e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 0-23298

QLogic Corporation

(Exact name of registrant as specified in its charter)


Delaware		33-0537669
(State of incorporation)		(I.R.S. Employer Identification No.)

26650 Aliso Viejo Parkway

Aliso Viejo, California 92656

(Address of principal executive office and zip code)

(949) 389-6000

(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of October 25, 2007, 136,885,225 shares of the Registrant’s common stock were outstanding.

PART I.
FINANCIAL INFORMATION


Item 1.	*Financial Statements*

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,			April 1,
	2007			2007
	(Unaudited; In thousands,
	except share and per share
	amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	99,646		$	76,804
Short-term marketable securities		292,436			467,118
Accounts receivable, less allowance for doubtful accounts of $1,098 and $1,075 as of September 30, 2007 and April 1, 2007, respectively		72,201			73,538
Inventories		35,071			38,935
Deferred tax assets		35,009			27,866
Other current assets		13,188			12,892

Total current assets		547,551			697,153
Property and equipment, net		90,774			90,913
Goodwill		103,734			102,910
Purchased intangible assets, net		44,632			55,093
Deferred tax assets		16,976			49
Other assets		25,147			25,241

	$	828,814		$	971,359


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,403		$	29,280
Accrued compensation		23,374			34,483
Accrued taxes		19,913			15,729
Deferred revenue		11,565			7,368
Other current liabilities		10,616			7,674

Total current liabilities		93,871			94,534
Accrued taxes		42,579			—
Deferred tax liabilities		—			2,294

Total liabilities		136,450			96,828

Subsequent event (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value; 500,000,000 shares authorized; 198,982,000 and 197,907,000 shares issued at September 30, 2007 and April 1, 2007, respectively		199			198
Additional paid-in capital		636,553			608,515
Retained earnings		1,030,303			988,728
Accumulated other comprehensive income		130			169
Treasury stock, at cost: 59,513,000 and 42,490,000 shares at September 30, 2007 and April 1, 2007, respectively		(974,821	)		(723,079	)

Total stockholders’ equity		692,364			874,531

	$	828,814		$	971,359

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended				Six Months Ended
	September 30,		October 1,		September 30,		October 1,
	2007		2006		2007		2006
	(Unaudited; In thousands, except per share amounts)

Net revenues	$	140,326	$	145,298	$	280,103	$	281,990
Cost of revenues		49,013		45,756		99,876		89,076

Gross profit		91,313		99,542		180,227		192,914

Operating expenses:
Engineering and development		33,058		32,619		67,742		65,539
Sales and marketing		20,639		20,108		41,812		42,509
General and administrative		8,804		7,594		16,990		16,036
Special charges		1,636		—		3,772		—
Purchased in-process research and development		—		—		—		1,910

Total operating expenses		64,137		60,321		130,316		125,994

Operating income		27,176		39,221		49,911		66,920
Interest and other income, net		5,753		5,844		12,019		12,686

Income before income taxes		32,929		45,065		61,930		79,606
Income taxes		10,349		14,618		20,355		28,083

Net income	$	22,580	$	30,447	$	41,575	$	51,523

Net income per share:
Basic	$	0.16	$	0.19	$	0.28	$	0.32

Diluted	$	0.16	$	0.19	$	0.28	$	0.32

Number of shares used in per share calculations:
Basic		144,782		158,468		148,980		160,008

Diluted		145,202		159,827		149,711		161,362

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	September 30,			October 1,
	2007			2006
	(Unaudited; In thousands)

Cash flows from operating activities:
Net income	$	41,575		$	51,523
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,964			12,157
Stock-based compensation		16,187			15,035
Acquisition-related:
Amortization of purchased intangible assets		9,489			5,481
Stock-based compensation		(38	)		5,472
Purchased in-process research and development		—			1,910
Deferred income taxes		(9,023	)		(9,732	)
Provision for losses on accounts receivable		188			480
Loss on disposal of property and equipment		795			135
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		1,149			(2,104	)
Inventories		3,864			(4,252	)
Other assets		365			1,120
Accounts payable		(1,024	)		(2,821	)
Accrued compensation		(8,439	)		(4,397	)
Accrued taxes		28,548			6,134
Deferred revenue		4,197			2,042
Other liabilities		(44	)		315

Net cash provided by operating activities		102,753			78,498

Cash flows from investing activities:
Purchases of marketable securities		(75,247	)		(122,422	)
Sales and maturities of marketable securities		249,883			211,928
Additions to property and equipment		(15,078	)		(16,961	)
Acquisition of businesses, net of cash acquired		67			(92,136	)
Restricted cash placed in escrow		—			(15,000	)

Net cash provided by (used in) investing activities		159,625			(34,591	)

Cash flows from financing activities:
Proceeds from issuance of stock under stock plans		8,631			5,528
Tax benefit from issuance of stock under stock plans		589			784
Purchase of treasury stock		(248,756	)		(85,616	)

Net cash used in financing activities		(239,536	)		(79,304	)

Net increase (decrease) in cash and cash equivalents		22,842			(35,397	)
Cash and cash equivalents at beginning of period		76,804			125,192

Cash and cash equivalents at end of period	$	99,646		$	89,795

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1.	Basis of Presentation

In the opinion of management of QLogic Corporation (QLogic or the Company), the accompanying unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2007. The results of operations for the three and six months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation in the accompanying condensed consolidated financial statements.


Note 2.	Acquisitions and Dispositions

In November 2006, the Company acquired SilverStorm Technologies, Inc. (SilverStorm) by merger. Cash consideration was $59.9 million, including $59.4 million for all outstanding SilverStorm common stock, vested stock options and stock warrants and $0.5 million for direct acquisition costs. Based on a preliminary purchase price allocation in fiscal 2007, the Company allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as purchased in-process research and development. The Company is in the process of finalizing the valuation of the intangible assets acquired and expects to finalize the purchase price allocation in fiscal 2008, which may result in adjustments to the amounts recorded related to the availability of net operating loss carryforwards and other tax benefits from the acquisition.

In August 2007, the Company reevaluated the use of the intellectual property acquired from Troika Networks, Inc. in November 2005. As a result, the Company suspended internal development of the underlying acquired technology and entered into a nonexclusive license of the technology with a third party. The Company expects to recover the carrying value of the related intangible assets from future royalty income. In addition, the Company sold all of the related inventory and equipment to the licensee.


Note 3.	Inventories

Components of inventories are as follows:


	September 30,		April 1,
	2007		2007
	(In thousands)

Raw materials	$	8,174	$	5,937
Finished goods		26,897		32,998

	$	35,071	$	38,935

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 4.	Purchased Intangible Assets

Purchased intangible assets consists of the following:


	September 30, 2007						April 1, 2007
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Value		Amortization		Value		Value		Amortization		Value
	(In thousands)

Acquisition-related intangibles:
Core/developed technology	$	51,500	$	15,708	$	35,792	$	54,300	$	11,138	$	43,162
Customer relationships		9,700		2,964		6,736		10,400		1,581		8,819
Other		775		310		465		1,400		322		1,078

		61,975		18,982		42,993		66,100		13,041		53,059
Other purchased intangibles:
Technology-related		2,596		957		1,639		2,596		562		2,034

	$	64,571	$	19,939	$	44,632	$	68,696	$	13,603	$	55,093

A summary of the amortization expense, by classification, included in the accompanying condensed consolidated statements of income is as follows:


	Three Months Ended				Six Months Ended
	September 30,		October 1,		September 30,		October 1,
	2007		2006		2007		2006
	(In thousands)

Cost of revenues	$	4,290	$	2,446	$	7,705	$	5,634
Engineering and development		78		66		251		133
Sales and marketing		886		225		1,928		450

	$	5,254	$	2,737	$	9,884	$	6,217

The following table presents the estimated future amortization expense of purchased intangible assets as of September 30, 2007:


Fiscal	(In thousands)

2008 (remaining six months)	$	7,681
2009		14,583
2010		11,987
2011		8,678
2012		1,703

	$	44,632


Note 5.	Treasury Stock

In November 2005, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to purchase up to $200 million of its outstanding common stock. During the three months ended July 1, 2007, the Company purchased 1.5 million shares for an aggregate purchase price of $26.9 million, which completed this program.

In April 2007, the Company’s Board of Directors approved a new stock repurchase program that authorized the Company to purchase up to $300 million of its outstanding common stock. During the six months ended

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

September 30, 2007, the Company purchased 15.5 million shares of its common stock under this program for an aggregate purchase price of $224.8 million, of which $6.0 million was pending settlement and is included in other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2007. As of October 25, 2007, the Company had purchased an additional 2.6 million shares of its common stock under this program for an aggregate purchase price of $34.7 million.

Repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.


Note 6.	Special Charges

During the six months ended September 30, 2007, the Company recorded special charges of $3.8 million associated with the consolidation and elimination of certain engineering activities. The special charges consist of $3.5 million for exit costs and $0.3 million for asset impairments.

Activity and liability balances for the exit costs for the six months ended September 30, 2007 are as follows:


				Contract
	Workforce			Cancellation
	Reductions			and Other			Total
	(In thousands)

Charged to costs and expenses	$	2,517		$	923		$	3,440
Cash payments		(2,031	)		(610	)		(2,641	)
Non-cash adjustments		—			64			64

Balance as of September 30, 2007	$	486		$	377		$	863

Workforce reduction costs relate to severance arrangements. Contract cancellation fees were paid during the second quarter of fiscal 2008. Workforce reductions and other costs that had not been paid are included in other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2007 and are expected to be paid over the terms of the related agreements, principally during fiscal 2008.


Note 7.	Comprehensive Income

The components of comprehensive income are as follows:


	Three Months Ended					Six Months Ended
	September 30,			October 1,		September 30,			October 1,
	2007			2006		2007			2006
	(In thousands)

Net income	$	22,580		$	30,447	$	41,575		$	51,523
Other comprehensive income (loss):
Change in unrealized gains/losses on available-for-sale investments		(485	)		605		(39	)		(2,527	)

	$	22,095		$	31,052	$	41,536		$	48,996


Note 8.	Stock-Based Compensation

During the six months ended September 30, 2007, the Company granted options to purchase 3,492,000 shares of common stock and 842,000 restricted stock units with weighted average grant date fair values of $6.58 and $16.52 per share, respectively.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of stock-based compensation expense, excluding stock-based compensation related to acquisitions, recorded by functional line item in the accompanying condensed consolidated statements of income is as follows:


	Three Months Ended				Six Months Ended
	September 30,		October 1,		September 30,		October 1,
	2007		2006		2007		2006
	(In thousands)

Cost of revenues	$	491	$	424	$	1,065	$	936
Engineering and development		3,508		2,419		7,280		5,243
Sales and marketing		1,649		1,425		3,274		4,116
General and administrative		2,169		2,103		4,568		4,740

	$	7,817	$	6,371	$	16,187	$	15,035

The Company entered into stock-based performance plans with certain former employees of PathScale, Inc. and Troika Networks, Inc. who became employees of QLogic as of the respective acquisition date. The performance plans provide for the issuance of QLogic common stock based on the achievement of certain performance milestones and continued employment with QLogic. During the three months ended September 30, 2007, the Company determined that the criteria for payment to certain individuals would not be met due to their termination of employment with the Company. Accordingly, the Company reversed the previously accrued stock-based compensation for such individuals during the three months ended September 30, 2007. As a result of this adjustment, the Company recognized a net reversal of expense of $0.7 million and $38,000 for the three and six months ended September 30, 2007, respectively, related to the stock-based performance plans. The Company recorded $2.6 million and $5.5 million of stock-based compensation expense during the three and six months ended October 1, 2006, respectively, related to the stock-based performance plans. In addition, the Company could recognize up to $3.0 million of additional compensation expense through April 2010.


Note 9.	Interest and Other Income, Net

Components of interest and other income, net are as follows:


	Three Months Ended						Six Months Ended
	September 30,			October 1,			September 30,			October 1,
	2007			2006			2007			2006
	(In thousands)

Interest income	$	5,604		$	6,163		$	11,803		$	12,801
Gain on sales of marketable securities		24			18			169			130
Loss on sales of marketable securities		(113	)		(592	)		(178	)		(978	)
Other		238			255			225			733

	$	5,753		$	5,844		$	12,019		$	12,686


Note 10.	Income Taxes

As of April 2, 2007, the Company adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The adoption of FIN 48 did not have a material impact on the Company’s consolidated results of operations or financial position. Upon adoption, the Company had $32.9 million of total gross unrecognized tax benefits. If these

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

unrecognized tax benefits were recognized, $17.5 million, net of tax benefits from foreign tax credits, state income taxes and timing adjustments, would favorably affect the Company’s effective income tax rate.

As of September 30, 2007, the Company had $35.8 million of total gross unrecognized tax benefits. If these unrecognized tax benefits were recognized, $20.2 million, net of tax benefits from foreign tax credits, state income taxes and timing adjustments, would favorably affect the Company’s effective income tax rate.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the unrecognized tax benefits noted above, the Company had accrued $4.1 million and $3.9 million of interest, net of the related tax benefit, and penalties as of September 30, 2007 and April 2, 2007, respectively.

The Company conducts business globally and files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. federal income tax examinations for years through fiscal 2003. The Company’s 2005 and 2006 fiscal year income tax returns are currently under routine examination by the Internal Revenue Service. With limited exceptions, the Company is no longer subject to state and foreign income tax examinations by taxing authorities for years through fiscal 2002.

As of September 30, 2007, it is reasonably possible that the Company’s liability for uncertain tax positions may be reduced by as much as $7.9 million as a result of either the settlement of tax positions with various tax authorities or by virtue of the statute of limitations expiring through the end of fiscal 2008.


Note 11.	Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:


	Three Months Ended				Six Months Ended
	September 30,		October 1,		September 30,		October 1,
	2007		2006		2007		2006
	(In thousands, except per share amounts)

Net income	$	22,580	$	30,447	$	41,575	$	51,523

Shares:
Weighted-average shares outstanding — basic		144,782		158,468		148,980		160,008
Dilutive potential common shares, using treasury stock method		420		1,359		731		1,354

Weighted-average shares outstanding — diluted		145,202		159,827		149,711		161,362

Net income per share:
Basic	$	0.16	$	0.19	$	0.28	$	0.32

Diluted	$	0.16	$	0.19	$	0.28	$	0.32

Stock-based awards, including stock options and restricted stock units, representing 25,564,000 and 24,790,000 shares of common stock have been excluded from the diluted net income per share calculations for the three and six months ended September 30, 2007, respectively, and 20,388,000 and 19,763,000 shares of common stock have been excluded from the diluted net income per share calculations for the three and six months ended October 1, 2006, respectively. These stock-based awards have been excluded from the diluted net income per share calculations because their effect would have been antidilutive. Contingently issuable shares of the Company’s common stock pursuant to performance plans associated with certain acquisitions are included, as appropriate, in the calculation of diluted net income per share as of the beginning of the period in which the respective performance conditions are met.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes. This discussion also contains descriptions of our expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this report are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, descriptions of our expectations regarding future trends affecting our business and other statements regarding future events or our objectives, goals, strategies, beliefs and underlying assumptions that are other than statements of historical fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed in Part II, Item 1A “Risk Factors” and elsewhere in this report. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a supplier of high-performance storage networking solutions and network infrastructure solutions, which are sold primarily to original equipment manufacturers, or OEMs, and distributors. Our Host Products consist primarily of Fibre Channel and Internet Small Computer Systems Interface, or iSCSI, host bus adapters, or HBAs; and InfiniBand^® host channel adapters, or HCAs. Our Network Products consist primarily of Fibre Channel switches, including core, blade and stackable switches; InfiniBand switches, including edge fabric switches and multi-protocol fabric directors; and storage routers for bridging Fibre Channel and iSCSI networks. Our Silicon Products consist primarily of protocol chips and management controllers. All of these solutions address the storage area network, or SAN, or server fabric connectivity infrastructure requirements of small, medium and large enterprises. Our products based on InfiniBand technology are designed for the emerging high performance computing, or HPC, environments.

Our products are incorporated in solutions from a number of OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company, International Business Machines Corporation, Network Appliance, Inc., Sun Microsystems, Inc. and many others.

Business Combinations

In November 2006, we acquired SilverStorm Technologies, Inc. (SilverStorm) by merger. The acquisition of SilverStorm expanded our portfolio of InfiniBand solutions to include edge fabric switches and multi-protocol fabric directors. Based on a preliminary purchase price allocation in fiscal 2007, we allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as purchased in-process research and development. We are in the process of finalizing the valuation of the intangible assets acquired and expect to finalize the purchase price allocation in fiscal 2008, which may result in adjustments to the amounts recorded related to the availability of net operating loss carryforwards and other tax benefits from the acquisition. The results of operations for SilverStorm have been included in the condensed consolidated financial statements since the date of acquisition.

Second Quarter Financial Highlights and Other Information

A summary of the key factors and significant events which impacted our financial performance during the second quarter of fiscal 2008 are as follows:


	•	Net revenues for the second quarter of fiscal 2008 increased to $140.3 million from $139.8 million for the first quarter of fiscal 2008.


