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Article by DailyStocks_admin    (07-18-08 06:56 AM)

The Daily Magic Formula Stock for 07/18/2008 is Datalink Corp. According to the Magic Formula Investing Web Site, the ebit yield is 12% 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.


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BUSINESS OVERVIEW

Overview

We are a leading independent information storage architect with operations throughout the United States. We work with customers to analyze, design, implement, and support information storage infrastructures that store, manage, and protect business critical information. Our areas of expertise include:

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Backup and Recovery—Datalink backup and recovery solutions mitigate risk by helping companies protect and quickly recover information.

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Consolidation and Virtualization—Designed to simplify management and improve productivity. Datalink consolidation and virtualization solutions help improve efficiencies of data storage infrastructures and the staff that manage them.

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Databases and Business Applications—Datalink storage, backup, and recovery solutions are designed to achieve stringent data availability requirements found in high performance database and business application environments.

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Archive and Compliance—Aligned with increasing compliance requirements, Datalink solutions help companies simplify the retention, protection, and discovery of information.

We offer a comprehensive suite of services spanning analysis, design, implementation and support. Our highly skilled technical services and practice management teams test and compare data storage technologies available from the leading manufacturers and software developers. Once a product is approved for our solution sets, our technical services team has the flexibility to choose from the best of these storage technologies to solve our customers' growing data storage needs. In addition, our support staff ensures the continued success of our data storage solutions for each customer. We believe these value-added services and our adherence to the highest quality standards have resulted in superior levels of customer satisfaction.

The Data Storage Industry

Information technology (IT) departments are faced with a daunting challenge of rapidly expanding amounts of data to manage. Coupled with this growth are increasing demands for availability of this data for day-to-day business and to meet regulatory requirements. At the same time, IT headcount is expected to remain relatively flat over the next several years. As a result, we expect customers will continue to look for alternatives to dramatically simplify management of storage infrastructures and increase productivity of existing IT teams.

To address the increased need for efficiency, we anticipate that organizations will consolidate and virtualize their server environments. We expect this will result in increased demand and requirements for shared storage infrastructures tuned to virtualized server environments. With a unified virtualization strategy, organizations will improve management and utilization, as well as reduce costs.

We expect that disk-based data protection, SAN/NAS convergence, storage management software, and storage services will grow rapidly over the next several years. We anticipate that, together, these areas will continue to grow faster than the rest of the storage industry. Organizations recognize the importance and value of data as a strategic and competitive asset. Employees, customers and suppliers demand uninterrupted access to mission-critical data 24 hours a day, 7 days a week. As a result, the ability to efficiently store, manage, and protect this data will continue as one of the most important aspects of business-critical decision-making, increasing the need for high-performance, scalable and highly available solutions.

In light of the importance of data to businesses, we believe that organizations will continue to dedicate a significant percentage of their information technology budgets to data storage. We believe that capital investment priorities will include:

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Enhanced data protection and recovery capabilities.


Increased need for high throughput performance, greater frequency of backups, quick restoration of data and stringent data availability requirements are key factors we expect will continue to drive the migration to disk-based protection solutions. Many of our customers have deployed disk-based backup and recovery solutions. With the convergence of key technologies, such as data deduplication, WAN optimization, and advanced heterogeneous replication and snapshot software, we expect the benefits customers receive from disk-based backup will increase, resulting in increased demand.

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Continued migration to networked storage infrastructures using virtualization technologies.

A comprehensive virtualization strategy should encompass both server and storage environments. Without this integrated approach, the full benefits of virtualization cannot be realized. We expect organizations will seek the professional services of a provider, like Datalink, to assess their environment, conduct a gap analysis, as well as design and deploy storage solutions tuned to their virtualized server environment. This approach will help organizations increase the quality of service and decrease the total cost of ownership.

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Retention and retrieval of data to address Email, regulatory, compliance and litigation support issues.

