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Article by DailyStocks_admin    (11-07-08 07:33 AM)

The Daily Magic Formula Stock for 11/07/2008 is QLogic Corp. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Introduction

QLogic Corporation was organized as a Delaware corporation in 1992. Our principal executive offices are located at 26650 Aliso Viejo Parkway, Aliso Viejo, California 92656, and our telephone number at that location is (949) 389-6000. Our Internet address is www.qlogic.com. The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendment to these reports, that we file with the Securities and Exchange Commission (SEC) are available free of charge on our website as soon as reasonably practicable after those reports are electronically filed with the SEC. On November 4, 2005, we completed the sale of our hard disk drive controller and tape drive controller business. On November 8, 2005, we completed the acquisition of the assets of Troika Networks, Inc. (Troika); on April 3, 2006, we completed the acquisition of PathScale, Inc. (PathScale); and on November 1, 2006, we completed the acquisition of SilverStorm Technologies, Inc. (SilverStorm).

Unless the context indicates otherwise, “we,” “our,” “us,” “QLogic” and the “Company” each refer to QLogic Corporation and its subsidiaries.

All references to years refer to our fiscal years ended March 30, 2008, April 1, 2007 and April 2, 2006, as applicable, unless calendar years are specified. All references to share and per share data have been adjusted to reflect the effects of our stock split in March 2006.

Overview

We are a supplier of high performance storage networking solutions and network infrastructure solutions, which are sold primarily to original equipment manufacturers, or OEMs, and distributors. We produce Fibre Channel and Internet Small Computer Systems Interface, or iSCSI, host bus adapters, or HBAs; and InfiniBand ® host channel adapters, or HCAs. We are also a supplier 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. Finally, we supply enclosure management and baseboard management products. 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.

Customers, Markets and Applications

Our customers rely on our SAN infrastructure and server fabric infrastructure technology to deliver solutions to information technology professionals in virtually every business sector.

Our products are found primarily in server, workstation and storage subsystem solutions that are used by small, medium and large enterprises with critical business data requirements. The business applications that drive requirements for our high performance interconnect infrastructure include:


• Data warehousing, data mining and online transaction processing;

• Media-rich environments such as film/video, broadcast, medical imaging, computer-aided design, or CAD, and computer-aided manufacturing, or CAM;

• Server clustering, high-speed backup and data replication; and

• Research and scientific applications.

Our products are incorporated in solutions from a number of OEM customers, including Cisco Systems, Inc., Dell Inc., EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company, International Business Machines Corporation, Network Appliance, Inc., Sun Microsystems, Inc. and many others. For information regarding our major customers, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.



Our SAN Solutions

Our ability to serve the storage industry stems from our broad product line of SAN infrastructure solutions. On the server side of the SAN, we provide Fibre Channel and iSCSI HBAs. Connecting servers to storage, we provide the network infrastructure with a broad line of Fibre Channel switches, including core, blade and stackable switches. In addition, we provide storage routers for bridging Fibre Channel and iSCSI networks and certain enclosure management and baseboard management products.

We have focused on providing our customers with solutions that are pre-tested and easy to install and, as a result, are designed to significantly reduce the critical implementation and time-to-market effort for OEMs. Today, our SAN infrastructure components are found in solutions from many major server and storage OEMs worldwide.

Our Server Fabric Solutions

Our server fabric solutions are based on InfiniBand technology. InfiniBand is a high performance, low-latency, server area fabric interconnect. Our ability to successfully address the requirements of server vendors targeting HPC environments is enhanced by our experience and success addressing the server to storage connectivity demands of these same customers. Our InfiniBand products, including HCAs, edge fabric switches and multi-protocol fabric directors, provide high performance interconnect fabric solutions for cluster and grid computing networks.

Sales and Marketing

Our products are marketed and sold primarily to OEMs by our internal sales team supported by field sales and systems engineering personnel. In addition, we sell our products through a network of regional and international distributors.

In domestic and in certain international markets, we maintain both a sales force to serve our large OEM customers and distributors that are focused on medium-sized and emerging accounts. We maintain a focused business development and outbound marketing organization to assist, train and equip the sales organizations of our major OEM customers and their respective reseller organizations and partners. We maintain sales offices in the United States and various international locations. For information regarding revenue by geographic area, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.

We work with our large storage subsystem and computer system OEM customers during their design cycles. We support these customers with pre-sales system design support and services, as well as training classes and seminars conducted both in the field and from our worldwide offices.

Our sales efforts are focused on establishing and developing long-term relationships with our OEM customers. The sales cycle typically begins with the identification of an OEM’s requirement that could be potentially fulfilled with an existing QLogic product or a product based on a new technology. The cycle continues with technical and sales collaboration with the OEM and if successful, leads to one of our product designs being selected as a component in a potential customer’s computer system or data storage peripheral. We then work closely with the customer to integrate our products with the customer’s current and next generation products or platforms. This cycle, from opportunity identification to shipment, typically ranges from six to twenty-four months.

In addition to sales and marketing efforts, we actively participate with industry organizations relating to the development and acceptance of industry standards. We collaborate with peer companies through open standards bodies, cooperative testing and certifications. To ensure and promote multi-vendor interoperation, we maintain interoperability certification programs and testing laboratories.

