CPCI Ciprico (MM)

NOTES TO FINANCIAL STATEMENTS

Ciprico Inc. — For the Fiscal Years ending on September 30, 2007 and 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS: The principal business activity of Ciprico Inc. (the Company) is the creation and design, manufacture and marketing of storage solutions for digital media assets throughout the United States and internationally.

ACCOUNTING ESTIMATES: In the preparation of the Company’s consolidated financial statements in accordance with accounting principals generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and related revenue and expenses. Actual results could differ from those estimates used by management.

REVENUE RECOGNITION: The Company recognizes revenue in accordance with:

·                   Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements , issued by the United States Securities and Exchange Commission as amended by Staff Accounting Bulletin No. 104;

·                   Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition , issued by the American Institute of Certified Public Accountants and interpretations;

·                   AICPA SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions ;

·                   SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts , issued by the AICPA;

·                   Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) EITF 00-21, Revenue Arrangements with Multiple Deliverables .

Materially all of revenue to date has been from the sale of product solutions as a result of a customer purchase order. As it is clear that an arrangement exists, the fee is fixed and determinable, and collection is reasonably assured, the Company recognizes revenue upon shipment of product. The Company’s software sales to date do not involve any undelivered elements. When the Company enters into services contracts based on time and materials, revenue is recognized when these services are provided. I f the Company enters into arrangements in which the customer payments are tied to specific milestones, the Company applies the provisions of SOP 81-1. The Company is offering its software platform under licensing arrangements and recognizes revenue upon shipment of the software or upon use by the customer in a per unit arrangement, provided there are no other material undelivered elements.

Though the Company has not sold a licensing agreement with multiple elements to date, if a licensing arrangement does include other elements such as maintenance or other consulting services, it is considered a multiple-element arrangement and the Company accounts for the software license component using the residual method. The residual method generally requires recognition of software license revenue in a multiple-element arrangement once all software products have been delivered and accepted by the customer and the only undelivered element is maintenance services or consulting services. The fair value of the maintenance services is determined based on VSOE of fair value and is deferred and recorded to revenue ratably over the maintenance term. The residual revenue is allocated to the license fee associated with the software products in the transaction. The Company’s maintenance services’ VSOE of fair value is determined by reference to the price the Company’s customers are required to pay for the services when sold separately (i.e. the maintenance services fees paid by the Company’s customers upon renewal).

The Company accrues a warranty reserve within cost of sales for estimated costs to provide warranty services. The Company estimates the costs to service its warranty obligations based on historical experience and expectation of future conditions.

PRODUCT WARRANTY COSTS: Estimated future warranty costs are provided for at the time of revenue recognition. Activity of the warranty account is as follows for the years ended (in thousands):

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Deductions represent warranty work performed during the year.

INVENTORIES: Inventories are stated at the lower of cost or replacement market. Inventory costs include outside assembly charges, allocated manufacturing overhead and direct material costs. Cost is determined using an average cost method, which approximates a first in first out cost.

Inventory consists of the following (in thousands) at September 30:

SHIPPING AND HANDLING COSTS: The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with outbound freight are included in cost of sales.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to expense as incurred.

ADVERTISING COSTS: Advertising costs are charged to expense as incurred. For the years ended September 30, 2007 and 2006, advertising expenses were approximately $52,000 and $68,000 respectively.

SALES TAXES: The Company collects sales taxes from its customers on sales of its various products for sales in which the customer is not a reseller or distributor . Sales taxes collected are included in Other accrued expenses. Sales taxes are remitted, in a timely manner, to the appropriate government tax authority on behalf of the customer.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. At September 30, 2007 and 2006 the Company’s cash and cash equivalents were invested in a money market fund and/or commercial paper. The Company maintains cash balances at several financial institutions, and at times, such balances exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

ACCOUNTS RECEIVABLE: Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due from customers within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowances by considering a number of factors, including the length of time receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industries as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Changes in the Company’s allowance for doubtful accounts has decreased as a result of a 33% decrease in accounts receivable, and is as follows for the years ended (in thousands):

(A) – Represents accounts receivable written-off during the year.

MARKETABLE SECURITIES AND SHORT TERM INVESTMENTS: The Company invests its excess cash in commercial paper, government agencies and other asset-backed short term investments. Commercial paper consists of auction rate securities that are held for seven to ten days and then sold. These investments are classified as available-for-sale securities, and their amortized cost approximates fair value, and thus there are no unrealized gains or losses. Other investments are classified as held-to-maturity given the Company’s intent and ability to hold the securities to maturity and are

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carried at amortized cost, which approximates fair value. Asset-backed short term investments are participation loans in real estate mortgages. The mortgage loans are for first and/or second mortgages for residential, commercial and development properties. Investments that have maturities of less than one year have been classified as current marketable securities.