Long-term data retention has become the norm with recent industry regulations such as the Sarbanes-Oxley Act, HIPAA (Health Insurance Portability and Accountability Act) and SEC section 17a-4 (electronic communication preservation) mandating the retention of documents for many years. The consequences can be great if a company does not have the proper retention of documents for compliance, including stiff monetary penalties.

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Acceptance and growing need for storage services.

We expect three factors to drive IT organizations to increasingly outsource storage-related services (consulting, implementation and support). They include the growing strategic importance of data storage, growing complexity of networked storage environments and increasing scope of spending on storage.

The Datalink Opportunity

The increased need for data storage and the development of sophisticated, enterprise-class information data storage systems have created a demand for independent data storage solution providers, such as Datalink. Both potential customers and data storage device manufacturers are looking to independent storage solutions providers such as Datalink primarily for the following reasons:

Pressures on Customers. We believe organizations will increasingly look outside their in-house technical staff to independent information storage architects, such as Datalink, for specialized expertise. Networked storage architecture design is complex. Advanced functionalities, such as disk-based backup and recovery and virtualization, further increase the level of complexity. Although organization-wide data storage solutions, such as SANs, are designed to ease data management functions, these systems are difficult to understand and implement because they integrate diverse operating systems, hardware and software. In addition, there continues to be a steady influx of new products and technologies introduced to the market. In-house information technology departments prefer to focus their efforts on mission- critical applications. Accordingly, they often turn to outside storage experts that are able to research, design, implement and support networked storage solutions.

Pressures on Manufacturers. We believe manufacturers increasingly rely on channel partners such as us for two principal reasons:

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Sophisticated disk-based backup and recovery solutions require the integration of highly specialized products made by a variety of manufacturers. A typical enhanced data recovery architecture, for instance, can utilize components such as software, tape libraries, and disk systems, each from a different manufacturer. High-end data storage manufacturers generally focus on only a portion of the overall enhanced data recovery system, leaving companies like us to integrate comprehensive networked data storage solutions from the best available products and technologies.

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Gross profit margins have been under pressure for many storage companies. Because of the high cost of maintaining a national sales and marketing organization, high-end data storage manufacturers have focused their resources on their research and development functions. This strategy requires them to leverage their sales and marketing functions by partnering with companies such as Datalink.

We believe we are uniquely positioned to capitalize on this significant opportunity for the following reasons:

Expertise. We have been implementing sophisticated data storage solutions for over twenty years. This experience has given us significant expertise in understanding and applying data storage technologies and has allowed us to earn and retain the trust and confidence of our customers and suppliers. We invest in and train resources to differentiate our company, adapt to the ever-changing needs of our customers and capitalize on opportunities.

Independence. Unlike many of our competitors, we are independent of any manufacturer or particular technology. Our customers are increasingly using open systems computing architectures, which can combine products from multiple manufacturers. Our customers value our independence and rely on us to choose the best available hardware and software and tailor it to their individual needs.

The Datalink Solution

We combine our technical expertise, the best products from leading manufacturers and comprehensive services to meet each customer's specific needs. Our services include:

Analysis

At the beginning of an engagement, we place considerable emphasis on formulating a needs analysis based on each customer's business initiatives, operating environment and current and anticipated data storage requirements. While our focus is on each customer's unique situation, we bring to each engagement our extensive product knowledge and the experience we have gained from providing data storage solutions for over twenty years to customers in numerous industries.

Datalink assessment services provide customers with objective guidance on developing data storage strategies that optimize their resources, leverage their existing environments and facilitate cost-effective growth for the future. These services provide an independent viewpoint to align people, processes and technologies with business objectives. These services help organizations maximize current investments, outline recommendations for future purchases and provide assurance that storage infrastructures are efficient, reliable and scalable.

Design

Once we have completed our initial analysis, we begin the design phase of the project. Our professional services teams work together to design a system that meets the customer's data storage needs and budget. Our independence permits us to choose from a wide range of technologies in order to fuse together the appropriate hardware, software and services for each project.