	•	Gross profit as a percentage of net revenues increased to 65.1% for the second quarter of fiscal 2008 from 63.6% for the first quarter of fiscal 2008.

	•	Operating income as a percentage of net revenues increased to 19.4% for the second quarter of fiscal 2008 from 16.3% in the first quarter of fiscal 2008 due primarily to a decline in operating expenses and the increase in our gross profit.

	•	Net income of $22.6 million, or $0.16 per diluted share, in the second quarter of fiscal 2008 increased from $19.0 million, or $0.12 per diluted share, in the first quarter of fiscal 2008. Net income included stock-based compensation expense, acquisition-related charges, special charges, and the related income tax effects, totaling $9.9 million for the second quarter of fiscal 2008 compared to $11.2 million for the first quarter of fiscal 2008.

	•	Cash, cash equivalents and marketable securities of $392.1 million at September 30, 2007 decreased $86.6 million from the balance at the end of the first quarter of fiscal 2008. This decrease is primarily due to $150.6 million of cash used for repurchases of our common stock, partially offset by $67.2 million of cash generated from operations during the second quarter of fiscal 2008.

	•	Accounts receivable was $72.2 million as of September 30, 2007 and declined from $77.3 million as of July 1, 2007. Days sales outstanding (DSO) in receivables decreased to 47 days as of September 30, 2007 from 50 days as of July 1, 2007. Our accounts receivable and DSO are primarily affected by linearity of shipments within the quarter and collections performance. Based on our customers’ procurement models and our current customer mix, we expect that DSO in the future will range from 45 to 55 days. There can be no assurance that we will be able to maintain our DSO consistent with historical periods and it may increase in the future.

	•	Inventories were $35.1 million as of September 30, 2007 and declined from $38.0 million as of July 1, 2007. Our annualized inventory turns in the second quarter of fiscal 2008 increased to 5.6 from the 5.4 turns in the first quarter of fiscal 2008.

Results of Operations

Net Revenues

A summary of the components of our net revenues is as follows:


	Three Months Ended						Six Months Ended
	September 30,			October 1,			September 30,			October 1,
	2007			2006			2007			2006
	(Dollars in millions)

Net revenues:
Host Products	$	104.4		$	100.4		$	208.7		$	190.9
Network Products		22.0			20.2			46.4			38.6
Silicon Products		11.5			20.2			21.1			45.6
Other		2.4			4.5			3.9			6.9

Total net revenues	$	140.3		$	145.3		$	280.1		$	282.0

Percentage of net revenues:
Host Products		74	%		69	%		74	%		68	%
Network Products		16			14			17			14
Silicon Products		8			14			8			16
Other		2			3			1			2

Total net revenues		100	%		100	%		100	%		100	%

The global marketplace for storage networking solutions and network infrastructure solutions continues to expand in response to the information storage requirements of enterprise business environments, as well as the

emerging market for solutions in HPC environments. This market expansion has resulted in increased volume shipments of our Host Products and Network Products. However, these markets have been characterized by rapid advances in technology and related product performance, which has generally resulted in declining average selling prices over time. In general, our revenues have been favorably affected by increases in units sold as a result of market expansion and the release of new products. The favorable effect on our revenues as a result of increases in volume has been partially offset by the impact of declining average selling prices.

Our net revenues are derived primarily from the sale of Host Products and Network Products. Net revenues decreased 3% to $140.3 million for the three months ended September 30, 2007 from $145.3 million for the three months ended October 1, 2006. This decrease was primarily the result of an $8.7 million, or 43%, decrease in revenue from Silicon Products, partially offset by a $4.0 million, or 4%, increase in Host Products and a $1.8 million, or 8%, increase in revenue from Network Products. The decrease in revenue from Silicon Products from the same period in the prior year was due primarily to a decrease in units sold. We expect revenue from Silicon Products to continue to decrease over time. The increase in revenue from Host Products was primarily due to a 21% increase in the quantity of HBAs sold partially offset by a 15% decrease in average selling prices of these products. This HBA volume increase was primarily driven by an over 200% increase in the quantity of Fibre Channel mezzanine cards sold, which are used in blade servers and have a lower average selling price than standard HBA products. The increase in revenue from Network Products was primarily due to the addition of InfiniBand switches to our product portfolio as a result of our acquisition of SilverStorm, partially offset by a 17% decrease in Fibre Channel switch revenue. The decrease in Fibre Channel switch revenue was primarily due to a decline in revenue from our legacy and end-of-life products, which was not offset by revenue from our more recent product offerings. Net revenues for the three months ended September 30, 2007 included $2.4 million of other revenue. Other revenue, which primarily includes royalties and service fees, is unpredictable and we do not expect it to be significant to our overall revenues.

Net revenues decreased to $280.1 million for the six months ended September 30, 2007 from $282.0 million for the six months ended October 1, 2006. This decrease was primarily the result of a $24.5 million, or 54%, decrease in revenue from Silicon Products, partially offset by a $17.8 million, or 9%, increase in revenue from Host Products and a $7.8 million, or 20%, increase in revenue from Network Products. The decrease in revenue from Silicon Products from the same period in the prior year was due primarily to a decrease in units sold. The increase in revenue from Host Products was primarily due to a 25% increase in the quantity of HBAs sold partially offset by a 13% decrease in average selling prices of these products. This HBA volume increase was primarily driven by an over 250% increase in the quantity of Fibre Channel mezzanine cards sold. The increase in revenue from Network Products was primarily due to the addition of InfiniBand switches to our product portfolio as a result of our acquisition of SilverStorm. Net revenues for the six months ended September 30, 2007 included $3.9 million of other revenue.

A small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top ten customers accounted for 85% of net revenues during the six months ended September 30, 2007 and 80% of net revenues during the fiscal year ended April 1, 2007. Three of our customers each represented 10% or more of net revenues for fiscal 2007, and these same three customers continued to be the only customers representing 10% or more of net revenues for the six months ended September 30, 2007.

We believe that our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Additionally, customers’ economic and market conditions frequently change. Accordingly, there can be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition or results of operations.

Revenues by geographic area are presented based upon the country of destination. Net revenues by geographic area are as follows:


	Three Months Ended				Six Months Ended
	September 30,		October 1,		September 30,		October 1,
	2007		2006		2007		2006
	(In millions)

United States	$	68.5	$	79.1	$	146.3	$	157.4
Europe, Middle East and Africa		34.6		31.3		65.2		58.1
Asia-Pacific and Japan		28.8		27.8		51.8		57.0
Rest of the world		8.4		7.1		16.8		9.5

Total net revenues	$	140.3	$	145.3	$	280.1	$	282.0

Gross Profit

Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of the cost of purchased products, assembly and test services; costs associated with product procurement, inventory management and product quality; and the amortization of purchased intangible assets. A summary of our gross profit and related percentage of net revenues is as follows:


	Three Months Ended						Six Months Ended
	September 30,			October 1,			September 30,			October 1,
	2007			2006			2007			2006
	(Dollars in millions)

Gross profit	$	91.3		$	99.5		$	180.2		$	192.9
Percentage of net revenues		65.1	%		68.5	%		64.3	%		68.4	%

Gross profit for the three months ended September 30, 2007 decreased $8.2 million, or 8%, from gross profit for the three months ended October 1, 2006. The gross profit percentage for the three months ended September 30, 2007 was 65.1% and declined from 68.5% for the corresponding period in the prior year. The decline in gross profit percentage was primarily impacted by a shift in product mix, including the addition of InfiniBand products, and an increase of $1.8 million in amortization of purchased intangible assets.

Gross profit for the six months ended September 30, 2007 decreased $12.7 million, or 7%, from gross profit for the six months ended October 1, 2006. The gross profit percentage for the six months ended September 30, 2007 was 64.3% and declined from 68.4% for the corresponding period in the prior year. The decline in gross profit percentage was primarily impacted by a shift in product mix, including the addition of InfiniBand products, and an increase of $2.1 million in amortization of purchased intangible assets.

Our ability to maintain our current gross profit percentage can be significantly affected by factors such as the results of our investment in engineering and development activities, supply costs, the worldwide semiconductor foundry capacity, the mix of products shipped, the transition to new products, competitive price pressures, the timeliness of volume shipments of new products, the level of royalties received, our ability to achieve manufacturing cost reductions and amortization of purchased intangible assets. We anticipate that it will be increasingly difficult to reduce manufacturing costs. As a result of these and other factors, it may be difficult to maintain our gross profit percentage consistent with historical trends and it may decline in the future.

