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 June 29, 2008
		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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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 July 23, 2008, 131,180,469 shares of the Registrant’s common stock were outstanding.

PART I.
FINANCIAL INFORMATION


Item 1.	*Financial Statements*

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 29,			March 30,
	2008			2008
	(Unaudited; In thousands,
	except share and per share
	amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	194,764		$	160,009
Short-term marketable securities		171,770			160,497
Accounts receivable, less allowance for doubtful accounts of $1,136 and $1,176 as of June 29, 2008 and March 30, 2008, respectively		86,655			81,642
Inventories		26,227			27,520
Deferred tax assets		30,893			32,227
Other current assets		10,266			8,925

Total current assets		520,575			470,820
Long-term marketable securities		38,877			55,903
Property and equipment, net		91,442			93,726
Goodwill		118,859			127,409
Purchased intangible assets, net		31,054			34,652
Deferred tax assets		30,711			25,870
Other assets		3,423			2,586

	$	834,941		$	810,966


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	37,482		$	35,643
Accrued compensation		19,225			31,120
Accrued taxes		12,582			5,262
Deferred revenue		9,977			8,693
Other current liabilities		7,015			5,952

Total current liabilities		86,281			86,670
Accrued taxes		52,383			48,163
Other liabilities		12,850			10,217

Total liabilities		151,514			145,050

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; 200,255,000 and 199,652,000 shares issued at June 29, 2008 and March 30, 2008, respectively		200			200
Additional paid-in capital		669,325			657,893
Retained earnings		1,116,585			1,084,938
Accumulated other comprehensive income (loss)		798			(2,530	)
Treasury stock, at cost: 68,513,000 and 66,638,000 shares at June 29, 2008 and March 30, 2008, respectively		(1,103,481	)		(1,074,585	)

Total stockholders’ equity		683,427			665,916

	$	834,941		$	810,966

See accompanying notes to condensed consolidated financial statements.

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	June 29,			July 1,
	2008			2007
	(Unaudited; In thousands)

Cash flows from operating activities:
Net income	$	31,647		$	18,995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,341			7,317
Stock-based compensation		7,805			8,370
Acquisition-related:
Amortization of purchased intangible assets		3,392			4,433
Stock-based compensation		270			703
Deferred income taxes		2,731			(6,584	)
Impairment of marketable securities		2,698			—
Provision for losses on accounts receivable		24			70
Loss on disposal of property and equipment		84			473
Changes in operating assets and liabilities:
Accounts receivable		(5,037	)		(3,822	)
Inventories		1,293			955
Other assets		(2,435	)		360
Accounts payable		2,113			1,495
Accrued compensation		(10,458	)		(12,530	)
Accrued taxes		11,540			15,238
Deferred revenue		4,081			719
Other liabilities		143			(665	)

Net cash provided by operating activities		58,232			35,527

Cash flows from investing activities:
Purchases of marketable securities		(35,720	)		(25,463	)
Sales and maturities of marketable securities		44,672			150,099
Additions to property and equipment		(6,209	)		(8,639	)
Acquisition of business		—			67

Net cash provided by investing activities		2,743			116,064

Cash flows from financing activities:
Proceeds from issuance of stock under stock plans		2,024			4,738
Tax effect from issuance of stock under stock plans		(104	)		424
Purchase of treasury stock		(28,140	)		(98,130	)

Net cash used in financing activities		(26,220	)		(92,968	)

Net increase in cash and cash equivalents		34,755			58,623
Cash and cash equivalents at beginning of period		160,009			76,804

Cash and cash equivalents at end of period	$	194,764		$	135,427

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 March 30, 2008. The results of operations for the three months ended June 29, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year.


Note 2.	Acquisition of SilverStorm Technologies, Inc.

In November 2006, the Company acquired SilverStorm Technologies, Inc. (SilverStorm) by merger. Cash consideration was $59.6 million, including $59.1 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, 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. During the three months ended June 29, 2008, the Company finalized its determination of the net operating loss carryforwards and other tax benefits available from the acquisition resulting in an increase in deferred tax assets of $8.6 million and a corresponding decrease in goodwill.