Datalink designs storage infrastructures based on each customer's developed detailed business requirements. The engagement begins with a definition of the project's objectives, scope and key milestones. The Datalink team then prepares an outline of the schedule and deliverables. Following a thorough analysis, the team prepares a comprehensive blueprint of the storage solution, including a detailed design schematic, key implementation milestones and recommendations for handling potential configuration issues to ensure a smooth transition to the new storage environment.

Implementation

Once we design and test a system, we formulate a detailed project implementation plan with our customers to meet their financial and operating objectives and minimize disruption to their operations. We oversee the timely delivery of hardware and software products to the customer's location. We then coordinate the installation with our technical services team, or personnel from the equipment manufacturer, and complete the installation at the customer's site using industry best practices.

Support

We provide our customers advanced technical support from a team of customer support and field engineers. Our extensive experience in data storage systems enables our staff to deliver expert configuration and usage assistance, technical advice and prompt incident detection and resolution. The support team also acts as our primary interface with manufacturers' technical support organizations.

Datalink support services offer additional flexible levels of service to help organizations maximize the return on their storage technology investments. We believe that our customer support program is one of very few customer service plans that provide support across multiple storage product lines and manufacturers.

We provide our analysis, design and support services to customers through either a stand-alone services engagement or as a part of an overall project that includes a storage solution and services.

Our Strategy

Our strategy is to improve our position as a leading, independent information storage architect and to develop a customer-focused, high performance company with sustainable profitable growth. To achieve these objectives, we intend to build upon our record of successfully addressing the evolving enterprise-class information storage management needs of our customers. Key elements of our strategy include:

Increase Sales Team Productivity

Although we believe that Datalink's sales productivity is high, we believe it can be enhanced. We continue to accelerate the learning and productivity curve of our newer sales professionals and enhance the skills of seasoned executives through implementation of techniques and best practices learned from our top producers.

Scale Existing Locations

We intend to focus on our existing geographic locations to increase market share, leverage fixed expenses and provide higher quality service levels. Datalink will drive this growth by hiring experienced, quality account executives and storage engineers to gain sales productivity and field engineering utilization.

Expand Customer Support Revenues

We have significantly increased our customer support capabilities and performance over the last several years and will continue to make this a focus. Our customers appreciate our quality support initiatives, which we believe will continue to be a key differentiator and growth driver for Datalink.

Enhance Our Professional Services Business

There is significant opportunity to sell more of our storage services expertise to customers. By improving our assessment, storage audit and implementation service methodologies and sales tools, we plan to enhance our solution selling capabilities and continue to drive gross margins to higher levels.

Pursue Acquisitions

We believe there is an opportunity to strengthen our resources and presence in key geographies through the acquisition of select competitors. On January 31, 2007, we acquired Midrange Computer Solutions Inc. (MCSI), a storage consulting, solutions and service provider based in Chicago, Illinois. The acquisition of MCSI increased our revenue base by approximately one-third, expanding the number of enterprise accounts we serve and extending our presence geographically in the Northeast, Midwest, and California. We will continue to look for other acquisition opportunities.

Suppliers and Products

As an independent information storage architect, we do not manufacture data storage products. Instead, we continually evaluate and test new and emerging technologies from leading manufacturers to ensure that our solutions incorporate state-of-the-art, high performance, cost-effective technologies. This enables us to maintain our technological leadership, identify new and innovative products and applications and objectively help our customers align their data storage solutions with their business needs.

We have strong, established relationships with the major enterprise-class information storage hardware and software suppliers. Our expertise in open system environments includes UNIX, Microsoft Windows, Linux and in-depth knowledge of all major hardware platforms manufactured by industry leaders, including Hewlett-Packard Company, International Business Machines Corp. and Sun Microsystems, Inc. This expertise has earned us preferred status with many of our principal suppliers. Preferred status often enables us to participate in our suppliers' new product development, evaluation, introduction and marketing programs. These collaborations enable us to identify and market innovative new hardware and software products and exchange critical information in order to maximize customer satisfaction.

