OVERLAND STORAGE, INC.

4820 Overland Avenue

October 10, 2007

Dear Shareholder:

You are cordially invited to attend the annual meeting of shareholders of Overland Storage, Inc. to be held at the offices of our company, located at 4820 Overland Avenue, San Diego, California 92123, on Tuesday, November 13, 2007 at 9:00 a.m. (Pacific Time).

The attached notice of annual meeting and proxy statement include the agenda for the shareholders’ meeting, explain the matters that we will discuss at the meeting and provide general information about our company.

Your vote is very important. Whether or not you plan to attend the meeting, please complete, sign, date and return the enclosed proxy card as soon as possible to ensure your representation at the meeting. We have provided a postage-paid envelope for your convenience. If you plan to attend the annual meeting and prefer to vote in person, you may still do so even if you have already returned your proxy card.

If you are a shareholder of record (that is, if your stock is registered with us in your own name), then you may vote by telephone, or electronically over the Internet, by following the instructions included in the proxy statement and with your proxy card. If your shares are registered in the name of a broker or other nominee, your nominee may be participating in a program provided through Broadridge Financial Solutions, Inc. (formerly ADP Investor Communication Services) that allows you to vote by telephone or the Internet. If so, the voting form that your nominee sends you will provide telephone and Internet instructions.

We look forward to seeing you at the annual meeting.

OVERLAND STORAGE, INC.

4820 Overland Avenue

San Diego, California 92123

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

NOVEMBER 13, 2007

The annual meeting of shareholders of Overland Storage, Inc. will be held at the offices of our company, located at 4820 Overland Avenue, San Diego, California 92123, on Tuesday, November 13, 2007 at 9:00 a.m. (Pacific Time) for the following purposes:

1.             To elect five directors;

2.             To approve the amendment and restatement of our 2003 Equity Incentive Plan, including an increase in authorized shares and the cancellation of certain outstanding options held by our current executive officers and directors;

3.             To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending June 29, 2008; and

4.             To transact any other business that may properly come before the meeting or any adjournment or postponement of the meeting.

The foregoing items of business are more fully described in the proxy statement.

The Board of Directors has fixed the close of business on September 18, 2007 as the record date for the determination of shareholders entitled to notice of and to vote at the annual meeting and at any adjournment or postponement thereof. A list of shareholders entitled to vote at the meeting will be available for inspection at our offices.

All shareholders are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please complete, sign, date and return the enclosed proxy card as soon as possible to ensure your representation at the meeting. A postage-paid return envelope is enclosed for your convenience. Shareholders with shares registered directly with our transfer agent, Wells Fargo Shareowner Services, may choose to vote those shares via the Internet at http://www.eproxy.com/ovrl, or they may vote telephonically, within the U.S. and Canada, by calling 1-800-560-1965. Shareholders holding shares with a broker, bank or other nominee may also be eligible to vote via the Internet or to vote telephonically if their broker, bank or other nominee participates in the proxy voting program provided by Broadridge Financial Solutions, Inc. (formerly ADP Investor Communication Services). See “Voting Shares Registered in the Name of a Broker or Bank” in the proxy statement for further details on the Broadridge program. Even if you have given your proxy, you may still vote in person if you attend the meeting. Please note, however, that if a broker, bank or other nominee holds your shares of record and you wish to vote at the meeting, then you must obtain from the record holder a proxy issued in your name.

OVERLAND STORAGE, INC.

4820 Overland Avenue

San Diego, California 92123

2007 PROXY STATEMENT

The Board of Directors of Overland Storage, Inc., a California corporation, is providing these proxy materials to you in connection with the solicitation of proxies for use at our 2007 annual meeting of shareholders. The meeting will be held at the offices of our company, located at 4820 Overland Avenue, San Diego, California 92123, on Tuesday, November 13, 2007 at 9:00 a.m. (Pacific Time) or at any adjournment or postponement thereof, for the purposes stated herein. This proxy statement summarizes the information that you will need to know to vote in an informed manner.

We will begin mailing this proxy statement and the accompanying proxy card on or about October 10, 2007 to all shareholders of record that are entitled to vote. Only shareholders that owned our common stock at the close of business on September 18, 2007, the record date, are entitled to vote at the annual meeting. On the record date, 12,756,466 shares of our common stock were outstanding.

Each share of our common stock that you own entitles you to one vote on all matters to be voted upon at the meeting. The proxy card indicates the number of shares of our common stock that you own. We will have a quorum to conduct the business of the annual meeting if holders of a majority of the shares of our common stock are present, in person or by proxy. Abstentions and broker non-votes (i.e., shares of common stock held by a broker, bank or other nominee that are represented at the meeting, but that the broker, bank or other nominee is not empowered to vote on a particular proposal) will be counted in determining whether a quorum is present at the meeting.

Directors will be elected by a plurality of votes cast by shares present or represented at the meeting. Abstentions will have no impact on the election of directors. The proposals to (i) approve the amendment and restatement of our 2003 Equity Incentive Plan and (ii) ratify the appointment of our independent registered public accounting firm must be approved by a majority of votes actually cast. Abstentions and broker non-votes are not counted as votes for or against these proposals, but the number of votes cast in favor of each proposal must be at least a majority of the required quorum.

If you are a shareholder of record, you may vote in one of four ways:

•      Attend the 2007 annual meeting and vote in person;

•      Complete, sign, date and return the enclosed proxy card;

•      Vote by telephone following the instructions included with your proxy card and outlined below; or

•      Vote by Internet following the instructions included with your proxy card and outlined below.

If you are a shareholder of record, then you may go to http://www.eproxy.com/ovrl/ to vote your shares over the Internet. The votes represented by this proxy will be generated on the computer screen and you will be prompted to submit or revise your vote as desired. If you are using a touch-tone telephone and are calling from the U.S. or Canada, then you may vote your shares by calling 1-800-560-1965 and following the recorded instructions.

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Votes submitted by telephone or via the Internet must be received by 2:00 p.m. (Pacific Time) on Monday, November 12, 2007. Submitting your proxy by telephone or via the Internet will not affect your right to vote in person should you decide to attend the annual meeting.

Most beneficial owners whose stock is held in street name will receive instructions for voting their shares from their broker, bank or other nominee, rather than our proxy card.

A number of brokers and banks participate in a program provided through Broadridge Financial Solutions, Inc. (formerly ADP Investor Communication Services) that allows shareholders to grant their proxy to vote shares by means of the telephone or Internet. If your shares are held in an account with a broker or bank participating in the Broadridge program, then you may vote your shares telephonically by calling the telephone number shown on the instruction form received from your broker or bank, or over the Internet at Broadridge’s web site at http://www.proxyvote.com.

If you wish to vote in person at the annual meeting, then you must obtain a legal proxy issued in your name from the broker, bank or other nominee that holds your shares of record.

A representative from our transfer agent, Wells Fargo Shareowner Services, will tabulate the votes. The shares of our common stock represented by proxy will be voted in accordance with the instructions given on the proxy so long as the proxy is properly executed and received by us prior to the close of voting at the meeting or any adjournment or postponement of the meeting. If no instruction is given, then the proxy will be voted for the nominees for director and for each of the other proposals. In addition, the individuals that we have designated as proxies for the meeting will have discretionary authority to vote for or against any other shareholder matter presented at the meeting.

As a shareholder of record, once you have submitted your proxy by mail, telephone or Internet, you may revoke it at any time before it is voted at the meeting. You may revoke your proxy in any one of three ways:

•      You may grant another proxy marked with a later date (which automatically revokes the earlier proxy) using any of the methods described above (and until the applicable deadline for each method);

•      You may notify our Secretary in writing that you wish to revoke your proxy before it is voted at the annual meeting; or

•      You may vote in person at the annual meeting.

This solicitation is made by our Board of Directors, and we will bear the entire cost of soliciting proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to shareholders. We have retained The Proxy Advisory Group, LLC to provide consulting and to assist us with the solicitation of proxies, and we will pay fees and reimbursements of customary expenses that are not expected to exceed $17,000 in the aggregate. We will provide copies of solicitation materials to banks, brokerage houses, fiduciaries and custodians holding in their names shares of our common stock that are beneficially owned by others for forwarding to the beneficial owners. We may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to the beneficial owners. Solicitations will be made primarily through the mail, but may be supplemented by telephone, telegram, facsimile, Internet or personal solicitation by our directors, executive officers, employees or other agents. No additional compensation will be paid to these individuals for these services.

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Requirements for Shareholder Proposals to be Considered for Inclusion in Overland’s Proxy Materials. Shareholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act and intended to be presented at our 2008 annual meeting must be received by us not later than June 12, 2008, in order to be considered for inclusion in our proxy materials for that meeting.

Requirements for Shareholder Proposals to be Brought Before an Annual Meeting. Our bylaws provide that, for shareholder nominations to the Board of Directors or other proposals to be considered at an annual meeting, the shareholder must have given timely notice of the proposal or nomination in writing to our Secretary. To be timely for the 2008 annual meeting, a shareholder’s notice must be delivered to or mailed and received by our Secretary at our principal executive offices between July 12, 2008 and August 11, 2008. A shareholder’s notice to the Secretary must set forth, as to each matter the shareholder proposes to bring before the annual meeting, the information required by our bylaws.

If you share an address with another shareholder, each shareholder may not receive a separate copy of our annual report and proxy materials. Shareholders who do not receive a separate copy of our annual report and proxy materials, and who want to receive a separate copy, may request to receive a separate copy of our annual report and proxy materials by writing to Investor Relations at Overland Storage, Inc., 4820 Overland Avenue, San Diego, California 92123 or by calling 1-800-729-8725. We undertake to deliver promptly a copy of the annual report or proxy materials, as applicable, upon the receipt of such request. Shareholders who share an address and receive multiple copies of our annual report and proxy materials may also request to receive a single copy following the instructions above.

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The following table outlines the ownership of our common stock as of September 18, 2007 (except as otherwise indicated below) by:

•      each of our directors and nominees for director;

•      each of our named executive officers;

•      all current directors and executive officers as a group; and

•      every person or entity that we know beneficially owns more than 5% of our outstanding common stock.

This table is based upon information supplied by executive officers, directors and principal shareholders and filings with the Securities and Exchange Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

*Less than 1%

+ Except as otherwise indicated, the address for each beneficial owner is 4820 Overland Avenue, San Diego, CA,  92123.

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(1)     Includes shares of common stock which could be acquired upon exercise of stock options which are either currently vested or will vest within 60 days of September 18, 2007, but excludes 468,300 shares subject to options which are proposed to be cancelled in Proposal No. 2 and which the holders have agreed not to exercise pending the vote of Proposal No. 2.

(2)     Based on 12,756,466 shares of common stock outstanding on September 18, 2007, calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended.

(3)     Based on the Schedule 13F filed with the SEC for the period ended June 30, 2007. Fidelity Management & Research Company and FMR Co., Inc., as the defined managers, share investment discretion with respect to these shares but have no voting power with respect to these shares.

(4)     Based on the Schedule 13F filed with the SEC for the period ended June 30, 2007, Kingdon Capital Management, LLC has sole voting power and shared investment discretion with respect to these shares.

(5)     Based on the Schedule 13F filed with the SEC for the period ended June 30, 2007, Dimensional Fund Advisors Inc. has sole voting power with respect to 923,388 shares, no voting power with respect to 20,856 shares and sole investment discretion with respect to all shares.

(6)     Based on the Schedule 13G filed with the SEC dated July 31, 2007, Wellington Management Company, LLP has shared voting power and shared investment discretion with respect to these shares.

(7)     Based on the Schedule 13F filed with the SEC for the period ended June 30, 2007, Galleon Management, LP has shared investment discretion and no voting authority with respect to these shares.

(8)     Based on the Schedule 13F filed with the SEC for the period ended June 30, 2007, Renaissance Technologies, Corp. has sole investment discretion and sole voting authority with respect to these shares.