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Marketable Securities and Fair Value Measurements

The Company’s portfolio of available-for-sale marketable securities consists of the following:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(In thousands)

June 29, 2008
Corporate bonds	$	70,570	$	286	$	(468	)	$	70,388
U.S. Government and agency securities		50,744		454		(194	)		51,004
Asset and mortgage backed securities		31,466		288		(64	)		31,690
Auction rate debt securities		25,435		—		(2,246	)		23,189
Municipal bonds		2,563		24		—			2,587

Total debt securities		180,778		1,052		(2,972	)		178,858
Auction rate preferred securities		18,021		—		(2,333	)		15,688
Publicly-traded common stock		10,140		5,961		—			16,101

Total available-for-sale securities	$	208,939	$	7,013	$	(5,305	)	$	210,647

March 30, 2008
Corporate bonds	$	68,234	$	635	$	(168	)	$	68,701
U.S. Government and agency securities		40,242		964		—			41,206
Asset and mortgage backed securities		35,373		490		(28	)		35,835
Auction rate debt securities		25,640		—		(1,582	)		24,058
Municipal bonds		4,548		67		—			4,615

Total debt securities		174,037		2,156		(1,778	)		174,415
Auction rate preferred securities		36,425		—		(4,580	)		31,845
Publicly-traded common stock		10,140		—		—			10,140

Total available-for-sale securities	$	220,602	$	2,156	$	(6,358	)	$	216,400

As of June 29, 2008, the fair value of certain of the Company’s marketable securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the financial condition and near term prospects of the issuer of the marketable security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. Based on this analysis, the Company determined that a portion of the unrealized losses associated with certain auction rate preferred securities were other-than-temporary and recorded impairment charges for these securities of $2.7 million during the three months ended June 29, 2008, which are included in interest and other income, net, in the accompanying condensed consolidated statement of income. The Company determined that the remaining unrealized losses are temporary in nature and recorded them as a component of accumulated other comprehensive income (loss).

The Company’s marketable securities include investments in auction rate securities, the majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many auction rate securities began to fail, including auctions for the Company’s auction rate securities. The underlying assets for the auction rate debt securities in the Company’s portfolio are student loans, substantially all of which are backed by the federal government under the Federal Family Education Loan Program. However, it could take until the final maturity of the underlying notes (up to 40 years) to realize the recorded value of these investments. The underlying assets of the

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s auction rate preferred securities are the respective funds’ investment portfolio, which each had an asset coverage in excess of 200% for the related preferred security holders as of June 29, 2008. Management believes that the gross unrealized losses associated with the auction rate securities in the Company’s portfolio are primarily due to the current liquidity issues in the auction rate securities market. The Company may be unable to liquidate some or all of its auction rate securities in the near term and, accordingly, has classified its auction rate debt and preferred securities as long-term as of June 29, 2008.

Effective March 31, 2008, the Company adopted certain provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one-year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company adopted the provisions of SFAS No. 157 with respect to only financial assets, which are comprised solely of marketable securities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:


	•	Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•	Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis as of June 29, 2008 are as follows:


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(In thousands)

Corporate bonds	$	62,122	$	8,266	$	—	$	70,388
U.S. Government and agency securities		46,412		4,592		—		51,004
Asset and mortgage backed securities		5,898		25,792		—		31,690
Auction rate debt securities		—		—		23,189		23,189
Municipal bonds		—		2,587		—		2,587

Total debt securities		114,432		41,237		23,189		178,858
Auction rate preferred securities		—		—		15,688		15,688
Publicly-traded common stock		16,101		—		—		16,101

Balance as of June 29, 2008	$	130,533	$	41,237	$	38,877	$	210,647

The Company’s investments in auction rate securities are classified within Level 3 because there are currently no active markets for auction rate securities and the Company is unable to obtain independent valuations from market sources. Therefore, the auction rate securities were primarily valued based on an income approach using an estimate of future cash flows. The assumptions used in preparing these discounted cash flow models included estimates for the amount and timing of future interest and principal payments, the collateralization of underlying

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

security investments, the creditworthiness of the issuer and the rate of return required by investors to own these securities in the current environment, including call and liquidity premiums. The total amount of assets measured using Level 3 valuation methodologies represented less than 5% of total assets as of June 29, 2008.

A summary of the changes in Level 3 assets measured at fair value on a recurring basis for the three months ended June 29, 2008 is as follows:


	Balance		Total Realized			Total Unrealized			Sales and Other			Balance
	March 30, 2008		Gains and Losses			Gains and Losses			Settlements			June 29, 2008
	(In thousands)

Auction rate debt securities	$	24,058	$	—		$	(664	)	$	(205	)	$	23,189
Auction rate preferred securities		31,845		(2,698	)		2,247			(15,706	)		15,688

Total	$	55,903	$	(2,698	)	$	1,583		$	(15,911	)	$	38,877

Realized gains and losses are included in interest and other income, net, in the accompanying condensed consolidated statement of income for the three months ended June 29, 2008. Unrealized gains and losses are included in accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheet at June 29, 2008.


