Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2004

OR

For the transition period from                         to                         

000-12230

(Commission file number)

BAKBONE SOFTWARE INCORPORATED

(Exact name of registrant as specified in its charter)

(858) 450-9009

(Registrant’s telephone number, including area code)

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

None

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

Common Shares, no par value

(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of September 30, 2003 was $83,950,000.*

*Excludes the Common Shares held by executive officers, directors and shareholders whose ownership exceeds 5% of the Common Shares outstanding as of September 30, 2003. The calculation does not reflect a determination that such persons are affiliates for any other purposes.

Number of Common Shares, no par value, outstanding as of May 31, 2004 was 64,527,858.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2004 Annual Meeting of Shareholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended March 31, 2004.

Table of Contents

BAKBONE SOFTWARE INCORPORATED

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

SIGNATURES

EXHIBIT INDEX

Table of Contents

PART I

This Annual Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Business Risks” in Item 7 below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Overview

The Company is currently incorporated under the federal jurisdiction of Canada. The Company originally engaged in mineral exploration activities, but those activities ceased during 1999, leaving the Company as a public shell corporation traded on the Toronto Stock Exchange. In March of 2000, the Company changed its name from Net Resources, Inc. to BakBone Software Incorporated and began a series of transactions resulting in its current corporate structure. The Company currently has three operating subsidiaries, BakBone Software, Inc., BakBone Software Ltd. and BakBone Software KK, and one non-operating subsidiary, BakBone Acquisition Corp.

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

We market and sell NetVault through an indirect global sales channel comprised of approximately 200 storage-focused resellers, distributors and original equipment manufacturers, or OEMs. We have developed OEM relationships with companies such as NCR Teradata, Network Appliance and Sony Electronics, each of which has integrated NetVault into certain product offerings. Our end-users consist of domestic and international businesses and organizations of all sizes and across numerous industries. We operate in three primary regions: North America; the Pacific Rim; and Europe, Middle East, and Africa, or EMEA.

1

Table of Contents

Our business strategy is to gain significant market share in the data protection software market through continued product innovation and sales channel expansion, while maintaining profitable growth. We intend to achieve this strategy by:

Our common shares trade on the Toronto Stock Exchange under the symbol “BKB” and on the over the counter bulletin board market in the United States under the symbol “BKBOF.” We operate and report using a fiscal year ending March 31. Our corporate headquarters is located at 10145 Pacific Heights Boulevard, Suite 500, San Diego, CA, 92121, and our telephone number is (858) 450-9009.

Our Product

Our product, NetVault, is data protection software that permits computer network administrators to maintain “backup” or duplicate copies of documents, data, images and records. NetVault also enables the recovery of this data if files are lost or corrupted in any way. NetVault utilizes a modular design to deliver maximum performance while supporting flexible implementation strategies. This modular design is composed of two key parts: our core product and application plug-in modules, or APMs. The core product contains key functionality that manages fundamental backup and recovery processes, contains auto discovery features and interfaces with specific operating systems. APMs attach to the core product to adapt it for backup and recovery within specific network architectures and with numerous applications and databases. NetVault further allows end-users to rapidly add and configure new servers, devices and clients, and controls them from a central location. Additionally, NetVault enables end-users to customize a combination of recovery methods that meet specific business needs. NetVault is designed to operate within a wide range of operating systems, applications, server platforms and storage systems—all with a common user interface. The key benefits of our product include:

2

Table of Contents

End-Users

Our sales and marketing strategy is focused on licensing our products and providing services to small and medium-sized businesses and organizations, as well as large enterprise environments through a combination of software, post-contract support and, to a lesser degree, professional services. We generally offer non-exclusive, perpetual software licenses through our channel partners to end-users and do not offer term-based software licenses. Maintenance contracts generally cover a period of one year, and after contract expiration, our customers have the right to purchase maintenance contract renewals, which generally cover a period of one year. Our product is used by end-user customers in a wide variety of industries, businesses, governments and applications. Our end-user customers include, among others, financial service providers, retailers, insurance companies, Internet service providers, law firms, real estate companies, educational institutions, science and biotech organizations, healthcare institutions, and domestic and international government agencies.

3

Table of Contents

Product Distribution

We distribute our products to end-users primarily through a multi-tiered global network of resellers that include value added resellers and value added distributors. We have an extensive network of resellers and distributors in North America, the Pacific Rim and EMEA. Our partnerships with resellers and distributors allow our products to reach end-users that we would not otherwise have the resources to identify. The reseller and distributor partnerships are the primary means by which our products are distributed, and a majority of our revenue is derived from our relationships with these resellers and distributors. We continually seek to partner with the premier resellers and distributors available in our three geographic regions, and our strategy going forward is to expand and improve the quality of our reseller and distributor partnerships. In addition, we intend to add relationships with systems integrators.

We have also focused on the development and growth of our major OEM relationships with NCR Teradata, Sony Electronics and Network Appliance. Members of our sales force work closely with our OEM partners to define and customize products, conduct on-site testing and provide engineering and field application engineering support. We derive, and believe we will continue to derive, a significant portion of our revenues from a limited number of customers. For the fiscal year ended March 31, 2004, NCR Teradata accounted for approximately 12% of our consolidated revenues. We believe that our solutions significantly complement and expand the solutions provided by our OEMs. In addition to maintaining and expanding our existing OEM relationships, our strategy is to grow our business by adding new OEM partners.

Research and Development

Our industry is subject to rapid technological advancements, changes in customer requirements, developing industry standards and new product introductions and enhancements. As a result, our success depends, in part, on our ability to continue to improve our software solution in a cost-effective and timely manner to address emerging customer and market needs. Our core development division is in Poole, United Kingdom, and our APM development division is in San Diego, California. We also conduct development activities in Tokyo, Japan that are focused on adapting our software for use in the Pacific Rim region.