(9)     Includes 1,000 shares of common stock held by Mr. Degan’s wife.

(10)   Represents shares of common stock owned by Mr. McClendon through his family trust and includes 1,000 shares held by his wife.

(11)   Mr. Calisi’s employment ended on November 1, 2006.

(12)   Ms. Huff’s employment ended on April 27, 2007.

(13)   Mr. Kerman’s employment ended on October 3, 2007. Shares acquirable within 60 days excludes options to purchase 95,833 shares with an exercise price of $10 per share or more, which will expire January 3, 2008 and are considered unlikely to be exercised.

(14)   Does not include the security ownership of Mr. Kerman. Includes the security ownership of  Messrs. LoForti, Degan, McClendon, Miller, Norkus, Farkaly, Gawarecki, Kalbfleisch and Scroop.

We are aware of no arrangements, including any pledge by any person of our common stock, the operation of which may at a subsequent date result in a change of control of our company.

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PROPOSAL NO. 1

Our Board of Directors, acting pursuant to our bylaws, has determined that the number of directors constituting the full Board of Directors shall be six at the present time. There is currently one vacancy on the Board of Directors. In accordance with provisions in our bylaws concerning advance notice for the nomination of directors, no nomination for the vacancy on the Board of Directors will be accepted at the 2007 annual meeting. The vacancy on the Board of Directors may be filled by the board in accordance with applicable law and our bylaws. The Nominating and Governance Committee is actively seeking new director candidates, and has retained a search firm to assist in the process of identifying and evaluating director candidates. See “Nominating and Governance Committee.”

The Board of Directors has, upon recommendation of the Nominating and Governance Committee, nominated Robert A. Degan, Vernon A. LoForti, Scott McClendon, William J. Miller and Michael Norkus for reelection as members of the Board of Directors. Each of the nominees is currently a director of our company. Each newly-elected director will serve a one-year term until the next annual meeting of shareholders or until his successor is qualified and elected. During the course of a term, the Board of Directors may appoint a new director to fill any vacant spot, including a vacancy caused by an increase in the size of the Board of Directors. The new director will complete the term of the director he or she replaced. Each person nominated for election has agreed to serve if elected, and we have no reason to believe that any nominee will be unable to serve. However, if any nominee cannot serve, then your proxy will be voted for another nominee proposed by the Board of Directors, or if no nominee is proposed by the Board of Directors, an additional vacancy will occur.

We, as a matter of policy, encourage our directors to attend meetings of shareholders. Each director proposed for election at our 2006 annual shareholder meeting (i.e., Messrs. Barrenechea, Degan, McClendon, Miller and Norkus) attended the 2006 annual shareholder meeting.

There are no family relationships between any nominees or executive officers of our company, and there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was or is selected as a director or nominee.

You are being asked to vote on the five director nominees listed below. Unless otherwise instructed, the proxy holders will vote the proxies received by them for these five nominees. All of our nominees for director are current members of our Board of Directors. The names of the director nominees, their ages as of October 10, 2007 and other information about them are shown below.

Robert A. Degan has been a private investor since January 2000. From November 1998 to December 1999, Mr. Degan served as General Manager of the Enhanced Services & Migration Business Unit (formerly, Summa Four, Inc.) of Cisco Systems, Inc., an Internet networking company. From July 1998 to November 1998, Mr. Degan was Chairman, President and Chief Executive Officer of Summa Four, Inc., and from January 1997 to July 1998 he served as its President and Chief Executive Officer and as a director. Mr. Degan became Chairman of the Board of CaminoSoft Corp. (OTCBB: CMSF.OB), an information storage company in April 2006. He retired from the board of directors of FlexiInternational Software, Inc. in July 2006 and Gensym Corporation in May 2005. Mr. Degan was formerly on the research staff at Massachusetts Institute of Technology (MIT).

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Vernon A. LoForti has served as our President, Chief Executive Officer and a member of our Board of Directors since August 2007 and as our Secretary since December 1997. Prior to August 2007, Mr. LoForti was our Vice President and Chief Financial Officer since joining us in December 1995 and was Assistant Secretary from December 1995 to November 1997. From August 1992 to December 1995, he was the Chief Financial Officer for Priority Pharmacy, a privately-held pharmacy company. From 1981 to 1992, Mr. LoForti was Vice President of Finance for Intermark, Inc., a publicly-held conglomerate.

Scott McClendon has served as Chairman of our Board since March 2001. From November 2006 to August 2007, he served as our Interim President and Chief Executive Officer and as our President and Chief Executive Officer from October 1991 to March 2001, when he was named our Chairman of the Board, and continued as an executive officer and employee until June 2001. Mr. McClendon has been a business consultant since June 2001. Mr. McClendon was employed by Hewlett-Packard Company, a global manufacturer of computing, communications and measurement products and services, for over 32 years in various positions in engineering, manufacturing, sales and marketing. He last served as the General Manager of the San Diego Technical Graphics Division and Site Manager of Hewlett-Packard in San Diego, California. Mr. McClendon is a director of SpaceDev, Inc. (OTCBB: SPDV.OB), an aerospace development company, and Procera Networks, Inc. (AMEX:PKT), a network equipment company.

William J. Miller has served as an independent director and advisor to technology companies since 1999. From April 1996 to November 1999, Mr. Miller was the Chairman and CEO of Avid Technology, a leader in digital media creation tools for film, video, audio, animation, games, and broadcast professionals. Prior to that time, he served as CEO of Quantum Corporation, a developer of storage technology (from 1992 to 1995) and as Chairman of Quantum (from 1993 to 1995). From 1981 to 1992, Mr. Miller held senior management positions at Control Data Corporation, most recently as Executive Vice President and President of its Information Services business. Mr. Miller currently serves as a director for: Digimarc Corporation (Nasdaq: DMRC), a supplier of secure identity and media management solutions, Nvidia Corp (Nasdaq: NVDA), a provider of graphics processing units (GPUs), media and communications processors (MCPs), wireless media processors (WMPs), and related software for personal computers (PCs), handheld devices, and consumer electronics platforms; Waters Corporation, a privately-held manufacturer of analytical instruments; Viewsonic Corporation, a provider of visual display products (Form S-1 registration statement for IPO filed July 2, 2007 (File No. 333-144262)); and Glu Mobile Corporation (Nasdaq: GLUU), a developer and publisher of games for mobile devices.

Michael Norkus is the President of Alliance Consulting Group, a strategy consulting firm, which he founded in 1986. From 1975 to 1986, Mr. Norkus served as a Vice President of Boston Consulting Group where he was the founding member of the firm’s Munich, Germany office. Mr. Norkus is a member of the Board of Associates of The Whitehead Institute in Cambridge, Massachusetts and of the Boston Public Library Foundation.

Our bylaws provide that you can cumulate your votes in the election of directors if, before the vote begins, the candidate or candidates have been nominated and any of our shareholders notifies us of such shareholder’s intent to cumulate such shareholder’s votes. Under cumulative voting, you may cast a number of votes equal to the product of the number of your shares times the number of directors to be elected at the meeting. If you notify us that you intend to cumulate your votes at any time before the election of directors begins, then you may vote all of your votes for one candidate, or you may distribute your votes among as many candidates as you desire. The candidates receiving the highest numbers of affirmative votes of the shares entitled to vote in the election of directors will be elected to the board positions up for election. If voting for directors is conducted by cumulative voting, then the person named on the proxy will have discretionary authority to cumulate votes among the candidates.

The nominees who receive the highest number of votes represented by shares of common stock present or represented by proxy and entitled to vote at the annual meeting will be elected.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION

TO THE BOARD OF EACH OF THESE NOMINEES

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PROPOSAL NO. 2

At the annual meeting, shareholders will be asked to approve the amended and restated Overland Storage, Inc. 2003 Equity Incentive Plan (2003 Plan). On September 22, 2007, our Board of Directors adopted the proposed amendment and restatement of the 2003 Plan described below conditioned and subject to shareholder approval. The amended and restated 2003 Plan as proposed to be approved by shareholders is attached to this proxy statement as Appendix A.

Shareholders are being asked to approve an amendment and restatement of the 2003 Plan to accomplish, among other things, the following items/changes:

•      Increasing by 1,300,000 the number of shares of common stock reserved for issuance under the 2003 Plan;

•      For future grants, shortening the maximum stock option and stock appreciation right term to six years from the date of grant;

•      Cancelling stock options for 468,300 shares that were previously issued to our current directors and executive officers, with the cancelled option shares no longer available for issuance under the 2003 Plan;

•      Expanding the enumerated examples of performance criteria for awards not subject to the limitation on deductibility under Internal Revenue Code Section 162(m);

•      Extending the ability to award incentive stock options under the Plan until the 10th anniversary of shareholder approval; and

•      Making certain other administrative amendments to the 2003 Plan that are in part intended to facilitate compliance with recently promulgated tax regulations.

We believe strongly that the approval of the amendment and restatement of the 2003 Plan is essential to our continued success. Stock options and other awards such as those provided under the 2003 Plan are vital to our ability to attract, retain and motivate key employees, consultants and directors who are important to the success and growth of our business, and to create a long-term mutuality of interest between such persons and our shareholders. By reducing the maximum stock option and stock appreciation right term life, the financial accounting expenses related to the issuance of such awards will be reduced. We believe the willingness of our current directors and executive officers to cancel stock options for a total of 468,300 shares, without return of such shares to the available reserve under the 2003 Plan, demonstrates their commitment to aligning their interests with those of our shareholders by reducing the overall shareholder dilution level.

Below is a summary of the principal provisions of the 2003 Plan assuming approval of the proposed amendment and restatement. If there is any inconsistency between the summary and the 2003 Plan’s terms or if there is any inaccuracy in the summary, the terms of the 2003 Plan govern.

Key features of the 2003 Plan, including features that are discussed in this proposal and subject to our shareholders’ approval, are as follows:

•      The 2003 Plan is generally administered by a committee comprised solely of independent directors.

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•      Any shares to which stock options or stock appreciation rights pertain will be counted against the total number of shares reserved under the plan as one share for every one share subject to those awards, and any shares to which restricted shares or stock units pertain will be counted against the total number of shares reserved under the plan as two shares for every one share subject those awards, except for stock units which are used to fulfill grants under other plans or programs (such as foreign sub-plans) which are in the nature of stock options or stock appreciation rights.

•      Stock options and stock appreciation rights may not be granted at prices below 100% of fair market value of the common stock on the date of grant.

•      Beginning on the date of shareholder approval of this proposal, the term life of future grants of stock options and stock appreciation rights may not exceed six years from the date of grant.

•      Stock options and stock appreciation rights may not be repriced nor can a stock option or stock appreciation right be cancelled and replaced with a new award with a lower exercise price such that the effect would be the same as reducing the exercise price, without shareholder approval (except as provided under the 2003 Plan for stock splits, recapitalizations and similar events).

A more detailed summary of these key features and further principal features of the 2003 Plan and its operation is set forth below under the heading “Description of the 2003 Plan.”

On August 7, 2003, our Board of Directors adopted the 2003 Plan and, on November 17, 2003, it was approved by shareholders. Upon approval of the 2003 Plan by our shareholders, our then existing option plans, including the 1995 Stock Option Plan, 1997 Equity Stock Option Plan, 2000 Stock Option Plan and 2001 Supplemental Stock Option Plan (collectively, the Old Option Plans) became unavailable for new grants. The Old Option Plans continue to govern outstanding awards previously granted under such plans.

It was determined to be in our best interest to effectively transfer the shares authorized and available for grant under the terminated Old Option Plans into the pool of shares available under the 2003 Plan. The initial reserve under the 2003 Plan was subject to a maximum limitation of 3,727,827 shares, and included:

•      Shares of common stock available for issuance under the Old Option Plans as of November 17, 2003, the date of shareholder approval of the 2003 Plan (the Approval Date);

•      Shares of common stock issued under any Old Option Plan or that are issuable upon exercise of stock options granted pursuant to the Old Option Plans that expire or become unexercisable for any reason without having been exercised in full after the Approval Date; and

•      400,000 new shares of common stock.