Note 4.	Inventories

Components of inventories are as follows:


	June 29,		March 30,
	2008		2008
	(In thousands)

Raw materials	$	9,109	$	7,403
Finished goods		17,118		20,117

	$	26,227	$	27,520


Note 5.	Purchased Intangible Assets

Purchased intangible assets consist of the following:


	June 29, 2008						March 30, 2008
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Value		Amortization		Value		Value		Amortization		Value
	(In thousands)

Acquisition-related intangibles:
Core/developed technology	$	43,700	$	18,255	$	25,445	$	43,700	$	15,737	$	27,963
Customer relationships		9,700		5,389		4,311		9,700		4,580		5,120
Other		775		504		271		775		439		336

		54,175		24,148		30,027		54,175		20,756		33,419
Other purchased intangibles:
Technology-related		2,596		1,569		1,027		2,596		1,363		1,233

	$	56,771	$	25,717	$	31,054	$	56,771	$	22,119	$	34,652

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Three Months Ended
	June 29,		July 1,
	2008		2007
	(In thousands)

Cost of revenues	$	2,758	$	3,415
Engineering and development		31		173
Sales and marketing		809		1,042

	$	3,598	$	4,630

The following table presents the estimated future amortization expense of purchased intangible assets as of June 29, 2008:


Fiscal	(In thousands)

2009 (remaining nine months)	$	12,208
2010		9,761
2011		7,382
2012		1,703

	$	31,054


Note 6.	Treasury Stock

Since fiscal 2003, the Company has had various stock repurchase programs that authorized the purchase of up to $1.25 billion of the Company’s outstanding common stock. During the three months ended June 29, 2008, the Company purchased 1.9 million shares of its common stock for an aggregate purchase price of $28.9 million, of which $2.5 million was pending settlement at June 29, 2008 and is included in other current liabilities in the accompanying condensed consolidated balance sheet. As of June 29, 2008, the Company had purchased a total of 68.5 million shares of common stock under these repurchase programs for an aggregate purchase price of $1.1 billion.

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 7.	Comprehensive Income

Components of comprehensive income are as follows:


	Three Months Ended
	June 29,		July 1,
	2008		2007
	(In thousands)

Net income	$	31,647	$	18,995
Other comprehensive income:
Change in unrealized gains/losses on available-for-sale marketable securities, net of tax		3,328		446

	$	34,975	$	19,441

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 8.	Stock-Based Compensation

During the three months ended June 29, 2008, the Company granted options to purchase 3,479,000 shares of common stock and 899,000 restricted stock units with weighted average grant date fair values of $5.66 and $15.10 per share, respectively.

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
	June 29,		July 1,
	2008		2007
	(In thousands)

Cost of revenues	$	479	$	574
Engineering and development		4,175		3,772
Sales and marketing		1,565		1,625
General and administrative		1,586		2,399

	$	7,805	$	8,370

In connection with certain acquisitions, the Company entered into stock-based performance plans with individuals 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. In connection with the performance plans, the Company recognized $0.3 million and $0.7 million of stock-based compensation expense related to acquisitions during the three months ended June 29, 2008 and July 1, 2007, respectively, and could recognize up to $1.3 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
	June 29,			July 1,
	2008			2007
	(In thousands)

Interest income	$	3,511		$	6,199
Gain on sales of marketable securities		416			145
Loss on sales of marketable securities		(11	)		(65	)
Impairment of marketable securities		(2,698	)		—
Other		321			(13	)

	$	1,539		$	6,266

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 10.	Net Income Per Share

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


	Three Months Ended
	June 29,		July 1,
	2008		2007
	(In thousands, except per share amounts)

Net income	$	31,647	$	18,995

Shares:
Weighted-average shares outstanding — basic		132,548		153,178
Dilutive potential common shares, using treasury stock method		940		1,041

Weighted-average shares outstanding — diluted		133,488		154,219

Net income per share:
Basic	$	0.24	$	0.12

Diluted	$	0.24	$	0.12

Stock-based awards, including stock options and restricted stock units, representing 26,065,000 and 24,015,000 shares of common stock have been excluded from the diluted net income per share calculations for the three months ended June 29, 2008 and July 1, 2007, respectively. These stock-based awards have been excluded from the diluted net income per share calculations because their effect would have been anti-dilutive. Contingently issuable shares of the Company’s common stock pursuant to performance plans associated with certain acquisitions are included, as appropriate, in the computation 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 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. 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, NetApp, Inc., Sun Microsystems, Inc. and many others.

First Quarter Financial Highlights and Other Information

A summary of the key factors and significant events which impacted our financial performance during the first quarter of fiscal 2009 are as follows:


	•	Net revenues of $168.4 million for the first quarter of fiscal 2009 increased sequentially by $8.7 million, or 5%, from $159.7 million in the fourth quarter of fiscal 2008. Revenues from Host Products and Network Products each increased sequentially by 9%.