Customers

Our customers trust us with their most demanding data storage projects. Customer engagements range from specialized professional assessment and design services, to complex organization-wide SAN implementations. We serve customers throughout the United States in a diverse group of data intensive industries. Our broad industry experience enables us to understand application and business issues specific to each customer and to design and implement appropriate networked storage solutions. We enjoy strong relationships with our customers, which are reflected by our significant repeat business. Spanning a broad array of industries, our customers include CBS SportsLine.com, AT&T Inc., Harris Corporation, NAVTEQ Corporation, St. Jude Medical, Inc., The Nielsen Company, Inc., and Blue Cross Blue Shield of Minnesota.

Sales and Marketing

We market and sell our products and services throughout the United States primarily through a direct sales force. In addition to our Minneapolis headquarters, as of December 31, 2007, we have 20 field sales offices in order to efficiently serve our customers' needs.

Our field account executives and account associates work closely with our technical services team in evaluating the enterprise-class information storage needs of existing and prospective customers and in designing high quality, cost effective solutions. To ensure quality service, we assign each customer a specific field account executive and account associate. We believe that the average longevity of service of our sales force, and their close collaboration with our technical services team, are key factors to earning and retaining the trust and confidence of our customers. We believe this differentiates us from many other storage solution providers.

In addition to the efforts of our field account executives, inside account associates, and technical services team we engage in a variety of other marketing activities designed to attract new business and retain customer loyalty. We regularly execute integrated, demand creation campaigns, gain exposure through online and print trade publications, hold webcasts and informational seminars and publish a quarterly newsletter.

Competition

Datalink primarily competes with the direct sales forces of storage OEM's. Besides Datalink's current technology partners, these OEM competitors include Hewlett-Packard Company and Dell Computer Corporation. In addition, we compete with channel partners of storage OEM's. These include Forsythe Technology, Inc., Trace--3, Inc., Midwave Corporation, and Sirius Computer Solutions, Inc.

Employees

As of December 31, 2007, we had a total of 199 full-time employees. We have no employment agreements with any of our employees, except for Mr. Barnum, our Chief Financial Officer and Mr. Beyer, our Senior Vice President of Field Operations. In November 2004, we entered into change of control severance agreements with Mr. Westling, our President and Chief Executive Officer, and Ms. West, our Vice President of Human Resources, and each of Messrs. Barnum and Beyer under their respective employment agreements. None of our employees are unionized or subject to a collective bargaining agreement. We have experienced no work stoppages and believe that our employee relations are good.