The terms of the 2003 Plan generally provide that if an award granted under the Old Option Plans terminates, expires or lapses for any reason without having been fully exercised or vested, or is settled by less than the full number of shares of common stock represented by such award actually being issued, the unvested, cancelled or unissued shares of common stock generally will be returned to the available pool of shares reserved for issuance under the 2003 Plan. However, if this proposal is approved by shareholders, then the shares underlying the 468,300 stock options that will be cancelled, as described below under the heading “Cancellation of Certain Stock Options,” will not be available for future issuance. The shares outstanding and available under the 2003 Plan are also subject to proportionate adjustments for stock splits, dividends, reorganizations and the like.

On September 29, 2004, our Board adopted an amendment to the Plan, which we refer to as the 2004 Amendment, which was approved by our shareholders on November 15, 2004. The 2004 Amendment provided for, among other things, an increase of 1,000,000 shares of common stock such that the total reserve under the 2003 Plan increased to a maximum of 4,727,827 shares.

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As of September 18, 2007, 376,376 shares were available for issuance under the 2003 Plan, which number reflects the grant of options to purchase an aggregate of 1,485,000 shares on August 13, 2007 (including an aggregate of 775,000 shares awarded to executive officers), as well as certain cancellations and forfeitures of options that occurred after the end of fiscal 2007. This amount does not include (a) additional shares that may become available upon the termination, cancellation, expiration or lapse of awards granted under the 2003 Plan or the Old Option Plans and (b) the 1,300,000 share increase subject to this proposal.

Accordingly, if this proposal is approved, the approximate number of shares that would be available for grant under the 2003 Plan would increase to 1,676,376 shares, giving effect to the cancellations discussed below, and the maximum reserve under the plan would increase to 5,559,527 shares. If shareholders do not approve the amended and restated 2003 Plan, the 2003 Plan (without giving effect to any of the amendments subject to this proposal) will continue to remain in effect. The fair market value of a share of our common stock on September 18, 2007 was $1.84.

Description of the 2003 Plan

Background and Purpose of the 2003 Plan. The purpose of the 2003 Plan is to promote the long-term success of our company and the creation of shareholder value by:

•      encouraging employees, non-employee directors and consultants to focus on critical long-range objectives,

•      encouraging the attraction and retention of employees, outside directors and consultants with exceptional qualifications, and

•      linking employees, outside directors and consultants directly to shareholder interests through increased stock ownership.

The 2003 Plan permits the grant of the following types of incentive awards: (1) stock options, (2) stock appreciation rights, (3) restricted shares, and (4) stock units.

Stock Subject to the 2003 Plan. If shareholders approve the increase in the aggregate number of shares authorized under the 2003 Plan pursuant to this Proposal No. 2, a maximum of 5,559,527 shares will be reserved for issuance under the 2003 Plan, representing an increase of 831,700 shares, which represents the 1,300,000 share increase, reduced by 468,300 shares subject to options that will be cancelled and not returned to the 2003 Plan. As of September 18, 2007 the record date for this annual meeting, of the total shares available under the 2003 Plan, 2,199,045 shares were subject to outstanding awards under the 2003 Plan and 376,376 shares were available for future grants. The difference between the maximum available reserve of shares, on the one hand, and the total number of shares subject to outstanding awards and currently available for grant, on the other hand, represents shares that may become available out of shares currently reserved under the Old Option Plans as described under the heading “History of the 2003 Plan” above. Any shares to which stock options or stock appreciation rights pertain will be counted against the total number of shares reserved under the 2003 Plan as one share for every one share subject to those awards, except for stock units which are used to fulfill grants under other plans or programs (such as foreign sub-plans) which are in the nature of stock options or stock appreciation rights. Any shares to which restricted shares or stock units pertain will be counted against the total number of shares reserved under the 2003 Plan as two shares for every one share subject those awards.

Administration of the 2003 Plan. The 2003 Plan requires a committee of two or more directors to administer the 2003 Plan. The members of the committee must be “non-employee directors” under Rule 16b-3 under the Exchange Act, and “outside directors” under Section 162(m) of the Internal Revenue Code. The Board has designated our Compensation Committee as the committee to administer the 2003 Plan. Subject to the terms of the 2003 Plan, the committee has the sole discretion to select the participants who will receive awards, to determine the terms and conditions of awards (for example, the exercise price and vesting schedule), to correct any defect, supply any omission, or reconcile any inconsistency in the 2003 Plan or any award agreement, to accelerate the vesting, extend the post-termination exercise term or waive restrictions of any awards at any time and under such terms and conditions as it deems appropriate, and to interpret the provisions of the 2003 Plan and outstanding awards. The committee may also use the 2003 Plan to issue shares under other plans or subplans as may be deemed necessary or

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appropriate, such as to provide for participation by our non-U.S. employees and those of any of our subsidiaries and affiliates.

Eligibility to Receive Awards. Employees, non-employee directors and consultants of us and certain of our related companies are eligible to receive awards under the 2003 Plan. The committee generally selects the participants who will be granted awards under the 2003 Plan. As of the record date for this annual meeting,  approximately 265 employees  (including officers and employee directors) and four non-employee members of the Board of Directors would be eligible to participate in the 2003 Plan.

Award Types

Stock Options. A stock option is the right to acquire shares at a fixed exercise price for a fixed period of time. The committee (or, if authorized for non-executive employees, the secondary committee) will determine the number of shares covered by each stock option and the exercise price of the shares subject to each stock option, but such exercise price cannot be less than 100% of the fair market value on the date of grant of the shares covered by the stock option. Stock options granted under the 2003 Plan may be either incentive stock options (ISOs) or nonstatutory stock options (NSOs). As required by the Internal Revenue Code and applicable regulations, ISOs are subject to limitations not applicable to NSOs. The exercise price for any ISO granted to any employee owning more than 10% of our common stock may not be less than 110% of the fair market value of the common stock on the date of grant. The aggregate fair market value (determined at the date of grant) of our common stock subject to all ISOs held by a participant that are first exercisable in any single calendar year cannot exceed $100,000. ISOs may not be transferred other than upon death, or to a revocable trust where the participant is considered the sole beneficiary of the stock option while it is held in trust.

A stock option granted under the 2003 Plan generally cannot be exercised until it becomes vested. The committee establishes the vesting schedule of each stock option at the time of grant. If this proposal is approved, the maximum term life for stock options granted under the 2003 Plan after such approval is obtained may not exceed six years from the date of grant. An ISO granted to any employee owning more than 10% of our common stock will expire not later than five years after the grant date.

The exercise price of each stock option granted under the 2003 Plan must be paid in cash at the time of exercise, through a broker-assisted “cashless” exercise and sale program, or through another method approved by the committee. The participant must make arrangements to pay any taxes we are required to withhold at the time of exercise.

No participant may be awarded stock options or stock appreciation rights with respect to more than 400,000 shares in any fiscal year.

Stock Appreciation Rights. A stock appreciation right is the right to receive, upon exercise, an amount equal to the excess of the fair market value of the shares on the date of exercise over the fair market value of the shares covered by the exercised portion of the stock appreciation right on the date of grant. The committee determines the terms of stock appreciation rights, including the exercise price, the vesting and the term of the stock appreciation right; provided, however, that if this proposal is approved, the maximum term life for stock appreciation rights granted under the 2003 Plan after such approval is obtained shall in no event exceed six years from the date of grant. The committee may determine that a stock appreciation right will only be exercisable if our company satisfies performance goals established by the committee. Settlement of a stock appreciation right may be in shares of common stock or in cash, or any combination thereof, as the committee may determine. No participant may be awarded stock options or stock appreciation rights with respect to more than 400,000 shares in any fiscal year.

Restricted Shares. Awards of restricted shares are shares of common stock that vest in accordance with the terms and conditions established by the committee. The committee also will determine any other terms and conditions of an award of restricted shares. In determining whether an award of restricted shares should be made, and/or the vesting schedule for any such award, the committee may impose whatever conditions to vesting as it determines to be appropriate. For example, the committee may determine that an award of restricted shares will vest only if our company satisfies performance goals established by the committee. However, in no event will the

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number of restricted shares which are subject to performance-based vesting conditions and which are granted to any one participant in a single fiscal year exceed 100,000.

Stock Units. Stock units are the right to receive an amount equal to the fair market value of the shares covered by the stock unit at some future date. The committee will determine all of the terms and conditions of an award of stock units, including the vesting period. Upon each vesting date of a stock unit, a participant will be entitled to receive an amount equal to the then fair market value of the shares vesting on that date. The committee may determine that an award of stock units will vest only if our company satisfies performance goals established by the committee. Payment of stock units may be in shares of common stock or in cash, or any combination thereof, as the committee may determine. However, in no event will the number of stock units which are subject to performance-based vesting conditions and which are granted to any one participant in a single fiscal year exceed 100,000.

Performance Conditions. The 2003 Plan specifies performance conditions that the committee may include  in awards. Examples of these performance conditions can include one or more of the following:

•      net order dollars

•      net profit dollars

•      net profit growth

•      net revenue dollars

•      profit/loss or profit margin

•      operating profit

•      net operating profit

•      operating margin

•      working capital

•      sales or revenue

•      revenue growth

•      gross margin

•      cost of goods sold

•      individual performance

•      cash

•      accounts receivables

•      write-offs

•      cash flow

•      liquidity

•      income

•      net income

•      operating income

•      net operating income

•      earnings

•      earnings before interest, taxes, depreciation and/or amortization

•      earnings per share

•      growth in earnings per share

•      price/earnings ratio

•      debt or debt-to-equity

•      economic value added

•      assets

•      return on assets

•      return on equity

•      stock price

•      shareholders’ equity

•      total shareholder return, including stand-alone or relative to a stock market or peer group index

•      return on capital

•      return on assets or net assets

•      return on investment

•      return on operating revenue

•      any other financial objectives

•      objective customer satisfaction indicators and efficiency measures

•      operations

•      research or related milestones

•      intellectual property (e.g., patents)

•      product development

•      site, plant or building development

•      internal controls

•      policies and procedures

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•      information technology

•      human resources

•      corporate governance

•      business development

•      market share

•      strategic alliances, licensing and partnering

•      contract awards or backlog

•      expenses

•      overhead or other expense reduction

•      compliance programs

•      legal matters

•      accounting and reporting

•      credit rating

•      strategic plan development and implementation

•      mergers and acquisitions and divestitures

•      financings

•      management

•      improvement in workforce diversity

•      or any similar criteria.

Performance conditions must be satisfied for the applicable performance period for awards containing  performance goals to vest.

Including  performance conditions in awards of stock and stock units to persons subject to the limitations of Internal Revenue Code Section 162(m) can permit these awards to qualify for the performance-based compensation  exception to the income tax deduction limit. See the section under the heading “Section 162(m) Limits” below for further details. Approval of the material terms of the 2003 Plan (including participant eligibility, the specified performance condition criteria and the numerical limitations on the magnitude of grants) by shareholders is necessary for grants of stock options, stock appreciation rights and stock units to employees covered by Internal Revenue Code Section 162(m) to qualify for the performance-based compensation exception to the income tax deduction limitations of Section 162(m) of the Internal Revenue Code.

