable		809			—
Current portion of deferred revenue		44,337			44,081

Total current liabilities		53,088			53,684
Deferred revenue, excluding current portion		44,840			47,684
Acquisition consideration payable, excluding current portion		6,037			—
Other liabilities		697			1,337

Total liabilities		104,662			102,705

Commitments and contingencies (Notes 9 and 10)
Shareholders’ deficit:
Series A convertible preferred stock, no par value, 22,000 shares authorized at March 31, 2010 and 2009, 18,000 issued and outstanding at March 31, 2010 and 2009, liquidation preference of $26,491 and $21,607 respectively		11,160			11,160
Share capital, no par value, unlimited shares authorized, 77,642 and 64,633 shares issued and outstanding at March 31, 2010 and 2009, respectively		159,940			152,423
Employee benefit trust		(8	)		(11	)
Accumulated deficit		(242,409	)		(232,657	)
Accumulated other comprehensive loss		(4,675	)		(2,062	)

Total shareholders’ deficit		(75,992	)		(71,147	)

Total liabilities and shareholders’ deficit	$	28,670		$	31,558

See accompanying notes to the consolidated financial statements.

F-2

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)


	Year ended March 31,
	2010			2009
Revenues:
License and service	$	60,368		$	56,020
Other		1,500			—

Total revenues		61,868			56,020

Cost of revenues		6,570			7,121

Gross profit		55,298			48,899

Operating expenses:
Sales and marketing		26,393			27,010
Research and development		13,159			11,220
General and administrative		12,402			16,751
Impairment of goodwill and intangible assets		12,450			—

Total operating expenses		64,404			54,981

Operating loss		(9,106	)		(6,082	)
Interest income		14			67
Interest expense		(813	)		128
Foreign exchange (loss) gain, net		(18	)		790

Loss before income taxes		(9,923	)		(5,097	)
(Benefit from) provision for income taxes		(171	)		354

Net loss	$	(9,752	)	$	(5,451	)

Net loss per common share:
Basic and diluted	$	(0.12	)	$	(0.08	)

Weighted-average common shares outstanding:
Basic and diluted		84,176			64,615

See accompanying notes to the consolidated financial statements.

F-3

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS

(in thousands, except share data)


	Series A convertible preferred stock			Share capital				Employee benefit trust			Deferred compen- sation		Accumulated deficit			Accumulated other compre- hensive (loss) gain			Compre- hensive loss			Total share- holders’ deficit
	Shares	Amount		Shares	Amount			Employee benefit trust			Deferred compen- sation		Accumulated deficit			Accumulated other compre- hensive (loss) gain			Compre- hensive loss			Total share- holders’ deficit
BALANCE, MARCH 31, 2008	18,000,000	$	11,160	64,542,358	$	152,102		$	—		$	—	$	(227,206	)	$	(6,927	)				$	(70,871	)
Shares issued upon vesting of restricted stock units	—		—	90,435		—			—			—		—			—						—
Value of restricted stock unit award upon modification from liability classified to equity classified	—		—	—		84			—			—		—			—						84
Stock-based compensation on equity-classified awards	—		—	—		226			—			—		—			—						226
Change of fair value of unallocated Employee Benefit Trust shares	—		—	—		11			(11	)		—		—			—						—
Comprehensive loss:
Net loss	—		—	—		—			—			—		(5,451	)		—		$	(5,451	)		(5,451	)
Foreign currency translation adjustment	—		—	—		—			—			—		—			4,865			4,865			4,865

Comprehensive loss																			$	(586	)

BALANCE, MARCH 31, 2009	18,000,000	$	11,160	64,632,793	$	152,423		$	(11	)	$	—	$	(232,657	)	$	(2,062	)				$	(71,147	)
Acquisition of certain assets from Asempra (Assignment for the Benefit of Creditors), LLC (Note 2)	—		—	3,846,154		1,389			—			—		—			—						1,389
Acquisition of ColdSpark, Inc. (Note 2)	—		—	9,117,877		5,595			—			—		—			—						5,595
Accretion of interest on acquisition of ColdSpark, Inc. (Note 2)	—		—	—		319			—			—		—			—						319
Shares issued upon vesting of restricted stock units	—		—	45,000		—			—			—		—			—						—
Value of restricted stock unit award upon modification from liability classified to equity classified	—		—	—		7			—			—		—			—						7
Stock-based compensation on equity-classified awards	—		—	—		210			—			—		—			—						210
Change of fair value of unallocated Employee Benefit Trust shares	—		—	—		(3	)		3			—		—			—						—
Comprehensive loss:
Net loss	—		—	—		—			—			—		(9,752	)		—		$	(9,752	)		(9,752	)
Foreign currency translation adjustment	—		—	—		—			—			—		—			(2,613	)		(2,613	)		(2,613	)

Comprehensive loss																			$	(12,365	)

BALANCE, MARCH 31, 2010	18,000,000	$	11,160	77,641,824	$	159,940		$	(8	)	$	—	$	(242,409	)	$	(4,675	)				$	(75,992	)

See accompanying notes to the consolidated financial statements.

F-4

BAKBONE SOFTWARE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(9,752	)	$	(5,451	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Impairment of goodwill and intangible assets		12,450			—
Depreciation and amortization		2,519			1,626
Non-cash interest expense		565			—
Operating expenses funded by financing arrangement		320			178
Stock-based compensation		210			260
Provision for bad debt		131			258
Loss on disposal of capital assets		12			20
Changes in assets and liabilities:
Accounts receivable		(880	)		2,917
Prepaid expenses and other assets		519			1,866
Accounts payable		(530	)		(115	)
Accrued and other liabilities		(2,157	)		832
Deferred revenue		(5,534	)		(905	)

Net cash (used in) provided by operating activities		(2,127	)		1,486

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(1,014	)		—
Capital expenditures		(423	)		(836	)
Release of restricted cash		325			227

Net cash used in investing activities		(1,112	)		(609	)

Cash flows from financing activities:
Payments on capital lease obligations		(228	)		(239	)
Payments on long term debt obligations		(523	)		(681	)

Net cash used in financing activities		(751	)		(920	)

Effect of exchange rate changes on cash and cash equivalents		495			(1,055	)

Net decrease in cash and cash equivalents		(3,495	)		(1,098	)
Cash and cash equivalents, beginning of period		8,398			9,496

Cash and cash equivalents, end of period	$	4,903		$	8,398

Cash paid during the period for:
Interest, net of capitalized interest	$	42		$	78

Income taxes	$	184		$	268

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Capital expenditures funded by capital leases	$	12		$	90

Capital expenditures funded by accounts payable	$	68		$	36

See accompanying notes to the consolidated financial statements.

F-5

BAKBONE SOFTWARE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Significant Accounting Policies

Description of Business

BakBone Software Incorporated (“BakBone” or the “Company”), a Canadian federal company, is a leading provider of data protection, retention and availability technologies that reduce storage management complexity. In May 2009, the Company acquired ColdSpark, Inc, (“ColdSpark”) a Colorado-based company and provider of enterprise email infrastructure solutions and platforms. Effective with the acquisition of ColdSpark, the Company commenced the sales and marketing efforts surrounding ColdSpark’s portfolio of solutions.

Effective with the ColdSpark acquisition, BakBone operates two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells ColdSpark’s SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. The Company has operations in three primary geographic regions: North America, Asia-Pacific, and Europe, Middle East and Africa, or EMEA, and conducts commercial operations primarily through four of its wholly-owned subsidiaries: BakBone Software, Inc., BakBone Software KK, BakBone Software Ltd., and ColdSpark, Inc. In May 2010, the Company decided to close its Message Management division. See Note 12 for further discussion.

Basis of Presentation

The accompanying consolidated financial statements of BakBone as of and for the years ended March 31, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates and reports using a fiscal year ended March 31.

Certain prior year amounts have been reclassified to conform to current year presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ from those estimates.

Foreign Currency

Asset and liabilities of the Company’s foreign subsidiaries have been translated into U.S. dollars using the current exchange rates in effect at the balance sheet date. Revenue and expenses have been translated at average exchange rates, which approximate the rates in effect at the transaction dates. Foreign currency translation gains and losses are included in “Accumulated other comprehensive loss” as a separate component of shareholders’ deficit. Certain transactions of the Company’s foreign subsidiaries are denominated in currencies other than the subsidiaries’ functional currency. Gains or losses resulting from these transactions are included in the Company’s results of operations as incurred.

Cash and Cash Equivalents

Cash and cash equivalents consist of money market instruments, commercial paper and other highly liquid investments with original maturities of three months or less from the date of purchase.

F-6

Restricted Cash

In fiscal 2009, certain of the Company’s lease agreements required the Company to maintain minimum cash balances in a pledged deposit account as collateral for the outstanding payment obligations until the lease term expires in fiscal 2011. During fiscal 2010, the Company paid the remaining balance due under the lease agreement, resulting in the release of the pledged deposit account balance of $0.3 million. As of March 31, 2010, the Company’s restricted cash balance of $51,000, relates to a cash deposit pledged as collateral for certain of the Company’s credit cards. The cash deposits totaled $51,000 and $0.3 million as of March 31, 2010 and 2009, respectively, and are reported in restricted cash on the consolidated balance sheets.