CEO BACKGROUND

Between 1985 and 1997, Mr. Lidsky was employed by Norstan, Inc, most recently as Executive Vice President of Strategy and Business Development.
Margaret A. Loftus , age 63, was elected as a director in June 1998. Since 2005, Ms. Loftus has served as an independent consultant. Between 1989 and 2005, Ms. Loftus was an owner of Loftus Brown-Wescott, Inc., a business consulting firm, which she co-founded in 1989. Between 1976 and 1989, she was employed by Cray Research, Inc., most recently as Vice President of Software. Ms. Loftus also serves on the Board of Directors for Analysts International Corporation and several private technology companies.
J. Patrick O'Halloran, age 51, was elected as a director in August 2006. Since January 2005, Mr. O'Halloran has served as Chief Executive Officer for Entiera. Between 1983 and 2004, Mr. O'Halloran served in a range of senior, international management positions at Accenture Ltd., most recently as Partner in charge of Accenture's Customer Insight organization.
James E. Ousley , age 62, was elected as a director in June 1998 and in May 2007 was elected as our Lead Director. Between 2002 and 2004, Mr. Ousley was President and Chief Executive Officer of Vytek Wireless Inc., which was acquired by Calamp, Inc. From 1999 to 2001, he served as President and Chairman of Syntegra (USA), a division of British Telecommunications plc. From 1991 to 1999, Mr. Ousley was President and Chief Executive Officer of Control Data Systems (CDS), which was acquired by British Telecommunications in August 1999. From 1968 to 1991, he held various sales and executive management positions with Control Data Corporation. Mr. Ousley also serves on the Board of Directors for Actidentity Inc., Bell Microproducts Inc. and Savvis, Inc.
Robert M. Price , age 77, was elected as a director in June 1998 and served as our Chairman of the Board between June 1998 and December 2005. Mr. Price has been President of PSV, Inc., since 1990. Between 1961 and 1990, he served in various executive positions, including as Chairman and Chief Executive Officer, with Control Data Corporation. From 1991 to 2005, Mr. Price was a Senior Advisor and Professor at the Fuqua School of Business at Duke University, and is now Adjunct Professor of the Pratt School of Engineering at Duke University. Mr. Price is Mr. Meland's father-in-law. Mr. Price also serves on the Board of Directors of Public Service Company of New Mexico, Affinity Technology Group, Inc. and National Center for Social Entrepreneurs.
Charles B. Westling , age 49, became our President and Chief Executive Officer in December 2005 and became a director in January 2006. He originally joined us in 2002 and prior to becoming our President and Chief Executive Officer, held the offices of Vice President—Corporate and Business Development, Vice President—Market Development, and President and Chief Operating Officer. Between 2000 and 2001, he was the Executive Vice President of Business Development of Agiliti, Inc. Mr. Westling served as Senior Managing Director and Director of Corporate Finance for John G. Kinnard and Company, Incorporated from 1997 to 1999. From 1990 to 1997, Mr. Westling was a member of the corporate finance department at Dain Bosworth Incorporated, serving most recently as a managing director and head of technology investment banking. Mr. Westling received his B.A. in economics from Carleton College and earned a Master of Management degree from the J.L. Kellogg Graduate School of Management at Northwestern University.
MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

We are an independent architect of enterprise-class information storage infrastructures. We derive our revenues principally from designing, installing and supporting data storage systems. Our solutions can include hardware products, such as disk arrays, tape systems and interconnection components and storage management software products. The market for data storage products and services is large. IDC estimates that digital information will occupy more than six times its current quantity, or 988 billion gigabytes, by 2010. As of December 31, 2007, we have 21 locations throughout the United States with the highest concentration of revenues in the central states.

We sell support service contracts to most of our customers. When customers purchase support services through us, customers receive the benefit of integrated system wide support. We have a qualified, independent support desk that takes calls from customers, diagnoses the issues they are facing and either solves the problem or coordinates with Datalink and/or vendor technical staff to meet the customer's needs. Our support service agreements with our customers include an underlying agreement with the product manufacturer. The manufacturer provides on-site support assistance if necessary. We defer revenues and direct costs resulting from these contracts, and amortize these revenues and expenses into operations, over the term of the contracts, which are generally twelve months.

The enterprise-class information storage market is rapidly evolving and highly competitive. Our competition includes other independent storage system integrators, high end value added resellers, distributors, consultants and the internal sales force of our suppliers. Our ability to hire and retain qualified outside sales representatives and engineers with enterprise-class information storage experience is critical to effectively competing in the marketplace and achieving our growth strategies.

In the past, we have experienced fluctuations in the timing of orders from our customers, and we expect to continue to experience these fluctuations in the future. These fluctuations have resulted from, among other things, the time required to design, test and evaluate our data storage solutions before customers deploy them, the size of customer orders, the complexity of our customers' network environments, necessary system configuration to deploy our solutions and new product introductions by suppliers. Completion of our installation and configuration services may also delay recognition of revenues. Economic conditions and competition also affect our customers' decisions to place orders with us. As a result, our net sales may fluctuate from quarter to quarter.

We view the current data storage market as providing significant opportunity for growth. Currently, Datalink's market share is a small part of the overall market. However, the providers of the data storage industry's products and technologies are increasing their utilization of indirect sales approaches to broaden their reach and optimize their margins. Increasingly, they are turning to companies such as Datalink to sell their products. While these trends provide opportunity for Datalink, we must improve our business model to generate sustainable, profitable growth. Our model requires highly skilled sales and technical staff which results in substantial fixed costs for us. We believe the best way to improve our company and create long-term shareholder value is to focus on building scaleable capabilities and a leverageable cost structure. Our current strategies are focused on:

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Increasing productivity of our sales, technical and customer support teams in our existing locations.