	•	Gross profit as a percentage of net revenues increased to 66.9% for the first quarter of fiscal 2009 from 66.3% for the fourth quarter of fiscal 2008.

	•	Operating income as a percentage of net revenues increased to 28.4% for the first quarter of fiscal 2009 from 24.9% in the fourth quarter of fiscal 2008.

	•	Net income of $31.6 million, or $0.24 per diluted share, in the first quarter of fiscal 2009 increased from $22.8 million, or $0.17 per diluted share, in the fourth quarter of fiscal 2008. Net income for the first quarter of fiscal 2009 included stock-based compensation expense, acquisition-related charges, impairment charges related to marketable securities, and the related income tax effects, totaling $10.3 million. During the fourth quarter of fiscal 2008, net income included stock-based compensation expense, acquisition-related charges, impairment charges related to intangible assets and marketable securities, special charges, and the related income tax effects, totaling $14.9 million.


	•	Cash, cash equivalents and marketable securities of $405.4 million at June 29, 2008 increased $29.0 million from $376.4 million at March 30, 2008. This increase was primarily due to $58.2 million of cash generated from operations during the first quarter of fiscal 2009, partially offset by $28.1 million of cash used for repurchases of our common stock.

	•	Accounts receivable was $86.7 million as of June 29, 2008, compared to $81.6 million as of March 30, 2008. Days sales outstanding (DSO) in receivables was 47 days as of June 29, 2008 and March 30, 2008. Our accounts receivable and DSO are primarily affected by linearity of shipments within the quarter and collections performance.

	•	Inventories were $26.2 million as of June 29, 2008, compared to $27.5 million as of March 30, 2008. Our annualized inventory turns in the first quarter of fiscal 2009 of 8.5 increased from the 7.8 turns in the fourth quarter of fiscal 2008.

Results of Operations

Net Revenues

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


	Three Months Ended
	June 29,			July 1,
	2008			2007
	(Dollars in millions)

Net revenues:
Host Products	$	120.6		$	104.2
Network Products		29.9			24.5
Silicon Products		15.6			9.6
Other		2.3			1.5

Total net revenues	$	168.4		$	139.8

Percentage of net revenues:
Host Products		72	%		75	%
Network Products		18			17
Silicon Products		9			7
Other		1			1

Total net revenues		100	%		100	%

The global marketplace for 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 increased 20% to $168.4 million for the three months ended June 29, 2008 from $139.8 million for the three months ended July 1, 2007. This increase was primarily the result of a $16.4 million, or 16%, increase in revenue from Host Products; a $5.4 million, or 22%, increase in revenue from Network Products; and a $6.0 million, or 62%, increase in revenue from Silicon Products. The increase in revenue from Host Products was primarily due to a 28% increase in the quantity of HBAs sold partially offset by a 10% decrease in average selling prices of these products. This HBA volume increase was primarily driven by an over 50% 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 a 69% increase in the number of units of Fibre Channel switches sold, partially offset by a 24% decrease in the average selling prices of these products. The increase in revenue from Silicon Products from the same period in the prior year was due primarily to an increase in units sold. Net revenues for the three months ended June 29, 2008 included $2.3 million of other revenue compared with $1.5 million of other revenue for the three months ended July 1, 2007. Other revenue, which primarily includes royalties and service fees, is unpredictable and we do not expect it to be significant to our overall revenues.

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 three months ended June 29, 2008 and the fiscal year ended March 30, 2008. Three of our customers each represented 10% or more of net revenues for fiscal 2008, and these same three customers continued to be the only customers representing 10% or more of net revenues for the three months ended June 29, 2008.

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
	June 29,		July 1,
	2008		2007
	(In millions)

United States	$	80.6	$	77.8
Europe, Middle East and Africa		41.0		30.6
Asia-Pacific and Japan		35.9		23.0
Rest of the world		10.9		8.4

	$	168.4	$	139.8

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
	June 29,			July 1,
	2008			2007
	(Dollars in millions)

Gross profit	$	112.7		$	88.9
Percentage of net revenues		66.9	%		63.6	%

Gross profit for the three months ended June 29, 2008 increased $23.8 million, or 27%, from gross profit for the three months ended July 1, 2007. The gross profit percentage for the three months ended June 29, 2008 was 66.9% and increased from 63.6% for the corresponding period in the prior year. The increase in gross profit percentage was primarily the result of manufacturing related efficiencies and a decrease of $0.7 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 and impairments 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 periods and it may decline in the future.