Concentration of Risk and Significant Customers

Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash in short-term investments with high quality financial institutions.

As of March 31, 2010 and 2009, there were no customers with accounts receivable balances greater than 10% of consolidated accounts receivable.

Fair Value of Financial Instruments

Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other short-term liabilities.

Property and Equipment

Property and equipment is recorded at cost and depreciated or amortized using the straight-line method over the assets’ useful lives as follows:


Computer equipment and software		3–5 years
Furniture and fixtures		5–7 years
Leasehold improvements and capital lease assets		Shorter of estimated useful life or life of lease (from 1 to 10 years)

Impairment of Long-Lived Assets

The Company reviewed its long-lived assets for impairment and determined that the technology-related intangible assets of its ColdSpark business were impaired. As a result, the Company recorded an impairment charge of $5.7 million for the year ended March 31, 2010. See Note 4 for additional discussion regarding the impairment.

F-7

In fiscal 2009, the Company did not recognize any impairment of long-lived assets.

Goodwill and Intangible Assets

The Company reviews its goodwill and indefinite-lived intangible assets for impairment as of April 1^st of each fiscal year or when an event or a change in circumstances indicates the fair value of a reporting unit may be below its carrying amount. For segment reporting, the Company reports its results of operations based on a single operating segment which consists of our NetVault product line. A reporting unit is defined as an operating segment, or one unit below. For purposes of its annual goodwill impairment analysis, the Company divides its operating segment into reporting units, which are based on its geographic reporting entities: North America, Asia-Pacific, and EMEA. Events or changes in circumstances considered as impairment indicators include but are not limited to the following:

•

significant underperformance of the Company’s business relative to expected operating results;

•

significant adverse economic and industry trends;

•

significant decline in the Company’s market capitalization for an extended period of time relative to net book value; and

•

expectations that a reporting unit will be sold or otherwise disposed.

The annual goodwill impairment test consists of a two-step process as follows:

Step 1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying value of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenues, or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company then performs the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.

Step 2. If further analysis is required, the Company compares the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

The Company reviewed its goodwill and indefinite-lived intangible assets for impairment and determined that the goodwill and trademarks related to its ColdSpark business were impaired. As a result, the Company recorded an impairment charge of $6.8 million in fiscal 2010. See Note 4 for additional discussion regarding the impairment.

In fiscal 2009, the Company did not recognize any impairment of goodwill or intangible assets.

Employee Benefit Trust (“EBT”)

In connection with an acquisition of a company in the United Kingdom in March 2000, 2,100,000 of the Company’s common shares were placed in trust and allocated to United Kingdom employees. Upon allocation of EBT shares to employees, the Company recorded the intrinsic value of the shares as deferred compensation and amortized the intrinsic value to stock-based compensation expense over the applicable vesting period. As of March 31, 2010 and 2009, all allocated shares are fully vested. The Company records the aggregate value of unallocated EBT shares in share capital and in employee benefit trust, a contra equity account, using the fair value of its common shares as of the end of each reporting period. As of March 31, 2010 and 2009, there were 22,500 unallocated shares, which remain available for allocation to employees.

F-8

The Company incurs a National Insurance Contribution (“NIC”) liability in the United Kingdom, which is a tax on earned income, whenever an employee removes shares from the EBT. The NIC liability incurred equates to a percentage of the fair value of common shares removed on the date of removal. Accordingly, the NIC liability for EBT related employee payroll taxes is recognized on the date of the event triggering the measurement and payment of the tax to the taxing authority.

Revenue Recognition

The Company derives revenues from software licenses, maintenance services, and professional services from three distinct groups of customers: resellers, OEMs, and direct end users.

The Company commences recognizing revenue under these arrangements when all of the following are met:

•

Persuasive Evidence of an Arrangement Exists. It is the Company’s practice to require a contract signed by both the partner and the Company and/or a customer-issued purchase order depending on the underlying facts and circumstances of the business relationship.

•

Delivery Has Occurred. The Company delivers software by both physical and electronic means. Both means of delivery transfer title and risk to the customer. Physical delivery terms are generally FOB shipping point. For electronic delivery of the software, delivery is complete when the customer has been provided electronic access to the software. Certain of the Company’s arrangements contain customer acceptance provisions. Under these arrangements, revenue recognition commences once the acceptance provisions have been satisfied.

•

The Vendor’s Fee is Fixed or Determinable. Fees are generally considered fixed and determinable when payment terms are within the Company’s standard credit terms.

•

Collectability is Probable. Customers must meet collectability requirements pursuant to the Company’s credit policy. For contracts that do not meet the Company’s collectability criteria, fees earned are deferred initially and recognized in accordance with its revenue policy once payment is received from the customer.

The Company’s customers are not contractually permitted to return products, but the Company accepts returns under certain circumstances. The Company accounts for potential returns from its reseller and OEM customers using historical returns experience with these customers to determine potential returns and to establish the appropriate sales returns allowance.

Sales incentives or other consideration given by the Company to its customers that are considered adjustments of the selling price of the Company’s products, such as rebates, are generally reflected as reductions to revenue.

Sales tax collected by the Company from its customers is not reported in revenue.

Storage Management Division

The Company licenses its software to its reseller customers under multiple-element arrangements involving a combination of software, post-contract support and/or professional services. Post-contract support includes rights to unspecified upgrades and enhancements and telephone support. Professional services include services related to implementation of the Company’s software as well as training. Software license arrangements with resellers include implicit platform transfer rights, which allow end users to exchange an original product for a different product or to exchange an original product on one platform for the same product operating on a different platform. The new product and/or different platform is not specified in the arrangement nor is the period of time in which the customer has to exercise this right. We have also historically provided our customers with a range of product concessions and other services which are not explicitly provided for in our sales arrangements. As no contract period exists under these arrangements, software-related revenue is recognized ratably over the estimated economic useful life of the software product of four years.

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The economic useful life of the software product is estimated to be four years based upon the Company’s version release and end of life data, as well as Company practice with respect to supporting the product. The Company weighted the product useful life and its years of sustaining support following the end of life to determine the estimated economic useful life of the software product.

The Company has multiple-element arrangements with OEM customers and one large direct customer under which, in addition to providing software licenses and maintenance services, the Company has a commitment to provide unspecified future software products. As vendor specific objective evidence of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are deferred and recognized ratably over the arrangement period.

Message Management Division

Effective with the acquisition of ColdSpark on May 13, 2009, the Company’s revenues include sales transactions of ColdSpark, which became a wholly-owned subsidiary of the Company on this date (see Note 4). The revenues generated by ColdSpark are primarily from the sale of software licenses and professional services to large enterprise users. The Company has established vendor specific objective evidence (“VSOE”) for the maintenance element of its contracts and as a result the fair value of the maintenance element is deferred and recognized ratably over the maintenance period. VSOE of fair value of the maintenance element of the arrangement is based upon the Company’s normal pricing and discounting practices for those services when sold separately. The remaining portion of the contract fee, which generally includes license and professional services, is recognized on a percent complete basis, over the period the services are performed, generally two to nine months. The Company calculates the percentage of professional services completed at each reporting period, based upon the actual hours incurred to date as compared to the total estimated hours to complete the agreed upon professional services. The Company’s product agreements generally include customer acceptance provisions, and as such, the Company assesses whether revenue recognition should be deferred pending customer acceptance. In May 2010, the Company closed its Message Management division. See further discussion in Note 12.

Business Combinations

The Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

•

future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents; and

•

discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the bookings targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations, financial position and cash flows in the period of the change in estimate.

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Cost of Revenues

Cost of revenues consists of the direct cost of providing customer support, including payroll and other benefits of staff working in the Company’s customer support departments, as well as the associated costs of computer equipment, telephone and other general costs necessary to maintain support for the Company’s end users. Also included in cost of revenues are third party software license royalties and the direct costs of products delivered to customers.

Product Development Costs

Product development costs related to research, design and development of software applications are charged to expense as incurred. To date, completion of working models of the Company’s applications and the general release of the products have substantially coincided. As a result, the Company has not capitalized any application development costs as no such costs have been incurred.

Stock-based Compensation

The Company records stock-based compensation expense for the fair value of employee stock options and other forms of employee stock-based compensation. The fair value of the stock awards is measured at the grant date using the Black-Scholes option pricing model and is recognized as an expense over the requisite service period or the vesting period. The Company granted 4,270,000 options during the year ended March 31, 2010. During the year ended March 31, 2009, the Company did not grant any stock options or issue any other stock based awards.

The Company’s stock-based compensation relates to stock options and restricted stock units. Stock-based compensation related to stock options and restricted stock units is recognized as expense using the straight-line method over the vesting period of the award, which is also the requisite service period.

The Company is required to estimate expected pre-vesting forfeitures for stock awards and only recognize expense for those awards that are expected to vest. The Company estimates pre-vesting forfeitures based upon historical forfeiture experience. Compensation expense recognized for the years ended March 31, 2010 and 2009 has been reduced for estimated pre-vesting forfeitures. If the Company were to change its estimate of pre-vesting forfeitures, the amount of stock-based compensation would differ from the amount recognized in the financial statements.