Our research and development expenditures in fiscal 2002, 2003 and 2004 totaled $4.2 million, $5.0 million and $4.8 million, respectively. Research and development expenditures in fiscal 2002, 2003 and 2004 were primarily related to upgrading the existing NetVault core software and APMs, as well as to developing new APMs. We also incurred research and development expenditures related to MagnaVault through November of 2002, when we made the decision to “end of life” the product. We focus our current research and development efforts on new features and functionality for our NetVault product to address new market opportunities and to meet changing customer needs. These projects include the continued introduction of new APMs, improvements in the performance and functionality of NetVault, product adaptations to meet the needs of new hardware offerings entering the market and the integration of new technologies to address the evolving data protection marketplace. We anticipate that we will have significant future research and development expenses in order to continue to provide a high quality product that enables us to maintain and enhance our competitive position while increasing market share.

Intellectual Property

Our software products rely on our internally developed intellectual property and other proprietary rights. We rely primarily on a combination of copyright, trade secret laws, confidentiality procedures, contractual provisions and trademarks to protect our intellectual property and other proprietary rights. However, we believe that these measures afford only limited protection of our intellectual property and other proprietary rights. We license our software products primarily under shrink wrap licenses that are included as part of the product packaging. Shrink wrap licenses are not negotiated with or signed by individual customers, and purport to take effect upon the opening of the product package or use of the software license key. The legal enforceability of shrink wrap

4

Table of Contents

licenses is uncertain in many jurisdictions, including some of the foreign countries in which we sell our products. We also generally enter into confidentiality agreements with our employees and technical consultants. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing the unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of our software products exists. In addition, the laws of some foreign countries, including those in which we sell our products, do not protect our proprietary rights as fully as do the laws of the United States.

Competition

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

Seasonality

Historically our business results have been generally weakest in our first quarter, primarily due to the purchasing cycles exhibited by our customers. Our other three quarters have not shown any consistent performance trends relative to each other.

Employees

As of March 31, 2004, we had 175 employees, including 44 in research and development, 76 in sales and marketing, 24 in customer support, and 31 in general administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

Executive Officers

Our executive officers and their ages as of March 31, 2004 are as follows:

Keith G. Rickard, age 57, has served as our President, Chief Executive Officer since June 2001. Additionally, Mr. Rickard has served as a Director of BakBone since September 2001. Prior to joining BakBone, Mr. Rickard was president of Sterling Software’s storage management division from February 1997 to October 1999 where he was responsible for all aspects of Sterling’s storage management software product suite, including worldwide sales, marketing, engineering and business development. Prior to that, Mr. Rickard held various positions at Sterling Software from June 1980 to February 1997. Mr. Rickard holds a B.S. in Mathematics from the University of London.

John Fitzgerald, age 33, has served as our Chief Financial Officer since January 2002. Prior to becoming our Chief Financial Officer, Mr. Fitzgerald served as our corporate controller from January 2001 to January 2002.

5

Table of Contents

Prior to joining BakBone, Mr. Fitzgerald consulted for high technology companies in the areas of SEC reporting, initial public offerings and strategic planning from April 1999 to January 2001. From January 1996 to April 1999, Mr. Fitzgerald worked for the accounting firm of Arthur Andersen. Mr. Fitzgerald holds a B.S. in Business Administration from San Diego State University.

Fabrice Helliker, age 36, has served as our Vice President, Engineering since March 2000. Since 1992, Mr. Helliker has served in many capacities at BakBone, as well as its predecessor companies and has successfully led several of our NetVault development teams and re-architecture efforts. Mr. Helliker holds a B.S. with Honors in Computer Science from Brighton University, United Kingdom.

Scott Petersen, age 48, has served as our Vice President, North American Sales since August 2002. Prior to joining BakBone, Mr. Petersen served as the Vice President of Sales at Actionpoint, Inc. (now known as Captiva Software Corporation), a publicly-held provider of data management software, from June 2000 to August 2002 where he was responsible for Actionpoint’s sales efforts. Prior to joining Actionpoint, Mr. Petersen served as the Vice President of Sales of the storage management division of Sterling Software, which was subsequently acquired by Computer Associates, from May 1995 to June 2000. Mr. Petersen holds a B.S. with an emphasis in Finance and Marketing from Old Dominion University.

Patrick Clarke, age 39, has served as our Vice President, Europe, Middle East, Africa since February 2004. Prior to joining BakBone, Mr. Clarke was the Vice President, Europe, Middle East and Africa Operations for Overland Storage, a publicly held company providing data storage management solutions, from April 2001 to February 2004. Prior to joining Overland Storage, Mr. Clarke was the director of sales and a member of the board of directors of Asbis Enterprises, a supplier of computer components, from May 1999 to February 2001.

Adrian Michael Jones, age 38, has served as our Senior Vice President, Worldwide Alliances and OEMs since February 2004. Prior to joining BakBone, Mr. Jones was employed at Quantum Corporation, a provider of data storage solutions, from November 1993 to February 2004, where he served in several capacities and most recently held the position of Vice President of Worldwide Sales. Mr. Jones holds a Electronics Engineering degree from Oxford College of Engineering, England.

Howard Weiss, age 36, has served as our Managing Director, Asian Operations since October 2000. Prior to joining BakBone, Mr. Weiss served as a Director of Phoenix Technologies Japan, a global system-enabling solutions provider for PCs and servers from December 1992 to July 2000. Prior to joining Phoenix Technologies, Mr. Weiss was a sales manager at MCM Japan, a distributor of computer and network security equipment, from May 1990 to December 1992. Mr. Weiss is fluent in Japanese and holds a Bachelor of Arts from the University of Michigan.

Ken Hudak, age 46, has served as our Vice President, Customer Support since April 2004. Mr. Hudak joined the Company in August of 2001 as our director of US sales support. Mr. Hudak brings 25 years of experience and oversees all customer support for offices in San Diego and Poole, England. Prior to joining BakBone, Mr. Hudak was vice president of technical support and services at Orchestria Corporation in Sacramento. Additionally, Mr. Hudak has held director level positions in sales support at Action Point, Sterling Software, and Landmark Systems.

Additional Information

We provide our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports free of charge under “Investor Relations” on our website at www.bakbone.com as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the United States Securities and Exchange Commission, or SEC. The information contained on our

6

Table of Contents

website is not part of this Annual Report. You may also read and copy the documents to which we refer at the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the SEC’s regional offices at 7 World Trade Center, Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We are required to file reports and other information with the securities commission in each of the provinces of Ontario, Alberta and British Columbia, Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC’s electronic document gathering and retrieval system, as well as on our website at www.bakbone.com under “Investor Relations”.