Engineering and Development

Our industry is subject to rapid and regular technological change. Our ability to compete depends upon our ability to continually design, develop and introduce new products that take advantage of market opportunities and address emerging standards. Our strategy is to leverage our substantial base of architectural and systems expertise to address a broad range of input/output, or I/O, SAN and server fabric solutions.

We are engaged in the design and development of Fibre Channel HBAs, switches and I/O controllers, as well as iSCSI HBAs and I/O controllers. We also design and develop InfiniBand-based HCAs and switches for server fabric environments; and storage routers for bridging Fibre Channel and iSCSI networks. We are also developing solutions based on Fibre Channel over Ethernet technology.

We continue to invest in engineering and development to expand our capabilities to address the emerging technologies in the rapid evolution of storage networks and server fabrics. During fiscal 2008, 2007 and 2006, we incurred engineering and development expenses of $134.7 million, $135.3 million, and $89.8 million, respectively.

Backlog

A substantial portion of our sales with OEM customers are transacted through hub arrangements whereby our products are purchased on a just-in-time basis and fulfilled from warehouse facilities, or hubs, in proximity to the facilities of our customers or their contract manufacturers. Our sales are made primarily pursuant to purchase orders, including blanket purchase orders for hub arrangements. Because of the hub arrangements with our customers and industry practice that allows customers to cancel or change orders with limited advance notice, we believe that backlog at any particular date is not a reliable indicator of our future revenue levels and is not material to understanding our business.

Competition

The markets for SAN and server fabric infrastructure components are highly competitive and characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. We believe the principal competitive factors in our industry include:


• time-to-market;

• product quality, reliability and performance;

• price;

• new product innovation;

• customer relationships;

• design capabilities;

• customer service and technical support; and

• interoperability of components in the SAN and server fabric infrastructure.

While we expect competition to continue to increase and evolve, we believe that we compete effectively with respect to each of these factors.

Due to the broad array of components required in the SAN and server fabric infrastructure, we compete with several companies. In the Fibre Channel HBA market, our primary competitor is Emulex Corporation. In the iSCSI HBA market, our primary competitor is 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. In the InfiniBand HCA and switch markets, we compete primarily with Voltaire Ltd., Cisco Systems, Inc. and Mellanox Technologies, Ltd.

Manufacturing

We use outside suppliers and foundries to manufacture our products. This approach allows us to avoid the high costs of owning, operating, maintaining and upgrading wafer fabrication and assembly facilities. As a result, we focus our resources on product design and development, quality assurance, sales and marketing, and supply chain management. Prior to the sale of our products, final tests are performed to ensure quality. Product test, customer-specific configuration and product localization are completed by third-party service providers or by us. We also provide fabrication process reliability tests and conduct failure analysis to confirm the integrity of our quality assurance procedures.

Our semiconductors are currently manufactured by a number of domestic and offshore foundries. Our semiconductor suppliers include International Business Machines Corporation, LSI Corporation, Samsung Semiconductor, Inc. and Taiwan Semiconductor Manufacturing Company. Most of the application specific integrated circuits, or ASIC, used in our products are manufactured using 0.18, 0.13 or 0.09 micron process technology. Newer technologies using 65 nanometer process technologies (0.065 micron) are currently under development. 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.

We depend on foundries to allocate a portion of their capacity sufficient to meet our needs and to produce products of acceptable quality and with satisfactory manufacturing yields in a timely manner. These foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. We do not have long-term agreements with any of these foundries; we purchase both wafers and finished chips on a purchase order basis. Therefore, the foundries generally are 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. We work with our existing foundries, and intend to qualify new foundries, as needed, to obtain additional manufacturing capacity. However, there can be no assurance that we will be able to maintain our current foundry relationships or obtain additional capacity.

We currently purchase our semiconductor products from foundries either in finished or wafer form. We use subcontractors to assemble our semiconductor products purchased in wafer form, and to assemble our HBA, switch, HCA and other products. In the assembly process for our semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packages and tested. For our HBA, switch, HCA and other products, we use third-party suppliers for material procurement, assembly, test and inspection in a turnkey model, prior to shipment to our customers.

Many of the component parts used in our HBA and HCA products are standard off-the-shelf items, which are, or can be, obtained from more than one source. We select suppliers on the basis of technology, manufacturing capacity, quality and cost. Our reliance on third-party manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, geopolitical instability, unavailability of or delays in obtaining access to certain product technologies, and the absence of complete control over delivery schedules, manufacturing yields and total production costs. The inability of our suppliers to deliver products of acceptable quality and in a timely manner or our inability to procure adequate supplies of our products could have a material adverse effect on our business, financial condition or results of operations.

Intellectual Property

While we have a number of patents issued and additional patent applications pending in the United States, Canada, Europe and Asia, we rely primarily on our trade secrets, trademarks, copyrights and contractual provisions to protect our intellectual property. We attempt to protect our proprietary information through confidentiality agreements and contractual provisions with our customers, suppliers, employees and consultants, and through other security measures. However, 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.