Accumulated Other Comprehensive Loss and Comprehensive Loss

Comprehensive loss is the total of net income (loss) and all other non-owner changes in shareholders’ deficit. The Company’s comprehensive loss combines net income (loss) and foreign currency translation adjustments. As of March 31, 2010 and 2009, accumulated other comprehensive loss consists of foreign currency translation adjustments as follows (in thousands):


	Total
Balance at March 31, 2008	$	(6,927	)
Foreign currency translation		4,865

Balance at March 31, 2009		(2,062	)
Foreign currency translation		(2,613	)

Balance at March 31, 2010	$	(4,675	)

The change in cumulative foreign currency translation adjustment each period represents the effect of the translation of assets and liabilities that are denominated in the functional currencies of foreign subsidiaries to the

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Company’s reporting currency. In fiscal 2009, the current period change of $4.9 million was primarily related to a decrease in the balance sheet value of the Company’s EMEA subsidiary as a result of the U.S dollar strengthening against the British pound. In fiscal 2010, the current period change of $2.6 million was related primarily to the translation of the Company’s deferred revenue balances in its Asia-Pacific subsidiary and was primarily the result of the weakening of the U.S. dollar against the Japanese yen.

Income Taxes

The Company applies the asset and liability method of accounting for deferred income taxes, under which future income tax assets and liabilities are determined based on temporary differences and are measured using the current tax rates and laws expected to apply when these differences reverse. In preparing the consolidated financial statements, the Company estimates its income tax liability in each of the jurisdictions in which it operates by estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. These differences result in deferred tax assets and liabilities. Significant management judgment is required in assessing the realizability of the Company’s deferred tax assets. In performing this assessment, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event that actual results differ from its estimates or the Company adjusts its estimates in future periods, the Company may need to reduce its valuation allowance, which could materially impact its financial position and results of operations.

Net Loss Per Share

Basic net loss per common share is computed by dividing the net loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss attributable to common shareholders for the period by the weighted average number of common shares and potential common shares outstanding during the period, except where the effect of including potential common shares would be antidilutive. Allocated EBT shares are included in the weighted-average common shares outstanding as they vest. There were 22,500 unallocated EBT shares held during the second half of fiscal 2009 and throughout fiscal 2010 which were not included in common shares outstanding upon becoming unallocated.

The following table summarizes the weighted-average potential common shares that are not included in the denominator used in the diluted net loss per share calculation because to do so would be anti-dilutive (in thousands):


	Year ended March 31,
	2010	2009
Stock options	5,817	5,685
Restricted stock units	80	159
Warrants	1,861	3,322
Unallocated shares held in EBT	23	11
Series A convertible preferred stock	18,000	18,000

Total weighted average anti-dilutive instruments	25,781	27,177

Segment Information

Public companies are required to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally

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evaluates separate financial information, business activities and management responsibility. Effective with the acquisition of ColdSpark in May 2009, the Company operates in two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells ColdSpark’s SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. In fiscal 2009 the Company operated in one reportable segment. In May 2010, the Company decided to close its Message Management division. See Note 12 for further discussion. The Company has operations in three primary geographic regions: North America, Asia-Pacific, and EMEA.

Adoption of Recent Accounting Pronouncements

Effective April 1, 2009, the Company adopted the Financial Accounting Standards Board’s (“FASB”) authoritative guidance for business combinations. Under this authoritative guidance, an acquiring entity is required to recognize all the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. During the first quarter of fiscal 2010, the Company acquired ColdSpark and certain assets from Asempra (Assignment for the Benefit of Creditors), LLC (“Asempra”), see Note 2 for a description of these acquisitions.

Effective April 1, 2009, the Company adopted the FASB’s authoritative guidance for determining the useful life of intangible assets, which amends the factors considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets. This guidance amends prior guidance and requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. The adoption did not have a material impact on the Company’s results of operations or financial condition for the year ended March 31, 2010.

Effective June 15, 2009, the Company adopted the FASB’s authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of this guidance did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after the balance sheet date of March 31, 2010 through the date these financial statements were issued. Other than disclosed in Note 12, the Company did not have any material recognizable or nonrecognizable subsequent events.

Effective June 15, 2009, the Company adopted the FASB’s authoritative guidance for interim disclosures about fair value instruments, which requires publicly traded companies to disclose in their interim financial statements the same information that is disclosed in their annual financial statements about the fair value of financial instruments. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Effective July 1, 2009, the Company adopted the new Accounting Standards Codification (ASC) as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP. The adoption of the ASC did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently

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issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of fiscal 2012, however, early adoption is allowed. The Company does not believe this will have a material impact on its consolidated financial statements upon adoption.

In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products, with “more than incidental” software, were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance includes factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a company elects earlier application and the first reporting period of adoption is not the first reporting period in the company’s fiscal year, the guidance must be applied through retrospective application from the beginning of the company’s fiscal year and the company must disclose the effect of the change to those previously reported periods. The Company does not believe this will have a material impact on its consolidated financial statements upon adoption.

2. Acquisitions

ColdSpark, Inc.

The Company acquired ColdSpark on May 13, 2009, by means of a merger of a wholly-owned subsidiary, such that ColdSpark became a wholly-owned subsidiary of the Company. The Company acquired ColdSpark, among other reasons, to expand and enhance its product portfolio and further advance its Universal Data Management strategy. In May 2010, the Company decided to close its Coldspark operations. See Note 12 for further discussion.

Pursuant to the merger agreement, at the closing, the Company made cash payments totaling $750,000 and issued 9,117,877 common shares for 100% of the equity shares outstanding of ColdSpark. In addition, the Company has agreed to make cash payments totaling up to $7,375,000 and to issue up to 9,051,903 common shares over a three year period from June 2010 to June 2012. The total acquisition date fair value of the consideration to be transferred is estimated at $12.85 million, which includes the initial cash payment of $750,000, the initial issuance of 9,117,877 of the Company’s common shares, the deferred cash payments of $7,375,000, and the deferred issuance of 9,051,903 of the Company’s common shares. The total acquisition date fair value of consideration transferred is estimated as follows:


(in thousands)
Cash payments to ColdSpark shareholders	$	7,253
Common share issuances to ColdSpark shareholders		5,595

Total acquisition date fair value	$	12,848

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The Company estimated the fair value of the cash consideration by discounting the future cash payments based upon its after tax cost of debt. The Company recognized a liability for the estimated acquisition date fair value of the future cash payments. Any change in the fair value of the future cash payments will be recognized in earnings in the period the estimated fair value changes.

The Company estimated the fair value of the common share consideration using the closing share price on the acquisition date and reduced the calculated value for: (i) the limited marketability of the common shares issued and to be issued, as they are unregistered shares and subject to Rule 144; and (ii) the impact of the Company issuing the shares over a three year period of time rather than at the acquisition date. Any change in the fair value of the stock consideration will be recognized in earnings in the period the estimated fair value changes.

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of May 13, 2009, the acquisition date. The excess of the acquisition date fair value of consideration transferred over estimated fair value of the net tangible assets and intangible assets was recorded as goodwill.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:


(in thousands)
Cash and cash equivalents	$	58
Restricted cash		51
Accounts receivable		271
Prepaid expenses and other assets		270
Property and equipment		82
Intangible assets		6,210
Trademarks		400

Total identifiable assets acquired		7,342
Accounts payable and accrued liabilities		649
Other liabilities		69
Deferred revenue		168

Total liabilities assumed		886
Goodwill		6,392

Net assets acquired	$	12,848

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Intangible Assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the intangible assets. In determining the fair value of the intangible assets the Company considered, among other factors, the best use of acquired assets, analyses of historical financial performance and estimates of future performance of ColdSpark’s products. The fair values of the identified intangible assets related to the existing technology, patents and trademarks were calculated using a market approach which relies on empirical market data from comparable intangible assets in determining the fair value of the intangible assets acquired. The fair value of the maintenance agreements was calculated using an income approach which relies on estimates and assumptions provided by the Company. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 18.5%. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as ColdSpark. The following table sets forth the components of identified intangible assets associated with the ColdSpark acquisition and their estimated useful lives:


(in thousands)	Useful Life	Fair Value
Existing technology	10 years	$	4,960
Patents	10 years		1,240
Maintenance agreements	6 months		10
Trademarks	indefinite		400

Total intangible assets acquired		$	6,610

The Company determined the useful life of intangible assets based on the expected future cash flows associated with the respective asset. Existing technology is comprised of products that have reached technological feasibility and are part of ColdSpark’s product line. Patents are related to the design and development of ColdSpark’s products that can be leveraged to develop new technology and products and improve their existing products. Maintenance agreements represent the underlying relationships and agreements with ColdSpark’s installed customer base. Trademarks represent the fair value of the brand and name recognition associated with the marketing of ColdSpark’s products and services. Amortization expense for the intangible assets is included in cost of revenues. See Note 4 for further discussion on the impairment related to our ColdSpark intangible assets.

Goodwill

Of the total estimated purchase price, approximately $6.4 million was allocated to goodwill. Goodwill is defined as the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and intangible assets and represents the benefits the Company expects to experience from the synergies and additional business opportunities created by the acquisition. The goodwill resulting from business acquisitions is tested for impairment at least annually and more frequently if certain indicators are present. In the event the Company determines that the value of goodwill has become impaired, it will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. None of the goodwill is expected to be deductible for income tax purposes. The Company has assigned the $6.4 million in goodwill to its Message Management reporting segment. See Note 4 for further discussion on the impairment related to our ColdSpark goodwill balance.