Marketable securities and short term investments consist the following (in thousands) at September 30:

PROPERTY AND EQUIPMENT: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over estimated useful lives of eighteen months to seven years or, in the case of leasehold improvements, over the period of the related lease, if shorter. Major replacements and improvements are capitalized; repairs and maintenance are expensed as incurred. Accelerated and straight-line methods of depreciation are used for income tax reporting.

VALUATION OF GOODWILL: In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and other intangible assets with indefinite lives are not amortized, they are instead tested for impairment annually or whenever events or changes in circumstances indicate that the asset may be impaired. There have been no impairment charges.

EARNINGS PER SHARE: The Company’s basic earnings per share amounts are computed by dividing net income by the weighted average number of outstanding common shares. Diluted earnings per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents attributable to the assumed exercise of dilutive stock options.

STOCK OPTION PLAN: The Company has a stock option plan under which officers, directors, employees and consultants have been or may be granted incentive and nonqualified stock options to purchase the Company’s common stock at fair market value on the date of grant. The options become exercisable over varying periods and in most cases expire five years from the date of grant; however, the plan provides a maximum term of 10 years.

On October 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment , (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors and consultants, including stock option grants. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”). In March 2005, the SEC issued SAB No. 107, Share-Based Payments , and the Company has applied SAB No. 107’s provisions in the adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2006, as further described below. In accordance with the modified prospective transition method, the Company’s financial statements for the year ended September 30, 2006 have not been restated to reflect, and do not include, the impact of the adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying condensed financial statements for the year ended September 30, 2007. Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards using the intrinsic value method in accordance with APB 25. Under the intrinsic value method, share-based compensation expense was only recognized if the exercise price of the grant was less than the fair market value of the underlying stock at the date of grant. No stock-based compensation expense was recorded by the Company as options have been granted at fair market value on the date of grant.

Prior to October 1, 2006, the Company disclosed compensation cost related to stock options in accordance with APB 25. The following table illustrates the effect on net income and earnings per share for the year ended September 30, 2006 if the Company had applied the fair value recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (amounts in thousands, except per share amounts):

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The weighted average fair value of options granted in 2007 and 2006 was $2.12 and $1.37, per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2007 and 2006: no dividend yield; risk-free rate of return of 4.67% and 4.5%, respectively; volatility of 35.4% and 35.2%, respectively; and an average term of 3.0 years. The Company uses historical information to estimate expected term and forfeiture rates of options. The forfeiture rate applied to 2007 grants is 4.75%. These effects may not be representative of the future effects of applying the fair value method.

NEW ACCOUNTING PRONOUNCEMENTS: In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006, in the Company’s case for the fiscal year ending September 30, 2008. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to retained earnings. The Company does not believe this will result in any material impact to its financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This statement does not require any new fair value measurement, but it provides guidance on how to measure fair value under other accounting pronouncements. SFAS No. 157 also establishes a fair value hierarchy to classify the source of information used in fair value measurements. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad categories. This standard is effective for the Company beginning year ending September 30, 2009. The Company is currently evaluating the impact of this pronouncement on its financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The election to measure the financial instrument at fair value is made on an instrument-by-instrument basis for the entire instrument, with few exceptions, and is irreversible. SFAS No. 159 is effective for the Company beginning year ending September 30, 2009. The Company is currently evaluating the impact of this pronouncement on its financial statements.

2. GOODWILL AND INTANGIBLES

In June 2006, The Company entered into a Technology License and Asset Purchase Agreement (“Agreement”) with Broadcom Corporation, a California corporation. This Agreement involves the purchase of Broadcom’s RAIDCore™ line of business and the cross license of software technology between the Company and Broadcom. The initial amount paid at closing of $330,000 was allocated in its entirety to fixed assets, primarily computer equipment. No goodwill or intangibles were recorded as part of this transaction. The Agreement with Broadcom also provides for payment of royalties and commissions based on actual revenue from product sales and licensing fees until life-to-date payments total $25 million. The Agreement further provides for contingent consideration in the form of warrants to purchase Ciprico common stock at certain prices, these warrants vest only when certain revenue targets are achieved.

In January 2005, the Company purchased substantially all of the assets (primarily the MediaVault ä product line) of Huge Systems, Inc. (“Huge”). Huge was a privately held company and a leading supplier of data storage solutions for the graphic and video content creation marketplace. The total transaction cost of approximately $3.4 million included an allocation of approximately $2.8 million to goodwill. As part of the analysis of the acquisition, it was determined there was no material in-process research and development at the date of acquisition.

In conjunction with the acquisition, the Company also issued certain warrants to purchase an aggregate of 30,000 shares of Ciprico common stock at a price of $5.00 per share to certain stockholders of Huge. The warrants become

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exercisable ratably through January 2009 and terminate five years from the date of issuance.