Operating Expenses

Our operating expenses are summarized in the following table:


	Three Months Ended
	June 29,			July 1,
	2008			2007
	(Dollars in millions)

Operating expenses:
Engineering and development	$	34.4		$	34.7
Sales and marketing		22.9			21.2
General and administrative		7.6			8.2
Special charges		—			2.1

Total operating expenses	$	64.9		$	66.2

Percentage of net revenues:
Engineering and development		20.4	%		24.8	%
Sales and marketing		13.6			15.1
General and administrative		4.5			5.9
Special charges		—			1.5

Total operating expenses		38.5	%		47.3	%

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 June 29, 2008, engineering and development expenses decreased to $34.4 million from $34.7 million for the three months ended July 1, 2007. The decrease in engineering and development expenses was due primarily to a $1.5 million decrease in cash compensation and related benefit costs resulting from a reduction in headcount during fiscal 2008 related to the consolidation and elimination of certain engineering activities. This decrease was partially offset by a $0.6 million increase in new product development costs and a $0.5 million increase in depreciation and equipment costs.

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.

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 increased to $22.9 million for the three months ended June 29, 2008 from $21.2 million for the three months ended July 1, 2007. The increase in sales and marketing expenses was due primarily to a $1.0 million increase in cash compensation and related benefit costs, principally related to increased commissions associated with the increase in our net revenues, and a $0.8 million increase in occupancy costs and related computer support costs.

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 decreased to $7.6 million for the three months ended June 29, 2008 from $8.2 million for the three months ended July 1, 2007. The decrease in general and administrative expenses was due primarily to a $0.8 million decrease in stock-based compensation.

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 months ended July 1, 2007, we recorded special charges of $2.1 million associated with the consolidation and elimination of certain engineering activities. The special charges consisted of $1.8 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. As of June 29, 2008, the payments related to these exit activities were substantially complete.

Interest and Other Income, Net

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


	Three Months Ended
	June 29,			July 1,
	2008			2007
	(In millions)

Interest income	$	3.5		$	6.2
Gain on sales of marketable securities		0.4			0.2
Loss on sales of marketable securities		—			(0.1	)
Impairment of marketable securities		(2.7	)		—
Other		0.3			—

	$	1.5		$	6.3

Interest and other income for the three months ended June 29, 2008 of $1.5 million was comprised principally of interest income of $3.5 million related to our portfolio of marketable securities and $0.4 million of net realized gains on sales of marketable securities, partially offset by a $2.7 million impairment charge on marketable securities. Interest and other income for the three months ended July 1, 2007 was comprised primarily of interest income related to our portfolio of marketable securities. Interest income decreased primarily due to a decrease in the balance of our marketable securities and a decline in interest rates.

We reviewed various factors in determining whether to recognize an impairment charge related to our unrealized losses in marketable securities, including the financial condition and near term prospects of the issuer of the marketable security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. Based on this analysis, we determined that a portion of the unrealized losses were other-than-temporary and recorded impairment charges of $2.7 million related to our auction rate preferred securities during the three months ended June 29, 2008.

Income Taxes

Our effective income tax rate was 36% and 35% for the three months ended June 29, 2008 and July 1, 2007, respectively. We expect the annual effective tax rate for fiscal 2009 to approximate 37% as compared to our annual effective tax rate of 35% for fiscal 2008. Our expected effective income tax rate for fiscal 2009 is adversely

impacted by the expiration of the federal research and development tax credit as the legislation related to this credit was not renewed. 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 other items including the tax effects of acquisitions, stock-based compensation and uncertain tax positions.

Liquidity and Capital Resources

Our combined balances of cash, cash equivalents and marketable securities increased to $405.4 million at June 29, 2008 from $376.4 million at March 30, 2008. The increase in cash, cash equivalents and marketable securities was due primarily to our cash generated from operations, partially offset by the purchase of our common stock pursuant to our stock repurchase program. We believe that 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 $58.2 million for the three months ended June 29, 2008 and $35.5 million for the three months ended July 1, 2007. Operating cash flow for the three months ended June 29, 2008 reflects our net income of $31.6 million, net non-cash charges of $25.4 million and a net decrease in the non-cash components of working capital of $1.2 million. The decrease in the non-cash components of working capital was primarily due to an $11.5 million increase in accrued taxes and a $4.1 million increase in deferred revenue, partially offset by a $10.5 million decrease in accrued compensation and a $5.0 million increase in accounts receivable. The changes in accrued taxes and accrued compensation were primarily due to the timing of payment obligations and the increases in accounts receivable and deferred revenue were associated with the growth of our business.

Cash provided by investing activities was $2.7 million for the three months ended June 29, 2008 and consisted of net sales and maturities of marketable securities of $8.9 million, partially offset by additions to property and equipment of $6.2 million. During the three months ended July 1, 2007, cash provided by investing activities of $116.1 million consisted primarily of net sales and maturities of marketable securities of $124.6 million, partially offset by additions to property and equipment of $8.6 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.