We currently lease 25,000 square feet in San Diego, California, for our corporate headquarters and our North American sales and development facility. We also lease approximately 7,850 square feet in Poole, United Kingdom, for our EMEA sales and development facility and approximately 6,000 square feet in Tokyo, Japan, for our Pacific Rim sales and development facility. In addition to these facilities, we also lease small sales offices throughout the world. In order to accommodate expected growth in headcount, we plan on either expanding our existing facilities in San Diego or locating new facilities that suit our needs. Our processes for production of software units shipped to customers entail the assembly of the software CD, the manual and any additional collateral material in product specific packaging and, as such, occupy minimal space.

At March 31, 2004, there were no material pending legal proceedings to which the Company was a party or of which any of its property was subject.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2004.

7

Table of Contents

PART II

Market Information.

Our common shares have been listed and posted for trading on the Over the Counter Bulletin Board in the United States since November 2002, and on the Toronto Stock Exchange in Canada since March 2000. The following table sets forth the high and low sales prices of the common shares as reported on the Over the Counter Bulletin Board and the Toronto Stock Exchange during the periods indicated:

As of May 31, 2004, there were approximately 362 holders of record of our common shares. On May 28, 2004, the last reported sales price on the Over the Counter Bulletin Board was $1.48. On May 31, 2004, the last reported sales price on the Toronto Stock Exchange was CDN $2.11. As May 31, 2004 was a trading holiday in the United States, the closing price per the Over the Counter Bulletin Board on the immediately preceding trading day is disclosed.

Dividends.

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

Equity Compensation Plans.

Information about our equity compensation plans at March 31, 2004 that were either approved or not approved by our shareholders was as follows:

8

Table of Contents

Additional information regarding our stock option plans and plan activity for fiscal 2002, 2003 and 2004 is provided in our consolidated financial statements. See “Notes to Consolidated Financial Statements, Note 8—“Shareholders’ Equity”.

Recent Sales of Unregistered Securities.

In July 2003, we sold and issued 22,000,000 Series A convertible preferred shares in exchange for an aggregate purchase price of CDN$22.0 million (US$15.7 million). In connection with the offering of the convertible preferred shares, we paid an aggregate of $1.5 million in underwriting discounts and commissions to Citigroup Capital Markets. The preferred shares were sold to accredited investors pursuant to a Series A Preferred Share Purchase Agreement with the investors. The issuance of Series A convertible preferred shares was deemed exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The investors in this transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the preferred share certificates issued in the transaction.

From April 1, 2003, through March 31, 2004, 14 option holders exercised options for an aggregate of 416,960 of our common shares pursuant to options granted under our 2002 Stock Option Plan and 2003 Stock Option Plan. The exercise prices per share ranged from CDN$1.18 to CDN$2.27. No consideration was paid to us by any recipient of any of the foregoing options for the initial grant of such options. We have received aggregate consideration of approximately CDN$650,000 in connection with the exercise of these options. These issuances were deemed exempt from registration under the Securities Act in reliance on Regulation S promulgated thereunder as transactions involving the offer and sale of our securities outside the United States.

Purchases of Equity Securities by the Company and Affiliated Purchasers.

We did not repurchase any of our equity securities, nor were any equity securities purchased on our behalf by any affiliated purchasers, during the quarter ended March 31, 2004. We have not publicly announced any repurchase plan or program for our equity securities.

9

Table of Contents

The following discussion should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled “Business Risks” and elsewhere in this Annual Report.

10

Table of Contents

Overview

We are a global provider of data protection software through our product, NetVault. We sell NetVault through our indirect global sales channel comprised primarily of storage-focused resellers, distributors and OEMs. Our channel customers remarket and distribute our product to end-users consisting of small and medium-sized businesses and organizations, as well as large enterprises. Over the past few years, we have significantly increased our revenues through a combination of factors, including enhancing the features of NetVault to address the needs of larger organizations, expanding our relationships with existing channel partners and obtaining new reseller and OEM customers. Although our revenues have increased substantially, we experienced continued net losses through fiscal 2004. As a result, as of March 31, 2004, we had an accumulated deficit of $145.5 million.

We have derived the majority of our historical revenues from licenses of our NetVault product and related maintenance contracts. We anticipate that NetVault will account for substantially all of our revenues for the foreseeable future.

We currently operate in three primary regions: North America, the Pacific Rim and EMEA. For the year ended March 31, 2004, our North American, Pacific Rim and EMEA operations contributed 39%, 37% and 24% of our revenues, respectively, compared to 42%, 38% and 20% of our revenues, respectively, for the year ended March 31, 2003. From a global perspective, we have focused on expanding our distribution channels and OEM relationships. In particular, we have OEM relationships with NCR Teradata, Sony Electronics and Network Appliance. We anticipate that these relationships will continue to be material to our business for the foreseeable future. We also recently entered into an OEM arrangement with Snap Appliance. Although we did not procure any license or maintenance sales through this arrangement in fiscal 2004, we expect to generate license and maintenance sales from this contract in the foreseeable future. A significant component of our business strategy is to increase our OEM revenues by expanding our existing relationships and establishing new OEM relationships with hardware and software vendors.

We generate revenues primarily through a combination of software licenses and related maintenance contracts. We generally offer non-exclusive, perpetual software licenses through our channel partners to end-users and do not offer term-based software licenses. Maintenance contracts generally cover a period of one year, and after contract expiration, our customers have the right to purchase maintenance contract renewals, which generally cover a period of one year.

We license software to resellers in arrangements under which they purchase a combination of software, post-contractual support and/or professional services (collectively “multiple element arrangements”). Post-contractual support includes rights to unspecified upgrades and enhancements, and telephone support. Professional services relate to implementation services and training. For each of these types of arrangements, we have established vendor specific objective evidence, or VSOE, of fair value for all elements in the multiple element arrangement, and thus, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. We determine VSOE of fair value of post-contractual support based on substantive renewal rates for the same term post-contractual support.