Our ability to compete may be affected by our ability to protect our intellectual property. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful.

We have received notices of claimed infringement of intellectual property rights in the past. There can be no assurance that third parties will not assert additional 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 the event of a patent or other intellectual property dispute, we may be required to expend significant resources to defend such claims, develop non-infringing technology or to obtain licenses to the technology which is the subject of the claim. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all. In the event of litigation to determine the

validity of any third party’s claims, such litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.

Environment

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 also 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) and similar legislation in other countries including China, Japan and Korea. The European Union adopted the Waste Electrical and Electronic Equipment, or WEEE, 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. These and similar laws adopted in other countries could impose a significant cost of doing business in those countries.

Environmental costs are presently not material to our results of operations or financial position, and we do not currently anticipate material capital expenditures for environmental control facilities.

Employees

We had 933 employees as of May 15, 2008. We believe our future prospects will depend, in part, on our ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. Our employees are not represented by a labor union. We believe that our relations with our employees are good.

CEO BACKGROUND

Mr. Desai currently serves as our Chairman of the Board and Chief Executive Officer. He joined us in August 1995 as our President and Chief Technical Officer. Mr. Desai was subsequently promoted to President and Chief Executive Officer and became a director in January 1996, and became Chairman of the Board in May 1999. From May 1995 to August 1995, Mr. Desai was Vice President, Engineering (Systems Products) at Western Digital Corporation, a manufacturer of disk drives. From July 1990 until May 1995, Mr. Desai served as Director of Engineering, and subsequently Vice President of Engineering, for QLogic.

Dr. Birnbaum has served as a director since February 2005. Dr. Birnbaum has served as a consultant in the technology industry since his retirement from Hewlett-Packard Company in 1999. From 1981 until his retirement in 1999, Dr. Birnbaum held several executive positions with Hewlett-Packard Company, including Senior Vice President for Research and Development and Director of HP Laboratories. Prior to this, Dr. Birnbaum spent 15 years at International Business Machines Corporation (“IBM”) where he last served as Director of Computer Sciences.

Dr. Fiebiger has served as a director since February 2000. Dr. Fiebiger is currently a consultant to the semiconductor and the electronic design automation industries. From December 1999 until October 2004, Dr. Fiebiger was Chairman and Chief Executive Officer of Lovoltech, Inc., a fabless semiconductor company specializing in low voltage devices. Dr. Fiebiger served as Vice Chairman of GateField Corporation, a fabless semiconductor company, from February 1999 until the company was sold to Actel Corporation in November 2000. He served as GateField’s President and Chief Executive Officer from June 1996 until February 1999. From October 1993 until June 1996, he was Managing Director and Chairman of Thunderbird Technologies, Inc., a semiconductor technology licensing company. From December 1987 to September 1993, he was President and Chief Operating Officer of VLSI Technology, Inc. Dr. Fiebiger has also served as Senior Corporate Vice President and Assistant General Manager for Motorola’s Worldwide Semiconductor Sector. Dr. Fiebiger currently serves on the Board of Directors of Mentor Graphics Corp., Actel Corporation, Power Integrations, Inc. and Pixelworks, Inc.

Mr. Iyer has served as a director since June 2003. From October 1998 to June 2003, Mr. Iyer was the Senior Vice President and Chief Financial Officer of Conexant Systems, Inc., a designer, developer and seller of semiconductor system solutions for communications applications. Prior to October 1998, Mr. Iyer served as the Senior Vice President and Chief Financial Officer of VLSI Technology, Inc. Mr. Iyer has held a number of senior finance positions at Advanced Micro Devices, Inc., a semiconductor company. Mr. Iyer currently serves on the Board of Directors of Conexant Systems, Inc., IHS Inc., Invitrogen Corporation, Power Integrations, Inc. and Skyworks Solutions, Inc.

Ms. Lewis has served as a director since February 2008. Ms. Lewis is currently Vice Chairman of the Board of Directors of Share Our Selves and THINK Together, both organizations that serve people at risk in Southern California. Until her retirement in 1998, Ms. Lewis held several executive positions with Western Digital Corporation. Most recently, she was President and Chief Operating Officer of Western Digital’s Personal Storage Division.

Mr. Wells has served as a director since February 1994. Mr. Wells was President and Chief Executive Officer of Exar Corporation, a manufacturer of analog and mixed-signal integrated circuits, from June 1992 until he retired in October 1996. Before joining Exar, Mr. Wells served as President and Chief Operating Officer of LSI Corporation (formerly LSI Logic Corporation), a manufacturer of HCMOS and BiCMOS application specific integrated circuits, for seven years.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

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

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

We use a fifty-two/fifty-three week fiscal year ending on the Sunday nearest March 31. Fiscal years 2008, 2007 and 2006 each comprised fifty-two weeks.

Business Combinations

SilverStorm Technologies

In November 2006, we acquired SilverStorm Technologies, Inc. (SilverStorm) by merger for total cash consideration of $59.6 million. The acquisition of SilverStorm expanded our portfolio of InfiniBand solutions to include edge fabric switches and multi-protocol fabric directors.