Deferred Revenue

In connection with the purchase price allocation, the Company estimated the fair value of the service obligations assumed from ColdSpark as a consequence of the acquisition. The estimated fair value of the service obligations was determined using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligation plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that the Company would be required to pay a third party to

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assume the service obligations. The estimated costs to fulfill the service obligations were based on the historical direct costs related to ColdSpark’s service agreements with its customers. Profit associated with selling efforts was excluded because ColdSpark had concluded the selling efforts on the service contracts prior to the date of the Company’s acquisition. The estimated research and development costs associated with support contracts have not been included in the fair value determination, as these costs were not deemed to represent a legal obligation at the time of acquisition. The Company recorded $168,000 in deferred revenue to reflect the estimate of the fair value of ColdSpark’s service obligations assumed.

Pre-Acquisition Contingencies

The Company has evaluated and continues to evaluate pre-acquisition contingencies related to ColdSpark that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable in nature and estimable during the remainder of the measurement period, amounts recorded for such matters will be adjusted in the financial statements during the measurement period and subsequent to the measurement period. The merger agreement provides for the Company to reduce the future cash payments and stock consideration by up to $1,625,000 for pre-acquisition contingencies that existed as of the acquisition date. If the Company determines there were pre-acquisition contingencies in excess of the $1,625,000 the amounts would be included in its results of operations.

Results of Operations

The amount of revenues and operating loss of ColdSpark included in the Company’s consolidated statement of operations from the acquisition date to the year ending March 31, 2010:


(in thousands)
Revenues	$	1,044
Net loss	$	(16,732	)

Unaudited Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results (including ColdSpark) for the years ended March 31, 2010 and 2009 as though the companies had been combined as of the beginning of each of the periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented nor is it indicative of results of operations which may occur in the future. The unaudited pro forma results presented include amortization charges for intangible assets, impairment charges for goodwill and intangible assets and eliminations of intercompany transactions.


	Year ended March 31,
(in thousands)	2010			2009
Total revenues	$	62,039		$	57,782
Net loss	$	(10,179	)	$	(10,084	)
Basic and diluted net loss per common share	$	(0.12	)	$	(0.16	)

The estimated acquisition date fair value of consideration transferred, assets acquired and the liabilities assumed for ColdSpark presented above represent the Company’s best estimates.

Certain Assets from Asempra (Assignment for the Benefit of Creditors), LLC

The Company acquired certain technology assets of Asempra on May 1, 2009. The Company acquired these assets, among other reasons, to enhance its market position in the windows application data protection market.

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Pursuant to the asset purchase agreement, the Company made cash payments totaling $350,000 and issued 3,846,154 common shares for certain technology assets relating to Asempra’s products and lab office equipment. The total acquisition date fair value of the consideration transferred is $1.7 million. The total acquisition date fair value of consideration transferred is estimated as follows:


(in thousands)
Cash payments to seller	$	350
Common share issuances to seller		1,389

Total acquisition date fair value	$	1,739

The Company estimated the fair value of the common share consideration using the closing share price on the acquisition date and reduced the calculated value for the limited marketability of the common shares issued as they are unregistered shares subject to Rule 144 and are subject to contractual resale restrictions.

Under the acquisition method of accounting, the identifiable assets acquired were recognized and measured as of the acquisition date based on their estimated fair values as of May 1, 2009, the acquisition date.

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:


(in thousands)
Intangible assets	$	1,632
Property and equipment		107

Total assets acquired	$	1,739

Intangible Assets

Management engaged a third-party valuation firm to assist in the determination of the fair value of the intangible assets. In determining the fair value of the intangible assets the Company considered, among other factors, the best use of acquired assets, analyses of historical financial performance and estimates of future performance of the acquired technology. The fair values of the identified intangible assets related to the existing technology and patents were calculated using a market approach which relies on empirical market data from comparable intangible assets in determining the fair value of the intangible assets acquired. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 18.5%. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as Asempra. The following table sets forth the components of identified intangible assets associated with the Asempra asset acquisition and their estimated useful lives:


(in thousands)	Useful Life	Fair Value
Existing technology	4 years	$	1,469
Patents	14 years		163

Total intangible assets acquired		$	1,632

The Company determined the useful life of intangible assets based on the expected future cash flows associated with the respective asset. Amortization expense for the intangible assets is included in cost of revenues.

The estimated asset acquisition date fair value of consideration transferred and assets acquired for the Asempra assets presented above represent the Company’s best estimates.

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In connection with the acquisitions of ColdSpark and Asempra the Company incurred approximately $0.7 million of acquisitions related costs, which are included in general and administrative expense in the consolidated statement of operations.

Supplemental cash flow disclosure for acquisitions

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition for ColdSpark:


Current assets	$	650
Property and equipment		82
Identifiable intangible assets		6,210
Trademarks		400
Goodwill		6,392

Total assets acquired		13,734
Consideration paid for ColdSpark:
Cash paid at acquisition		(750	)
Deferred cash consideration		(6,503	)
Stock consideration		(5,595	)

Liabilities assumed	$	886

The Company acquired certain assets from Asempra for cash consideration of $350,000 and stock consideration of $1.4 million, for total consideration of $1.7 million. The assets acquired were primarily intangible assets.

3. Balance Sheet Details

As of March 31, 2010, and 2009, accounts receivable, net, includes $55,000 and $95,000, respectively, for the allowance for returns. Activity related to the allowance for returns for fiscal 2010 and 2009 (in thousands) is as follows:


	2010			2009
Beginning balance	$	95		$	125
Provision		185			298
Returns		(225	)		(328	)

Ending balance	$	55		$	95

As of March 31, 2010, and 2009, accounts receivable, net, includes $23,000 and $123,000, respectively, for the allowance for doubtful accounts. Activity related to the allowance for doubtful accounts for fiscal 2010 and 2009 (in thousands) is as follows:


	2010			2009
Beginning balance	$	123		$	—
Provision		39			150
Write-offs		(139	)		(27	)

Ending balance	$	23		$	123

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Property and equipment consists of the following (in thousands):


	March 31,
Class	2010		2009
Computer equipment and software	$	5,337	$	4,902
Furniture and fixtures		865		809
Leasehold improvements		1,474		1,366
Construction in progress		—		—

	$	7,676	$	7,077
Less: accumulated depreciation and amortization		5,656		4,364

Net property plant and equipment	$	2,020	$	2,713

During the year ended March 31, 2010, the Company disposed of property and equipment with a cost basis of $0.1 million and a net book value of $13,000. During the year ended March 31, 2009, the Company disposed of property and equipment with a cost basis of $0.1 million and a net book value of $20,000. Depreciation expense for each of the years ended March 31, 2010 and 2009 was $1.3 million.

The net book values of assets under capital leases at March 31, 2010 and 2009 were $0.1 million and $0.5 million, respectively, which are net of accumulated amortization of $33,000 and $0.6 million, respectively.

Current accrued liabilities consist of the following (in thousands):


	March 31,
	2010		2009
Accrued compensation and employee benefits	$	3,439	$	3,390
Accrued taxes		1,310		1,631
Accrued professional services		586		609
Accrued customer settlement		360		428
Current portion of long-term debt		86		329
Other accrued liabilities		320		925

	$	6,101	$	7,312

4. Goodwill and Intangible Assets

Goodwill and trademarks

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net assets acquired. As of March 31, 2010, goodwill consists of the following:


Goodwill balance at March 31, 2009	$	7,615
Acquired in connection with the ColdSpark acquisition		6,392
Impairment of ColdSpark goodwill		(6,392	)

Goodwill balance at March 31, 2010	$	7,615

In April 2010, the Company performed its annual goodwill impairment analysis. Based upon this analysis, the Company determined that the fair value of its Message Management, or ColdSpark, reporting segment was zero. As the circumstances which resulted in the reduced fair value existed as of March 31, 2010, the Company recorded an impairment charge of $6.4 million during fiscal 2010.

In connection with the acquisition of ColdSpark in May 2010, the Company recorded a $0.4 million indefinite-lived intangible asset related to the acquired trademarks. In connection with the Company’s annual

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impairment analysis, the Company reviewed the fair value of these trademarks and determined the fair value to be zero as of March 31, 2010. As a result, the Company recorded an impairment charge of $0.4 million during fiscal 2010.

The Company applies a fair value based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill or indefinite-lived intangible assets may not be recoverable and an impairment loss may have been incurred.

When potential impairment of goodwill is indicated, the Company determines the carrying value of the assets and liabilities related to the identified reporting units, including an allocation of goodwill, and estimates the respective fair value of its reporting units. The specific analysis of potential goodwill impairment then requires a two-step process. The first step of evaluating impairment involves determining if the estimated fair value of each reporting unit is less than its carrying value, in which case the Company then performs the second step of the goodwill impairment analysis. The second step requires estimating the fair value of all identifiable assets and liabilities of the respective reporting unit, in a manner similar to a purchase price allocation for an acquired business. An impairment loss is then recognized for the amount by which the carrying value of the reporting unit’s goodwill exceeds the implied fair value.