In accordance with SFAS 142, goodwill and other intangible assets with indefinite lives are not amortized, but are instead tested for impairment annually or whenever events or changes in circumstances indicate that the asset may be impaired. No impairments were identified in 2007 and 2006.

Intangible assets with finite lives that are subject to amortization are listed in the table below as of September 30, 2007 (in thousands):

Amortization expense for the year ended September 30, 2007 was $102,000. These intangibles will be fully amortized in the fiscal year 2008.

Accrued restructuring is related to lease termination costs for the abandonment of our headquarters facility in Plymouth, Minnesota.

Deferred income taxes arise from temporary differences between financial and tax reporting. In accordance with SFAS 142, goodwill and other intangible assets with indefinite lives are not amortized for financial reporting purposes. As goodwill is amortized for tax purposes, the company has recorded deferred tax expense of approximately $66,000 for both 2007 and 2006. The deferred tax expense and deferred tax liability are related to an asset with an indefinite life and are thus created as it is more likely than not that any deferred tax asset will not be realized. Also during the fiscal year 2006 it became apparent that $66,000 accrued for state taxes was no longer necessary.

The tax effects of the cumulative temporary differences result in net deferred taxes as follows (in thousands):

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As of September 30, 2007, the Company had net operating loss carry forwards of approximately $32.8 million, which expire at various dates from 2022 to 2027, and general business credit carry forwards of approximately $1.3 million, which expire at various dates from 2011 to 2018.

The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate:

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006, in the Company’s case for the fiscal year ending September 30, 2008. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to retained earnings. The Company does not believe this will result in any material impact to its financial statements.

5. STOCKHOLDERS’ EQUITY

Authorized Shares

The Company is authorized to issue 1,000,000 shares of Preferred Stock at $.01 par value and 9,000,000 shares of Common Stock at $.01 par value. The Company has not issued any shares of Preferred Stock.

Stock Repurchase

The Company’s stock buyback program is currently suspended. Under the plan $12.0 million was authorized to be used for the repurchase program. There were no shares repurchased in the fiscal years 2007 and 2006.

Stockholders Rights Plan

On January 8, 2003, the Board of Directors adopted a stockholder rights plan under which the Board declared a dividend distribution of one right for each outstanding share of Ciprico common stock as of January 14, 2003. Upon becoming exercisable, each right would entitle its holder to buy one one-hundredth of a share of a new series of preferred stock at an exercise price of $32.00 per right. Subject to certain allowable actions by the Board, the rights will become

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exercisable if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer for 15% or more of its common stock. Unless the Board exercises certain other rights, if such a person acquires 15% or more of the Company’s common stock, each right would enable a Ciprico stockholder to acquire Ciprico stock having a market value of twice the right’s exercise price. The rights are redeemable at the option of the Company in certain instances.

The following table summarizes information regarding outstanding and exercisable stock options:

As of September 30, 2007, total unrecognized share-based compensation cost related to unvested stock options was $988,000, which is expected to be recognized over a weighted average period of approximately four years. The Company has included the following amounts for share-based compensation cost, for the year ended September 30, 2007 (amounts in thousands, except per share amount):

The Company did not realize any actual tax benefit from the tax deductions for stock option exercises during year ended September 30, 2007, due to the full valuation allowance on the Company’s U.S. deferred tax assets

Share-based compensation expense recognized during the year ended September 30, 2007 included (1) compensation expense for awards granted prior to, but not yet fully vested as of October 1, 2006, and (2) compensation

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expense for the share-based payment awards granted subsequent to September 30, 2006 based on the grant date fair values estimated in accordance with the provisions of SFAS 123(R). SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has historically and will continue to estimate the fair value of share-based awards using the Black-Scholes option-pricing model. Total unrecognized share-based compensation cost related to unvested stock options as of September 30, 2007 has been adjusted for estimated forfeitures.

As of September 30, 2007, the Company had 279,481 shares reserved for future issuance under the plan.

Restricted Stock Plan

The 1996 Restricted Stock Plan (“RSP”) provides for common stock awards to officers, directors and certain key employees of the Company. All restricted stock awards entitle the participant to full dividend and voting rights.

The following table summarizes the status of the Company’s non-vested restricted stock as of September 30, 2007.

During the year ended September 30, 2007, $244,000 of expense was recognized related to outstanding restricted stock awards. The vesting period for these awards currently ranges from one to two years. Those that vest over a one-year period vest without other conditions. Those that vest over a two-year period vest only if certain service, market and, in some cases, performance conditions are met.