Cash used in financing activities of $26.2 million for the three months ended June 29, 2008 consisted primarily of our purchase of $28.1 million of common stock under our stock repurchase program, partially offset by $2.0 million of proceeds from the issuance of common stock under our stock plans. During the three months ended July 1, 2007, cash used in financing activities of $93.0 million consisted primarily of our purchase of $98.1 million of common stock under our stock repurchase program, partially offset by $4.7 million of proceeds from the issuance of common stock under our stock plans.

Our marketable securities include $38.9 million of investments in auction rate securities, the majority of which are rated AA or higher. During late fiscal 2008, the market auctions of many auction rate securities began to fail, including auctions for our auction rate securities. The underlying assets for auction rate debt securities in our portfolio are student loans, substantially all of which are backed by the federal government under the Federal Family Education Loan Program. However, it could take until the final maturity of the underlying notes (up to 40 years) to realize the recorded value of these investments. The underlying assets of our auction rate preferred securities are the respective funds’ investment portfolio, which each had an asset coverage in excess of 200% for the

related preferred security holders as of June 29, 2008. We believe that the gross unrealized losses associated with the auction rate securities in our portfolio are primarily due to the current liquidity issues in the auction rate securities market. Accordingly, we may be unable to liquidate some or all of our auction rate securities should we need or desire to access the funds invested in those securities. Based on our existing cash, cash equivalents and other marketable securities, as well as our expected cash flows from operating activities, we do not anticipate that the potential lack of liquidity of these investments in the near term will affect our ability to execute our current business plan.

Except for auction rate securities, our marketable securities are valued based on quoted market prices or other observable market inputs. As of June 29, 2008, the entire $38.9 million portfolio of auction rate securities (approximately 18% of our marketable securities portfolio) was measured at fair value based on an income approach using an estimate of future cash flows. The assumptions used in preparing the discounted cash flow model included estimates for the amount and timing of future interest and principal payments, the collateralization of underlying security investments, the creditworthiness of the issuer and the rate of return required by investors to own these securities in the current environment, including call and liquidity premiums.

Since fiscal 2003, we have had stock repurchase programs that authorized us to purchase up to an aggregate of $1.25 billion of our outstanding common stock. As of June 29, 2008, we had repurchased a total of 68.5 million shares of common stock under our stock repurchase programs for an aggregate purchase price of $1.1 billion. During the three months ended June 29, 2008, we repurchased 1.9 million shares for an aggregate purchase price of $28.9 million, of which $2.5 million was pending settlement as of June 29, 2008.

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 June 29, 2008, and their impact on our cash flows in future fiscal years, is as follows:


	2009
	(Remaining
	nine months)		2010		2011		2012		2013		Thereafter		Total
	(In millions)

Operating leases	$	4.1	$	4.2	$	3.2	$	2.7	$	1.9	$	9.4	$	25.5
Non-cancelable purchase obligations		75.9		0.5		—		—		—		—		76.4

Total	$	80.0	$	4.7	$	3.2	$	2.7	$	1.9	$	9.4	$	101.9

The amount of unrecognized tax benefits under Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” at June 29, 2008 was $52.4 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. In addition, we record provisions against revenue and cost of revenue for estimated product returns in the same period that revenue is recognized. These provisions are based on historical experience as well as specifically identified product returns. 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. Such deferred revenue is recognized over the service period or when all elements have been delivered.

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 undelivered elements 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 an undelivered element, the entire amount of revenue from the arrangement is deferred and recognized over the service period or when all elements have been delivered.

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.

Stock-Based Compensation

We account for stock-based awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (revised), “Shared-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 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 restricted stock units, and the offering period for the ESPP. The determination of fair value of stock-based 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. In estimating expected stock price volatility, we use a combination of both historical volatility, calculated based on the daily closing prices of our common stock over a period equal to the expected term of the option, and implied volatility, utilizing market data of actively traded options on our common stock. We believe that the historical volatility of the price of our common stock over the expected term of the option is a strong indicator of the expected future volatility. We also believe that implied volatility takes into consideration market expectations of how future volatility will differ from historical volatility. Accordingly, we believe a combination of both historical and implied volatility provides the best estimate of the future volatility of the market price of our common stock. 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.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. FIN 48 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.

At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items are individually computed and recognized in the interim period in which the item occurs. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

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 against our deferred tax assets. 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.