We also license software under several OEM agreements, which are segregated into two categories for revenue recognition purposes. Certain OEM arrangements involve multiple elements where VSOE of fair value exists for all undelivered elements but VSOE of fair value does not exist for one or more delivered elements. Under these arrangements revenue is recognized using the residual method, whereby, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming the price is fixed or determinable, delivery has occurred and collectibility is probable. Revenue allocated to post-contractual support is recognized ratably over the arrangement period, which is generally one year. One OEM customer has a specific right of return, whereby the customer is contractually permitted to return our product during the arrangement period. We account for potential returns from this customer in accordance

11

Table of Contents

with Statement of Financial Accounting Standards, or SFAS, 48, “Revenue Recognition When Right of Return Exists”. We use historical returns experience with this customer to estimate potential returns and to establish the appropriate sales returns allowance.

We have also entered into multiple element arrangements with certain OEM customers under which, in addition to providing software licenses and maintenance services, we make a commitment to the customer to provide unspecified future software products. As VSOE of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are initially deferred and subsequently recognized ratably over the arrangement period. Revenue recognized under these arrangements is included under “Development Software Solutions” in Note 15 to the consolidated financial statements.

Portions of our Pacific Rim revenues are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our product more expensive and, therefore, potentially less competitive in those markets. A majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We have not previously undertaken hedging transactions to cover currency exposure, and we do not currently intend to engage in hedging activities.

Cost of revenues consists of the direct cost of providing customer support, including salary and benefits of staff working in our customer support departments, as well as associated costs of computer equipment, telephone and other general costs necessary to maintain support for our end-users. Also included in cost of revenues are third party software license royalties and the direct costs of raw materials and packaging for products shipped to customers. The direct costs of raw materials and packaging are nominal as products shipped to customers consist of a CD, manual, printed box and other media. Product costs for these items individually and in the aggregate are minimal, and we have little risk of inventory obsolescence due to the small quantities of these items needed to fill our customers’ orders and the short lead time to acquire additional materials. Raw material purchases are held in inventory until the sale of the related software product, at which time the cost per unit sold is released to cost of revenues.

Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows, web advertising and travel costs for our worldwide sales and marketing staff. Commissions are part of our sales personnel’s compensation package, which is based on the procurement of sales orders and subsequent collection of customer receivables. As we expand our sales and marketing force, we expect sales and marketing expenses to increase in absolute dollars, but to decrease as a percentage of revenues.

Research and development expenses consist primarily of salary and related costs for our worldwide engineering staff. Our Poole, United Kingdom and San Diego, California offices include engineering personnel responsible for the development effort of NetVault and our APMs, respectively. We expect to continue to devote substantial additional resources to research and development such that these expenses will increase in absolute dollars, but is expected to remain consistent as a percentage of revenues.

General and administrative expenses include salaries and benefits for our corporate personnel and other expenses, such as facilities costs and professional services. We expect general and administrative expenses to increase in the future on an absolute dollar basis, but to decrease as a percentage of revenues, reflecting growth in operations and other factors.

Our provision for income taxes is comprised of two primary components: royalty withholding taxes and federal, state, and foreign income taxes. Currently, BakBone, Inc., our U.S. operating subsidiary, and BakBone

12

Table of Contents

Ltd., our U.K. operating subsidiary, earn intercompany royalty revenues from BakBone KK, our Japanese operating subsidiary, for NetVault license sales procured by BakBone KK. For every royalty dollar earned by BakBone, Inc. and BakBone Ltd., 10% of the royalty amount must be withheld and remitted to the Japanese tax authority. The withholding tax is generally recorded in the same period as the NetVault license transaction that generates the tax. The United States and Japan recently ratified a treaty that, among other things, eliminated the 10% royalty withholding tax for transactions between U.S. and Japanese companies, effective July 1, 2004. We expect the elimination of the withholding tax to have a positive impact on our results of operations and cash flows.

We also recognize a provision for income taxes that relates to income generated. Historically, we have accumulated losses from operations, but certain tax regulations in the state of California limit the usage of tax loss carry forwards to offset income earned. The state regulations limiting the Company’s usage of tax loss carry forwards expired, effective March 31, 2004. We expect that the expiration of these state regulations will have a positive impact on our future results of operations and cash flows. In addition, we are subject to alternative minimum tax (AMT) at the federal tax jurisdictional level. AMT creates a tax credit that is available to offset regular federal income tax generated in the future, if any.

Conversion to U.S. GAAP

In connection with our past filings with securities regulators in Canada and the United States, we prepared and presented our financial data in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). The financial information presented in this Annual Report has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and, accordingly, the information in this Annual Report differs in certain material respects from the information previously published. In particular, our historical financial statements published in accordance with Canadian GAAP for periods prior to March 31, 2002 differ from those presented in this Annual Report in part because Canadian GAAP required that we consolidate the results of operations of foreign subsidiaries that are not permitted to be consolidated under U.S. GAAP. The treatment of stock-based compensation in fiscal 2000, 2001 and 2002 also differs materially under U.S. GAAP and Canadian GAAP. As a result, the financial data included in this Annual Report reflects changes to the previously reported stock-based compensation charges. In addition to these specific differences, various other differences exist between U.S. and Canadian GAAP, all of which are discussed in “Notes to Consolidated Financial Statements- Note 17, Differences Between Accounting Principles Generally Accepted in the United States and in Canada.” We intend to continue to publish our financial information in the future in accordance with U.S. GAAP in reports on Form 10-K, 10-Q and 8-K and otherwise. To the extent required by securities regulations in Canada in order to maintain our listing on the Toronto Stock Exchange, we will publish reconciliations to Canadian GAAP in our future filings with regulatory authorities in Canada.

Restatement of Prior Period Financial Statements

In connection with the preparation of this Annual Report, we determined that our previously published financial statements reflected several errors in fiscal 2002 and 2003, and the first three quarters of fiscal 2004. These financial statements did not properly reflect the treatment of certain deferred stock-based compensation charges and the revenue recognition related to specific customer contracts. Several additional adjustments were also identified. The financial statements included in this Annual Report for fiscal 2002 and 2003, and as of March 31, 2002 and 2003 reflect the appropriate characterization of certain stock-based compensation charges and other noted adjustments.

