That "strategic alternative" could be an acquisition of all or part of the company by storage and security giant EMC, or even Hewlett-Packard, according to former employees.

Neither EMC nor NeoScale would comment about a possible acquisition. An executive still working at NeoScale, who preferred to remain anonymous, did say that the company was exploring strategic alternatives. That phrase is often a euphemism for looking to be acquired.

"Hopefully we'll have some resolution we can talk about soon," the executive said.

EMC has of late been making several acquisitions of both storage and security technology developers.

NeoScale, who's encryption and key management technology was adopted by several solution providers and their customers, has decided to focus more of its R&D on developing its Secure File System, or SFS, technology, according to former employees of the company.

That's a real shame, said solution providers who have found widespread acceptance of NeoScale's technology in their customers looking for ways to ensure compliance with new regulations aimed at ensuring the security of their data.

Gordon Nyquist of Mercury Storage, a Southfield, Mich.-based solution provider, said the NeoScale products were among the best his company has sold.

However, Nyquist said, NeoScale has been doing a disappointing job of communicating with its channel partners. "But we hope to work with them in the future," he said. "A number of clients and resellers are waiting for clear communications. A number of resellers have invested a lot of time and energy in evangelism"

Mark Tuggle, regional sales manager at USI, a Chicago-based solution provider, called NeoScale's technology awesome.

"Everybody we worked with at NeoScale were great people, and their product and support were great," Tuggle said. "We sold quite a bit of their products."

Unfortunately that stopped a couple of weeks ago when NeoScale laid off almost all the people who worked with USI and stopped selling maintenance contracts, Tuggle said.

"A couple of weeks ago, we sold an appliance and it was shipped before we were told we couldn't sell maintenance support," he said. "We told the customer to ship it back. We can't sell product like that."

However, Tuggle said, he has checked, and NeoScale still has technical support available for the appliances.

Next: Maintenance Contracts Reportedly Not For Sale

One former NeoScale employee, who preferred to remain anonymous, confirmed that customers cannot buy maintenance contracts for now, which hurt sales. "One account was begging to buy the appliances, but the company wouldn't sell the maintenance contract," the former employee said. "What does that mean for other customers who just purchased their appliances?"

For USI, the answer is sell more encryption appliances from Decru, which was acquired by Network Appliance in June of 2005.

"Fortunately we're also a NetApp partner," Tuggle said. "We're converting customers to Decru."

The company's encryption appliance business started unraveling in mid-October when MTI Technology, a Tustin, Calif.-based storage solution provider, declared Chapter 11 bankruptcy.

The former NeoScale employee said that MTI owed NeoScale about $800,000 as a result of the MTI bankruptcy, a figure not denied by an executive still working at NeoScale.

A second former NeoScale employee, who preferred to remain anonymous, said MTI should have been recognized earlier as a problem. "We should have been a little more diligent in our dealings with them," the employee said.

The other problem at NeoScale, according to a couple of former employees, is that the company's Board of Directors and its investors looked at the encryption market and saw that it is difficult for a stand-alone appliance vendor to succeed in a market where several other vendors, including tape manufacturers, are implementing encryption in different ways, including native tape encryption.

A third former NeoScale employee, who preferred to remain anonymous, said employees started hearing rumors on Oct. 16 about a possible closing of the encryption business about a week after being told not to pay any invoices.

The former employee said that NeoScale CEO Barbara Nelson told employees on a company-wide call on Oct. 17 that the company was insolvent.

Shortly thereafter, most of the employees, except for a few who were mainly working on SFS technology, were let go without severance pay, bonuses, and even travel reimbursement. Some employees were owed several thousands of dollars in travel reimbursement, with one being owed over $30,000, the former executive said.

Reimbursements and current commissions are in the process of being paid, the current NeoScale executive said.

"The worst part is that many people who were let go were there since the inception of the company," the former employee said. "They just walked us out the door."

Former employees and solution providers said that NeoScale left the market early, and that there were many opportunities out there. A couple of former employees said the company had six open requisitions for sales people.