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Deepening our presence in existing enterprise accounts and penetrating new enterprise accounts.

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Targeting high growth market segments and deploying new technologies.

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Growing our customer support revenue and market share. We believe that our customer support services offerings are becoming increasingly attractive to companies looking for system-wide integrated support.

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Increasing our professional services revenues. We believe there is an opportunity to sell more of our data storage services such as implementation services, storage environment assessments and on-site data storage management and architecture services.

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Exploring potential acquisitions that we believe can strengthen our resources and capabilities in key geographic locations.

To pursue these strategies, we are:

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Improving our training, tools and recruiting efforts for sales and engineering teams to increase productivity.

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Hiring additional customer support staff and enhancing the customer support staff's communications and call management capabilities.

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Developing more effective delivery capabilities for professional services and solutions.

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Meeting regularly with potential acquisition candidates.

All of these plans have various challenges and risks associated with them, including that:

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We may not increase our productivity and may lose, or not successfully recruit and retain key sales, technical or other personnel.

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Competition is intense and may adversely impact our profit margin. Customers have many options for data storage products and services.

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Economic conditions may adversely impact our business. Customers may delay purchasing decisions or seek to spend less.

In January 2007, we entered into an agreement and plan of merger with Midrange Computer Systems Inc. (MCSI), a storage consulting, solutions and service provider based in Chicago, Illinois. We believe the acquisition has strengthened our presence in existing regional markets and expanded our reach into a number of key new regional markets. We paid a purchase price of approximately $14.3 million for MCSI, consisting of $5.0 million cash and 1,163,384 shares of our common stock. Our results of operations for 2007 reflect the addition of MCSI for eleven months.

Results of Operations

Our sales for 2007 increased $31.8 million or 21.8% to $177.8 million for 2007 as compared to 2006. Our gross margin increased $7.2 million or 18.9% to $45.3 million for 2007 as compared to 2006. Our earnings from operations decreased $4.4 million from $5.6 million in 2006 to $1.2 million in 2007. The following table shows, for the periods indicated, certain selected financial data expressed as a percentage of net sales.

Comparison of Years Ended December 31, 2007, 2006 and 2005

Net Sales. Our product sales increased 8.6% in 2007 from 2006 to $111.2 million, and increased 25.5% in 2006 from 2005 to $102.4 million. Our service sales, which includes customer support, consulting and installation services, increased 52.7% in 2007 from 2006 to $66.6 million, and increased 22.7% in 2006 from 2005 to $43.6 million.

The increase in our product sales in 2007 as compared to 2006 is primarily due to the acquisition of MCSI in January 2007. The increase in our product sales in 2006 as compared to 2005 reflects a greater number of customers funding large projects, particularly for enhanced data recovery technology solutions. We had an increase in customers representing more than $1 million in annual revenues from 20 in 2005 to 24 in 2006 to 31 in 2007. Product sales growth decreased from 25.5% in 2006 to 8.6% in 2007 continuing to reflect what we believe to be a slow down in IT and storage spending with some of our larger customers, as they have become more cautious about the economy and their individual growth prospects. This has created longer sales cycles with a number of large project delays. We do not know whether this spending slow down among our customers will continue.

The increase in our service revenues for 2007 over 2006 reflects an increase in our customer support contract revenues and consulting service revenues. For 2007 customer support contract revenues increased $21.4 million or 61.7% over 2006 and consulting service revenues increased $1.3 million or 82.3%. The majority of our increase in customer support contract revenues in 2007 was due to the acquisition of MCSI. The increase in our service revenues for 2006 over 2005 reflects an increase in our customer support contract revenues and our installation and configuration service revenues. Customer support contract revenues increased $8.3 million or 31.4%, consulting service revenues decreased $1.3 million or 53.1% and installation and configuration service revenues increased $1.1 million or 16.3%. With the growth in our product revenues, we continue to successfully sell our installation and configuration services and customer support contracts. The decrease in our consulting revenues between 2005 and 2006 reflects the completion of a long term professional services contract at the end of 2005.