Formula Grants of Awards to Non-Employee Directors. Under the 2003 Plan, non-employee directors will receive a non-statutory stock option to purchase 18,000 shares of our common stock upon each annual meeting date. The shares underlying these stock options vest in equal monthly installments over a 12-month period commencing on the first monthly anniversary of the date of grant. However, non-employee directors who have existing unvested non-employee director stock options (see “Overview of Non-Employee Director Compensation and Procedures” below) at an annual meeting date will not receive a new grant. When a new non-employee director joins the Board of Directors, or when an existing non-employee director stock option grant for an existing director fully vests, such director will be awarded a new stock option for the number of shares determined by multiplying 1,500 by the number of months remaining until the next scheduled annual meeting date, giving credit for any partial month. Such stock option will vest at the rate of 1,500 shares per month and will be fully vested at the next annual meeting date, at which time the director will receive the normal annual grant. If this proposal is approved, the formula stock options granted to non-employee directors will have six-year terms.

Generally, upon a change in our ownership or control or a merger or sale of all or substantially all of our assets, the vesting of stock options granted to directors, who are then serving on the Board of Directors, will fully vest, and become immediately exercisable.

Limited Transferability of Awards. Awards granted under the 2003 Plan generally may not be transferred other than upon death, or pursuant to a court-approved domestic relations order. However, the committee may permit awards other than ISOs to be transferred. Generally, where transfers are permitted, they will be permitted only by gift to a member of the participant’s immediate family or to a trust or other entity for the benefit of the member(s) of the participant’s and/or his or her immediate family.

Termination of Employment, Death or Disability. The committee will determine the effect of the termination of employment on awards, which determination may be different depending on the nature of the termination, such as terminations for cause, terminations resulting from death, disability or retirement and the like.

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Corporate Transaction. In the event that we are a party to a merger or other reorganization, outstanding awards will be subject to the agreement of merger or reorganization. Such agreement may provide for (a) the continuation of the outstanding awards by our company, if our company is a surviving corporation, (b) the assumption of the outstanding awards by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding awards, (d) full exercisability or vesting and accelerated expiration of the outstanding awards, or (e) settlement of the full value of the outstanding awards in cash or cash equivalents followed by cancellation of such awards. If we sell a division or subsidiary of our company, the Board of Directors may, but need not, direct that one or more of the above actions be taken with respect to awards held by persons for whom the transaction or event resulted in a termination of their service. The Board of Directors need not adopt the same rules for each award or participant.

Change in Control. The committee will decide the effect of a change in control of our company on outstanding awards. The committee may provide that awards will full vest upon a change in control, or upon a change in control followed by an involuntary termination within a certain period of time.

Deferral of Awards. Subject to committee approval and compliance with applicable tax laws, participants may elect to (a) defer amounts (cash or shares) that would otherwise be paid or delivered from the exercise or settlement of certain awards to a deferred compensation account with the company, or (b) convert shares that would otherwise be delivered as a result of the exercise of a stock option or stock appreciation right to an equal number of stock units. Any deferred compensation account established on behalf of a participant will generally represent an unfunded and unsecured obligation of the company.

Term of the 2003 Plan. The 2003 Plan will continue in effect until terminated by the Board of Directors, except that no ISOs may be granted on or after November 15, 2014, or if the shareholders approve this proposal, November 13, 2017.

Amendment and Termination of the 2003 Plan. The Board of Directors generally may amend or terminate the 2003 Plan at any time and for any reason, except that the Board of Directors must obtain shareholder approval of material amendments, including any repricing of stock options or stock appreciation rights after the date of their grant (except for stock splits, recapitalizations and similar events), as required by Nasdaq Marketplace Rules.

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Cancellation of Certain Stock Options. Under the terms of the 2003 Plan and under applicable Nasdaq Marketplace Rules, the Board of Directors may not cancel an optionee’s stock option and grant such optionee a new stock option with a lower exercise price such that the effect would be the same as reducing the exercise price, without the approval of the shareholders. The Compensation Committee recently authorized new stock option grants to executive officers under the 2003 Plan and directors will receive new formula stock option grants on the date of the 2007 annual meeting. Our current executive officers and directors have agreed to cancel outstanding stock options with an exercise price of $10 per share or more, and the Board of Directors has determined that the shares subject to such stock options will not become available for issuance under the 2003 Plan. In order to comply with the terms of the 2003 Plan and the Nasdaq Marketplace Rules governing repricing of stock options, we have therefore conditioned the cancellation of such stock options on shareholder approval of this Proposal No. 2. If this Proposal No. 2 is approved, the stock options shown on the following table will be immediately cancelled, with the shares underlying the cancelled stock options no longer available for future issuance under the 2003 Plan.

The following is a general summary as of September 2007 of the federal income tax consequences to us and to U.S. participants for awards granted under the 2003 Plan. The federal tax laws may change and the federal, state and local tax consequences for any participant will depend upon his or her individual circumstances. Tax consequences for any particular individual may be different. This summary is not  intended to be exhaustive and does not discuss the tax consequences of a participant’s death or provisions of

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Incentive Stock Options. For federal income tax purposes, the holder of an ISO receives no taxable income at the time of the grant or exercise of the ISO. If such person retains the common stock for a period of at least two years after the stock option is granted and one year after the stock option is exercised, any gain upon the subsequent sale of the common stock will be taxed as a long-term capital gain. A participant who disposes of shares acquired by exercise of an ISO prior to the expiration of two years after the stock option is granted or one year after the stock option is exercised will realize ordinary income as of the date of exercise equal to the difference between the exercise price and fair market value of the stock on the date of exercise. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss. The difference between the option exercise price and the fair market value of the shares on the exercise date of an ISO is an adjustment in computing the holder’s alternative minimum taxable income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the year.

Nonqualified Stock Options. A participant who receives an NSO with an exercise price equal to the fair market value of the stock on the grant date generally will not realize taxable income on the grant of such option, but will realize ordinary income at the time of exercise of the stock option equal to the difference between the option exercise price and the fair market value of the stock on the date of exercise. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

Stock Appreciation Rights. No taxable income is reportable when a stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

Restricted Shares. A participant will not have taxable income upon grant unless he or she elects to be taxed at that time. Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the shares or cash received minus any amount paid for the shares.

Stock Units. No taxable income is reportable when stock units are granted to a participant. Upon settlement, the participant will recognize ordinary income in an amount equal to the value of the payment received pursuant to the stock units.

Tax Effect for our Company. We generally will be entitled to a tax deduction in connection with an award under the 2003 Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, upon the exercise of an NSO).

Excess Parachute Payments. The benefits of any award will be reduced if, as a result of a penalty tax that would be imposed by Section 4999 of the Internal Revenue Code for “parachute payments,” the after-tax value of the award to the participant will be greater than if the award were not so reduced. In addition, the committee may determine at the time of granting an award or any time after grant to reduce an award so that the award will not be subject to the limitation on deductibility of “parachute payments” imposed by Section 280G of the Internal Revenue Code.

Section 162(m) Limits. Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to our principal executive officer and each of our other three most highly compensated officers (other than our principal financial officer). Certain performance-based compensation approved by shareholders is not subject to the deduction limit. Our 2003 Plan is intended to enable certain awards to constitute performance-based compensation not subject to the limitations of Section 162(m) of the Internal Revenue Code. However, to maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the committee has not adopted a policy that all compensation must be deductible.

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Section 409A. Section 409A of the Internal Revenue Code provides specific rules governing the federal income taxation of certain types of deferred compensation arrangements. A violation of Section 409A of the Internal Revenue Code generally results in an acceleration of income of amounts intended to be deferred and the imposition of an excise tax of 20%, paid by the employee, over and above the income tax owed. The IRS issued final regulations under Section 409A of the Internal Revenue Code in April 2007 and is expected to continue to provide guidance regarding the applicability of these rules to different forms of equity compensation arrangements. The types of arrangements covered by Section 409A of the Internal Revenue Code are broad and may apply to certain awards available under the 2003 Plan. The intent is for the 2003 Plan, including any awards available thereunder, to comply with the requirements of Section 409A of the Internal Revenue Code to the extent applicable.

The following table describes the formula grants that will be granted to our non-employee directors immediately after the annual meeting. The other awards, if any, that may be made in the future under the 2003 Plan are not determinable.

We believe strongly that the approval of the amendment and restatement of the 2003 Plan, which includes the increase in the number of authorized shares for issuance, the cancellation of certain stock options held by our officers and directors, the reduction in the maximum term of stock options to six years, and the expansion of enumerated examples of qualifying performance criteria, is essential to our continued success. Awards such as those provided under the 2003 Plan constitute an important incentive for participants and will help us to attract and retain qualified individuals to serve on behalf of our company.

Approval of this proposal requires the affirmative vote of the holders of a majority of the shares casting votes in person or by proxy on this proposal at the annual meeting. The number of such affirmative votes must be at least a majority of the required quorum for the meeting.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2003 EQUITY INCENTIVE PLAN INCLUDING CANCELLATION OF CERTAIN STOCK OPTIONS

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PROPOSAL NO. 3

We are asking you to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending June 29, 2008. PricewaterhouseCoopers LLP has audited our financial statements annually since our inception in 1980. Representatives of PricewaterhouseCoopers LLP are expected to be at the annual meeting to answer any questions and make a statement should they choose to do so.

Although our bylaws do not require that our shareholders approve the appointment of our independent registered public accounting firm, our Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to our shareholders for ratification as a matter of good corporate practice. If our shareholders vote against the ratification of PricewaterhouseCoopers LLP, our Board of Directors will reconsider whether or not to retain the firm. Even if our shareholders ratify the appointment, our Board of Directors may choose to appoint a different independent registered public accounting firm at any time during the year if our Board of Directors determines that such a change would be in the best interests of our company and our shareholders.

The following table summarizes the aggregate fees billed to the company by its independent registered public accounting firm, PricewaterhouseCoopers LLP for the fiscal years ended July 2, 2006 and July 1, 2007.

(1)   Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements. Audit Fees for 2006 (but not 2007) include the audit of the effectiveness of our company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

(2)   Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under Audit Fees. During fiscal years 2006 and 2007 there were no such services rendered to us by PricewaterhouseCoopers LLP.

(3)   Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning. During fiscal years 2006 and 2007 there were no such services rendered to us by PricewaterhouseCoopers LLP.

(4)   All Other Fees consist of fees for products and services other than the services reported above. During fiscal years 2006 and 2007 there were no such services rendered to us by PricewaterhouseCoopers LLP.

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As a matter of policy, all audit and non-audit services provided by our independent registered public accounting firm are approved in advance by the Audit Committee, which considers whether the provision of non-audit services is compatible with maintaining such firm’s independence. All services provided by PricewaterhouseCoopers LLP during fiscal years 2006 and 2007 were pre-approved by the Audit Committee. The Audit Committee has considered the role of PricewaterhouseCoopers LLP in providing services to us for the fiscal year ended July 1, 2007 and has concluded that such services are compatible with their independence as our auditors.

Ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm requires the affirmative vote of the holders of a majority of the shares casting votes in person or by proxy on this proposal at the annual meeting. The number of votes cast in favor of this proposal must also be at least a majority of the required quorum. The presence in person or by proxy of the persons entitled to vote a majority of shares our common stock will constitute a quorum under our bylaws. Abstentions will be counted towards the tabulation of votes cast on this proposal. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION

OF  PRICEWATERHOUSECOOPERS LLP AS OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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INFORMATION ABOUT OUR BOARD OF DIRECTORS

The Board of Directors, upon the recommendation of the Nominating and Governance Committee, has affirmatively determined that Messrs. Degan, McClendon, Miller and Norkus are independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15). Mr. LoForti does not meet the independence requirements under Nasdaq Marketplace Rule 4200(a)(15) because he is our President and Chief Executive Officer. In the course of determining whether Messrs. Degan, McClendon, Miller and Norkus were independent under Nasdaq Marketplace Rule 4200(a)(15), the Board of Directors considered the following transactions, relationships and arrangements not required to be disclosed in “Certain Relationships and Related Party Transactions”:

•      Although Mr. McClendon served as our Interim President and Chief Executive Officer from November 2006 through August 2007, he is not automatically disqualified from being an independent director under Nasdaq Marketplace Rule 4200(a)(15) because he served in these interim positions for less than one year. In August 2007, the Board of Directors, upon the recommendation of the Nominating and Governance Committee, found that Mr. McClendon, upon his resignation from the interim positions, had no relationship with our company which, in the opinion of the Board of Directors, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director.