Operating Expenses

Our operating expenses are summarized in the following table:


	Three Months Ended						Six Months Ended
	September 30,			October 1,			September 30,			October 1,
	2007			2006			2007			2006
	(Dollars in millions)

Operating expenses:
Engineering and development	$	33.1		$	32.6		$	67.7		$	65.6
Sales and marketing		20.6			20.1			41.8			42.5
General and administrative		8.8			7.6			17.0			16.0
Special charges		1.6			—			3.8			—
Purchased in-process research and development		—			—			—			1.9

Total operating expenses	$	64.1		$	60.3		$	130.3		$	126.0

Percentage of net revenues:
Engineering and development		23.5	%		22.5	%		24.2	%		23.2	%
Sales and marketing		14.7			13.8			14.9			15.1
General and administrative		6.3			5.2			6.1			5.7
Special charges		1.2			—			1.3			—
Purchased in-process research and development		—			—			—			0.7

Total operating expenses		45.7	%		41.5	%		46.5	%		44.7	%

Engineering and Development. Engineering and development expenses consist primarily of compensation and related benefit costs, development-related engineering and material costs, occupancy costs and related computer support costs. During the three months ended September 30, 2007, engineering and development expenses increased to $33.1 million from $32.6 million for the three months ended October 1, 2006. Engineering and development expenses increased during the three months ended September 30, 2007 from the comparable period in the prior year due primarily to the SilverStorm acquisition, partially offset by a decrease in stock-based compensation, including acquisition-related charges, of $1.6 million primarily from workforce reductions associated with the consolidation and elimination of certain engineering activities. See further discussion under “Special Charges.”

During the six months ended September 30, 2007, engineering and development expenses increased to $67.7 million from $65.6 million for the six months ended October 1, 2006. Engineering and development expenses increased during the six months ended September 30, 2007 from the comparable period in the prior year due primarily to an increase of $2.5 million in cash compensation and related benefit costs as a result of an increase in headcount, including the impact of the SilverStorm acquisition, partially offset by a decrease in headcount resulting from workforce reductions associated with the consolidation of certain engineering activities. See further discussion under “Special Charges.” Engineering and development expenses were also impacted by an increase in stock-based compensation, excluding acquisition-related charges, of $2.0 million and an increase in depreciation and equipment costs of $1.9 million. These increases were offset by a decrease in acquisition-related stock-based compensation of $4.2 million primarily from workforce reductions associated with the consolidation and elimination of certain engineering activities.

We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities. We expect engineering and development expenses to increase in the future as a result of continued, and increasing costs associated with, new product development, including our recent acquisitions.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses of $20.6 million for the three months ended September 30, 2007 increased from $20.1 million for the three months ended October 1, 2006, primarily due to the amortization of purchased intangible assets related to the acquisition of SilverStorm.

Sales and marketing expenses decreased to $41.8 million for the six months ended September 30, 2007 from $42.5 million for the six months ended October 1, 2006. The decrease in sales and marketing expenses was due primarily to a decrease in stock-based compensation of $2.0 million, including stock-based compensation related to acquisitions, and a $1.5 million decrease in promotional costs, including the costs for certain sales and marketing programs, partially offset by a $1.8 million increase in amortization of purchased intangible assets related to the acquisition of SilverStorm and an increase in depreciation and equipment costs of $0.7 million.

We believe continued investments in our sales and marketing organizational infrastructure and related marketing programs are critical to the success of our strategy of expanding our customer base and enhancing relationships with our existing customers. As a result, we expect sales and marketing expenses to increase in the future.

General and Administrative. General and administrative expenses consist primarily of compensation and related benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include accounting, legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses increased to $8.8 million for the three months ended September 30, 2007 from $7.6 million for the three months ended October 1, 2006. The increase in general and administrative expenses was due primarily to an increase of $0.4 million for consulting services and an increase of $0.4 million in cash compensation and related benefit costs.

General and administrative expenses increased to $17.0 million for the six months ended September 30, 2007 from $16.0 million for the six months ended October 1, 2006. The increase in general and administrative expenses was due primarily to an increase of $0.6 million for legal and consulting services and an increase of $0.5 million in cash compensation and related benefit costs.

In connection with the anticipated growth of our business, we expect general and administrative expenses will increase in the future.

Special Charges. During the three and six months ended September 30, 2007, we recorded special charges of $1.6 million and $3.8 million, respectively, associated with the consolidation and elimination of certain engineering activities. The special charges consist of $3.5 million for exit costs and $0.3 million for asset impairments.

The exit costs were comprised of workforce reductions, contract cancellation costs and other costs. The workforce reduction costs relate to severance arrangements and totaled $2.5 million, of which $2.0 million was paid during the six months ended September 30, 2007. Contract cancellation and other costs totaled $0.9 million and $0.6 million of these costs were paid as of September 30, 2007. The remaining balances for workforce reductions and other costs are expected to be paid over the terms of the related agreements, principally in fiscal 2008.

Interest and Other Income, Net

Components of our interest and other income, net are as follows:


	Three Months Ended						Six Months Ended
	September 30,			October 1,			September 30,			October 1,
	2007			2006			2007			2006
	(In millions)

Interest income	$	5.6		$	6.2		$	11.8		$	12.8
Gain on sales of marketable securities		—			—			0.2			0.1
Loss on sales of marketable securities		(0.1	)		(0.6	)		(0.2	)		(0.9	)
Other		0.3			0.2			0.2			0.7

	$	5.8		$	5.8		$	12.0		$	12.7

Interest and other income is comprised primarily of interest income related to our portfolio of marketable securities.

Income Taxes

Our effective income tax rate was 33% and 35% for the six months ended September 30, 2007 and October 1, 2006, respectively. The decrease in the effective tax rate was primarily due to a greater percentage of worldwide income being attributable to foreign operations and taxed in jurisdictions outside of the United States. We expect the annual effective tax rate for fiscal 2008 to approximate 34% as compared to our annual effective tax rate of 32% for fiscal 2007. The annual rate for fiscal 2007 reflects tax benefits associated with the resolution of routine tax examinations and the reversal of tax reserves as a result of the expiration of the federal statute of limitations. Given the increased global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it has become increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate. Additionally, our effective tax rate may be impacted by the tax effects of acquisitions, stock-based compensation and uncertain tax positions.

As of April 2, 2007, we adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The adoption of FIN 48 did not have a material impact on our consolidated results of operations or financial position.

Liquidity and Capital Resources

Our combined balances of cash, cash equivalents and marketable securities decreased to $392.1 million at September 30, 2007 from $543.9 million at April 1, 2007. The decrease in cash, cash equivalents and marketable securities was due primarily to the purchase of our common stock pursuant to our stock repurchase programs, partially offset by our cash generated from operations. We believe that our existing cash, cash equivalents, marketable securities and expected cash flow from operations will provide sufficient funds to finance our operations for at least the next twelve months. However, it is possible that we may need to supplement our existing sources of liquidity to finance our activities beyond the next twelve months or for the future acquisition of businesses, products or technologies. In addition, our future capital requirements will depend on a number of factors, including changes in the markets we address, our revenues and the related manufacturing and operating costs, product development efforts and requirements for production capacity. In order to fund any additional capital requirements, we may seek to obtain debt financing or issue additional shares of our common stock. There can be no assurance that any additional financing, if necessary, will be available on terms acceptable to us or at all.

Cash provided by operating activities was $102.8 million for the six months ended September 30, 2007 and $78.5 million for the six months ended October 1, 2006. Operating cash flow for the six months ended September 30, 2007 reflects our net income of $41.6 million, net non-cash charges of $32.6 million and a net decrease in the non-cash components of working capital of $28.6 million. The decrease in the non-cash components of working capital was primarily due to a $28.5 million increase in accrued taxes, a $4.2 million increase in deferred revenue and a $3.9 million decrease in inventory, partially offset by an $8.4 million decrease in accrued compensation. The changes in accrued taxes and accrued compensation were primarily due to the timing of payment obligations.

Cash provided by investing activities was $159.6 million for the six months ended September 30, 2007 and consisted primarily of net sales and maturities of marketable securities of $174.6 million, partially offset by additions to property and equipment of $15.1 million. During the six months ended October 1, 2006, cash used in investing activities of $34.6 million consisted of $107.1 million of cash used for the acquisition of PathScale including the $15.0 million placed in escrow, net of cash acquired of $3.0 million, and additions to property and equipment of $17.0 million, partially offset by net sales and maturities of marketable securities of $89.5 million.

As our business grows, we expect capital expenditures to increase in the future as we continue to invest in machinery and equipment, more costly engineering and production tools for new technologies, and enhancements to our corporate information technology infrastructure. In addition, we had previously entered into an operating lease for a facility in Minnesota, which contained a purchase option. We have notified the landlord of our intent to exercise the purchase option and expect to finalize the purchase of the facility for approximately $20 million during the third quarter of fiscal 2008.