Based on a preliminary purchase price allocation, we allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as purchased in-process research and development (IPR&D), based on their respective fair values at the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. None of the goodwill resulting from this acquisition will be tax deductible. We are in the process of finalizing the determination of net operating loss carryforwards and other tax benefits from the acquisition and expect to complete this analysis in fiscal 2009, which may result in certain adjustments to goodwill.

PathScale

In April 2006, we acquired PathScale, Inc. (PathScale) by merger for total consideration of $110.5 million. The acquisition of PathScale expanded our portfolio to include InfiniBand solutions.

Based on the purchase price allocation, we allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as IPR&D based on their respective fair values at the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. None of the goodwill resulting from this acquisition will be tax deductible.

We also entered into performance plans with certain former PathScale employees who became employees of QLogic as of the 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, we recognized $2.0 million and $7.5 million of compensation expense during fiscal 2008 and 2007, respectively, and could recognize up to $1.6 million of additional compensation expense through April 2010.

Troika Networks

In November 2005, we completed the purchase of substantially all of the assets of Troika Networks, Inc. (Troika) for $36.5 million in cash and the assumption of certain liabilities. The acquisition of Troika expanded our product line and, through the acquired intellectual property, enhanced certain of our existing products. Based on a preliminary purchase price allocation in fiscal 2006, we recorded goodwill of $20.7 million and core technology of $3.6 million and recognized a charge of $10.5 million for IPR&D. During fiscal 2007, we finalized our valuation of the intangible assets acquired resulting in an increase in core technology of $7.7 million, an increase in IPR&D of $0.3 million and a corresponding decrease in goodwill of $8.0 million. As this acquisition was an asset purchase, the goodwill resulting from this acquisition will be tax deductible.

In addition, we entered into a performance plan with certain former Troika employees upon their employment with QLogic. The performance plan provided 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 plan, we recognized $1.6 million and $0.5 million of compensation expense during fiscal 2007 and 2006, respectively. During fiscal 2008, we determined that the criteria for payment to the former Troika employees would not be met and reversed the previously recognized stock-based compensation expense, aggregating $0.8 million, that would not be paid.

In August 2007, we reevaluated the use of the intellectual property acquired from Troika. As a result, we suspended internal development of the underlying acquired technology and entered into a nonexclusive license of the technology with a third party. In addition, we sold all of the related inventory and equipment to the licensee.

During the fourth quarter of fiscal 2008, we determined that the carrying amount of intangible assets previously acquired from Troika exceeded the future undiscounted cash flows expected to be generated by these assets. As a result, we recorded a non-cash impairment charge of $2.3 million, as a component of cost of revenues, to write down the carrying value of the core technology to its estimated fair value.

Stock-Based Compensation

As of the beginning of fiscal 2007, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options, restricted stock units and stock purchases under our employee stock purchase plan based on estimated fair values. We adopted SFAS No. 123R using the modified prospective transition method and consequently have not retroactively adjusted results from prior periods.

Stock-based compensation expense related to acquisitions of $1.2 million and $9.1 million for fiscal 2008 and 2007, respectively, is excluded from the above table. During fiscal 2006, we recorded stock-based compensation expense of $0.5 million related to acquisitions.

Discontinued Operations

In November 2005, we completed the sale of our hard disk drive controller and tape drive controller business, or the Discontinued Business, to Marvell Technology Group Ltd. (Marvell) for cash and shares of Marvell’s common stock. As a result of this transaction, all financial information related to the Discontinued Business has been presented as discontinued operations. The following discussion and analysis excludes the Discontinued Business and amounts related to the Discontinued Business unless otherwise noted.

Fiscal Year and Fourth Quarter Financial Highlights and Other Information

During fiscal 2008, our net revenues increased to $597.9 million from $586.7 million in fiscal 2007 and were highlighted by increases in net revenues from Host Products and Network Products of 7% and 15%, respectively. Revenue from Silicon Products decreased by $32.4 million, or 42%.

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


• Net revenues of $159.7 million for the fourth quarter of fiscal 2008 increased by $12.6 million, or 9%, from $147.1 million in the fourth quarter of fiscal 2007. Revenues from Host Products and Network Products increased from the comparable quarter in the prior year by 5% and 6%, respectively. In addition, other revenues increased by $5.9 million from the fourth quarter of fiscal 2007 due primarily to an increase in royalty revenue.

• Gross profit as a percentage of net revenues of 66.3% for the fourth quarter of fiscal 2008, increased from 64.5% for the fourth quarter of fiscal 2007. The gross profit percentage for the fourth quarter of fiscal 2008 was impacted by the increase in royalty revenue, partially offset by the $2.3 million impairment charge related to intangible assets.

• Operating income as a percentage of net revenues increased to 24.9% for the fourth quarter of fiscal 2008 from 18.3% in the fourth quarter of fiscal 2007.

• Net income was $22.8 million, or $0.17 per diluted share, in the fourth quarter of fiscal 2008 and increased from $18.4 million, or $0.12 per diluted share, in the fourth quarter of fiscal 2007. 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 for the fourth quarter of fiscal 2008 compared to $16.8 million for the fourth quarter of fiscal 2007.