Marketable Securities and Investments

We invest primarily in marketable debt securities. We also hold shares of common stock in a publicly-traded company, which were received in connection with the sale of our hard disk drive controller and tape drive controller business in November 2005. All of our marketable securities are classified as available for sale and are recorded at fair value, primarily based on quoted market prices or other observable inputs. Due to the recent failures in the auction rate securities market, quoted market prices were not available for these assets as of June 29, 2008 and March 30, 2008. Accordingly, such securities were valued based on an income approach using an estimate of future cash flows.

Our available-for-sale marketable securities are classified in our consolidated balance sheets based on the nature of the security and the availability for use in current operations. Unrealized gains and losses, net of related income taxes, are excluded from earnings and reported as a separate component of other comprehensive income until realized.

We recognize an impairment charge when the decline in the fair value of an investment below its cost basis is judged to be other-than-temporary. Various factors are considered in determining whether to recognize an impairment charge, including the financial condition and near term prospects of the issuer of the security, the magnitude of the loss compared to the cost of the investment, the length of time the investment has been in a loss position and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.

Realized gains or losses and other-than-temporary declines in the fair value of marketable securities are determined on a specific identification basis and reported in interest and other income, net, as incurred.

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. These assumptions 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. 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.

Goodwill and Other Intangible Assets

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 or asset group 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. Estimating future net cash flows and determining proper asset groupings for the purpose of this impairment test requires the use of significant management judgment. If our actual results, or estimates used in future impairment analyses, are lower than our current estimates, we could incur impairment charges.


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

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 29, 2008, the carrying value of our cash and cash equivalents approximates fair value.

We maintain a portfolio of marketable securities consisting 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. We are exposed to fluctuations in interest rates as movements in interest rates can result in changes in the market value of our investments in debt securities. However, due to the short-term nature of our investment portfolio we do not believe that we are subject to material interest rate risk.

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. In addition, our portfolio of marketable securities includes $38.9 million of investments in auction rate securities, the majority of which are rated AA or higher.

There is currently significant turmoil in the credit market, including the impact to the value and liquidity of auction rate securities. As of June 29, 2008, our investment portfolio includes $23.2 million of auction rate debt securities and $15.7 million of auction rate preferred securities. During late fiscal 2008, the market auctions of many auction rate securities began to fail, including auctions for our auction rate securities. The underlying assets for auction rate debt securities in our portfolio are student loans, substantially all of which are backed by the federal government under the Federal Family Education Loan Program. However, it could take until the final maturity of

the underlying notes (up to 40 years) to realize the recorded value of these investments. The underlying assets of our auction rate preferred securities are the respective funds’ investment portfolio, which each had an asset coverage in excess of 200% for the related preferred security holders as of June 29, 2008. We believe that the gross unrealized losses associated with the auction rate securities in our portfolio are primarily due to the current liquidity issues in the auction rate securities market. Accordingly, we may be unable to liquidate some or all of our auction rate securities should we need or desire to access the funds invested in those securities. Based on our existing cash, cash equivalents and other marketable securities, as well as our expected cash flows from operating activities, we do not anticipate that the potential lack of liquidity of these investments in the near term will affect our ability to execute our current business plan.

Our asset and mortgage-backed securities totaled $31.7 million as of June 29, 2008 and consisted primarily of high quality investments insured by the federal government under various programs.

All of our marketable securities are classified as available for sale. As of June 29, 2008, we had gross unrealized losses of $5.3 million that were determined by management to be temporary in nature. If the credit market continues to deteriorate, we may conclude that the decline in value is other than temporary and incur realized losses, which could adversely affect our financial condition or results of operations.

We do not use derivative financial instruments.


Item 4.	*Controls and Procedures*

We maintain disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of June 29, 2008. There was no change in our internal control over financial reporting during our quarter ended June 29, 2008 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 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;

	•	the timing of revenue recognition and revenue deferrals;

	•	gains or losses related to our marketable securities;

	•	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, communications 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 advantages in price, performance or features;

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

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

	•	amortization and impairments of purchased intangible assets;

	•	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. Certain of our large customers are reporting weaknesses in particular markets and geographies, which may adversely affect our revenues. 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;

	•	operating results or forecasts of our major customers or competitors;

	•	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, in large part, 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 system 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, which allow a single server to 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 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 may be 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% of net revenues for the three months ended June 29, 2008 and the fiscal year ended March 30, 2008. 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, 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 may 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 periods of our customers.

In addition, as our customers increasingly require us to maintain products at hub locations near their facilities, it becomes 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, or at an increased cost, 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 storage router markets, we compete primarily with Brocade Communications Systems, Inc. and Cisco Systems, Inc. Our competition in the Fibre Channel switch market includes 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 Ltd., Cisco Systems, Inc. and Mellanox Technologies, Ltd. We may also compete with some of our server 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 engineering 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 stock and sell 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 stocking and selling products from other suppliers, thus reducing their efforts and ability 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 decrease the amounts of product purchased from us. This could result in a change of business behavior, 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. If one of these suppliers experiences an interruption in their ability to supply our needs, or chooses to sever their relationship with us, we may be unable to produce certain of our products which could result in the loss of customers and have a material adverse effect on our results of operations.