Meetings of the Board and Committees

Board of Directors. Our Board of Directors currently has five directors. During fiscal 2007, our Board of Directors held 14 meetings and each director attended at least 75% of all meetings of the Board of Directors and applicable committees, during the periods that he served.

Committees. During fiscal 2007, our Board of Directors had the following five committees:  Audit, Compensation, Shareholder Value, Nominating and Governance, and Strategy. The Shareholder Value Committee and the Strategy Committee were suspended in June 2007.

Nasdaq Marketplace Rule 4350(d)(2)(A) requires the audit committee of each listed issuer to have at least three independent members, at least one of whom is a financial expert.  Currently, as a result of the resignation of Mr. Barrenechea in June 2007, the Audit Committee is comprised of two independent members, one of whom is a financial expert. Under Nasdaq Marketplace Rule 4350(d)(4)(B), we have until December 6, 2007 to regain compliance with Nasdaq Marketplace Rule 4350(d)(2)(A).

The charters of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee, which have been adopted by the Board of Directors, are publicly available on our website at www.overlandstorage.com. The Audit Committee, the Compensation Committee and the Nominating and Governance Committee are comprised entirely of independent directors as defined in Nasdaq Marketplace Rule 4200(a)(15). Current membership of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee is as follows:

Each of the above-listed committee members served in such capacity for all of the last fiscal year, except Mr. Norkus who was appointed to the Audit Committee in November 2006 and Mr. Degan who was appointed to the Compensation Committee in June 2007.

During the last fiscal year, Mr. McClendon was a member of the Audit and Compensation Committees until he was appointed Interim President and Chief Executive Officer in November 2006.

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Prior to his resignation from the Board of Directors in June 2007, Mr. Barrenechea was a member of the Audit Committee, the Compensation Committee, the Shareholder Value Committee and the Strategy Committee.

Audit Committee. The Audit Committee held eight meetings during fiscal 2007. The Audit Committee acts pursuant to the Audit Committee Charter and currently performs the following functions, among others:

•      reviews our annual and quarterly financial statements and oversees the annual and quarterly financial reporting processes;

•      reviews and approves related party transactions;

•      selects our independent registered public accounting firm, pre-approves all audit and non-audit services by them, oversees and approves their compensation, confirms their independence and reviews the scope of their activities;

•      receives and considers our independent registered public accounting firm’s comments as to the adequacy and effectiveness of our accounting and financial controls;

•      retains independent counsel, accountants, or others at the expense of the company to advise the committee or assist in the conduct of an investigation;

•      reviews the company’s effectiveness and methodology for monitoring compliance with laws and regulations and oversees any investigations regarding compliance matters;

•      reviews the process for communicating our Code of Business Conduct and Ethics to company personnel and monitors compliance with such code of ethics; and

•      considers the effectiveness of our company’s internal control over the financial reporting process, including information technology security and control.

In addition to being independent under Nasdaq Marketplace Rule 4200(a)(15), all members of the Audit Committee must meet the additional independence standards for audit committee members set forth in SEC Rule 10A-3(b)(1) and Nasdaq Marketplace Rule 4350(d)(2)(A). The Board of Directors has determined that Mr. Degan qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K under the Exchange Act.

Compensation Committee. The Compensation Committee held eight discrete meetings and one joint meeting with the Nominating and Governance Committee during fiscal 2007. The Compensation Committee acts pursuant to the Compensation Committee Charter adopted by the Board of Directors and currently performs the following functions, among others:

•      reviews and approves executive and director compensation levels;

•      reviews the performance of our CEO;

•      awards stock options and restricted stock, and administers our various equity compensation and employee stock purchase plans; and

•      reviews director compensation.

In addition to being independent under Nasdaq Marketplace Rule 4200(a)(15), all members of the Compensation Committee must qualify as “non-employee directors” under Rule 16b-3 under the Exchange Act and “outside directors” under Section 162(m) of the Internal Revenue Code, in accordance with the Compensation Committee Charter. The Compensation Committee may delegate to a subcommittee of two or more directors the authority to make grants under our equity-based incentive plans to employees and consultants who are not executive officers or directors of our company.

The Compensation Discussion and Analysis included in this proxy statement includes additional information regarding the Compensation Committee’s processes and procedures for considering and determining executive compensation, and discusses the role of executive officers and compensation consultants in determining executive officer and director compensation.

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Nominating and Governance Committee. The Nominating and Governance Committee held six discrete meetings and one joint meeting with the Compensation Committee during fiscal 2007. The Nominating and Governance Committee currently performs the following functions, among others:

•      identifies individuals qualified to become members of the Board of Directors;

•      recommends the persons to be nominated for election as directors at the annual meeting of shareholders;

•      regularly reviews and advises the Board of Directors with respect to corporate governance principles and policies applicable to our company; and

•      oversees the annual evaluation of the director effectiveness.

The Nominating and Governance Committee is responsible for reviewing with the Board of Directors, on an annual basis, the appropriate skills and characteristics required of directors in the context of the current make-up of the Board of Directors and to set those forth in writing. This assessment includes issues of diversity, experience, judgment, ability and willingness to devote the necessary time, and familiarity with domestic and/or international markets, all in the context of an assessment of the perceived needs of our company. The Nominating and Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. We believe that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board of Directors to fulfill its responsibilities. The Nominating and Governance Committee has not established any specific minimum criteria or qualifications that a nominee must possess. In August 2007, the Nominating and Governance Committee retained the services of Spencer Stuart, an executive search firm, to assist in the process of identifying and evaluating director candidates. To date, neither the Nominating and Governance Committee nor any predecessor to the committee has rejected a director nominee from a shareholder or shareholders holding more than 5% of our voting stock.

The Nominating and Governance Committee will consider nominees recommended by our shareholders if the nominee recommendations are submitted in writing to our Secretary at our headquarters in San Diego, California. The Nominating and Governance Committee will evaluate nominees recommended by our shareholders under the same criteria as other nominees.

Shareholder Value Committee. The Shareholder Value Committee held no meetings during fiscal 2007. The Shareholder Value Committee’s function was to evaluate and respond to any unsolicited third-party proposals to acquire the company and to advise the Board of Directors regarding any company-solicited transactions that were out of the ordinary course of business and designed to increase shareholder value. Upon the recommendation of the Nominating and Governance Committee, the Board of Directors decided to suspend operation of the Shareholder Value Committee in June 2007.

Strategy Committee. The Strategy Committee held two meetings during fiscal 2007. The Strategy Committee was formed in November 2006 to provide input to the Board of Directors and management in the development of our corporate strategy. Upon the recommendation of the Nominating and Governance Committee, the Board of Directors decided to suspend operation of the Strategy Committee in June 2007.

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The following table provides compensation information for the year ended July 1, 2007 for each non-employee member of our Board of Directors. See “Summary Compensation Table” for information related to the compensation of Mr. McClendon, who served as our Interim President and Chief Executive Officer from November 1, 2006 to August 8, 2007.

(1)    The amounts listed in this column represent the dollar amount we recognized for financial statement reporting purposes with respect to fiscal 2007 (for awards made both in and before fiscal 2007), disregarding an estimate of forfeitures related to service-based vesting conditions, under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” or SFAS No. 123(R). For a more detailed discussion on the valuation model and assumptions used to calculate the fair value of these awards, see Note 10 to the consolidated financial statements included in our annual report on Form 10-K for the year ended July 1, 2007.

(2)     Messrs. Barrenechea, Degan, Miller and Norkus were each granted 18,000 stock options on November 14, 2006, with a fair value of $57,096 calculated under SFAS No. 123(R). Mr. Barrenechea was granted 60,000 stock options on December 20, 2006 with a fair value of $166,728 calculated under SFAS No. 123(R). At fiscal year end, the aggregate number of shares subject to outstanding option awards for each director was as follows:  Mr. Barrenechea – 85,500; Mr. Degan – 155,000; Mr. Miller – 25,500; and Mr. Norkus – 58,500.

(3)     Mr. Barrenechea resigned from the Board of Directors effective June 9, 2007. The 85,500 option shares outstanding at July 1, 2007, as noted above, expired unexercised on September 9, 2007.

We compensate non-employee directors through a mix of cash and equity-based compensation. In November 2005, the Compensation Committee reviewed the level of director compensation in comparison to like companies and concluded that the level of director compensation was appropriate. Each non-employee director receives a quarterly retainer of $5,000, plus $2,500 for each meeting attended ($1,250 if held telephonically), plus reimbursement for expenses. The Chairman of the Board receives an additional $2,500 per quarter in addition to the non-employee director fee of $5,000 per quarter. However, Mr. McClendon did not receive a Chairman of the Board fee or other fees paid to non-employee directors while serving as our Interim President and Chief Executive Officer. Members of the Audit Committee and the Compensation Committee receive a retainer of $500 per quarter in lieu of a fee for committee meetings attended during a quarter and members of the Nominating and Governance Committee receive $500 for each committee meeting attended ($250 if held telephonically and no fee if held the same day as a board meeting). Before its suspension, members of the Shareholder Value Committee received $500 for each committee meeting attended (whether telephonically or in person), but such fees were not paid for committee meetings held in joint session with the full board. We also reimburse expenses incurred by non-employee directors to attend meetings.

In addition to the cash component of compensation, each non-employee director receives stock options. Under the company’s 2003 Equity Incentive Plan (2003 Plan), our methodology for options and other equity awards granted to non-employee directors is a formula-based methodology. Pursuant to the 2003 Plan, each non-employee director receives a ten-year nonqualified stock option to purchase 18,000 shares on the same date as our annual meeting of shareholders. These options are exercisable at fair market value on the date of grant and vest in equal monthly installments over a 12-month period, as measured from the grant date. If our shareholders approve the

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amendments to the 2003 Plan, the formula-based stock options will change from a ten-year non-qualified stock option to a six-year non-qualified stock option. On November 14, 2006, Messrs. Barrenechea, Degan, Miller and Norkus each received an annual option grant for 18,000 shares. Under the 2003 Plan, when a new non-employee director joins the board, such director will be awarded a new option for a number of shares determined by multiplying 1,500 by the number of months remaining until the next scheduled annual meeting date, giving credit for any partial month. Such option will vest at the rate of 1,500 shares per month and will be fully-vested at the next annual meeting date, at which time the director will receive the normal annual stock option grant.

In November 2006, the Compensation Committee engaged the consulting firm of Pearl Meyer & Partners (PM&P) to provide guidance on remuneration for Mr. Barrenechea, upon his assumption of the role of Chairman of the newly-formed Strategy Committee and Chairman of the Shareholder Value Committee. In addition to Mr. Barrenechea’s normal board duties, it was anticipated that these roles would require Mr. Barrenechea to commit one to two days a week for six months working with management, outside entities and the Board of Directors to evaluate our future strategic development, evaluate acquisitions, and consider opportunities for sale or merger of our company. Following their review of Mr. Barrenechea’s employment and compensation history and the PM&P 2006  Director Compensation Survey, specifically the data on Special Committee Compensation, PM&P recommended that Mr. Barrenechea be granted an additional equity award for these new roles. Accordingly, he was granted an option to purchase 60,000 shares on December 20, 2006. This option was immediately vested as to 10,000 shares (reflecting commencement of service as Chairman of the Strategy Committee and Chairman of the Shareholder Value Committee on November 1, 2006), with the remainder vesting at a rate of 10,000 shares on the first day of each month commencing January 1, 2007 through May 1, 2007 so long as Mr. Barrenechea was serving as the Chairman of the Strategy Committee and Chairman of the Shareholder Value Committee. Mr. Barrenechea resigned from our Board of Directors and all committees upon which he served on June 9, 2007. This option grant and the other options Mr. Barrenechea held at the time of his resignation expired unexercised.