• Cash, cash equivalents and marketable securities of $376.4 million at March 30, 2008 decreased $167.5 million from $543.9 million at April 1, 2007. This decrease is primarily due to $352.8 million in repurchases of our common stock, partially offset by $211.6 million of cash flow from operations. During the fourth quarter of fiscal 2008, we generated $49.0 million of cash from operating activities.

• Accounts receivable was $81.6 million as of March 30, 2008, compared to $73.5 million as of April 1, 2007. Days sales outstanding (DSO) in receivables as of March 30, 2008 increased to 47 days from 45 days as of April 1, 2007. Our accounts receivable and DSO are primarily affected by linearity of shipments within the quarter and collections performance.

• Inventories were $27.5 million as of March 30, 2008, compared to $38.9 million as of April 1, 2007. Our annualized inventory turns in the fourth quarter of fiscal 2008 of 7.8 turns increased from the 5.4 turns in the fourth quarter of fiscal 2007.

RESULTS OF OPERATIONS

Net Revenues

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

Our net revenues are derived primarily from the sale of Host Products and Network Products. Net revenues were $597.9 million for fiscal 2008 compared to $586.7 million for fiscal 2007. This increase was primarily the result of a $27.3 million, or 7%, increase in revenue from Host Products and a $13.5 million, or 15%, increase in revenue from Network Products, partially offset by a $32.4 million, or 42%, decrease in revenue from Silicon Products. The increase in revenue from Host Products was primarily due to a 21% increase in the quantity of HBAs sold partially offset by a 12% decrease in average selling prices of these products. This HBA volume increase was primarily driven by approximately a 150% increase in the quantity of Fibre Channel mezzanine cards sold which are used in blade servers and have a lower average selling price than standard HBA products. The increase in revenue from Network Products was primarily due to the addition of InfiniBand switches to our product portfolio as a result of our acquisition of SilverStorm, partially offset by a 4% decrease in revenue from Fibre Channel switch products. The decrease in Fibre Channel switch revenue was primarily due to a decline in revenue from our legacy and end-of-life products, which was not offset by revenue from our more recent product offerings until late fiscal 2008. The decrease in revenue from Silicon Products from the same period in the prior year was due primarily to an expected decrease in units sold. Net revenues for fiscal 2008 included $13.9 million of other revenue compared with $11.1 million of other revenue for fiscal 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.

Net revenues for fiscal 2007 increased 19% to $586.7 million from $494.1 million for fiscal 2006. This increase was primarily the result of an $81.8 million, or 25%, increase in revenue from Host Products and a $17.6 million, or 25%, increase in revenue from Network Products, partially offset by an $11.1 million, or 13%, decrease in revenue from Silicon Products. The increase in revenue from Host Products was primarily due to a 37% increase in the quantity of HBAs sold partially offset by a 10% decrease in average selling prices of these products. The increase in revenue from Network Products was primarily due to a 27% increase in the number of units of Fibre Channel switches sold partially offset by a 12% decrease in average selling prices of Fibre Channel switches. The decrease in revenue from Silicon Products from the same period in the prior year was due primarily to a decrease in units sold. Net revenues for fiscal 2007 included $11.1 million of other revenue compared with $6.8 million of other revenue for fiscal 2006.

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%, 80% and 77% of net revenues during fiscal 2008, 2007 and 2006, respectively.


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.

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 and impairment of purchased intangible assets.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Net Revenues

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 22% to $171.2 million for the three months ended September 28, 2008 from $140.3 million for the three months ended September 30, 2007. This increase was primarily the result of a $15.3 million, or 15%, increase in revenue from Host Products; a $7.8 million, or 36%, increase in revenue from Network Products; and a $4.1 million, or 36%, increase in revenue from Silicon Products. The increase in revenue from Host Products was primarily due to a 21% increase in the quantity of HBAs sold partially offset by a 5% decrease in average selling prices of these products. The increase in revenue from Network Products was primarily due to a 58% increase in the number of units of Fibre Channel switches sold, partially offset by an 18% 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. Royalty and Service revenues for the three months ended September 28, 2008 increased to $6.1 million from $2.4 million for the three months ended September 30, 2007, primarily due to a $3.5 million one-time royalty associated with the license of technology acquired from Troika Networks. Royalty and Service revenues are unpredictable and we do not expect them to be significant to our overall revenues.

Net revenues increased 21% to $339.6 million for the six months ended September 28, 2008 from $280.1 million for the six months ended September 30, 2007. This increase was primarily the result of a $31.6 million, or 15%, increase in revenue from Host Products; a $13.3 million, or 29%, increase in revenue from Network Products; and a $10.1 million, or 48%, increase in revenue from Silicon Products. The increase in revenue from Host Products was primarily due to a 24% increase in the quantity of HBAs sold partially offset by a 7% decrease in average selling prices of these products. The increase in revenue from Network Products was primarily due to a 63% increase in the number of units of Fibre Channel switches sold, partially offset by a 21% 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. Royalty and Service revenues for the six months ended September 28, 2008 increased to $8.4 million from $3.9 million for the six months ended September 30, 2007, primarily due to a $4.0 million increase in royalty revenue.