The Company uses an income approach when performing its impairment analysis. Under the income approach the Company calculates the fair value based upon the estimated discounted future cash flows of that specific reporting unit. The income approach was determined to be the most representative valuation technique that would be utilized by a market participant in an assumed transaction.

Intangible Assets

During fiscal 2010, the Company acquired ColdSpark and certain assets from Asempra, which resulted in the following changes to intangible assets (in thousands):


	Estimated Useful life	Carrying value at March 31, 2009		Intangible assets acquired		Amortization expense			Impairment			Carrying value at March 31, 2010
Technology	4 to 14 years	$	824	$	7,832	$	(1,183	)	$	(5,659	)	$	1,814
Maintenance agreements	6 months		—		10		(10	)		—			—

Total intangible assets		$	824	$	7,842	$	(1,193	)	$	(5,659	)	$	1,814

Intangible assets consist of the following (in thousands):


	Weighted- Average Amortization Period	As of March 31, 2010							As of March 31, 2009
	Weighted- Average Amortization Period	Gross Carrying Value		Accumulated Amortization			Net		Gross Carrying Value		Accumulated Amortization			Net
Technology	6 years	$	3,485	$	(1,671	)	$	1,814	$	1,853	$	(1,029	)	$	824
Maintenance agreements	9 months		23		(23	)		—		23		(23	)		—
Non-compete agreements	2 years		516		(516	)		—		516		(516	)		—
Customer contracts and related relationships	4 years		427		(427	)		—		427		(427	)		—

Total intangible assets		$	4,451	$	(2,637	)	$	1,814	$	2,819	$	(1,995	)	$	824

Amortization expense for intangible assets was $1.2 million and $0.4 million for the years ended March 31, 2010 and 2009, respectively. For the year ended March 31, 2010, total amortization expense of $1.2 million is

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included in cost of revenues. For the year ended March 31, 2009, amortization expense of $0.3 million and $0.1 million, is included in cost of revenues and sales and marketing expense, respectively, in the consolidated statements of operations.

In April 2010, the Company performed its annual goodwill impairment analysis and determined that the fair value of its ColdSpark goodwill balance was zero. As a result, the Company determined it needed to review its ColdSpark-related intangible assets for impairment. To determine whether the intangible assets were impaired, the Company compared the carrying value of the intangible assets to its estimated undiscounted future cashflows expected to be generated. Based upon the analysis performed, the Company determined that the fair value of its ColdSpark related intangible assets was zero. As a result, the Company recorded an impairment charge of $5.7 million related to the net book value of its ColdSpark intangible assets.

Based on the intangible asset balances as of March 31, 2010, the estimated annual amortization expense of intangible assets is as follows (in thousands):


Fiscal year ending March 31,
2011	$	690
2012		557
2013		381
2014		91
2015		14
Thereafter		81

	$	1,814

5. Related Party Transactions

During the years ended March 31, 2010 and 2009, an employee of the Company was a director of a software development company to which the royalties are paid under a license agreement. The royalties paid to this company are included in costs of revenues on the consolidated statement of operations. During the years ended March 31, 2010 and 2009, the Company paid royalties to this company of $78,000 and $61,000, respectively. As of March 31, 2010 and 2009, the Company owed royalties to this company of $5,000 and $22,000, respectively.

Ian Bonner, a member of the Company’s board of directors, served as Chief Executive Officer of ColdSpark from March 2008 through November 2008 and from November 2008 until the closing of the acquisition, as Acting CEO. Mr. Bonner waived his right to receive any consideration or other payments in connection with the acquisition and waived all compensation related to his services to ColdSpark. Mr. Bonner abstained from voting when the Company’s board of directors voted to approve the acquisition.

6. Shareholders’ Deficit

Preferred Stock

In July 2003, the Company completed a private offering and raised proceeds of $13.6 million, net of $2.1 million in offering costs, through the sale of 22,000,000 shares of its Series A convertible preferred stock at CDN $1.00 (USD $0.71) per share to a single investor. Each preferred share is convertible at any time, at the option of the shareholder, and in certain circumstances at the option of the Company, into one share of the Company’s common stock. The preferred shares include a liquidation preference equal to CDN $1.50 per share, plus, ratably with holders of common stock, any declared but unpaid dividends. Each preferred share also entitles the holder thereof to voting rights on an as-converted basis with the shareholders of common shares. At issuance, the Series A convertible preferred stock was determined to have an embedded beneficial conversion feature with an intrinsic value that exceeded the net proceeds raised from the preferred stock offering of $13.6 million. The preferred shares were immediately convertible upon issuance, therefore, upon issuance, the Company recorded a

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$13.6 million increase in net loss attributable to common shareholders associated with the beneficial conversion feature.

In November 2003, the Company’s preferred shareholder converted 4,000,000 convertible preferred shares on a one-to-one basis into common shares. Following the conversion, the Company had 18,000,000 preferred shares that remained outstanding. The conversion transaction had no cash flow impact to the Company. As of March 31, 2010, 18,000,000 preferred shares remain outstanding.

Warrants

Historically, the Company has granted warrants to purchase share capital to employees and service providers. In April 2007, the Company entered into a warrant agreement with Sun Microsystems, Inc. (“Sun”), pursuant to which the Company granted to Sun the right to purchase 4,425,126 shares of its common stock at a price of $1.78 per share, subject to adjustment per the terms of the agreement. The warrants were issued in connection with a technology development and license agreement, dated as of December 18, 2006, by and between the Company and Sun. The warrants vest upon the satisfaction of specific events and sales achievement levels as follows: 20% upon general product release; 26.67% upon a predetermined, aggregate sales achievement level by March 31, 2008; 26.67% upon a predetermined, aggregate sales achievement level by March 31, 2010; and 26.67% upon a predetermined, aggregate sales achievement level by March 31, 2010.

Upon issuance of the warrants in the first quarter of fiscal 2008, Sun had satisfied the general product release vest condition, therefore the Company recorded sales and marketing expense of $1.3 million representing the fair value of the vested warrants. As of March 31, 2010, Sun has not satisfied the sales achievement level required in order for the second, third and fourth tranches of warrants to vest. The fair value of the vested warrants was estimated on the grant date using the Black-Scholes option valuation model with the following assumptions:


Risk-free interest rate	4.7	%
Expected term	10.0
Stock price volatility	83	%
Expected dividend yield	0	%

Certain of the Company’s warrants are denominated in Canadian dollars. Per share amounts stated below have been translated to U.S. dollars.

Warrant activity is summarized as follows:


	Number of warrants		Weighted- average exercise price
Outstanding at March 31, 2008	3,324,945		$	1.76
Issued	—			—
Exercised for cash	—			—
Expired	(1,180,181	)		1.78

Outstanding at March 31, 2009	2,144,764		$	1.74
Issued	—			—
Exercised for cash	—			—
Expired	(1,259,739	)		1.73

Outstanding at March 31, 2010	885,025		$	1.78

Exercisable at March 31, 2010	885,025

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There were no exercises of warrants during the years ended March 31, 2010 and 2009.

Stock Options and Stock Option Modifications

The Company has a 2000, 2002 and 2003 stock option plan (collectively, the “Plans”) pursuant to which the board of directors of the Company may grant nontransferable stock options to purchase common shares of the Company to directors, officers, employees, advisers and consultants. There are 10,331,516 common shares authorized for awards under the Plans.

On May 7, 2009, the Company’s board of directors amended the Company’s 2003 Stock Option Plan. The amended plan permits the Company to make equity-based awards to employees, officers and directors. The total number of shares reserved for issuance under the amended plan is not changed by the amendment. The amended and restated plan is now titled the BakBone Software Incorporated 2003 Equity Incentive Plan.

As of March 31, 2010, options to purchase 1,440,208 common shares remained available for future grants under the Plans. The maximum number of common shares which may be reserved for issuance to any one person under the Plan is 5% of the common shares outstanding at the time of grant (calculated on a non-diluted basis). Stock options granted to our directors generally vest over one year and options issued to officers and employees generally vest over four years. All options are exercisable for a maximum term of ten years.

The Company’s options granted prior to fiscal 2010 are denominated in Canadian dollars. Stock options granted during fiscal 2010 were denominated in U.S. dollars. Where applicable, per share amounts stated below have been translated to U.S. dollars at the rate of exchange in effect at the balance sheet date.

A summary of activity under the Company’s stock option plans is as follows:


	Number of options		Weighted- average exercise price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding at March 31, 2008	5,737,543		$	1.74
Granted	—			—
Exercised	—			—
Cancelled	(263,025	)		1.63

Outstanding at March 31, 2009	5,474,518		$	1.43
Granted	4,270,000			0.35
Exercised	—			—
Cancelled/Forfeited	(853,210	)		1.96

Outstanding at March 31, 2010	8,891,308		$	1.06	4.7	$	43

Exercisable at March 31, 2010	5,245,058		$	1.55	2.5	$	6

During the year ended March 31, 2010, the Company granted 4,270,000 stock options to its directors, officers and certain employees. The weighted average fair value of stock options granted was $0.22 per share.

During the year ended March 31, 2009, the Company modified vested stock options for 5 employees who terminated during this period. The modifications extended the post-termination exercise period from 90 days post-termination to 30 days post-resumption of trading of the Company’s stock on an established exchange. There were no stock options granted to employees during the year ended March 31, 2009.