The financial statements for fiscal 2004 and as of March 31, 2004, including the quarterly results for fiscal 2004, reflect the appropriate revenue recognition for certain customer contracts and other noted adjustments. Investors should rely solely on the financial statements in this Annual Report and not on the previously published reconciliations from Canadian GAAP to U.S. GAAP, or on any other previously reported financial statements. A complete discussion of the restated financial data is included in Note 3 to our consolidated financial statements included in this Annual Report.

13

Table of Contents

Internal Controls Over Financial Reporting

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results may be misstated, we could fail to meet our public reporting obligations, our reputation may be harmed and investors may lose confidence in our reported financial results.

In connection with the audit of our financial statements for the fiscal year ended March 31, 2004, our independent auditors have issued a letter to our Audit Committee in which they noted certain matters involving our internal controls and operation that they consider to be “reportable conditions”, as defined under standards established by the American Institute of Certified Public Accountants, or AICPA, including our revenue recognition practices for certain customer contracts and our accounting for domestic and international income taxes. In addition, our independent auditors have advised us that they consider these matters to be “material weaknesses” that, by themselves or in combination, result in a more than remote likelihood that a material misstatement in our financial statements will not be prevented or detected by our employees in the normal course of performing their assigned functions. See “Item 9A-Controls and Procedures.”

Application of Critical Accounting Policies

The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, valuation allowance for deferred tax assets and valuation of goodwill. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

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

Revenue recognition

We recognize software license revenue in accordance with AICPA Statement of Position 97-2, “Software Revenue Recognition”. We derive revenues from licensing software and providing maintenance services to two distinct groups of customers: resellers and OEMs.

For software license arrangements that do no require significant modifications or customization of the software, and that do not contain commitments made by us to provide the customer with unspecified additional software products, we recognize software license revenue when all of the following are met:

14

Table of Contents

We license software to resellers in arrangements under which they purchase a combination of software, post-contractual support and/or professional services (collectively “multiple element arrangements”). Post-contractual support includes rights to unspecified upgrades and enhancements, and telephone support. Professional services relate to implementation services and training. For these types of arrangements, we have established vendor specific objective evidence, or VSOE, of fair value for all elements in the multiple element arrangement, and thus, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. We determine VSOE of fair value of post-contractual support based on substantive renewal rates for the same term post-contractual support.

We also license software under several OEM agreements, which are segregated into two categories for revenue recognition purposes. Certain OEM arrangements involve multiple elements where VSOE of fair value exists for all undelivered elements, but VSOE of fair value does not exist for one or more delivered elements. Under these arrangements revenue is recognized using the residual method, whereby, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to post-contractual support is recognized ratably over the arrangement period, which is generally one year. One OEM customer has a specific right of return, whereby the customer is contractually permitted to return our product during the arrangement period. We account for potential returns from this customer in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists”. We use historical returns experience with this customer to estimate potential returns and to establish the appropriate sales returns allowance.

We have also entered into multiple element arrangements with certain OEM customers under which, in addition to providing software licenses and maintenance services, we make a commitment to the customer to provide unspecified future software products. As VSOE of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are initially deferred and subsequently recognized ratably over the arrangement period. Revenue recognized under these arrangements is included under “Development Software Solutions” in Note 15 to the consolidated financial statements.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. We determine the adequacy of this allowance by evaluating individual customer accounts receivable, considering the customer’s financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

15

Table of Contents

Valuation allowance for deferred tax assets

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

Valuation of goodwill

We have recorded goodwill in connection with the acquisitions we have completed in prior periods. In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, we review our goodwill for impairment as of April 1^st of each fiscal year or when an event or a change in facts and circumstances indicates the fair value of a reporting unit may be below its carrying amount. For segment reporting, we have historically reported our results of operations based on our primary product offerings: NetVault and MagnaVault. Subsequent to November 2002, when we decided to “end of life” the MagnaVault product, we operate in a single business segment. SFAS No. 142 defines a reporting unit as an operating segment, or one unit below. For purposes of its transitional and annual goodwill impairment analyses, we have divided our operating segment into reporting units, which are based on our geographic reporting entities: North America, EMEA, and the Pacific Rim. Events or changes in facts and circumstances that it considers as impairment indicators include the following:

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

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

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

16

Table of Contents

Results of Operations

Investors should rely solely on the financial statements in this Annual Report and not on the previously published reconciliations from Canadian GAAP to U.S. GAAP, or on any other previously reported financial statements.

Comparison of operating results for the years ended March 31, 2004 and 2003 (restated)

Revenues

Revenues increased 51% to $27.1 million for the year ended March 31, 2004, from $17.9 million for the year ended March 31, 2003. Revenues for the year ended March 31, 2004 consisted of $21.2 million in licensing revenues, $5.3 million in service revenues, and $589,000 in development software solutions revenues, compared to revenues for the year ended March 31, 2003, which consisted of $15.3 million in licensing revenues and $2.6 million in service revenues. We generated no development software solutions revenue during the year ended March 31, 2003.

In November 2002, we decided to “end of life” the MagnaVault product line, effective January 1, 2003. During the year ended March 31, 2004, we entered into several MagnaVault license arrangements due to customer demand for the product. Included in the revenues during the year ended March 31, 2004 was MagnaVault licensing and service revenues of $566,000 and $204,000, respectively. During the year ended March 31, 2003, MagnaVault licensing revenues were $905,000 and service revenues were $462,000. We do not expect to continue to generate a consistent or material revenue stream from this product line.

Licensing revenues. During the year ended March 31, 2004, we generated significant OEM licensing revenues through NCR Teradata. Our relationships with existing resellers and the establishment of new reseller relationships led to significant licensing revenues growth. Furthermore, we continued the expansion of our business into new territories, primarily within the Pacific Rim and EMEA regions, which led to licensing revenues growth.

In North America, licensing revenues for the year ended March 31, 2004 increased 24% to $7.3 million, from $5.9 million for the year ended March 31, 2003. Licensing revenues growth in North America was driven by both the OEM and reseller channels. The increase in OEM-driven licensing revenues was due primarily to increased sales activity through our relationship with NCR Teradata. During the year ended March 31, 2004, we also continued to establish new reseller relationships, while leveraging existing relationships in North America, to grow revenues through our reseller channel.