A small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top ten customers accounted for 85% of net revenues during the six months ended September 28, 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 six months ended September 28, 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, which is not necessarily indicative of the location of the ultimate end-user of our products.

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:

Gross profit for the three months ended September 28, 2008 increased $24.9 million, or 27%, from gross profit for the three months ended September 30, 2007. The gross profit percentage for the three months ended September 28, 2008 was 67.9% and increased from 65.1% for the corresponding period in the prior year. The increase in gross profit percentage was primarily the result of manufacturing related efficiencies and the $3.5 million one-time royalty, partially offset by a $1.3 million increase in amortization of purchased intangible assets. As certain intangible assets are fully amortized as of September 28, 2008, amortization expense is expected to decrease in the future.

Gross profit for the six months ended September 28, 2008 increased $48.7 million, or 27%, from gross profit for the six months ended September 30, 2007. The gross profit percentage for the six months ended September 28, 2008 was 67.4% and increased from 64.3% for the corresponding period in the prior year. The increase in gross profit percentage was primarily the result of manufacturing related efficiencies.

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

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. Engineering and development expenses were $33.1 million for the three months ended September 28, 2008 and September 30, 2007. New product development costs decreased by $1.0 million, offset by a $1.0 million increase in acquisition-related stock-based compensation. The increase in acquisition-related stock-based compensation was primarily due to a net reversal of expense of $0.7 million during the three months ended September 30, 2007, when we determined that the criteria for payment to certain individuals would not be met.

During the six months ended September 28, 2008, engineering and development expenses decreased to $67.4 million from $67.7 million for the six months ended September 30, 2007. The decrease in engineering and development expenses was due primarily to a $1.9 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 $0.8 million increase in depreciation and equipment costs and a $0.6 million increase in stock-based compensation.

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 $24.0 million for the three months ended September 28, 2008 from $20.6 million for the three months ended September 30, 2007. The increase in sales and marketing expenses was due primarily to a $2.6 million increase in cash compensation and related benefit costs, principally related to an $0.8 million increase in commissions and a $0.7 million increase in salaries due to increased headcount. In addition, occupancy costs and related computer support costs increased by $0.5 million.

Sales and marketing expenses increased to $47.0 million for the six months ended September 28, 2008 from $41.8 million for the six months ended September 30, 2007. The increase in sales and marketing expenses was due primarily to a $3.6 million increase in cash compensation and related benefit costs, principally related to a $1.5 million increase in commissions and a $1.1 million increase in salaries due to increased headcount. In addition, occupancy costs and related computer support costs increased by $1.2 million.

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

General and Administrative. General and administrative expenses consist primarily of compensation and related benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include accounting, legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses increased to $9.2 million for the three months ended September 28, 2008 from $8.8 million for the three months ended September 30, 2007. The increase in general and administrative expenses was due primarily to a $0.6 million increase in cash compensation and related benefit costs due to increased headcount and a $0.4 million increase in legal expenses, partially offset by a $0.5 million decrease in stock-based compensation.

General and administrative expenses decreased to $16.7 million for the six months ended September 28, 2008 from $17.0 million for the six months ended September 30, 2007. The decrease in general and administrative expenses was due primarily to a $1.3 million decrease in stock-based compensation, partially offset by a $1.2 million increase in cash compensation and related benefit costs due to increased headcount.

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

Special Charges. During the three and six months ended September 30, 2007, we recorded special charges of $1.6 million and $3.8 million, respectively, associated with the consolidation and elimination of certain engineering activities. As of September 28, 2008, the payments related to these activities were substantially complete.

CONF CALL

Jeanie Herbert

Welcome to QLogic second quarter fiscal year 2009 earnings conference call. On our call today are H. K. Desai, Chief Executive Officer, and Simon Biddiscombe, Senior Vice President and Chief Financial Officer. Simon will begin the call with a review of the second quarter financial results. Then H. K. will follow with an update on the business in the second quarter and progress on our strategic initiatives. Afterwards, we will open the call for questions.

Certain of our comments today will include forwardlooking statements regarding future events and our projections of the financial performance of the company based on their current expectations. These comments contain significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forwardlooking statements. We refer you to the documents QLogic files with the SEC, specifically, our most recent Forms 10K and 10Q. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forwardlooking statements that we make today.

In our second quarter earnings press release issued early today, we reported both GAAP and nonGAAP results. The difference between the results in fiscal year 2009 is due to stockbased compensation, acquisitionrelated charges, impairment of marketable securities, and the related income tax effects and evaluation allowances for deferred tax assets. The reconciliation of GAAP net income to nonGAAP net income and a summary of our nonGAAP adjustments are included in our earnings press release.

All of the references we will make on our call today relate to nonGAAP results unless otherwise stated. Now I will turn the call over to our CFO, Simon Biddiscombe.

Simon Biddiscombe

Our revenue in the second quarter ended September 28, 2008, was a record $171.2 million, an increase of 22 percent from the same quarter last year. This revenue was within our forecasted range of $168 million to $172 million provided during our first quarter earnings conference call.