During each of the years ended March 31, 2010 and 2009, the Company recognized stock-based compensation expense of $0.2 million related to the vesting of stock options and stock option modifications for employees who terminated during the year.

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As of March 31, 2010, there was approximately $0.6 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.6 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

The fair values of the stock options granted during fiscal 2010 and stock options modified during fiscal 2009 were measured as the excess of the fair values of the modified stock options over their pre-modification fair values on the modification date using the Black-Scholes option valuation model with the following weighted-average assumptions:


	Year ended March 31,
	2010		2009
Risk free interest rate	2.3	%	1.8	%
Expected term	5.8		1.3
Stock price volatility	70	%	53	%
Expected dividend yield	0	%	0	%

Risk-free interest rate—This is the U.S. Treasury rate on the date of grant or modification with the term that most closely resembles the expected life of the modified option.

Expected term—This is the period of time that the granted or modified option is expected to remain unexercised.

For stock option grants, the Company used the Simplified Method to determine the expected term of the option as the stock options granted are considered Plain Vanilla options. Under the Simplified Method, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company concluded that the Simplified Method was appropriate as it is unable to rely on historical exercise data. The Company is unable to rely on its historical exercise data as there have been no exercises in recent periods. From December 2004 through April 2009, the Company was under cease trade orders in Canada and from December 2004 through February 2009, the Company was delinquent with respect to its quarterly and annual SEC filings. Thus, the Company could not legally issue shares. Additionally, the Company’s stock was traded on the Pink Sheets from February 2005 through May 2009. Prior to the stock option grants in March 2010, all of our outstanding stock options are underwater and have been for an extended period of time.

For option modifications, the Company estimates the expected life of the option based upon when it expects its stock to resume trading on an established exchange and the amount of time available for the modified option to be exercised.

Expected volatility—This is a measure of the amount by which the share price of the Company’s stock is expected to fluctuate over the expected option life. The Company estimates expected volatility based upon the historical volatility of the Company’s stock measured over a term commensurate with the expected option life, but not less than three years.

Expected dividend—The Company has never declared or paid dividends on common stock and does not expect to do so in the foreseeable future.

Restricted Stock Units

In April 2006, the Company granted 300,000 restricted stock units to an executive officer. The restricted stock units vest over a four year period, with 50% vesting on the second anniversary of the grant date and 25%

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vesting on each of the third and fourth anniversaries of the grant date. The restricted stock unit award contained a cash settlement feature which obligated the Company to settle the award in cash in the event that certain specified criteria are not met on the vest dates. At each reporting date, the Company assesses the probability of each vesting tranche of the restricted stock unit award being subject to the cash settlement feature upon vesting.

In April 2008, the Company entered into an amendment to the restricted stock unit award agreement. The amendment modified the cash settlement feature of the original award such that it provided for the settlement of the first vesting tranche of the restricted stock unit award in a cash amount sufficient to satisfy the expected tax obligation of the grantee, with the residual value of the award to be settled in shares. Further, under the amendment, if the contingent cash-settlement conditions contained in the restricted stock unit award are not met on the vest dates of the second and third tranches of the award, these tranches will be settled in an amount of cash equal to either (i) the expected tax obligation of the grantee or (ii) if elected by the grantee, 40% of the award, with the residual value of the award to be settled in shares. Otherwise, the second and third tranches will be settled entirely in shares. The Company accounted for the amendment to the original award on the date of the modification, by reclassifying the portion of the award that no longer contained a cash-settlement feature from liability to equity.

As of March 31, 2010 there are no restricted stock units classified as a liability award. As of March 31, 2009, there were 44,700 of the restricted stock units classified as a liability award. These awards were remeasured at each balance sheet date based upon the market value of the Company’s common stock and recognized over the requisite service period. As of March 31, 2010 and 2009, the remaining 75,000 and 105,300 restricted stock units, respectively, have been classified as equity and are being recognized over the requisite service period at the market value of the Company’s common stock on the grant date or modification date, as applicable.

During the year ended March 31, 2010, 75,000 restricted stock units vested pursuant to the vesting conditions of an outstanding restricted stock unit award. In connection with the vesting of the restricted stock units, the Company issued 45,000 shares. The remaining 30,000 restricted stock units were settled in cash pursuant to the contingent cash-settlement conditions of the award. During the year ended March 31, 2009, 150,000 restricted stock units vested pursuant to the vesting conditions of the amended award. In connection with the vesting of the restricted stock units, the Company issued 90,435 shares. The remaining 59,565 restricted stock units were settled in cash pursuant to the contingent cash-settlement conditions of the amended award. A summary of the change in restricted stock unit awards during the years ended March 31, 2010 and 2009 is as follows:


	Number of shares
Unvested at March 31, 2008	300,000
Awarded	—
Vested	(150,000	)
Forfeited	—

Unvested at March 31, 2009	150,000
Awarded	—
Vested	(75,000	)
Forfeited	—

Unvested at March 31, 2010	75,000

Exercisable at March 31, 2010	—

As of March 31, 2010, the weighted-average remaining contractual term of the restricted stock unit award is one month and the aggregate intrinsic value of the unvested restricted stock unit award is $27,000.

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During the years ended March 31, 2010 and 2009, the Company recognized stock-based compensation expense for the restricted stock units of $40,000 and $99,000, respectively. As of March 31, 2010, total unrecognized stock-based compensation expense for the restricted stock units classified as equity was $3,000, which is expected to be recognized over approximately one month. As of March 31, 2010, there is no liability recorded related to the unvested restricted stock units. As of March 31, 2009, the Company has recorded a liability of $20,000, related to the restricted stock units classified as a liability award.

Stock-based Compensation Expense

Stock-based compensation expense is required to be reported on the same line on the statement of operations as if the compensation were paid in cash. For the years ended March 31, 2010 and 2009, the Company has reported the following amounts of stock-based compensation expense in the consolidated statements of operation (in thousands):


	Years ended March 31,
	2010		2009
Cost of revenues	$	7	$	4
Sales and marketing		39		2
Research and development		18		1
General and administrative		146		253

	$	210	$	260

7. Income Taxes

Loss before provision for income taxes for the years ended March 31, 2010 and 2009 is comprised of the following (in thousands):


	2010			2009
United States	$	(10,362	)	$	(6,165	)
Other		439			1,068

	$	(9,923	)	$	(5,097	)

The (benefit) provision for income taxes for the years ended March 31, 2010 and 2009 is comprised of the following (in thousands):


	2010			2009
Current:
United States	$	17		$	16
Other		(188	)		338

	$	(171	)	$	354

Deferred:
United States	$	—		$	—
Other		—			—

		—			—

	$	(171	)	$	354

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The income tax effects of the temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities as of March 31, 2010 and 2009 are presented below (in thousands):


	2010			2009
Deferred tax assets:
Net operating losses	$	41,284		$	35,956
Deferred revenue		8,194			11,741
Property and equipment		353			260
Accumulated other comprehensive income		2,398			1,794
Other		3,488			3,828

Deferred tax assets before valuation allowance		55,717			53,579
Less valuation allowance		(55,078	)		(52,469	)

Deferred tax assets	$	639		$	1,110


Deferred tax liabilities:
Accumulated other comprehensive income	$	(339	)	$	(662	)
Other		(300	)		(448	)

Net deferred tax assets	$	—		$	—

A reconciliation of the expected income tax benefit to the actual income tax benefit or expense reported in the consolidated statements of operations is as follows (in thousands):


	2010			2009
Computed expected income tax benefit at Canadian statutory income tax rate of 29.0% for both 2010 and 2009	$	(2,878	)	$	(1,478	)
Foreign tax rate differential		(157	)		(176	)
State income tax, net of U.S. federal benefits		(572	)		(330	)
Foreign taxes		(189	)		340
Permanent differences		3,122			330
Net operating losses utilized		262			1,307
Change in valuation allowance		(108	)		36
Other, net		349			325

Income tax (benefit) expense	$	(171	)	$	354

Included in the $3.1 million permanent difference above, is $2.5 million related to the impairment of goodwill related to our ColdSpark operations. Additionally, $0.3 million of the permanent difference is related to the acquisitions costs associated with the acquisition of ColdSpark.

As of March 31, 2010, the Company has Canadian non-capital losses of approximately $6.5 million that are available to apply against future Canadian taxable income. These losses began to expire in 2010 through 2015.

BakBone Software, Inc., a U.S. operating subsidiary, has federal net operating loss carryforwards of approximately $75.3 million as of March 31, 2010 that are available to reduce its taxable income in future years. These carryforwards will begin to expire in 2021 through 2030. BakBone Software, Inc. also has state net operating loss carryforwards of approximately $61.8 million as of March 31, 2010 that are available to reduce its taxable income in future years in certain jurisdictions in which it operates. These carryforwards began to expire in 2010 through 2030.