Cash used in financing activities of $239.5 million for the six months ended September 30, 2007 resulted from our purchase of $248.8 million of common stock under our stock repurchase programs, partially offset by $8.6 million of proceeds from the issuance of common stock under our stock plans and a related $0.6 million tax benefit. During the six months ended October 1, 2006, cash used in financing activities of $79.3 million resulted from our purchase of $85.6 million of common stock under our stock repurchase programs, partially offset by $5.5 million of proceeds from the issuance of common stock under our stock plans and a related $0.8 million tax benefit.

Since fiscal 2003, we have had stock repurchase programs that authorized us to purchase up to an aggregate of $1.05 billion of our outstanding common stock. The most recent program was approved in April 2007 and authorized us to repurchase up to $300 million of our outstanding common stock. As of September 30, 2007, we had repurchased a total of 59.5 million shares of common stock under these programs for an aggregate purchase price of $974.8 million. During the six months ended September 30, 2007, we repurchased 17.0 million shares for an aggregate purchase price of $251.7 million, of which $6.0 million was pending settlement as of September 30, 2007. As of October 25, 2007, we repurchased an additional 2.6 million shares of our common stock under this program for an aggregate purchase price of $34.7 million.

We have certain contractual obligations and commitments to make future payments in the form of non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements. A summary of our contractual obligations as of September 30, 2007, and their impact on our cash flows in future fiscal years, is as follows:


	2008
	(Remaining
	six months)		2009		2010		2011		2012		Thereafter		Total
	(In millions)

Operating leases	$	2.3	$	3.3	$	2.1	$	1.1	$	0.6	$	0.1	$	9.5
Non-cancelable purchase obligations		43.4		—		—		—		—		—		43.4

Total	$	45.7	$	3.3	$	2.1	$	1.1	$	0.6	$	0.1	$	52.9

Additionally, we have entered into an operating lease for a facility in Minnesota, which contained a purchase option. In October 2007, we notified the landlord of our intent to exercise the purchase option and expect to finalize the purchase of the facility for approximately $20 million during the third quarter of fiscal 2008. The future minimum lease payments associated with this lease are not included in the table above.

We adopted FIN 48 during the first quarter of fiscal 2008 and the amount of unrecognized tax benefits at September 30, 2007 was $42.6 million. The Company has not provided a detailed estimate of the timing due to the uncertainty of when the related tax settlements are due.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We base our estimates on historical experience and on various other factors 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. We believe the accounting policies described below to be our most critical accounting policies. These accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of the financial statements and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

We recognize revenue from product sales when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.

For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. The customer’s obligation to pay and the payment terms are set at the time of delivery and are not dependent on the subsequent resale of our product. However, certain of our sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions. We recognize revenue from these distributors based on the sell-through method using inventory information provided by the distributor. At times, we provide standard incentive programs to our customers and account for such programs in accordance with Emerging Issues Task Force (EITF) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Accordingly, we account for our competitive pricing incentives, which generally reflect front-end price adjustments, as a reduction of revenue at the time of sale, and rebates as a reduction of revenue in the period the related revenue is recorded based on the specific program criteria and historical experience. Royalty and service revenue is recognized when earned and receipt is reasonably assured.

For those sales that include multiple deliverables, we allocate revenue based on the relative fair values of the individual components as determined in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” When more than one element, such as hardware and services, are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative fair value, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. Fair value is generally determined based upon the price charged when the element is sold separately. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue recognition for the delivered elements until all undelivered elements have been fulfilled.

We sell certain software products and related post-contract customer support (PCS), and account for these transactions in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended. We recognize revenue from software products when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is probable. Revenue is allocated to each element based upon vendor-specific objective evidence (VSOE) of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. If we are unable to determine VSOE of fair value for PCS, the entire amount of revenue from the arrangement is deferred and recognized ratably over the period of the PCS.

Amounts billed or payments received in advance of revenue recognition are deferred until the recognition criteria are met.

An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of our customers to make required payments. This reserve is determined by analyzing specific customer accounts and applying historical loss rates to the aging of remaining accounts receivable balances. If the financial condition of our customers were to deteriorate, resulting in their inability to pay their accounts when due, additional reserves might be required.

We record provisions against revenue and cost of revenue for estimated product returns and allowances such as competitive pricing programs and rebates in the same period that revenue is recognized. These provisions are based on historical experience as well as specifically identified product returns and allowance programs. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We write down the carrying value of our inventory to estimated net realizable value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. Once we write down the carrying value of inventory, a new cost basis is established. Subsequent changes in facts and circumstances do not result in an increase in the newly established cost basis.

We compare current inventory levels on a product basis to our current sales forecasts in order to assess our inventory balance. Our sales forecasts are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our current products, expected future products and other assumptions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. As of April 2, 2007, we adopted FIN 48, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Under FIN 48, income tax positions should be recognized in the first reporting period that the tax position meets the recognition threshold. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period should be derecognized in that period. As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent management believes that recovery is more likely than not, we do not establish a valuation allowance. An adjustment to income would occur if we determine that we are able to realize a different amount of our deferred tax assets than currently expected.

Stock-Based Compensation

We account for stock-based awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options, restricted stock units (RSUs) and stock purchases under our Employee Stock Purchase Plan (the ESPP) based on estimated fair values on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our consolidated financial statements. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense on a straight-line basis over the requisite service period, which is the vesting period for stock options and RSUs, and the offering period for the ESPP. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility

over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. However, our employee stock options have certain characteristics that are significantly different from traded options. Changes in the subjective assumptions can materially affect the estimate of their fair value.

Goodwill

We account for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research and development is expensed immediately.

SFAS No. 142 requires that goodwill not be amortized but instead be tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the assets might be impaired, by comparing the carrying value to the fair value of the reporting unit to which the goodwill is assigned. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit with the carrying amount of goodwill. We perform the annual test for impairment as of the first day of our fiscal fourth quarter and utilize the two-step process.

The initial recording and subsequent evaluation for impairment of goodwill and purchased intangible assets requires the use of significant management judgment regarding the forecasts of future operating results. It is possible that our business plans may change and our estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than original estimates used, we could incur impairment charges.

Long-Lived Assets

Long-lived assets, including property and equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

We maintain a marketable securities investment portfolio of various holdings, types and maturities. In accordance with our investment guidelines, we only invest in instruments with high credit quality standards and we limit our exposure to any one issuer or type of investment. We also hold shares of common stock of Marvell Technology Group Ltd. (Marvell) that were received in connection with the sale of our hard disk drive controller and tape drive controller business. The shares of Marvell common stock are equity securities and, as such, inherently have higher risk than the marketable securities in which we usually invest. We do not use derivative financial instruments.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 30, 2007, the carrying value of our cash and cash equivalents approximates fair value.

Our investment portfolio consists primarily of marketable debt securities, including government securities, corporate bonds, municipal bonds, asset and mortgage-backed securities, and other debt securities, which

principally have remaining terms of three years or less. Consequently, such securities are not subject to significant interest rate risk. All of our marketable securities are classified as available for sale.


Item 4.	*Controls and Procedures*

As of the end of the quarter ended September 30, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2007 to ensure that information required to be disclosed by us in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our quarter ended September 30, 2007 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION


Item 1A.	*Risk Factors*

Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results of operations to differ materially from the results contemplated by the forward-looking statements contained in this report or otherwise publicly disclosed by the Company.

Our operating results may fluctuate in future periods, which could cause our stock price to decline.

We have experienced, and expect to experience in future periods, fluctuations in sales and operating results from quarter to quarter. In addition, there can be no assurance that we will maintain our current gross margins or profitability in the future. A significant portion of our net revenues in each fiscal quarter results from orders booked in that quarter. Orders placed by major customers are typically based on their forecasted sales and inventory levels for our products. Fluctuations in our quarterly operating results may be the result of:


	•	the timing, size and mix of orders from customers;

	•	gain or loss of significant customers;

	•	customer policies pertaining to desired inventory levels of our products;

	•	negotiated rebates and extended payment terms;

	•	changes in our ability to anticipate in advance the mix of customer orders;

	•	levels of inventory our customers require us to maintain in our inventory hub locations;

	•	the time, availability and sale of new products;

	•	shifts or changes in technology;

	•	changes in the mix or average selling prices of our products;

	•	variations in manufacturing capacities, efficiencies and costs;

	•	the availability and cost of components, including silicon chips;

	•	variations in product development costs, especially related to advanced technologies;

	•	variations in operating expenses;

	•	changes in effective income tax rates, including those resulting from changes in tax laws;

	•	our ability to timely produce products that comply with new environmental restrictions or related requirements of our OEM customers;

	•	actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements;

	•	changes in accounting rules;

	•	changes in our accounting policies;

	•	general economic and other conditions affecting the timing of customer orders and capital spending; or

	•	changes in the global economy that impact information technology, or IT, spending.