Our second quarter revenue from Host Products, which are comprised primarily of Fibre Channel and iSCSI host bus adapters and InfiniBand host channel adapters, was $119.7 million and increased 15% from $104.4 million recorded in the second quarter of last year. The increase in our revenue from Host Products was primarily driven by Fibre Channel HBAs.

During the second quarter, our revenue from Network Products, which are comprised primarily of Fibre Channel and InfiniBand switches, was $29.8 million and increased 36% from $22 million recorded in the second quarter of last year. The growth was primarily driven by our Fibre Channel blade and edge switches and InfiniBand switches.

Our second quarter revenue from Silicon Products, comprised of protocol chips and management controllers, was $15.7 million and increased 36% from $11.5 million recorded in the second quarter of last year. The growth was due to stronger demand for iSCSI and Fibre Channel protocol chips. During the second quarter, we also made our final shipments of management controller products.

Our revenue from royalty and service was $6.1 million which included a onetime nonrecurring royalty of $3.5 million associated with the license of Trico Technologies.

Our second quarter gross margin of 71.3% increased from 68.3% recorded in the second quarter of last year. The increase in our gross margin was primarily due to manufacturingrelated efficiencies, the onetime royalty revenue, and product mix.

Next, I would like to cover our second quarter operating expenses. Total operating expenses were $58.4 million, up 6% from $55 million reported in the second quarter last year. Engineering expenses in the second quarter of $29.2 million decreased 4% from a year ago and declined as a percentage of revenue from 21.5% to 17%. We expect future engineering expenses as a percentage of revenue to be in the range of 18% to 21%.

Sales and marketing expenses in the second quarter of $21.8 million increased 20% from a year ago and declined as a percentage of revenue from 12.9% to 12.7%. We expect that future sales and marketing expenses as a percentage of revenue will range from 11% to 14%.

G&A expenses in the second quarter of $7.5 million increased from $6.6 million a year ago and were 4.4% of revenue in the current quarter. We expect that future G&A expenses as a percentage of revenue will be approximately 4%.

Operating profit in the second quarter increased 56% to $63.7 million versus a year ago and increased as a percentage of revenue from 29.2% to 37.2%.

Interest and other income was $3 million in the second quarter due to lower yields on our cash and portfolio of marketable securities. The income tax rate for the second quarter of 32.3% was slightly below the annual forecasted tax rate of approximately 33% provided during our first quarter earnings conference call.

Our second quarter net income was $45.2 million or $0.34 per diluted share, an improvement from $35.2 million or $0.22 in the prior year. This represented a net profit margin of 26.4% in the quarter. Our second quarter net income per diluted share exceeded our forecasted range of $0.30 to $0.31 provided during our first quarter earnings conference call. This represent the 53rd consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. Our financial position continues to be very strong especially with regard to cash flow. During the second quarter, we generated $55.2 million in cash from operations. The company's cash and marketable securities were $421 million at the end of the second quarter. Our strong cash position, combined with the fact that we have no debt, provides financial stability and flexibility in these uncertain times.

During the quarter, we purchased $39.2 million of the company's common stock pursuant to our stock repurchase program. Since 2003, we have repurchased over $1.1 billion of the company's common stock under programs authorized by our board of directors.

Receivables of $77.9 million at the end of the second quarter decreased from $86.7 million at the end of the June quarter. DSO at the end of the September quarter was 41 days and improved from 47 days in the June quarter. Based on hub arrangements at OEM customers and our current customer and channel mix, we expect DSO in the future will range from 45 to 55 days.

Annualized inventory turnover in the second quarter was 5.9 turns compared to 8 turns in the June quarter. Inventory at the end of the second quarter was $33.3 million and increased sequentially from $26.2 million at the end of the June quarter.

Turning now to our nearterm outlook. While we are pleased with our performance for the first half of the fiscal year, it is clear that as we enter our second half, environment is increasingly uncertain. We believe that toward the end of the second quarter, the credit crisis and its impact on the global macro economic environment began to affect IT spending. There is incremental uncertainty around enduser demand, resulting in cautious outlooks from our OEM and channel customers. In response to this uncertainty, we are proactively tightening our operating expenses without impacting our key development programs.

In addition, as a result of the uncertainty, we are also providing a broader range for our third quarter revenue outlook. We expect total revenue for the December quarter to be in the range of $160 million to $170 million. Due to the potential variation in product mix, we expect gross margin for the December quarter to range from 68% to 69%.

Based on this outlook, combined with the planned operating expenses of approximately $58 million and a projected annual tax rate of approximately 33%, we expect to achieve nonGAAP earnings per diluted share of approximately $0.28 to $0.32 in the December quarter. Actual results from future periods may differ materially due to a number of factors included those outlined during the course of this conference call, in the company's filings with the SEC, and in the disclaimer statement at the end of our earnings press release. I will now turn the call over to H. K. Desai, our Chief Executive Officer.

H. K. Desai

We are pleased to share with you another quarter of solid financial performance despite significant challenges posted by macro economic environment. Revenue in the second quarter was a record $171.2 million, an increase of 22% from the same quarter last year and within our previously forecasted range of $168 million to $172 million.

Our second quarter net income was $45.2 million, an increase of 39% over the yearago quarter and resulted in earnings of $0.34 per diluted share. This exceeded our previously forecasted EPS range of $0.30 to $0.31.