Pursuant to stock ownership guidelines recommended by our Nominating and Governance Committee and  as approved by the Board of Directors, each director is expected to own at least 1,000 shares of our common stock during their term of service as a director, with new directors expected to acquire at least that number of shares within 90 days of commencement of service as a director.

Messrs. Barrenechea, McClendon, Miller and Norkus served on the Compensation Committee during all or portions of fiscal 2007. None of these directors have been employees or officers of our company, except Mr. McClendon who served as our Interim President and Chief Executive Officer from November 2006 to August 2007. Mr. McClendon also served as our President and Chief Executive Officer from October 1991 to March 2001 when he was named our Chairman of the Board and remained an executive officer and employee until June 2001.

No executive officer of our company (1) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our company’s compensation committee, (2) served as a director of another entity, one of whose executive officers served on our company’s compensation committee, or (3) served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of our company.

We have adopted a formal process by which shareholders may communicate with our Board of Directors. Communications to the board must either be in writing and sent care of the Secretary by mail to our offices at 4820 Overland Avenue, San Diego, California 92123, or delivered via e-mail to secretary@overlandstorage.com. This centralized process will assist the Board of Directors in reviewing and responding to shareholder communications in an appropriate manner. The name of any specific intended recipient should be noted in the communication. All

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communications (i) must be accompanied by a statement of the type and amount of the securities of our company that the person holds,  (ii) must identify any special interest, meaning an interest not in the capacity of a shareholder of our company, of the person submitting the communication, and (iii) the address, telephone number and e-mail address, if any, of the person submitting the communication. The Board of Directors has instructed the Secretary to forward it such correspondence; however, before forwarding any correspondence, the Board of Directors has also instructed the Secretary to review such correspondence and, in the Secretary’s discretion, not to forward certain items if they are deemed of a personal, illegal, commercial, offensive or frivolous nature or otherwise inappropriate for director consideration.

Section 16(a) of the Exchange Act requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Based solely on copies of these reports provided to us and written representations that no other reports were required, we believe that these persons met all of the applicable Section 16(a) filing requirements during fiscal 2007, except one late Form 4 was filed for George Karabatsos to report the cancellation of his unvested restricted stock when his employment with our company terminated in August 2006.

We have adopted the Overland Storage, Inc. Code of Business Conduct and Ethics, which applies to our directors, executive officers and employees. A copy of the Code of Business Conduct and Ethics is publicly available on our website at www.overlandstorage.com. If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the code applying to our principal executive officer or our principal financial or accounting officer, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K.

The names of our current executive officers, their ages as of October 10, 2007, and their positions are shown below. Biographical summaries of each of our executive officers who are not also members of our Board of Directors are included below.

Vernon A. LoForti is a director. See “Proposal 1, Election of Directors” for a description of his business experience.

Robert Farkaly  has served as our Vice President of Worldwide Sales since April 2007. Mr. Farkaly joined us in June 2003 when we acquired Okapi Software, Inc. where he served as Chief Marketing Officer since June 2002. Since joining us, Mr. Farkaly has served as our Director of Product Marketing (June 2003 to August 2003), Sales Director for Disk Products (August 2003 to July 2005) and Director of Product Management (July 2005 to April 2007).

W. Michael Gawarecki has served as Vice President of Operations since joining us in July 1998. From October 1997 to June 1998, he was Vice President of Operations for SubMicron Systems Corporation, a supplier of equipment to the semiconductor industry. From February 1994 to September 1997, Mr. Gawarecki was Director of California Operations for Millipore Corporation, a supplier of purification products to the biopharmaceutical and semiconductor industries. From February 1993 to January 1994, he was Director of Advanced Manufacturing at Telectronics Pacing Systems, a medical device company.

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Kurt L. Kalbfleisch has served as our Interim Chief Financial Officer since August 2007 and as our Vice President of Finance since July 2007. Mr. Kalbfleisch has been an employee of our company since December 1993 and has served in key management roles in our finance department during that time. Prior to joining our company, Mr. Kalbfleisch worked as a manufacturing budget analyst for McDonnell Douglas Corporation, a major aerospace manufacturer and defense contractor, from July 1989 to December 1993.

Robert J. Scroop joined us in February 1993 as our Vice President of Engineering. He currently serves as Vice President of New Product Delivery and has held that position since January 2007. Prior to that time, he served as our Vice President of Engineering (April 2005 to January 2007), Vice President and General Manager of our Automation Business Unit (July 2004 to April 2005), Vice President and General Manager of our Storage Resource Business Unit (August 2001 to July 2004) and Vice President of Engineering (February 1993 to August 2001). From April 1990 to February 1993, he was Vice President of Engineering of the Cipher Division of Archive Corporation, a computer storage company. From December 1985 to April 1990, he was a Director of Engineering at Cipher.

There were no arrangements or understandings between any officer and any other person pursuant to which such executive officer was or is to be selected as an executive officer. There are no family relationships between any executive officer, director or person nominated by the company to become a director or executive officer.

We have adopted a basic philosophy and practice of offering market competitive compensation that is designed to attract, retain and motivate a highly qualified executive management team. With respect to (i) each person who served as our principal executive officer or principal financial officer during fiscal 2007 (regardless of compensation level), (ii) the three most highly-compensated executive officers during fiscal 2007 who were serving as executive officers at the end of fiscal 2007 who did not serve as principal executive officer or principal financial officer, and (iii) one additional executive officer who would have been one of the three most highly-compensated executive officers during fiscal 2007 except that she was not serving as an executive officer at the end of fiscal 2007 (each of whom we refer to as a “named executive officer”), this Compensation Discussion and Analysis describes our compensation philosophy and objectives, the methodologies used for establishing the compensation programs for the named executive officers, and the policies and practices to administer such programs.

The Compensation Committee, comprised entirely of independent directors, reviews and approves executive officer compensation and oversees the administration of our employee stock option plans and employee stock purchase plan. Our executive compensation programs have been designed to provide incentives for both short- and long-term performance.

The Compensation Committee’s policy on executive compensation is that compensation should:

•      be effective in attracting and retaining key executives critical to our success;

•      align the interests of the executives with the interests of our shareholders;

•      reflect our financial performance; and

•      reward executives for their individual performance.

In pursuit of these objectives, the Compensation Committee believes that the compensation packages provided to the named executive officers should include both cash and stock-based compensation, with an emphasis on pay for performance.

Methodologies for Establishing Compensation

Executive compensation generally includes base salary, bonuses based on our performance and the individual performance of the officers, and stock option and restricted stock awards. The Compensation Committee

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reviews the compensation packages of the named executive officers at least once annually, generally in November. In determining the appropriate compensation levels for our Chief Executive Officer, the Compensation Committee meets outside the presence of our executive officers and other employees. With respect to our other executive officers, our Chief Executive Officer reviews the performance of each executive officer with the Compensation Committee and makes recommendations.

The Compensation Committee evaluates executive performance with the goal of setting compensation levels competitive with companies in the computer peripherals industry of similar revenue, with adjustments for individual experience levels and performance. To help fulfill its responsibilities, the Compensation Committee periodically engages third-party executive compensation consultants to gather market data and to conduct reviews of our executive compensation program. In making decisions regarding salary levels for our named executive officers, the Compensation Committee used compensation consultants to advise only with respect to persons who served as our Chief Executive Officers during fiscal year 2007 (Messrs. LoForti, McClendon and Calisi). The current salary levels for Mr. Gawarecki and Mr. Scroop have not changed since fiscal 2005 and fiscal 2004, respectively. Mr. Kerman’s salary did not change after his employment with us in fiscal 2005.

In making changes to compensation levels (including stock option awards) in fiscal 2005 and fiscal 2004, the Compensation Committee relied on information provided by our human resources department personnel and their knowledge of local pay practices together with salary surveys such as the Radford Executive Survey. The Compensation Committee believes that the Radford Executive Survey provided an appropriate representation of the full range of competitive companies. The survey is widely recognized as one of the most authoritative and comprehensive sources for data on competitive total direct executive compensation packages. The data reported was gathered from more than 700 participating organizations nationwide. These companies were predominantly in technology-based industries and approximately half operated inside of California. In fiscal 2005 and fiscal 2004, the Compensation Committee targeted overall compensation for executive officers at approximately the 50th percentile of compensation paid to similar positions at comparable companies. Since fiscal 2005, the Compensation Committee has not revisited its previous assessment of the targeted overall compensation for our executive officers (other than our Chief Executive Officer as described below), and the salaries of our executive officers have generally been unchanged since that time.

In making the above-referenced compensation decisions in 2004 and 2005, we generally defined comparable companies as those with the following attributes:

•              Principal business is in the computer peripherals industry;

•              $200 million to $500 million in annual revenues;

•              200 to 400 employees; and

•              Headquartered or main operations in Southern California.

With new hires, the Compensation Committee took and takes into account past compensation history, any compensation forfeited by the new hire experienced in leaving such new hire’s immediately prior job, or any uniquely valuable skills the new hire might bring to us to enhance shareholder value. With internal promotions to executive officers, the Compensation Committee also takes into account past compensation history, the new levels of responsibility of the executive officer, and the importance of maintaining the continued employment of an individual with an established history of contributing to shareholder value and a thorough knowledge of our company.

To set the compensation level for Mr. McClendon (our former Interim President and Chief Executive Officer) the Compensation Committee considered the compensation levels of Christopher Calisi, the President and Chief Executive Officer immediately preceding Mr. McClendon, and engaged independent compensation specialists Pearl Meyer & Partners (PM&P). PM&P provided the Compensation Committee with current compensation data for the following selected peer group who generally approximated the attributes of a comparable company. These

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peer group companies were all in the “computer storage & peripherals” industry and had annual revenues between $100 million to $600 million and had a market capitalization of less than $1 billion. The peer group of companies were:

The Compensation Committee and PM&P compared the peer group compensation levels to the compensation levels of Mr. Calisi and determined that the remuneration of Mr. Calisi was within market median levels. A detailed explanation regarding the compensation methodology for Mr. Calisi can be found under his name in the section entitled “Compensation Actions Taken for Our Named Executive Officers.”

The Compensation Committee relied on the same report to set compensation for Mr. LoForti when Mr. LoForti was promoted to President and Chief Executive Officer in August 2007.

Until October 2006, the Compensation Committee had established quarterly cash bonus awards primarily based on our degree of achievement of the quarterly operating plan goals set each quarter by the Board of Directors (typically earnings per share) in consultation with management. If these goals were satisfied, management was eligible to receive bonuses based on success in achieving specific objectives established and assessed by the Compensation Committee. As discussed further below, the cash bonus program was suspended by the Compensation Committee in October 2006. The Compensation Committee periodically evaluates the merits of reinstating this program or another cash bonus program.

We also provide a portion of our executive compensation in the form of stock options that vest over time, which we believe can help to retain our executives and align their interests with those of our shareholders by allowing them to participate in the longer term success of our company.

In April 2006, the Compensation Committee retained the services of Watson Wyatt to conduct an Incentive Program Review. Specifically, the Compensation Committee asked Watson Wyatt to review the long-term incentive program and develop a strategy for managing compensation-share usage and to evaluate the executive short-term incentive plan to ensure it effectively motivates and rewards the senior executive team. After evaluating the program recommended by Watson Wyatt, the Compensation Committee decided not to implement it but may re-consider it in the future.

The compensation consultants retained by the Compensation Committee act as independent advisors to the Compensation Committee and they have no other consulting relationships with the company or its management.

The primary elements of our executive compensation program are:

•      base salary;

•      quarterly cash bonuses based on our performance (program currently suspended as of October 2006);

•      stock option awards;

•      fringe benefits;

•      change-of-control agreements; and

•      severance benefits for qualifying terminations of employment.