We are dependent on worldwide third-party subcontractors and contract manufacturers.

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 postponement 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 acquired Agere Systems, Inc. in early 2007. 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 marketable securities portfolio could experience a decline in market value which could materially and adversely affect our financial results.

As of June 29, 2008, we held short-term and long-term marketable securities aggregating $210.6 million. We invest primarily in marketable debt securities, the majority of which are high investment grade, and we limit the amount of credit exposure through diversification and investment in highly rated securities. A deterioration in the economy, including a credit crisis or significant volatility in interest rates, could cause our marketable securities to decline in value or could impact the liquidity of the portfolio. If market conditions deteriorate significantly, our results of operations or financial condition could be materially and adversely affected.

Our marketable securities include investments in auction rate securities, the majority of which are rated AA or higher. As of June 29, 2008, our investment portfolio included $23.2 million of auction rate debt securities and $15.7 million of auction rate preferred securities. During late fiscal 2008, the market auctions of many auction rate securities began to fail, including auctions for our auction rate securities. The underlying assets for auction rate debt securities in our portfolio are student loans, substantially all of which are backed by the federal government under the Federal Family Education Loan Program. However, it could take until the final maturity of the underlying notes (up to 40 years) to realize the recorded value of these investments. The underlying assets of our auction rate preferred securities are the respective funds’ investment portfolio, which each had an asset coverage in excess of 200% for the related preferred security holders as of June 29, 2008. We believe that the gross unrealized losses associated with the auction rate securities in our portfolio are primarily due to the current liquidity issues in the auction rate securities market. Accordingly, we may be unable to liquidate some or all of our auction rate securities should we need or desire to access the funds invested in those securities. If the fair value of our auction rate securities declines in the future and an impairment of such securities is determined to be other-than-temporary, any write-down of such investments could have a material adverse affect on our financial condition and results of operations.

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 could adversely affect 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 results of operations.

Most 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 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 various countries, and required to recall and replace any products already shipped, if such products were found to be non-compliant. This 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 adopted the Waste Electrical and Electronic Equipment Directive, which requires European Union countries to enact legislation to make 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 52% and 49% of our net revenues for the three months ended June 29, 2008 and the fiscal year ended March 30, 2008, 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. Any of the foregoing factors could 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 or 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, financial condition or results of operations.

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. 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 material adverse effect on our financial position and results of operations.

We have recently completed acquisitions that expanded our portfolio of products to include InfiniBand solutions. 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 the accounting requirements under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” 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 include ASICs which are manufactured in 0.18, 0.13 and 0.09 micron geometry processes. In addition, we have begun to develop certain new ASIC 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, or against customers who we are contractually obligated to indemnify, 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.

Some 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 results of operations.

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. 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 a 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. Finally, 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, unanticipated outcomes from these continuous examinations could 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 our results of operations.

Despite our implementation of network security measures and anti-virus defenses, 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 November 2007, our Board of Directors approved a new program to repurchase up to $200 million of our common stock over a two-year period. Set forth below is information regarding our stock repurchases made during the first quarter of fiscal 2009 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 Plan

March 31, 2008 — April 27, 2008		448,650	$	15.68		448,650	$	168,382,000
April 28, 2008 — May 25, 2008		442,600	$	15.56		442,600	$	161,496,000
May 26, 2008 — June 29, 2008		983,710	$	15.22		983,710	$	146,519,000

Total		1,874,960	$	15.41		1,874,960	$	146,519,000

We previously purchased 1,642,824 shares under the November 2007 program for an aggregate purchase price of $24.6 million.


Item 6.	*Exhibits*

Exhibits


Exhibit No.

	10	.1	Employment Separation and Mutual General Releases Agreement, dated July 14, 2008, between Denis Maynard and QLogic Corporation.*
	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.


*		Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission.

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PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets at June 29, 2008 and March 30, 2008		1
		Condensed Consolidated Statements of Income for the three months ended June 29, 2008 and July 1, 2007		2
		Condensed Consolidated Statements of Cash Flows for the three months ended June 29, 2008 and July 1, 2007		3
		Notes to Condensed Consolidated Financial Statements		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
	Item 4.	Controls and Procedures		22

PART II. OTHER INFORMATION
	Item 1A.	Risk Factors		23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
	Item 6.	Exhibits		35
		Signatures		36
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32