Revenue from Host Products for the second quarter was $119.7 million, relatively flat from the prior quarter. In the quarter, we continued to ramp revenues of our 8 gig Fibre Channel HBAs and also realized initial revenue for FCoE converged network adapters.

Revenue from Network Products for the second quarter was $29.8 million, also relatively flat with the prior quarter. In the quarter, we experienced sequential growth in revenue from InfiniBand switches. Revenue from Silicon Products was $13.7 million leaving the second quarter flat sequentially.

During the second quarter, QLogic remained well positioned in the fastgrowing markets including blade servers, virtualizations, and high performance computing.

We sold these markets with high quality products, robust volume relationships, and leading edge technology. These attributes, along with the progress on our strategic initiatives, allow us to best serve our customers and navigate through these uncertain times.

Now I would like to give you an update on the strategic initiatives under way in the areas of InfiniBand, Fibre Channel, and Fibre Channel over Ethernet or FCoE.

Within our InfiniBand initiative, the QLogic TrueScale DDR host channel adapters that began shipping in June are gaining acceptance by the HPC community. Our TrueScale high message rate, low scalable latency HCAs achieved world record performance in the SPEC MPI 2007 Benchmark Suite.

The Benchmark measures the performance of computing systems and clusters, learning, message, passing interface applications. The QDR version of the TrueScale HCA family remains on plan for revenue contribution in 2009.

QLogic's InfiniBand switchboard portfolio has continued its market momentum with QLogic leading in industry for InfiniBand solution interoperability. A successful QLogicled collaboration of 40 HPC vendors related to network interoperability. The results are published in the QLogicHPC interoperability guides.

To further expand the traditionally Linuxonly HPC market, QLogic also recently announced availability of QLogic InfiniBand switches and adaptors for the Microsoft Windows, HP Server 2008. Microsoft HPC Server 2008 makes full computing most accessible to end users, allowing them to seamlessly harness the power of distributed computing to a family of Windows environment without requiring specialized skills or training.

Turning to Fibre Channel, we continue to demonstrate strong performance and lead the market with both our 4 gig and 8 gig HBA solutions. The Dell’Oro second quarter 2008 SAN reports showed that our Fibre Channel HBAs continue to be the revenue market share leader at 53%, a full 15point lead over closest competitor and a 4point increase from the previous report. The demand for our Fibre Channel HBA products continues to be fueled by successfully addressing key customer requirements, including optimizations for standardsbased security, standardsbased virtualizations, and standardsbased management as well as power and place capabilities. All major OEMs have completed qualifications and are now shipping [inaudible] for 8 gig HBAs.

We recently competed work with HP to extend the previouslyannounced range of products that are qualified to be part of the simple SAN connection portfolio. HP storage was MSA 2000 Fibre Channel erase, and HP blade system servers are now part of the qualified simple SAN connection portfolio, which is based on QLogic 8 gig switches and 8 gig HBAs. This provides HP's customers the first endtoend 8 gig Fibre Channel solutions in the market.

QLogic also recently announced an important standardbased collaboration with Cisco on virtualization technology using QLogic Fibre Channel on HBAs. It allows users to realize the benefits of quality of service, service capabilities in standardbased virtualization fabric environments.

Now let me turn to our Fibre Channel over Ethernet program. FCoE continues to present a major market expansion opportunity for us beyond storage into data networking while building on and leveraging the success we have achieved in the Fibre Channel and iSCSI HBA markets. The technology is moving quickly, having gone from standards introduced and available in 2007 to the general availability of products with important industry certifications in only 18 months, a very rapid pace for a new technology.

QLogic achieved general availability for previously announced 8000 series converged network adapter and began customer shipments in the second quarter. The availability was quickly followed by an impressive list of partner certifications, including VMware ESX, Oracle Enterprise Linux, NetApp, and most recently MCE left tested. Customers rely heavily on certifications when choosing solutions.

Another very significant milestone was the recent announcement by NetApp of the first native FCoE tourist system. Based on QLogic FCoE target technology, NetApp's announcement marked availability of the first true endtoend FCoE solutions, a milestone many argued was years off.

Last month, the FCI sponsored a plug fest at the University of New Hampshire. Fifteen companies participated in a highly successful interoperability event with all of the FCoE initiatives being able to communicate across the FCoE fabrics to both FCoE and Fibre Channel targets.

This is an unprecedented level of success for the first plug fest and is indicative of the market readiness of the products. QLogic played a leadership role in the plug fest with multiple instances of its 8000 series VNS in successful operation.

While the pace of FCoE development is rapid, the customer options may be gradual because the technology allows either fullscale implementation or incremental change while protecting investment in existing technologies. In our opinion, there are many factors that will good under actually pace of production but there is no doubt that FCoE is here to stay and will be a major force in the data centers of the future.

Despite the challenges caused by the current macro economic uncertainty, we continue to be very pleased with our progress and are confident that these strategic initiatives will yield positive results for the company.

We remain focused and continue to execute on delivering value to shareholders. This concludes our prepared remarks. We are now ready for the questions.

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