In the Pacific Rim, licensing revenues for the year ended March 31, 2004 increased 38% to $8.7 million, from $6.3 million for the year ended March 31, 2003. The Pacific Rim grew licensing revenues through both the reseller and OEM sales channels. During fiscal 2003 and 2004, we expanded our Pacific Rim operations, particularly in China and Korea, and also strengthened existing operations. These expansion efforts contributed to the increase in licensing revenues for the year ended March 31, 2004.

In EMEA, licensing revenues for the year ended March 31, 2004 increased 70% to $5.2 million, from $3.1 million for the year ended March 31, 2003. EMEA experienced increased licensing revenues from the reseller and OEM channels. Increased sales to existing resellers, supplemented by sales to new resellers, helped to drive licensing revenues higher. Furthermore, licensing revenues increased due to the geographic expansion of our operations in EMEA, most notably in Germany and France. The growth in OEM licensing revenues was due to the strength of our worldwide relationship with NCR Teradata, which accounted for all of EMEA’s OEM licensing revenues during the year ended March 31, 2004.

Service revenues. In North America, service revenues for the year ended March 31, 2004 increased 75% to $2.7 million, from $1.5 million for the year ended March 31, 2003. In the Pacific Rim, service revenues for the

17

Table of Contents

year ended March 31, 2004 grew 144% to $1.3 million, from $532,000 for the year ended March 31, 2003. In EMEA, service revenues for the year ended March 31, 2004 increased 137% to $1.3 million, from $550,000 for the year ended March 31, 2003. The worldwide growth in service revenues is directly related to increased licensing revenues from sales to new customers and to maintenance contract renewals from existing customers.

Development Software Solutions revenues. During fiscal 2003 and 2004, we entered into OEM arrangements, under which, we committed to provide unspecified additional software products to the OEM partners during the respective arrangement periods. As such, revenue from the arrangements is classified as “Development Software Solutions” and is recognized ratably over the applicable arrangement period. Through March 31, 2004, we had billed and collected $4.4 million under these arrangements, $589,000 of which was recognized as revenue during fiscal 2004, resulting in $3.8 million of deferred revenue as of March 31, 2004. We expect to recognize annual revenues of approximately $850,000 through fiscal 2008 from these arrangements.

Cost of revenues

Cost of revenues for the year ended March 31, 2004 totaled $3.0 million with a gross margin of 89% compared with cost of revenues of $1.7 million with a gross margin of 91% for the year ended March 31, 2003. The increase in cost of revenues in absolute dollars was due to increased product costs associated with the overall increase in sales volume, additions in customer support headcount and increases in third party software license royalties.

Sales and marketing expenses

Sales and marketing expenses increased $3.2 million, or 26%, to $15.3 million for the year ended March 31, 2004, from $12.1 million for the year ended March 31, 2003. The increase was attributable primarily to increases in headcount, and commissions and bonuses, as well as to marketing costs associated with the release of a new version of our product. Headcount increased primarily in the Pacific Rim and EMEA as we expanded our sales operations in those regions. The increase in performance-based payments was a direct function of revenue growth during the year ended March 31, 2004.

Research and development expenses

Research and development expenses decreased $151,000, or 3%, to $4.8 million for the year ended March 31, 2004, from $5.0 million for the year ended March 31, 2003. The overall decrease was due primarily to a reduction in headcount surrounding the November 2002 “end of life” of the MagnaVault product line. We have made recent research and development hires, but, as of March 31, 2004, we had not reached the pre-November 2002 research and development headcount level. We expect that research and development expenses will increase in fiscal 2005 due to planned headcount increases during the period.

General and administrative expenses

General and administrative expenses decreased $558,000, or 9%, to $5.4 million for the year ended March 31, 2004, from $6.0 million for the year ended March 31, 2003. The decrease in general and administrative expenses relates mainly to the decrease in professional service expenses. During the year ended March 31, 2003, we incurred significant, non-recurring legal and accounting costs in conjunction with a corporate restructuring, through which we reduced our subsidiaries from seven to four. Furthermore, we incurred legal costs in connection with an external review of our intellectual property portfolio, which also took place during the year ended March 31, 2003. This decrease was offset partially by increased legal and accounting costs relating to corporate governance compliance and public reporting requirements, as well as to increased insurance expenses during the year ended March 31, 2004.

18

Table of Contents

Stock-based compensation

During the years ended March 31, 2003 and 2004, we recorded stock-based compensation expense related to the amortization of deferred stock-based compensation. From fiscal 2000 through fiscal 2003, we granted various equity instruments to employees and non-employees that required us to recognize stock-based compensation expense. The intrinsic value of these equity instruments granted to employees was recorded in accordance with APB No. 25, which requires the excess of market price over the grant price, which is referred to as the intrinsic value, to be recorded as stock-based compensation. In general, the intrinsic value is deferred and amortized over the vesting period of the underlying equity instrument. Furthermore, we also recorded stock-based compensation during the year ended March 31, 2003 in connection with the issuance of warrants to non-employees for services rendered. The fair value of these equity issuances was calculated using the Black-Scholes option-pricing model and was recorded as stock-based compensation during the year ended March 31, 2003. A complete discussion of these equity transactions is included in Note 9 to our consolidated financial statements included in this Annual Report. A summary of the stock-based compensation charges recorded during the years ended March 31, 2003 and 2004 is included below (in thousands):

Stock-based compensation decreased $11.3 million during the year ended March 31, 2004 from the year ended March 31, 2003 primarily due to the timing of deferred stock-based compensation amortization. In general, our stock-based compensation charges are recorded over the vesting period of the underlying equity instrument. A majority of the deferred stock-based compensation charges recorded in prior periods had been amortized fully as of March 31, 2003, thus resulting in a lesser charge incurred during the year ended March 31, 2004.

Special charges

In November 2002, we implemented a plan to “end of life” our MagnaVault product. During the year ended March 31, 2003, and in connection with the MagnaVault exit activities, we recorded a charge of $415,000, which was comprised of charges related to employee severance of $87,000, an idle facility of $192,000 and fixed asset impairment and other exit costs of $136,000. We did not incur any special charges during the year ended March 31, 2004.