On May 15, 2009, BakBone Software, Inc acquired 100% of the stock of ColdSpark, Inc. The acquisition of ColdSpark triggered an ownership change within the meaning of IRC §382. This ownership change limits the

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amount of tax attributes that can be utilized by ColdSpark that relate to the period prior to the ownership change. The Company has only disclosed the amount of tax attributes, specifically net operating losses, which can be utilized. ColdSpark, Inc., a U.S. operating subsidiary, has federal net operating loss carryforwards of approximately $14.5 million as of March 31, 2010 that are available to reduce its taxable income in future years. These carryforwards will begin to expire in 2026 through 2030. ColdSpark, Inc. also has state net operating loss carryforwards of approximately $14.5 million as of March 31, 2010 that are available to reduce its taxable income in future years in certain jurisdictions in which it operates. These carryforwards will begin to expire in 2026 through 2030.

BakBone Software Ltd., a U.K. operating subsidiary, has trade loss carryforwards of approximately $16.8 million as of March 31, 2010 that are available as reductions to its taxable income in future years. These carryforwards generally have an indefinite carryforward period.

BakBone Software KK, a Japanese operating subsidiary, has net operating loss carryforwards of approximately $0.2 million as of March 31, 2010 that are available as reductions to its taxable income in future years. These carryforwards began to expire in 2010 through 2015. Future utilization of these loss carryforwards could be subject to certain limitations under provision of Japanese tax law relating to the use of loss carryforwards obtained through merger or acquisition activity. The amount of any such limitations, if any, has not yet been determined.

The Company has tax exemptions in China and Malaysia as long as it meets specific requirements as outlined by the respective tax authority. For China and Malaysia, the Company periodically performs self assessments to verify that the specific requirements are met for exempt status.

Deferred income taxes have not been recorded on the undistributed earnings of the Company’s foreign subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings. The Company may be subject to U.S. income taxes and foreign withholding taxes if earnings of the foreign subsidiaries were distributed.

The net change in the valuation allowance for the year ended March 31, 2010 was an increase of $2.6 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical operating results and projections of future taxable income, management has determined that it is more likely than not that the deferred tax assets not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly, the Company has recorded a full valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The portion of the change in the valuation allowance recorded to accumulated other comprehensive loss during fiscal 2010 and 2009 was an increase of $0.9 million and a decrease of $1.3 million, respectively. Additionally, in connection with the purchase of ColdSpark, Inc, deferred tax assets increased by $1.8 million.

The Company records a liability for any tax positions taken that are not more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based upon the technical merits of the position. The liability for uncertain tax positions is reflected in current and long-term accrued liabilities on the consolidated balance sheets. As of March 31, 2010 and 2009, the total amount of the Company’s liability for uncertain tax positions was $0.5 million and $0.8 million, respectively. As of March 31, 2010, $0.4 million of the Company’s liability for uncertain tax positions was included in current accrued liabilities and $0.1 million was included in long-term other liabilities. As of March 31, 2009, $0.3 million of the Company’s liability for uncertain tax positions was included in current accrued liabilities and $0.5 million was included in long-term other liabilities.

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A reconciliation of the unrecognized tax benefits for the years ended March 31, 2010 and 2009 is as follows (in thousands):


Balance at March 31, 2008	$	803
Additions for tax positions related to the current year		9
Additions for tax positions related to prior years		44
Reductions for tax positions related to prior years		(96	)
Settlements		—

Balance at March 31, 2009	$	760
Additions for tax positions related to the current year		—
Additions for tax positions related to prior years		46
Reductions for tax positions related to prior years		(294	)
Settlements		—

Balance at March 31, 2010	$	512

The unrecognized tax benefits of $0.5 million as of March 31, 2010, would affect the Company’s effective tax rate, if recognized. The Company expects to reduce its liability for uncertain tax positions by $0.4 million during fiscal 2011 due to the expiration of statute of limitations.

The Company records interest and penalties related to uncertain tax positions in income tax expense. For the years ended March 31, 2010 and 2009, the Company recognized approximately $24,000 and $26,000, respectively, of interest and penalties related to uncertain tax positions. As of March 31, 2010 and 2009, the Company had accrued approximately $101,000 and $141,000, respectively, of interest and penalties related to uncertain tax positions.

The Company conducts business globally, and as a result, files income tax returns in the United States and in various state and foreign jurisdictions. As a result, the Company is subject to examination by taxing authorities throughout the world. The Company is not currently under audit in any tax jurisdiction. The following table summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of March 31, 2010.


Tax Jurisdiction		Fiscal Years Subject to Income Tax Examination
U.S. Federal		2000—Present
California		2000—Present
United Kingdom		2005—Present
Japan		2003—Present
Canada		2006—Present
Other Jurisdictions		2004—Present

8. Employee Benefits

The Company maintains a voluntary defined contribution plan for employees in the United States (the “U.S. Plan”) in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The U.S. Plan allows participants to contribute up to $16,500 of their annual salary, subject to certain limitations, as provided by federal law. Each year, the Company’s board of directors determines the amount, if any, of the Company’s matching contributions. There were no matching contributions to the U.S. Plan during the years ended March 31, 2010 and 2009.

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The Company maintains voluntary defined contribution plans for employees of the United Kingdom entity (the “U.K. Plan”). The U.K. Plan allows participants to defer a percentage of their annual salary. In addition, the U.K. Plan calls for the Company to match a percentage of each participant’s salary annually; these matching contributions vest immediately. During the years ended March 31, 2010 and 2009, the Company contributed $0.2 million in each period.

9. Commitments and Contingencies

Litigation

The Company is involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of management, any liability that may arise from such contingencies would not have a significant adverse effect on the consolidated financial position, results of operations or liquidity and cash flows of the Company.

Leases

The Company leases certain facilities and equipment under non-cancelable operating and capital leases. Future minimum lease payments for years ending March 31 are as follows (in thousands):


	Capital leases			Operating leases
2011	$	43		$	1,292
2012		5			656
2013		—			668
2014		—			669
2015		—			959
Thereafter		—			112

Total minimum lease payments		48		$	4,356

Less amount representing interest		(4	)

Present value of net minimum lease payments, including current portion of $39	$	44

Rent expense for each of the years ended March 31, 2010 and 2009 approximated $2.4 million.

Financing Arrangement

In September 2005, the Company entered into a term lease master agreement which allows the Company to finance certain equipment and expenses. Borrowings related to equipment under this arrangement are accounted for as capital lease transactions and are included in the future minimum lease payments information above under the caption—Capital Leases. All other amounts financed under this arrangement are accounted for as debt.

Borrowings under the term lease master agreement are made upon the issuance of a supplemental schedule. The amount financed and the terms of each supplemental schedule are subject to the approval of the lender. Either the Company or the lender may terminate the term lease master agreement at any time by providing one month prior written notice. However, each supplemental schedule then in effect shall remain subject to the provisions of the term lease master agreement until its expiration or termination. Generally, amounts financed under the term lease master agreement have an original term of three years.

Interest rates applicable to amounts financed are determined at each borrowing date. As of March 31, 2010, the weighted-average interest rate applicable to the financed amounts was 8.8%, with the interest rates ranging from 7.8% to 9.2%. Principal and interest payments are payable monthly through June 2010. As of March 31,

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2010, approximately $39,000 of debt was outstanding under this arrangement, which is scheduled to mature in fiscal 2011.

Customer Settlement

The Company entered into a settlement agreement with one of its customers whereby the Company is required to refund the customer a total of $1.4 million related to the overpayment of prior period bookings. During fiscal 2010 and 2009, the Company paid $0.4 million and $0.2 million, respectively, related to this settlement agreement. The future payments under this settlement agreement are $0.4 million for each of the years ended March 31, 2011 and 2012.

National Insurance Contribution (“NIC”) liability

The Company incurs a NIC liability in the United Kingdom, which is a tax on earned income, whenever an employee removes shares from the EBT (Note 1). The NIC liability incurred equates to a percentage of the fair value of common shares removed on the date of removal. Payroll tax liabilities generated from the exercise of an equity instrument are recognized on the date of exercise. As of March 31, 2010, 51,000 allocated and unexercised shares remained in the EBT, the NIC liability rate was 12.8%, and the fair value of the Company’s common shares was $0.36 per share, resulting in a potential NIC liability of $2,000 as of March 31, 2010.

10. Guarantees

In the ordinary course of business, the Company is not subject to potential obligations under guarantees except for standard indemnification and warranty provisions that are contained within many of the Company’s customer license and service agreements and certain supplier agreements, as well as standard indemnification agreements that the Company has executed with certain of its officers and directors, which give rise only to disclosure requirements. The Company also monitors the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

Indemnification and warranty provisions contained within the Company’s customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in the Company’s industry. The Company has not incurred significant obligations under customer indemnification or warranty provisions historically and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for potential customer indemnification or warranty-related obligations.

11. Segment Information

Segment Information

During the year ended March 31, 2009, the Company operated in one reportable segment. Effective with the ColdSpark acquisition on May 13, 2009, the Company operates two reporting segments: (i) Storage Management, which sells the NetVault products and solutions; and (ii) Message Management, which sells the ColdSpark SparkEngine, MailFusion and Compliance Catalyst families of products and solutions. In May 2010, the Company decided to close its Message Management division. See Note 12 for further discussion.