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We do not have a formal or informal policy for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the Compensation Committee reviews market data, historical practices, salary history, and practices of comparable companies, provided by our human resources department personnel and/or outside third party consultants and determines what it believes to be the appropriate level and mix of the various compensation components.

The Compensation Committee approved no salary modifications for our executive officers during fiscal 2007 or fiscal 2006. Salary increases were suspended for all employees in fiscal 2006 for budgetary reasons. Because of our financial losses in fiscal 2006 and fiscal 2007, the Compensation Committee determined not to increase salaries for executive officers. Moreover, the Compensation Committee approved a voluntary reduction in salary for Mr. Calisi, our former President and Chief Executive Officer, in fiscal 2006, as further described below under “Compensation Actions Taken for Our Named Executive Officers.”

Until it was suspended by the Compensation Committee in October 2006 as part of a revised 2007 fiscal plan, our Chief Executive Officer and other executive officers participated in our executive bonus plan which was designed as a performance-based component of their compensation packages. The Compensation Committee tailored the bonus plan for each executive to be unique to such executive’s area of responsibility. Until it was suspended, the plan established by the Compensation Committee was evaluated on a quarterly basis and included two performance measurement points for each executive officer:

•                  our actual earnings per share (EPS) in comparison to the target approved by the Compensation Committee; and

•                  achievement of individual job performance goals and objectives.

No bonuses were paid under our executive bonus plan during fiscal 2006 or fiscal 2007 (through October 2006 when it was suspended) because the plan does not provide for bonus payments for quarters in which we sustain a net loss per share. Bonuses under the executive bonus plan were last earned during the first fiscal quarter of 2005.

The company has from time to time awarded (and could in the future award) discretionary bonuses for special contributions, such as creating a unique strategic opportunity for us. In fiscal 2006, some executive officers were paid a $10,000 discretionary bonus in recognition of new business awarded to us. No discretionary bonuses were paid in fiscal 2007. In July 2007, a retention bonus plan was approved for Mr. Kalbfleisch, our Vice President of Finance and Interim Chief Financial Officer. Under this arrangement, Mr. Kalbfleisch will earn cash bonuses of $10,000 each in October 2007, January 2008, April 2008 and July 2008, subject to his continued employment at those times.

We believe that equity grants provide our executive officers with a strong link to our long-term performance, create an ownership culture, and help to align the interests of our executive officers and our shareholders. In addition, the vesting feature of our equity grants, generally over three years, serves to aid executive officer retention.

We have historically provided our executive officers with long-term incentives by awarding them stock options and, to a lesser extent, restricted stock awards. The exercise price of options awarded to executive officers is equal to the closing market price of our common stock on the date of award. The options have generally vested monthly over a three-year period for existing employees, and for new employees, one-third of the shares subject to option vest after the first year of employment and the remaining two-thirds vest monthly over the next 24 months. The options have had ten year terms, subject to continuing service, and have remained exercisable for between 30 days and three months after termination of service, or longer in the event service terminates due to death or

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disability. If our shareholders approve Proposal No. 2, future stock option grants under our 2003 Equity Incentive Plan will have maximum six year terms. An initial award of a stock option, restricted stock, or both, is made at the time an executive officer is hired. The Compensation Committee annually considers additional awards based on both company and individual performance. The Compensation Committee takes into account the executive officer’s position and level of responsibility, existing stock and unvested option holdings and the potential reward if the stock price appreciates in the public market and, to ensure that such person’s total compensation conforms to our overall compensation philosophy and objectives, all other components of the executive officer’s compensation. With respect to the timing of option grants, our current policy is to grant options only at regularly scheduled meetings of the Compensation Committee. However, if we are in a blackout period under our Insider Trading Policy at the time of the Compensation Committee meeting, our policy is for the options approved by the Compensation Committee at that meeting to be granted on the day which is the second business day following the end of the blackout period with an exercise price equal to the closing market price of our common stock on that day.

In August 2007, the Compensation Committee approved stock options for our executive officers. The Committee determined that it needed to make a one-time significant equity award to its executive officers and key employees as a retention tool, because (i) no salary increases had been made for Messrs. Gawarecki and Kerman since fiscal 2005 and for Mr. Scroop since fiscal 2004, (ii) all existing stock option awards had exercise prices in excess of our current share price, (iii) no bonuses had been awarded in fiscal 2007 and (iv) our financial performance had been weak during the last several years. These options vest monthly for one year and have a three year term. Following this special equity award program in August 2007, less than 212,000 option shares remained available for grant under the 2003 Equity Incentive Plan, the only equity plan available for the grant of equity awards. As a result of this low share reserve, the Compensation Committee and the Board of Directors approved in September 2007 an amendment and restatement of the 2003 Equity Incentive Plan to, among other things, increase the share reserve by 1,300,000 shares, subject to approval of our shareholders. The Compensation Committee and the Board of Directors also approved the cancellation of outstanding stock options held by our current executive officers and directors with an exercise price of $10.00 per share or more, subject to approval of our shareholders, and determined that the shares subject to such cancelled stock options will not become available for issuance under the 2003 Equity Incentive Plan. This has the effect of offsetting the increase in the share reserve by the 468,300 shares subject to the cancelled options. See “Proposal No. 2 - Approval of Amendment and Restatement of 2003 Equity Incentive Plan Including Cancellation of Certain Stock Options” above for more information concerning the share reserve of the 2003 Equity Incentive Plan and the cancellation of certain stock options held by our executive officers and directors.

All stock options granted to our executive officers, including our Chief Executive Officer, become immediately exercisable in the event of a merger, sale, liquidation or other change in control of our company. Restricted stock awards historically did not provide for accelerated vesting upon such events. There currently are no outstanding restricted stock awards.

We maintain broad-based benefits that are provided to all employees, including health and dental insurance, life and disability insurance, flexible spending accounts, long term care insurance, and a 401(k) plan. Executive officers are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees, with the exception of the flexible spending accounts which are not available to our executive officers since the company reimburses all out-of-pocket medical expenses as described below.

We provide executive officers with other personal benefits that are reasonable and consistent with our overall compensation program to enable us to attract and retain employees for key positions. For fiscal 2007, we provided the following personal benefits to our named executive officers, all of which benefits are fully paid for by us:  standard medical and dental insurance for employee and family; reimbursement of any out of pocket medical expenses for employee and family; executive supplemental term life insurance; executive long-term disability insurance; annual physicals; gym membership; and unlimited paid time off. As a result of our unlimited paid time off policy, vacation time is no longer accrued for executive officers.

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The Compensation Committee periodically reviews the levels of perquisites and personal benefits provided to executive officers.

We have agreements with our executive officers that provide certain benefits in the event of a change in control of our company or in the event their employment is terminated without cause. We have provided detailed information about these benefits, along with estimates of their value under various circumstances in the sections entitled “Retention Agreements” and “Stock Options” under “Potential Payments Upon Termination or Change in Control” below.

The Compensation Committee has determined to provide for change in control benefits for company leadership because we recognize that, as is the case with many publicly-held corporations in the technology sector, the possibility of a change in control exists, and the uncertainty and questions which a potential change in control may raise among our executive officers could result in the departure or distraction of executive officers to the detriment of our company and our shareholders. Stock options and restricted stock awards held by executive officers generally vest in full upon a change of control (“single trigger”), while the remainder of benefits to be received by an executive officer upon a change of control generally requires a change of control followed by termination of the executive officer’s employment (“double trigger”). We believe single trigger treatment for equity awards is appropriate because: (i) it helps retain key employees during change in control discussions, especially more senior executive officers where equity represents a significant portion of their total pay package; (ii) it is difficult to replicate underlying performance goals, particularly for performance-contingent vesting; (iii) the company that made the original equity grant will no longer exist after a change in control and employees should not be required to have the fate of their outstanding equity tied to the new company’s future success; and (iv) it ensures that ongoing employees are treated the same as terminated employees with respect to outstanding equity awards. On the other hand, we believe a “double trigger” is appropriate for the remainder of benefits, particularly payments of cash, because it prevents an unintended windfall to executive officers in the event of a friendly change in control, while still providing them appropriate incentives to cooperate in negotiating any change in control in which they believe they may lose their employment. The Compensation Committee further believes that if a named executive officer remains employed by us following a change in control, but such officer experiences a defined set of adverse circumstances regarding such officer’s employment, then such officer should have the opportunity (during a two year period from the change in control) to elect to resign and receive the same severance benefits applicable as if such officer’s employment was severed by the company without cause.

We have an employment agreement with our current President and Chief Executive Officer, Mr. LoForti, which, as amended in September 2007, provides severance if we terminate his employment without cause or if he resigns for good reason. We also had a similar employment agreement with our former Chief Executive Officer, Mr. Calisi. These agreements with Messrs. Calisi and LoForti are further described below under “Compensation Actions Taken for Our Named Executive Officers.”

Severance, if any, for executive officers without employment agreements who are terminated by us “without cause” is determined by our Compensation Committee based upon (i) the reason for termination, (ii) the length of service to our company, and (iii) as recommended by our Chief Executive Officer.

The severance benefits paid to Mr. Calisi and Ms. Huff, each of whom separated from us in fiscal 2007, are described below under “Compensation Actions Taken for Our Named Executive Officers” and in the Summary Compensation Table.

Compensation Actions Taken for Our Named Executive Officers

Christopher Calisi. Mr. Calisi’s employment as our President and Chief Executive Officer ended effective November 1, 2006. Details regarding his post-termination compensation are set forth below following the discussion regarding his recent compensation history.

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During fiscal 2005, the Compensation Committee retained a professional compensation consultant, J. Richard & Co., to assist it in developing an appropriate compensation package for Mr. Calisi. The compensation consultant and the Compensation Committee reviewed all components of Mr. Calisi’s compensation, including base salary, bonus, long-term incentive awards, accumulated realized and unrealized stock option gains, matching contributions under the company’s 401(k) plan and other benefits and perquisites provided to Mr. Calisi. The compensation consultant provided the Committee with comparable data from the Radford Technology Survey of Executive Compensation Practices and a peer group of 12 companies suggested by the Compensation Committee which included:  Adaptec, Inc., Advanced Digital Information, Brocade Communications, Crossroads Systems, EMC Corporation, Imation Corp., Iomega Corporation, Network Appliance, Quantum Corporation, Sandisk, Storage Technology, and SunGard Data Systems. The compensation consultant and the Compensation Committee also looked at comparable data removing Brocade Communications, EMC Corporation and Network Appliance from the initial peer group at the recommendation of the compensation consultant.

The final package consisted of an increase in Mr. Calisi’s base salary from $430,000 to $500,000 per year, which the Compensation Committee determined to be market compensation level for CEOs of the peer group. The Compensation Committee also determined to award Mr. Calisi a cash bonus of $21,500, which represented the prorated amount of the annual compensation increase for the period of November 2004, when his salary increase would normally have been effective, to the April 2005 effective date of the increase. No additional bonus award was granted to Mr. Calisi in connection with his performance for fiscal 2004. Additionally, the Compensation Committee recommended that the 2003 Equity Incentive Plan Committee grant to Mr. Calisi the following equity awards:

•                  an option to purchase up to 100,000 shares of common stock at an exercise price of $11.00 per share, which option was immediately vested as to 11,200 shares, with the remainder vesting at a rate of 2,775 shares per month from May 2005 through December 31, 2007;

•                  50,000 shares of restricted stock, vesting in installments of 16,667, 16,667 and 16,666 shares on the first day of calendar years 2006, 2007 and 2008, respectively; and

•                  50,000 shares of restricted stock, vesting as to 12,500, 12,500 and 25,000 shares, respectively, if the volume weighted daily average stock price for ten consecutive trading days reached $20, $25 and $30, respectively, on or before the first day of calendar 2008, subject to Mr. Calisi’s employment as Chief Executive Officer on such date(s).