Our quarterly results of operations are also influenced by competitive factors, including the pricing and availability of our products and our competitors’ products. Portions of our expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet our expectations, our fixed expenses could adversely affect our

gross profit and net income until net revenues increase or until such fixed expenses are reduced to an appropriate level. Furthermore, announcements regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely affected our quarterly results of operations. Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease.

We expect gross margin to vary over time, and our recent level of gross margin may not be sustainable.

Our recent level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:


	•	changes in product mix;

	•	increased price competition;

	•	introduction of new products by us or our competitors, including products with price-performance advantages;

	•	our inability to reduce manufacturing-related or component costs;

	•	entry into new markets or the acquisition of new businesses;

	•	sales discounts;

	•	increases in material, labor or overhead costs;

	•	excess inventory and inventory holding charges;

	•	changes in distribution channels;

	•	increased warranty costs; and

	•	how well we execute our business strategy and operating plans.

Our revenues may be affected by changes in IT spending levels.

In the past, unfavorable or uncertain economic conditions and reduced global IT spending rates have adversely affected the markets in which we operate. We are unable to predict changes in general economic conditions and when global IT spending rates will be affected. Furthermore, even if IT spending rates increase, we cannot be certain that the market for Storage Area Network (SAN) and server fabric infrastructure solutions will be positively impacted. If there are future reductions in either domestic or international IT spending rates, or if IT spending rates do not increase, our revenues, operating results and financial condition may be adversely affected.

Our stock price may be volatile.

The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Several factors could impact our stock price including, but not limited to:


	•	differences between our actual operating results and the published expectations of analysts;

	•	quarterly fluctuations in our operating results;

	•	introduction of new products or changes in product pricing policies by our competitors or us;

	•	conditions in the markets in which we operate;

	•	changes in market projections by industry forecasters;

	•	changes in estimates of our earnings by industry analysts;

	•	overall market conditions for high technology equities;


	•	rumors or dissemination of false information; and

	•	general economic and geopolitical conditions.

In addition, stock markets have experienced extreme price and volume volatility in recent years and stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of our common stock.

Our business is dependent on the continued growth of the SAN market and if this market does not continue to develop and expand as we anticipate, our business will suffer.

A significant number of our products are used in SANs and, therefore, our business is dependent on the SAN market. Accordingly, the widespread adoption of SANs for use in organizations’ computing systems is critical to our future success. SANs are often implemented in connection with the deployment of new storage systems and servers. Therefore, our future success is also substantially dependent on the market for new storage systems and servers. Our success in generating revenue in the SAN market will depend on, among other things, our ability to:


	•	educate potential OEM customers, distributors, resellers, system integrators, storage service providers and end-user organizations about the benefits of SANs;

	•	maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators and storage system providers;

	•	predict and base our products on standards which ultimately become industry standards; and

	•	achieve interoperability between our products and other SAN components from diverse vendors.

Our business could be adversely affected by the broad adoption of server virtualization technology.

Server virtualization technologies, where a single server can take on the function of what was previously performed by many individual servers, are gaining momentum in the industry. The broad implementation of server virtualization could result in a decrease in the demand for servers, which could result in a lower demand for our products. This could have a material adverse effect on our business or results of operations.

Our business could be adversely affected by a significant increase in the market acceptance of blade servers.

Blade server products have gained acceptance in the market over the past few years. Blade servers use custom SAN infrastructure products, including blade switches and mezzanine cards which have lower average selling prices than the SAN infrastructure products used in a non-blade server environment. If blade servers gain an increased percentage of the overall server market, our business could be adversely affected by the transition to blade server products. This could have a material adverse effect on our business or results of operations.

Our financial condition will be materially harmed if we do not maintain and gain market or industry acceptance of our products.

The markets in which we compete involve rapidly changing technology, evolving industry standards and continuing improvements in products and services. Our future success depends, in part, on our ability to:


	•	enhance our current products and develop and introduce in a timely manner new products that keep pace with technological developments and industry standards;

	•	compete effectively on the basis of price and performance; and

	•	adequately address OEM and end-user customer requirements and achieve market acceptance.

We believe that to remain competitive, we will need to continue to develop new products, which will require a significant investment in new product development. Our competitors are developing alternative technologies, which

may adversely affect the market acceptance of our products. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated today from Fibre Channel technology. If alternative technologies are adopted by the industry, we may not be able to develop products for new technologies in a timely manner. Further, even if alternative technologies do augment Fibre Channel revenues, our products may not be fully developed in time to be accepted by our customers. Even if our new products are developed on time, we may not be able to manufacture them at competitive prices or in sufficient volumes.

We depend on a limited number of customers, and any decrease in revenues or cash flows from any one of our major customers could adversely affect our results of operations and cause our stock price to decline.

A small number of customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues in the foreseeable future. Our top ten customers accounted for 85% and 80% of net revenues for the six months ended September 30, 2007 and the fiscal year ended April 1, 2007, respectively. We are also subject to credit risk associated with the concentration of our accounts receivable. The loss of any of our major customers could have a material adverse effect on our business, financial condition or results of operations.

Our customers generally order products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase products from us for any extended period. Major customers also have significant leverage over us and may attempt to change the terms, including pricing and payment terms, which could have a material adverse effect on our business, financial condition or results of operations. This risk is increased due to the potential for some of these customers to merge with or acquire one or more of our other customers. As our OEM customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be obtained. If we are unable to achieve such cost reductions, our gross margins could decline and such decline could have a material adverse effect on our business, financial condition or results of operations.

Our business may be subject to seasonal fluctuations and uneven sales patterns in the future.

A large percentage of our products are sold to customers who experience seasonality and uneven sales patterns in their businesses. As a result, we could continue to experience similar seasonality and uneven sales patterns. We believe this uneven sales pattern is a result of many factors including:


	•	the tendency of our customers to close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter;

	•	spikes in sales during the fourth quarter of each calendar year that some of our customers experience; and

	•	differences between our quarterly fiscal periods and the fiscal quarters of our customers.

In addition, as our customers increasingly require us to maintain products at hub locations near their facilities, it becomes easier for our customers to order products with very short lead times, which makes it increasingly difficult for us to predict sales trends. Our uneven sales pattern also makes it extremely difficult to predict the demand of our customers and adjust manufacturing capacity accordingly. If we predict demand that is substantially greater than actual customer orders, we will have excess inventory. Alternatively, if customer orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, which could have a material adverse effect on quarterly revenues and earnings.

Competition within the markets for our products is intense and includes various established competitors.

The markets for our products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product improvements and evolving industry standards. In the Fibre Channel HBA market, we compete primarily with Emulex Corporation. In the iSCSI HBA market, we compete primarily with Broadcom Corporation and we also compete with companies offering software initiator solutions. In the Fibre Channel switch and iSCSI router markets, we compete primarily with Brocade Communications Systems, Inc. and Cisco Systems, Inc. Our competition in the Fibre Channel switch market include well-established

participants who have significantly more sales and marketing resources to develop and penetrate this market. In the InfiniBand HCA and switch markets, we compete primarily with Voltaire, Inc., Cisco Systems, Inc. and Mellanox Technologies, Ltd. We may also compete with some of our computer and storage systems customers, some of which have the capability to develop products comparable to those we offer.

We need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved features. While we continue to devote significant resources to research and development, these efforts may not be successful or competitive products may not be developed and introduced in a timely manner. In addition, while relatively few competitors offer a full range of SAN and server fabric infrastructure products, additional domestic and foreign manufacturers may increase their presence in these markets. We may not be able to compete successfully against these or other competitors. If we are unable to design, develop or introduce competitive new products on a timely basis, our future operating results will be materially and adversely affected.

We expect the pricing of our products to continue to decline, which could reduce our revenues, gross margins and profitability.

We expect the average unit prices of our products (on a product to product comparison basis) to decline in the future as a result of competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors, or other factors. If we are unable to offset these factors by increasing sales volumes, or reducing product manufacturing costs, our total revenues and gross margins may decline. In addition, we must develop and introduce new products and product enhancements. Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenues. As a result, we may not be able to decrease our spending to offset any unexpected shortfall in revenues. If this occurs, our operating results and gross margins may be below our expectations and the expectations of investors and public market analysts, and our stock price could be negatively affected.

Our distributors may not adequately distribute our products and their reseller customers may purchase products from our competitors, which could negatively affect our results of operations.