Amortization of intangible assets

In connection with our acquisition of BakBone KK in March 2002, we recorded $221,000 in separately identifiable intangible assets. These intangible assets are amortized over the estimated useful life, or four years. Thus, we recognized $55,000 in amortization expense during each of the years ended March 31, 2003 and 2004.

Impairment of goodwill

In connection with our decision to “end of life” our MagnaVault product, we recorded a goodwill impairment charge of $888,000, which represents the amount by which the carrying value of the MagnaVault-related goodwill exceeded its estimated fair value as of March 31, 2003. We did not incur any goodwill impairment charges during the year ended March 31, 2004.

19

Table of Contents

Provision for income taxes

During the years ended March 31, 2003 and 2004, we recorded provisions for income taxes of $510,000 and $951,000, respectively. During the years ended March 31, 2003 and 2004, certain transactions between our foreign subsidiaries triggered tax liabilities of $510,000 and $586,000, respectively, in certain jurisdictions in which we do business. Furthermore, we recorded an aggregate provision for federal, state, and foreign income taxes of $365,000 during the year ended March 31, 2004 related to taxable income generated during the period. Although we generated losses during the year ended March 31, 2004, certain permanent and temporary revenue and expense recognition differences exist between financial statement and tax reporting resulting in the tax provision. Historically, we have accumulated net operating losses, but certain tax regulations limit the usage of tax loss carry forwards to offset income earned. As we expand our business worldwide, we may become subject to additional tax liabilities in new tax jurisdictions.

Comparison of operating results for the years ended March 31, 2003 (restated) and 2002 (restated)

Revenues

Revenues increased 171% to $17.9 million for the year ended March 31, 2003, from $6.6 million for the year ended March 31, 2002. Revenues for the year ended March 31, 2003 consisted of $15.3 million in licensing revenues and $2.6 million in service revenues, compared to revenues for the year ended March 31, 2002, which consisted of $5.2 million in licensing revenues and $1.4 million in service revenues.

The year ended March 31, 2003 included $6.3 million and $532,000 in licensing and service revenues, respectively, from our Japanese subsidiaries, compared to $812,000 and $7,000 in licensing and service revenues, respectively, for the year ended March 31, 2002. The results of operations of our Japanese subsidiaries were not consolidated until we acquired in excess of 50% ownership of each subsidiary in the fourth quarter of fiscal 2002.

Licensing revenues. Licensing revenues growth worldwide was driven by growth in both our OEM and reseller sales channels, as well as by the consolidation of revenues generated by our Japanese subsidiaries. During the year ended March 31, 2003, we generated significant OEM licensing revenues from NCR Teradata. Our relationships with existing resellers and the establishment of new reseller relationships led to significant licensing revenues growth through our reseller channel. Furthermore, we continued the expansion of our business into new territories, which led to licensing revenues growth.

In North America, licensing revenues for the year ended March 31, 2003 increased 96% to $5.9 million, compared to $3.0 million for the year ended March 31, 2002. Licensing revenues growth in North America was driven by both the OEM and reseller channels. During the year ended March 31, 2003, we established many new reseller relationships, while leveraging existing relationships, to grow revenues through the reseller channel. Prior to fiscal 2003, North America OEM licensing revenues were relatively insignificant in terms of consolidated revenues, but fiscal 2003 experienced significant OEM licensing revenues growth.

In the Pacific Rim, licensing revenues for the year ended March 31, 2003 were $6.3 million, compared to $812,000 for the year ended March 31, 2002. The increase was due to the consolidation of our Japanese subsidiaries and to organic revenue growth. Our Pacific Rim operations experienced success during the year ended March 31, 2003 through both the reseller and OEM sales channels. During fiscal 2003, we expanded our Pacific Rim business operations into new territories, including China and Korea, and strengthened existing Pacific Rim operations.

In EMEA, licensing revenues for the year ended March 31, 2003 increased 125% to $3.1 million, compared to $1.4 million for the year ended March 31, 2002. Increased sales to existing resellers, supplemented by sales to new resellers, and the maturation of our relationship with NCR Teradata, helped to drive revenues higher. Furthermore, licensing revenues increased as we expanded our operations in several territories, most notably Germany, during the year ended March 31, 2003.

20

Table of Contents

Service revenues. In North America, service revenues for the year ended March 31, 2003 increased 49% to $1.5 million, from $1.0 million for the year ended March 31, 2002. In the Pacific Rim, service revenues for the year ended March 31, 2003 were $532,000, compared to $7,000 for the year ended March 31, 2002. In EMEA, service revenues for the year ended March 31, 2003 increased 45% to $550,000, compared to $379,000 for the year ended March 31, 2002. The worldwide growth in service revenues is directly related to the increased licensing revenues from sales to new customers and to maintenance contract renewals from existing customers. Additionally, the consolidation of our Japanese subsidiaries contributed to higher service revenues during the year ended March 31, 2003.

Cost of revenues

Cost of revenues for the year ended March 31, 2003 totaled $1.7 million with a gross margin of 91%, compared with cost of revenues of $1.2 million with a gross margin of 82% for the year ended March 31, 2002. The decrease in cost of revenues as a percent of total revenues for the year ended March 31, 2003 compared to the year ended March 31, 2002 was due primarily to the overall increase in service revenues and to the consolidation of our Japanese subsidiaries.

Sales and marketing expenses

Sales and marketing expenses increased $3.8 million, or 46%, to $12.1 million for the year ended March 31, 2003, compared to $8.3 million for the year ended March 31, 2002. The increase was attributable primarily to an increase in performance-based payments, commissions and bonuses, which were a result of increased revenues, and to the consolidation of our Japanese subsidiaries’ sales and marketing expenses.

Research and development expenses

Research and development expenses increased $724,000, or 17%, to $5.0 million for the year ended March 31, 2003, from $4.2 million for the year ended March 31, 2002. The overall increase was due primarily to increased salaries and travel expenditures. In November 2002, headcount was reduced in conjunction with the MagnaVault exit activities. Although headcount between March 31, 2002 and 2003 remained stable, year-over-year salary expense increased due to the hiring that took place during the first half of fiscal 2003.