Warrants

Pursuant to the Technology License and Asset Purchase Agreement (“Agreement”) with Broadcom Corporation there is contingent consideration in the form of warrants to purchase Ciprico stock at certain prices, if certain revenue targets are achieved. There are three warrants each for 300,000 shares. The exercise price of the first warrant is $6.00 and vests if sales of software licenses exceed $2,000,000 and sales of RAID controller cards exceed $5,000,000 in the first year ending June 6, 2007. The exercise price of the second warrant is $8.00 and vests if sales of software licenses exceed $4,000,000 and sales of RAID controller cards exceed $15,000,000 in the second year ending June 6, 2008. The exercise price of the third warrant is $10.00 and vests if sales of software licenses exceed $4,000,000 and sales of RAID controller cards exceed $20,000,000 in the third year ending June 6, 2009. The first tranche of warrants related to the period ending June 6, 2007 did not vest as revenue targets were not achieved. There is provision for a cumulative provision if sales meet the stated target over the 3 year period ending June 6, 2009.

6.                NET LOSS PER SHARE

Basic and diluted loss per share amounts were computed using weighted average shares outstanding for each respective period. As the Company incurred losses for the years ended September 30, 2007 and 2006, the effect of potentially dilutive securities has been excluded from the calculation of loss per share as inclusion would have had an anti-dilutive effect.

Actual weighted average shares outstanding used in calculating basic and diluted loss per share were as follows for the years ended September 30:

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Securities excluded from the computation of diluted loss per share because inclusion would have had an anti-dilutive effect were as follows for the years ended September 30:

7. EMPLOYEE BENEFIT PLAN

The Company provides a 401(k) savings plan covering substantially all of its employees. Minimum contributions to the plan by the Company are 50 percent of employee contributions up to the first 6 percent of the participants’ salaries. Contributions in addition to the minimum may also be made by the Company based on the Company’s financial performance. The Company’s contributions to the plan in 2007 and 2006 were $146,000 and $116,000 respectively.

8. SEGMENT INFORMATION

The Company operates in a single reportable segment.

The Company has no material long-lived assets outside of the United States. Our products are sold mostly to distributors, who in turn sell them to the final customer. As such, because we are not selling to the final customer, we may not know the geographic location in which our products are used. The table below represents sales by major geographic area for the fiscal year :

Sales as a percentage of net sales, to two significant customers for the fiscal year 2007 were 11% and 1%, and for the fiscal year 2006 those same customers accounted for 13% and 12%, respectively. Receivables from those two significant customers at September 30, 2007 were $68,000 and $0, respectively.

9. COMMITMENTS AND CONTINGENCIES

In October, 2007, the Company moved its headquarters, offices and manufacturing space to St. Louis Park, MN. The operating leases for office and manufacturing space expire at varying dates through November 2014. Future minimum payments under these leases are as follows (in thousands) for the fiscal years ending September 30:

For the years ended September 30, 2007 and 2006, operating lease expenses were $496,000 and $446,000.

10. SUBSEQUENT EVENT

On December 26, 2007, Ciprico Inc. (the “Company”) entered into a Convertible Note Purchase Agreement (“Purchase Agreement”) with multiple accredited investors for the private placement of a minimum of $3,000,000 and a maximum of $7,800,000 of convertible notes and common stock warrants for $0.25 worth of warrant shares for each $1.00 of principal invested.

The conversion price for the notes and the exercise price for the warrants is fixed at an amount equal to the average closing bid price of the Company’s common stock for the five (5) consecutive trading days ending on the trading day prior to the issue date. That price was $3.86 for the initial closing on December 21, 2007 for a principal amount of $5.1 million.

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The notes are due and payable in full on the 15-month anniversary of the date of issuance and the warrants are exercisable from the date of issuance until the five year anniversary. The number of shares issuable upon exercise of the warrant is subject to adjustment in the event of stock splits or dividends, business combinations, sale of assets or other similar transitions.

The notes, warrants and common stock issuable upon conversion of the notes or exercise of the warrants have not been registered under the Securities Act of 1933, as amended, (the “Securities Act”), or any state securities laws and were sold in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated thereunder, as a transaction by an issuer not involving any public offering.

The Company is obligated to register the shares of common stock issuable upon the conversion of the notes and the exercise of the warrants pursuant to certain customary terms and conditions contained in the note and the warrant.

Four related parties purchased notes and received warrants.  Board member James W. Hansen purchased a Note from the Company in the amount of $100,000 and was issued 6,577warrants.  Board member James D. Gerson purchased a Note from the Company in the amount of $500,000, and was issued 32,383 warrants. Steven D. Merrifield, President, Chief Executive Officer, purchased a Note from the Company in the amount of $100,000 and was issued 6,477 warrants.  Monte S. Johnson, Senior Vice President and Chief Financial Officer, purchased a Note from the Company in the amount of $100,000 and was issued 6,477 warrants.

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