Our distributors generally offer a diverse array of products from several different manufacturers and suppliers. Accordingly, we are at risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell our products. A reduction in sales efforts by our current distributors could materially and adversely impact our business or results of operations. In addition, if we decrease our distributor-incentive programs (i.e., competitive pricing and rebates), our distributors may temporarily decrease the amounts of product purchased from us. This could result in a change of business habits, and distributors may decide to decrease the amount of product held and reduce their inventory levels, which could impact availability of our products to their customers.

As a result of these factors regarding our distributors or other unrelated factors, the reseller customers of our distributors could decide to purchase products developed and manufactured by our competitors. Any loss of demand for our products by value-added resellers and system integrators could have a material adverse effect on our business or results of operations.

We are dependent on sole source and limited source suppliers for certain key components.

We purchase certain key components used in the manufacture of our products from single or limited sources. We purchase application specific integrated circuits, or ASICs, from single sources and we purchase microprocessors, certain connectors, logic chips, power supplies and programmable logic devices from limited sources.

We use forecasts based on anticipated product orders to determine our component requirements. If we overestimate component requirements, we may have excess inventory, which would increase our costs. If we underestimate component requirements, we may have inadequate inventory, which could interrupt the manufacturing process and result in lost or postponed revenue. In addition, lead times for components vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We also

may experience shortages of certain components from time to time, which could also delay the manufacturing processes.

Third-party subcontractors located outside the United States assemble and test certain products for us. To the extent that we rely upon third-party subcontractors to perform these functions, we will not be able to directly control product delivery schedules and quality assurance. This lack of control may result in product shortages or quality assurance problems that could delay shipments of products or increase manufacturing, assembly, testing or other costs. If any of these subcontractors experience capacity constraints or financial difficulties, suffer damage to their facilities, experience power outages or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner.

In addition, the loss of any of our major third-party contract manufacturers could significantly impact our ability to produce products for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is a lengthy and expensive process. Some customers will not purchase any products, other than a limited number of evaluation units, until they qualify the manufacturing line for the product, and we may not always be able to satisfy the qualification requirements of these customers. If we are required to change a contract manufacturer or if a contract manufacturer experiences delays, disruptions, capacity constraints, component parts shortages or quality control problems in its manufacturing operations, shipment of our products to our customers could be delayed resulting in loss or deferral of revenues and our competitive position and relationship with customers could be harmed.

We depend on our relationships with silicon chip suppliers and a loss of any of these relationships may lead to unpredictable consequences that may harm our results of operations if alternative supply sources are not available.

We currently rely on multiple foundries to manufacture our semiconductor products either in finished form or wafer form. We generally conduct business with these foundries through written purchase orders as opposed to long-term supply contracts. Therefore, these foundries are generally not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. If a foundry terminates its relationship with us or if our supply from a foundry is otherwise interrupted, we may not have a sufficient amount of time to replace the supply of products manufactured by that foundry. As a result, we may not be able to meet customer demands, which could harm our business.

Historically, there have been periods when there has been a worldwide shortage of advanced process technology foundry capacity. The manufacture of semiconductor devices is subject to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of personnel and equipment. We are continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries have in the past taken, and could in the future take, longer than anticipated. New supply sources may not be able or willing to satisfy our silicon chip requirements on a timely basis or at acceptable quality or unit prices.

We have not developed alternate sources of supply for some of our products. A customer’s inability to obtain a sufficient supply of products from us may cause that customer to satisfy its product requirements from our competitors. Constraints or delays in the supply of our products, due to capacity constraints, unexpected disruptions at foundries or with our subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials or other reasons, could result in the loss of customers and have a material adverse effect on our results of operations.

The number of suppliers we use may decrease as a result of business combinations involving these suppliers. For example, LSI Corporation recently acquired Agere Systems, Inc. Both LSI Corporation and Agere Systems, Inc. were QLogic suppliers. This transaction has reduced the number of companies we can use to produce our semiconductor products.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.

Our products are complex and may contain undetected software or hardware errors when first introduced or as newer versions are released. We are also exposed to risks associated with latent defects in existing products. From time to time, we have found errors in existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect the sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

The migration of our customers toward new products may result in fluctuations of our results of operations.

As new or enhanced products are introduced we must successfully manage the transition from older products in order to minimize the effects of product inventories that may become excess and obsolete, as well as ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure to manage the transition to newer products in the future or to develop and successfully introduce new products and product enhancements could adversely affect our business or results of operations. When we introduce new products and product enhancements, we face risks relating to product transitions, including risks relating to forecasting demand. Any such adverse events could have a material adverse effect on our business, financial condition or results of operations.

Historically, the electronics industry has developed higher performance ASICs, which create chip level solutions that replace selected board level or box level solutions at a significantly lower average selling price. We have previously offered ASICs to customers for certain applications that have effectively resulted in a lower-priced solution when compared to an HBA solution. This transition to ASICs may also occur with respect to other current and future products. The result of this transition may have an adverse effect on our business, financial condition or results of operations. In the future, a similar adverse effect to our business could occur if there were rapid shifts in customer purchases from our midrange server and storage solutions to products for the small and medium-sized business market or if our customers shifted to lower cost products that could replace our HBA or HCA solutions.

Environmental compliance costs could adversely affect our net income.

Many of our products are subject to various laws governing chemical substances in products, including those regulating the manufacture and distribution of chemical substances and those restricting the presence of certain substances in electronic products. We could incur substantial costs, or our products could be restricted from entering certain countries, if our products become non-compliant with environmental laws.

We face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances that apply to specified electronic products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances Directive, or RoHS) and similar legislation in other countries including China, Japan and Korea. In addition, certain recycling, labeling and related requirements have already begun to apply to products we sell internationally. Where necessary, we are redesigning our products to ensure that they comply with these requirements as well as related requirements imposed by our OEM customers. We are also working with our suppliers to provide us with compliant materials, parts and components. If our products do not comply with the European substance restrictions, we could become subject to fines, civil or criminal sanctions, and contract damage claims. In addition, we could be prohibited from shipping non-compliant products into the European Union, and required to recall and replace any products already shipped, if such products were found to be non-compliant, which would disrupt our ability to ship products and result in reduced revenue, increased obsolete or excess inventories and harm to our business and customer relationships. We also must successfully manage the transition to RoHS-compliant products in order to minimize the effects of product inventories that may become excess or obsolete, as well as ensure that sufficient supplies of RoHS-compliant products can be delivered to meet customer demand. Failure to manage this transition may adversely impact our revenues and operating results. Various other countries and states in the United States have issued, or are in the process of issuing, other

environmental regulations that may impose additional restrictions or obligations and require further changes to our products. These regulations could impose a significant cost of doing business in those countries and states.

The European Union has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant.

Because we depend on foreign customers and suppliers, we are subject to international economic, currency, regulatory, political and other risks that could harm our business, financial condition and results of operations.

International revenues accounted for 48% and 46% of our net revenues for the six months ended September 30, 2007 and the fiscal year ended April 1, 2007, respectively. We expect that international revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. In addition, a significant portion of our inventory purchases are from suppliers that are located outside the United States. As a result, we are subject to several risks, which include:


	•	a greater difficulty of administering and managing our business globally;

	•	compliance with multiple and potentially conflicting regulatory requirements, such as import or export requirements, tariffs and other barriers;

	•	less effective intellectual property protections;

	•	potentially longer accounts receivable cycles;

	•	currency fluctuations;

	•	overlapping or differing tax structures;

	•	political and economic instability, including terrorism and war; and

	•	general trade restrictions.

Our international sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on our business, financial condition or results of operations.

In addition, we and our customers are subject to various import and export regulations of the United States government and other countries. Certain government export regulations apply to the encryption or other features contained in some of our products. Changes in or violations of any such import or export regulations could materially and adversely affect our business, financial condition and results of operations.

Moreover, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.

We may engage in mergers, acquisitions and strategic investments and these activities may adversely affect our results of operations and stock price.

Our future growth may depend in part on our ability to identify and acquire complementary businesses, technologies or product lines that are compatible with our existing business. Mergers and acquisitions involve numerous risks, including:


	•	the failure of markets for the products of acquired companies to develop as expected;


	•	uncertainties in identifying and pursuing target companies;

	•	difficulties in the assimilation of the operations, technologies and products of the acquired companies;

	•	the existence of unknown defects in acquired companies’ products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;

	•	the diversion of management’s attention from other business concerns;

	•	risks associated with entering markets or conducting operations with which we have no or limited direct prior experience;

	•	risks associated with assuming the legal obligations of acquired companies;

	•	risks related to the effect that acquired companies’ internal control processes might have on our financial reporting and management’s report on our internal control over financial reporting;

	•	the potential loss of, or impairment of our relationships with, current customers or failure to retain the acquired companies’ customers;

	•	the potential loss of key employees of acquired companies; and

	•	the incurrence of significant exit charges if products acquired in business combinations are unsuccessful.