General and administrative expenses

General and administrative expenses increased $959,000, or 19%, to $6.0 million for the year ended March 31, 2003, from $5.0 million for the year ended March 31, 2002. The increase in general and administrative costs related primarily to increases in payroll expenses and insurance premiums, and to the consolidation of our Japanese subsidiaries’ general and administrative expenses.

Stock-based compensation

During the years ended March 31, 2002 and 2003, we recorded stock-based compensation related to the amortization of deferred stock-based compensation and to the issuance of various equity instruments. A summary of the stock-based compensation charges recorded during the years ended March 31, 2002 and 2003 is included below (in thousands):

21

Table of Contents

Stock-based compensation decreased $9.6 million during the year ended March 31, 2003 from the year ended March 31, 2002 due in large part to the fully vested provisions of one incentive share grant made during the year ended March 31, 2002. The fair value of $4.0 million was recognized during the year ended March 31, 2002. Furthermore, the decrease during the year ended March 31, 2003 was also due to the timing of equity forfeitures. During the year ended March 31, 2002, the Company recorded a stock-based compensation charge of $3.9 million related to the cancellation of certain employee options associated with the August 2001 voluntary employee stock option cancel and regrant program.

Special charges

In November 2002, we implemented a plan to “end of life” our MagnaVault product. In the third quarter of fiscal 2003 and in connection with the MagnaVault exit activities, we recorded a charge of $415,000, which was comprised of charges related to employee severance of $87,000, an idle facility of $192,000 and fixed asset impairment and other exit costs of $136,000. We did not incur any special charges during the year ended March 31, 2002.

Amortization of Intangible Assets

In connection with our acquisition of BakBone KK in March 2002, we recorded $221,000 in separately identifiable intangible assets. These intangible assets are amortized over the estimated useful life, or four years. Thus, we recognized $55,000 in amortization expense during the year ended March 31, 2003. We incurred no such charge during the year ended March 31, 2002.

Amortization of investment in affiliate

During the year ended March 31, 2002, we incurred $854,000 in amortization expense related to our purchase of a minority interest in BakBone KK in March of 2000. In March 2002, we acquired a majority interest in BakBone KK and discontinued the usage of the equity method of accounting for this subsidiary. Accordingly, the investment in affiliate balance was eliminated and, as such, we did not incur an amortization charge during the year ended March 31, 2003.

Amortization of goodwill

Effective April 1, 2002 and pursuant to SFAS No. 142, goodwill is no longer amortized, but is reviewed periodically for impairment. Therefore, we incurred no amortization expense during the year ended March 31, 2003 compared to $3.9 million of amortization expense during the year ended March 31, 2002.

Impairment of goodwill

We recorded goodwill impairment charges of $888,000 and $2.8 million for the years ended March 31, 2003 and 2002, respectively. The impairment charges in fiscal 2003 and 2002 relate to goodwill booked in connection with our June 2000 acquisition of Tracer Technologies, Inc. (Tracer) and its MagnaVault product line.

In connection with our acquisition of Tracer, we acquired exclusive intellectual property rights to MagnaVault. Since the initial acquisition date and through the MagnaVault “end of life” in November 2002, we marketed and sold MagnaVault as a stand-alone software product. MagnaVault revenues were flat during the first three quarters of the year ended March 31, 2002, with a notable decrease during the fourth quarter of the year ended March 31, 2002. Based on MagnaVault’s sales performance during the fourth quarter of the year ended March 31, 2002, we performed an impairment analysis of the Tracer goodwill. As of March 31, 2002, we determined that the carrying value of the Tracer goodwill exceeded its fair value as determined by the estimated discounted cash flows expected to be generated by the underlying assets. Therefore, we recorded an impairment charge of $2.8 million in the accompanying consolidated statement of operations for the year ended March 31, 2002, reflecting the difference between the carrying value and discounted projected future cash flows.

22

Table of Contents

During the first two quarters of fiscal 2003, total revenues generated by MagnaVault experienced a continued decline. This trend continued into the third quarter of fiscal 2003, and in November 2002, management decided to “end of life” the MagnaVault product, whereby all activities, with the exception of customer support, related to MagnaVault would cease permanently, effective December 31, 2002. In connection with this decision, we terminated several employees and closed our Maryland office facility. Based on this triggering event, in accordance with SFAS No. 142, we were required to perform an impairment analysis on the MagnaVault-related goodwill during the year ended March 31, 2003. The first step in the impairment analysis involved comparing the carrying values of the MagnaVault reporting units to their fair values. It was determined that the carrying values of the reporting units exceeded the estimated fair values, consequently, step two of the impairment test was required. As a result of step two, the related goodwill was deemed impaired and we recognized charges of $442,000 and $446,000 in the third and fourth quarters of fiscal 2003, respectively. These charges represented the amount by which the goodwill’s carrying value exceeded its estimated fair value. As of March 31, 2003, all MagnaVault-related goodwill had been amortized or written-off.

Provision for income taxes

During the year ended March 31, 2003, we recognized a provision for income taxes related to transactions between our foreign subsidiaries. Certain transactions between our foreign subsidiaries trigger tax liabilities in the respective jurisdictions in which we do business. Income taxes arising out of these transactions were immaterial during the year ended March 31, 2002.

Quarterly Operating Results

The following tables set forth unaudited quarterly operating information and financial data for each of the eight quarters beginning April 1, 2002 and ended March 31, 2004. This data has been prepared on the same basis as the audited consolidated financial statements contained elsewhere in this Annual Report and, in the opinion of management, includes all adjustments necessary for the fair presentation of the information for the periods presented. This information should be read in conjunction with the consolidated financial statements and related notes. The operating results and financial data in any quarter are not necessarily indicative of the results that may be expected for any future period.

Throughout fiscal 2004, we publicly reported our quarterly results in Canada and the United States under Canadian GAAP. As a part of the detailed review of our accounting practices discussed earlier, certain errors were identified in the revenue recognition of certain customer contracts for each of the first three quarters of fiscal 2004. Investors should rely solely on the U.S. GAAP quarterly financial data in this Annual Report which reflects the appropriate revenue recognition for these contracts and not on any other previously published quarterly results.

We believe that future operating results will be subject to quarterly fluctuations, and, as a result, we believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected in any future period.

23

Table of Contents