The following table represents a summary of revenues, operating income or loss, and total assets for each reporting segment as of and for the year ended March 31, 2010 (in thousands):


	Year ended March 31, 2010
	Storage Management		Message Management			Total
Revenues from external customers	$	60,824	$	1,044		$	61,868
Net income (loss)	$	6,980	$	(16,732	)	$	(9,752	)
Total assets	$	28,207	$	463		$	28,670

F-32

There were no inter-segment revenues during the year ended March 31, 2010.

Geographic Information

The Company currently operates in three primary geographic regions: North America; Asia-Pacific; and EMEA. The following table represents a summary of revenues by major geographic region for the periods presented (in thousands):


	Year ended March 31,
	2010		2009
North America	$	22,312	$	21,414
Asia-Pacific		23,077		20,283
EMEA		16,479		14,323

Total revenues	$	61,868	$	56,020

Revenues are presented by major geographic region based on the region from which the revenues were sourced. During the years ended March 31, 2010 and 2009, the Company’s OEM revenues have been primarily administered from North America, with subsequent revenue allocations made to the applicable region. The Company procured aggregate license and maintenance bookings in its country of domicile, Canada, of $0.8 million and $0.7 million during the years ended March 31, 2010 and 2009, respectively.

The following table represents a summary of capital assets and goodwill by major geographic region as of March 31, 2010 and 2009 (in thousands):


	North America		Asia- Pacific		EMEA		Total
Identifiable assets at March 31, 2010:
Property and equipment, net	$	1,353	$	101	$	566	$	2,020
Intangible assets, net	$	1,814	$	—	$	—	$	1,814
Goodwill	$	7,615	$	—	$	—	$	7,615

Identifiable assets at March 31, 2009:
Property and equipment, net	$	1,847	$	229	$	637	$	2,713
Intangible assets, net	$	824	$	—	$	—	$	824
Goodwill	$	7,615	$	—	$	—	$	7,615

12. Subsequent Events

Chief Executive Officer Termination

On April 6, 2010, James Johnson ceased to be the Company’s Chief Executive Officer and resigned as a member of the Company’s board of directors. Upon termination of Mr. Johnson, the Company’s board of directors appointed Steven Martin as the Company’s Interim Chief Executive Officer. Mr. Martin is continuing in his role as the Company’s Chief Financial Officer.

On May 19, 2010, the Company entered into a Separation Agreement and Release with James Johnson, former Chief Executive Officer of the Company. Consistent with the terms of the Company’s existing employment agreement with Mr. Johnson, Mr. Johnson is entitled to receive $300,000, payable over a 12 month period following the termination of his employment, less applicable withholdings and in accordance with the Company’s regular payroll practices. In addition, any unvested equity awards accelerate on the termination date as if Mr. Johnson had been employed for an additional 12-month period after the termination date. The separation agreement also includes a mutual release of claims.

F-33

ColdSpark

On May 21, 2010, the Company announced that it was exiting its ColdSpark Message Management business, which it acquired in connection with its acquisition of ColdSpark, Inc. in May 2009. The Company closed its Broomfield, Colorado office and terminated employees associated with the ColdSpark operations. The Company expects to record charges of approximately $0.5 million in the aggregate, comprised of approximately $0.3 million for termination benefits and $0.2 million for certain amounts due under its lease agreement, substantially all of which are anticipated to be recorded in the quarter ended June 30, 2010. The action is estimated to result in future cash expenditures of approximately $0.5 million and will be treated as discontinued operations in the Company’s financial statements for the first fiscal quarter ended June 30, 2010 and the full fiscal year ended March 31, 2011.

F-34

SIGNATURES

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

Date: June 24, 2010


BAKBONE SOFTWARE INCORPORATED

By:		/S/ STEVE R. MARTIN
		Steve R. Martin Senior Vice President, Chief Financial Officer and Interim Chief Executive Officer (Principal executive, financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons in the capacities indicated have signed this annual report on the date(s) indicated below:


Signature	Title	Date

/S/ STEVE R. MARTIN Steve R. Martin	Senior Vice President, Chief Financial Officer and Interim Chief Executive Officer (principal executive, financial and accounting officer)	June 24, 2010

/S/ IAN BONNER Ian Bonner	Director	June 24, 2010

/S/ DOUGLAS LINDROTH Douglas Lindroth	Director	June 24, 2010

/S/ NEIL MACKENZIE Neil MacKenzie	Director	June 24, 2010

/S/ M. BRUCE NAKAO M. Bruce Nakao	Director	June 24, 2010

/S/ ARCHIBALD NESBITT Archibald Nesbitt	Director	June 24, 2010

/S/ RICHARD N. FRASCH Richard N. Frasch	Director	June 24, 2010

/S/ RICHARD HARROCH Richard Harroch	Director	June 24, 2010

INDEX TO EXHIBITS


Exhibit No.		Description of Documents
2.1(10)		Agreement and Plan of Merger, dated May 11, 2009, by and among BakBone Software Incorporated, Chickasaw Acquisition Corporation, Chickasaw Acquisition Corporation II, ColdSpark, Inc. and Tom Neustaetter as stockholder representative. Certain schedules and exhibits referenced in the Agreement and Plan of Merger have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.

3.1(1)		Restated Articles of Continuance of the registrant

3.2(7)		Bylaws, as amended, of the registrant

4.1(1)		Shareholder Protection Rights Plan Agreement made as of June 17, 2002 by and between the registrant and CIBC Mellon Trust Company

10.1(11)		Form of Indemnity Agreement for directors and executive officers

10.2(11)		Form of Change in Control for executive officers

10.3(1)		2000 Stock Option Plan

10.4(2)		2002 Stock Option Plan

10.5(1)		Form of stock option agreement for the 2000 Stock Option Plan and the 2002 Stock Option Plan

10.6(9)		BakBone Software Incorporated 2003 Equity Incentive Plan

10.7(1)		Series A Preferred Share Purchase Agreement made as of June 18, 2003, by and among the registrant and VantagePoint Venture Partners IV (Q), L.P., and certain affiliated entities

10.8(1)		Investors’ Rights Agreement, dated June 18, 2003, by and among the registrant and VantagePoint Venture Partners IV (Q), L.P., and certain affiliated entities

10.9(5)		Standard Form Modified Gross Office Lease, dated April 20, 2005, between The Irvine Company and the registrant

10.10(3)		Employment Agreement, dated November 1, 2004, by and between the registrant and James R. Johnson

10.11(4)		Warrant to Purchase Common Stock, dated April 17, 2007, by and between the registrant and Sun Microsystems, Inc.

10.12(5)		Stand-alone Restricted Stock Unit Award Agreement dated April 27, 2006, by and between registrant and Doug Lindroth

10.13(5)		Amendment to Stand-alone Restricted Stock Unit Award Agreement dated April 24, 2008, by and between registrant and Doug Lindroth

10.14(6)		Offer Letter, dated August 20, 2008, by and between the registrant and Steven R. Martin

10.15(7)		Offer Letter, dated February 9, 2009, by and between the registrant and Robert Wright

10.16(11)		Offer Letter, dated September 14, 2005, by and between the registrant and Kenneth Horner

10.17(11)		Amendment to Offer Letter, dated June 19, 2009, by and between the registrant and Kenneth Horner

10.18(11)		Offer Letter, dated March 29, 2006, by and between the registrant and Dan Woodward

10.19(11)		Amendment to Offer Letter, dated June 19, 2009, by and between the registrant and Dan Woodward


Exhibit No.		Description of Documents
10.20(8)		Asset Purchase Agreement dated May 1, 2009 by and between BakBone Software, Inc. and Asempra (Assignment for the Benefit of Creditors), LLC, as Assignee for the Benefit of Creditors of Asempra Technologies, Inc.

10.21(11)		Offer Letter, dated June 15, 2009, by and between the registrant and Roy Hogsed

10.22(12)		Retention Letter Agreement, dated May 19, 2010, by and between the Company and Steve Martin

10.23(12)		Retention Letter Agreement, dated May 19, 2010, by and between the Company and Dan Woodward

10.24		Retention Letter Agreement, dated May 19, 2010, by and between the Company and Roy Hogsed

10.25		Retention Letter Agreement, dated May 19, 2010, by and between the Company and Robert Wright

10.26(12)		Separation Agreement and Release, dated May 19, 2010, by and between the Company and James Johnson

10.27(12)		Separation Agreement and Release, dated May 20, 2010, by and between the Company and Kenneth Horner

21.1(11)		Subsidiaries of the registrant

23.1		Consent of Mayer Hoffman McCann P.C., Independent Registered Public Accountants

31.1		Certification of principal executive and financial officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Steve Martin

(1)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Annual Report on Form 10-K filed on June 30, 2004.

(2)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Annual Report on Form 20-F filed on June 26, 2003.

(3)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on November 2, 2004.

(4)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on April 24, 2007.

(5)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Annual Report on Form 10-K filed on August 6, 2008.

(6)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on August 26, 2008.

(7)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Quarterly Report on Form 10-Q filed on February 9, 2009.

(8)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on May 4, 2009.

(9)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on May 13, 2009.

(10)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on May 14, 2009.

(11)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Annual Report on Form 10-K filed on June 23, 2009.

(12)	Previously filed with the SEC as an exhibit to and incorporated herein by reference from our Current Report on Form 8-K filed on May 21, 2010.

Year ended March 31,

Consolidated deferred revenue

BAKBONE SOFTWARE INC 10-K