Further, we may never realize the perceived benefits of a business combination. Future acquisitions by us could negatively impact gross margins or dilute stockholders’ investment and cause us to incur debt, contingent liabilities and amortization/impairment charges related to intangible assets, all of which could materially and adversely affect our financial position or results of operations. In addition, our effective tax rate for future periods could be negatively impacted by mergers and acquisitions.

We have made, and could make in the future, investments in technology companies, including privately-held companies in a development stage. Many of these private equity investments are inherently risky because the companies’ businesses may never develop, and we may incur losses related to these investments. In addition, we may be required to write down the carrying value of these investments to reflect other-than-temporary declines in their value, which could have a materially adverse effect on our financial position and results of operations.

While the usage of InfiniBand technology has increased since its first specifications were completed in October 2000, continued adoption of InfiniBand is dependent on continued collaboration and cooperation among IT vendors. In addition, the end users that purchase IT products and services from vendors must find InfiniBand to be a compelling solution to their IT system requirements. We cannot control third-party participation in the development of InfiniBand as an industry standard technology. InfiniBand may fail to effectively compete with other technologies which may be adopted by vendors and their customers in place of InfiniBand. The adoption of InfiniBand is also impacted by the general replacement cycle of IT equipment by end users, which is dependent on factors unrelated to InfiniBand. These factors may reduce the rate at which InfiniBand is incorporated by the industry and impede its adoption in the storage, communications infrastructure and embedded systems markets, which in turn would harm our ability to sell our InfiniBand products.

If we are unable to attract and retain key personnel, we may not be able to sustain or grow our business.

Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers. If we lose the services of key personnel or fail to hire personnel for key positions, our business would be adversely affected. We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, periodically we have experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. We may not be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future or to manage our business, both in the United States and abroad.

We have historically used stock options and other forms of stock-based compensation as key components of our total employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage retention of key personnel, and provide competitive compensation packages. In recent periods, many of our employee stock options were granted with exercise prices which exceed our current stock price, which reduces their value to employees and could affect our ability to retain employees. As a result of our adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” in fiscal 2007, the use of stock options and other stock-based awards to attract and retain key personnel may be limited. Moreover, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant stock-based awards to employees in the future, which may result in changes in our stock-based compensation strategy. These and other developments relating to the provision of stock-based compensation to employees could make it more difficult to attract, retain and motivate key personnel.

We may experience difficulties in transitioning to smaller geometry process technologies.

We expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. Currently, most of our products are manufactured in 0.18, 0.13 and 0.09 micron geometry processes. In addition, we have begun to develop certain new products with 65 nanometer (0.065 micron) geometry process technology. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.

Our proprietary rights may be inadequately protected and difficult to enforce.

Although we have patent protection on certain aspects of our technology in some jurisdictions, we rely primarily on trade secrets, trademarks, copyrights and contractual provisions to protect our proprietary rights. There can be no assurance that these protections will be adequate to protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain such technology as trade secrets. There also can be no assurance that any patents we possess will not be invalidated, circumvented or challenged. We have taken steps in several jurisdictions to enforce our trademarks against third parties. No assurances can be given that we will ultimately be successful in protecting our trademarks. The laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States or at all. If we fail to protect our intellectual property rights, our business could be negatively impacted.

Disputes relating to claimed infringement of intellectual property rights may adversely affect our business.

We have received notices of claimed infringement of intellectual property rights in the past and have been involved in intellectual property litigation in the past. There can be no assurance that third parties will not assert future claims of infringement of intellectual property rights against us with respect to existing and future products. In addition, individuals and groups are purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive, time consuming and could divert management’s attention from other matters. Our business could suffer regardless of the outcome of the litigation.

Our supply of silicon chips and other components can also be interrupted by intellectual property infringement claims against our suppliers.

Dependence on third-party technology could adversely affect our business.

Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that necessary licenses will be available on acceptable terms, if at all. In addition, we may have little or no ability to correct errors in the technology provided by such third parties, or to continue to develop new generations of such technology. Accordingly, we may be dependent on their ability and willingness to do so. In the event of a problem with such technology, or in the event that our rights to use such technology become impaired, we may be unable to ship our products containing such technology, and may be unable to replace the technology with a suitable alternative within the time frame needed by our customers. The inability to find suitable alternatives to third-party technology, obtain certain licenses or obtain such licenses on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse impact on our business, results of operations and financial condition.

If we fail to carefully manage the use of “open source” software in our products, we may be required to license key portions of our products on a royalty-free basis or expose key parts of source code.

Certain of our software may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License (GPL), which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

We are subject to income taxes in the United States and various foreign jurisdictions. Our effective income tax rates have recently been and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, by discovery of new information in the course of our tax return preparation process, or by changes in the valuation of our deferred tax assets and liabilities. Our effective income tax rates are also affected by intercompany transactions for licenses, services, funding and other items. Additionally, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities which may result in the assessment of additional income taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. However, there can be no assurance that the outcomes from these continuous examinations will not have a material adverse effect on our financial condition or results of operations.

Computer viruses and other forms of tampering with our computer systems or servers may disrupt our operations and adversely affect net income.

Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, results of operations or financial condition.

Our facilities and the facilities of our suppliers and customers are located in regions that are subject to natural disasters.

Our California facilities, including our principal executive offices, our principal design facilities and our critical business operations, are located near major earthquake faults. We are not specifically insured for earthquakes or other natural disasters. Any personal injury or damage to the facilities as a result of such occurrences could have a material adverse effect on our business, results of operations or financial condition. Additionally, some of our products are manufactured or sold in regions which have historically experienced natural disasters. Any earthquake or other natural disaster, including a hurricane, tsunami or fire, affecting a country in which our products are manufactured or sold could adversely affect our business, results of operations and financial condition.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

In April 2007, our Board of Directors approved a program to repurchase up to $300 million of our outstanding common stock. Set forth below is information regarding our stock repurchases made during the second quarter of fiscal 2008 under this stock purchase program.


					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares that
	Total Number of		Average Price		as Part of Publicly		May Yet be Purchased
Period	Shares Purchased		Paid per Share		Announced Plans		Under the Plans

July 2, 2007 — July 29, 2007		2,319,668	$	16.18		2,319,668	$	182,362,000
July 30, 2007 — August 26, 2007		4,579,968	$	12.75		4,579,968	$	123,949,000
August 27, 2007 — September 30, 2007		3,806,277	$	12.81		3,806,277	$	75,179,000

Total		10,705,913	$	13.52		10,705,913	$	75,179,000

We previously purchased 4,758,819 shares under this program for an aggregate purchase price of $80.1 million.


Item 4.	*Submission of Matters to a Vote of Security Holders*

a) The QLogic Corporation Annual Meeting of Stockholders was held on August 23, 2007.


	b)	The following persons were elected to serve as directors of QLogic Corporation: H.K. Desai, Joel S. Birnbaum, Larry R. Carter, James R. Fiebiger, Balakrishnan S. Iyer, Carol L. Miltner and George D. Wells.

	c)	The following is a tabulation of the votes of the stockholders of QLogic Corporation with respect to the proposals presented at the 2007 Annual Meeting of Stockholders:


									Broker
	For		Against		Withheld		Abstain		Non-Votes

(i) Election of Directors:
H.K. Desai		128,869,880		—		4,207,873		—		—
Joel S. Birnbaum		129,743,170		—		3,334,583		—		—
Larry R. Carter		129,644,725		—		3,433,028		—		—
James R. Fiebiger		128,067,373		—		5,010,380		—		—
Balakrishnan S. Iyer		124,538,393		—		8,539,360		—		—
Carol L. Miltner		128,888,525		—		4,189,228		—		—
George D. Wells		128,916,502		—		4,161,251		—		—
(ii) Ratification of the appointment of KPMG LLP as Independent Registered Public Accounting Firm for fiscal year 2008		130,087,964		1,944,399		—		1,045,390		—

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PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets at September 30, 2007 and April 1, 2007		1
		Condensed Consolidated Statements of Income for the three and six months ended September 30, 2007 and October 1, 2006		2
		Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2007 and October 1, 2006		3
		Notes to Condensed Consolidated Financial Statements		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
	Item 4.	Controls and Procedures		20

PART II. OTHER INFORMATION
	Item 1A.	Risk Factors		21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
	Item 4.	Submission of Matters to a Vote of Security Holders		32
	Item 6.	Exhibits		33
		Signatures		34
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


Exhibit No.

	31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.