The 2003 Equity Incentive Plan Committee was a subcommittee of the Compensation Committee composed of two directors, each of whom qualified as a “non-employee director” under Rule 16b-3 under the Exchange Act and an “outside director” under Section 162(m) of the Internal Revenue Code, which was established to administer the 2003 Equity Incentive Plan so that awards made under that plan would (i) be exempt from the short-swing trading restrictions of Section 16(b) of the Exchange Act, and (ii) qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.

Mr. Calisi’s award levels were based in part on the analysis and recommendations of the compensation consultant, and were intended to increase the retentive value of Mr. Calisi’s long-term incentive compensation rather than to reward past performance. Restricted shares were included in the package at the recommendation of the compensation consultant to reduce the dilution and increase the retentive value of the package. The Compensation Committee emphasized the long-term incentive nature of the restricted stock awards by providing that 50,000 restricted shares would vest only upon very substantial increases in share price during Mr. Calisi’s tenure as our Chief Executive Officer. The other 50,000 restricted shares vested at future points in time, thereby aligning the value that Mr. Calisi would have received from such award with his continued tenure at our company and with our future share price performance. The 2003 Equity Incentive Plan Committee followed the recommendations of the Compensation Committee and made the foregoing equity awards under the 2003 Equity Incentive Plan.

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In fiscal 2006, the Compensation Committee amended the terms of Mr. Calisi’s employment agreement and retention agreement pursuant to a voluntary offer made by Mr. Calisi in November 2005. Although the Compensation Committee believed Mr. Calisi’s salary to be appropriate at the time, Mr. Calisi offered the salary reduction in the context of the losses sustained by the company in fiscal 2006. Pursuant to the amendments, Mr. Calisi’s gross annual base salary was reduced from $500,000 to $395,000 effective as of November 15, 2005, except that, solely for purposes of calculating severance payments under his employment agreement and retention agreement, Mr. Calisi’s salary would be deemed to be the greater of $500,000 or his then current salary as of the date of termination or a change in control, as applicable. The reduction in salary also reduced the annual bonus for which Mr. Calisi was eligible under his employment agreement and the retention agreement. Mr. Calisi’s compensation was not modified again before the termination of his employment agreement in November 2006.

In connection with the termination of Mr. Calisi’s employment agreement, the Compensation Committee considered a number of critical transitional issues for which Mr. Calisi had unique knowledge, including the transition of manufacturing services from our outsourced manufacturer back to us, and relationships with key distributors, suppliers and potential partners. The Compensation Committee also considered that any ill-will of Mr. Calisi and/or post-employment disputes would be a distraction to us at a critical juncture and could have a negative effect on retention of key commercial relationships. In order to retain Mr. Calisi’s transitional consulting services and achieve a prompt and full resolution of Mr. Calisi’s termination of employment, the Compensation Committee approved our entry into a separation agreement and a consulting agreement with Mr. Calisi. Under the terms of the consulting agreement, Mr. Calisi agreed to provide transitional consulting services to us for a period of six months. For his consulting services, Mr. Calisi was paid $20,833.33 per month during the term of the agreement. Under the terms of the separation agreement, we also agreed to (i) provide Mr. Calisi a lump sum payment of $500,000 in accordance with the provisions of his employment agreement, (ii) pay health benefit premiums on Mr. Calisi’s behalf for a period not to extend beyond one year, (iii) reimburse up to $10,000 of outplacement services for Mr. Calisi, which he did not utilize, and (iv) allow him to keep certain used office equipment. Mr. Calisi agreed to waive his post-separation exercise rights for his outstanding stock options, and he executed a general release of all claims against us. The Compensation Committee determined that the value and flexibility created by the waiver of exercisability of the options was greater than the value of the modest additional benefits beyond those provided in Mr. Calisi’s employment agreement.

Scott McClendon. In November 1, 2006, the board appointed Mr. McClendon as our Interim President and Chief Executive Officer, and Mr. McClendon served in this position until August 2007. The Compensation Committee approved a compensation package for Mr. McClendon that consisted of a monthly salary of $32,916.67. The base salary was equivalent to the base salary earned by Mr. Calisi at the time of his departure. Mr. McClendon also participated in our employee benefit plans. Mr. McClendon did not receive fees paid to our non-employee directors or the Chairman of the Board fee while serving as Interim President and Chief Executive Officer.

The Compensation Committee retained the services of PM&P to assist it in determining the appropriate compensation package for Mr. McClendon as described above under “Methodologies for Establishing Compensation.”  The final package consisted of a salary and stock option award which the Compensation Committee determined to be market compensation level for CEOs of similarly-situated companies as provided by PM&P.

In December 2006, Mr. McClendon received an option to purchase up to 75,000 shares of our common stock at the purchase price of $4.29 per share, the closing price of our common stock on the date of grant. The option was immediately vested as to 6,250 shares (reflecting the commencement of service as Interim President and Chief Executive Officer on November 1, 2006), with the remainder vesting at a rate of 6,250 shares on the first day of each month commencing January 1, 2007 through November 1, 2007, subject to Mr. McClendon’s continuing service to us.

Vernon A. LoForti. In connection with his appointment as President and Chief Executive Officer in August 2007, Mr. LoForti’s annual base salary was increased from $297,750 to $400,000. Prior to this increase, Mr. LoForti’s salary was last increased in November 2004 while he served as our Vice President and Chief Financial Officer. In determining Mr. LoForti’s current compensation, the Compensation Committee considered the compensation earned by Mr. Calisi and Mr. McClendon, each of whom previously served as President and Chief

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Executive Officer, and reviewed all components of Mr. LoForti’s compensation, including base salary, bonus, long-term incentive awards, accumulated realized and unrealized stock option gains, matching contributions under the company’s 401(k) plan and other benefits and perquisites provided to Mr. LoForti. In August 2007, as part of the special grant of stock options described above under “Stock Options and Restricted Stock Awards,” Mr. LoForti was granted an option to purchase up to 250,000 shares of our common stock at the purchase price of $1.62 per share, the closing price of the company’s common stock on the date of grant.

We entered into an employment agreement with Mr. LoForti in December 2000 pursuant to which Mr. LoForti continued employment as our Vice President and Chief Financial Officer. The employment agreement was amended and restated in September 2007 to reflect Mr. LoForti’s promotion to President and Chief Executive Officer and his new salary. It was also amended to add severance provisions, as the severance provisions previously in effect under the agreement had expired on December 3, 2003. These severance provisions provide that if we terminate Mr. LoForti’s employment without cause, then we are obligated to pay him a severance payment equal to his base salary, payable on a pro-rated basis according to our normal payroll cycle for the 12 months following his termination. In addition, he is entitled to receive accelerated vesting for any stock options that would otherwise have vested during the 12-month period following his termination. He is also entitled to receive the cash severance payment if he resigns following any of the following events (good reason): (i) reduction in compensation of more than 10%; (ii) change in position or duties so that his duties are no longer consistent with his previous position; or (iii) change in principal place of work to more than 50 miles from our current facility without his approval. The payment of the severance benefits described above are conditioned on the execution by Mr. LoForti of a general release of all claims against us. The employment agreement has a one-year term, automatically renews for successive one-year terms unless one of the parties timely gives notice to terminate, and provides that our Board of Directors may unilaterally modify Mr. LoForti’s compensation at any time. Mr. LoForti did not receive any bonus or equity awards in fiscal 2007. Mr. LoForti is also party to a retention agreement with us, as described above under “Change in Control Benefits.”

W. Michael Gawarecki. Mr. Gawarecki is an at-will employee whose employment may be terminated by us for any reason, with or without notice. Mr. Gawarecki currently earns an annual salary of $246,500 and has earned this same salary since November 2004. Mr. Gawarecki did not receive any bonus or equity awards in fiscal 2007. In August 2007, as part of the special grant of stock options described above under “Stock Options and Restricted Stock Awards,” he received an option to purchase up to 100,000 shares of our common stock at the purchase price of $1.62 per share the closing price of the company’s common stock on the date of grant.

Christie Huff. Ms. Huff’s employment with us terminated in April 2007. At the time of termination, Ms. Huff earned an annual salary of $195,000 and was an at-will employee and could be terminated by us for any reason, with or without notice. We entered into a separation agreement with Ms. Huff under which we agreed to:  (i) provide Ms. Huff a lump sum payment of $97,500 equal to six months base salary; (ii) pay health benefit premiums on Ms. Huff’s behalf for a period not to extend beyond one year; and (iii) allow her to keep certain used office equipment. In exchange, Ms. Huff executed a general release of all claims against us.

Michael Kerman. Mr. Kerman’s employment with us terminated in October 2007. Mr. Kerman earned an annual salary of $225,000 per year and had earned this same salary since he was hired in August 2004. Mr. Kerman did not receive any bonus or equity awards in fiscal 2007. In August 2007, as part of the special grant of stock options described above under “Stock Options and Restricted Stock Awards,” he received an option to purchase up to 150,000 shares of the company’s common stock at the purchase price of $1.62 per share, the closing price of the company’s common stock on the date of grant. This stock option will expire on January 3, 2008.

Robert Scroop. Mr. Scroop is an at-will employee whose employment may be terminated by us for any reason, with or without notice. Mr. Scroop currently earns an annual salary of $220,500 per year and has earned this same salary since November 2003. Mr. Scroop did not receive any bonus or equity awards in fiscal 2007. On August 2007, as part of the special grant of stock options described above under “Stock Options and Restricted Stock Awards,” he received an option to purchase up to 75,000 shares of the company’s common stock at the purchase price of $1.62 per share, the closing price of the company’s common stock on the date of grant.

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The Compensation Committee has considered the impact of Section 162(m) of the Internal Revenue Code, which disallows a deduction for any publicly-held corporation for individual compensation exceeding $1 million in any taxable year for the Chief Executive Officer and the three other most highly compensated executive officers (excluding the principal financial officer) unless such compensation meets the requirements for “performance-based compensation.”  As the cash compensation we pay to each of our executives officers is expected to be below $1 million and the Compensation Committee believes that options and performance-vesting restricted stock awarded under the equity incentive plans to such officers will meet the requirements for qualifying as performance-based compensation, the Compensation Committee believes that Section 162(m) will not affect the tax deductions available to us with respect to the compensation of our executives fiscal 2007. It is the Compensation Committee’s policy to qualify to the extent reasonable executive officer compensation for deductibility under applicable tax law. However, the Compensation Committee may, from time to time, approve compensation to officers that may not be fully deductible.

The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the proxy statement for the 2007 annual meeting of shareholders. This report is provided by the following committee members, all of whom are independent:

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Summary Compensation Table

The following table contains information concerning the compensation received by our named executive officers in fiscal 2007.

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Grants Of Plan-Based Awards

The following table contains information about plan-based awards granted to our named executive officers in fiscal 2007.

The option award listed above was granted to Mr. McClendon under our 2003 Equity Incentive Plan. The option was immediately vested as to 6,250 shares (reflecting Mr. McClendon’s commencement of service as Interim President and Chief Executive Officer on November 1, 2006), with the remainder vesting at a rate of 6,250 shares on the first day of each month commencing January 1, 2007 through November 1, 2007, subject to Mr. McClendon’s continuing service to our company. The option will fully vest upon a change in control as defined in our 2003 Equity Incentive Plan. The option has a ten-year life, subject to continuing service.

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Outstanding Equity Awards At Fiscal Year-End

The following table provides information about the current holdings of stock options by our named executive officers at July 1, 2007. This table includes unexercised and unvested option awards. Each option award is shown separately for each named executive officer. Messrs. McClendon, LoForti, Gawarecki and Scroop have agreed to cancel those options set forth below with exercise prices of $10.00 per share or more if Proposal No. 2 described above is approved by our shareholders, and have agreed not to exercise any such options prior to the vote on Proposal No. 2.