We derived approximately 13.9% of our sales from our customer, AT&T Inc., during 2006. We cannot provide assurance that this customer will account for a substantial portion of our future sales. We had no customers that comprised more than 10% of our sales in 2005 or 2007.

Gross Profit. Our total gross profit as a percentage of net sales was 25.5% in 2007 decreasing from 26.1% in 2006 and 26.2% in 2005.

Product gross profit as a percentage of product sales decreased to 24.1% in 2007 as compared to 24.4% in 2006 which increased as compared to 23.8% in 2005. Our product gross profit as a percentage of product sales is impacted by the mix and type of projects we complete for our customers. Our product gross profit as a percentage of product sales decreased for 2007 over 2006 due to the additional MCSI revenues which historically had lower product margins. Our efforts to successfully integrate the MCSI sales force, by leveraging product and service offerings across our vendors, has gradually improved the gross margins realized by the MCSI sales force. The MCSI sales force has not yet achieved the product gross profit margins that we previously experienced and we cannot assure they will reach those targets. The percentage improvement in 2006 over 2005 reflects the increase in enhanced data recovery technology solution purchases made by our customers for which we achieved a higher gross profit. We have various programs in place with our vendors that provide economic incentives for achieving various sales performance targets. Achieving these targets contributed favorably to our product gross profit by $2.0 million, $1.5 million and $829,000 in 2007, 2006 and 2005, respectively. These vendor incentive programs constantly change and we negotiate them separately with each vendor. While we expect the incentive programs to continue, the vendors could modify or discontinue them, which would unfavorably impact our product gross profit margins.

Service gross profit as a percentage of service sales decreased to 27.7% in 2007 as compared to 30.0% in 2006 and 31.5% in 2005. The percentage decrease in 2007 as compared to 2006 is primarily due to a $664,000 reduction in revenues and corresponding margins for the MCSI acquisition to reflect the fair value of maintenance contracts we acquired. The percentage decrease in 2006 as compared to 2005 reflects the completion of a long term professional services contract at the end of 2005 which carried a higher gross profit percentage.

Sales and Marketing. Sales and marketing expenses include wages and commissions paid to sales and marketing personnel, travel costs and advertising, promotion and hiring expenses. Sales and marketing expenses totaled $22.1 million, or 12.4% of net sales for 2007 as compared to $16.0 million, or 10.9% of net sales for 2006 and $15.1 million, or 12.9% of net sales for 2005. The increase in sales and marketing expense in absolute dollars for 2007 over 2006 is primarily a result of higher commission expense of $1.6 million and compensation expense of $3.7 million. The increase in commission expense is due to our increase in revenues for the year. The increase in compensation expense is due to our acquisition of MCSI which increased our sales and marketing headcount by approximately 45%. The increase in sales and marketing expense in absolute dollars for 2006 over 2005 is primarily a result of higher commission expense of $1.5 million related to our increased 2006 revenues. The increase in sales and marketing expense as a percentage of net sales from 2007 to 2006 reflects primarily the increase in sales and marketing headcount as a result of our MCSI acquisition, and investments in sales management. The decrease in sales and marketing expense as a percentage of net sales from 2006 to 2005 reflects better leverage of our fixed costs as revenues increased in 2006. As we continue to selectively hire additional outside sales representatives, our sales and marketing expenses may increase without a commensurate increase in sales.

General and Administrative. General and administrative expenses include wages for administrative personnel, professional fees, depreciation, communication expenses and rent and related facility expenses. General and administrative expenses increased to $11.7 million, or 6.6% of net sales for 2007 compared to $10.4 million, or 7.2% of net sales for 2006 and $9.9 million, or 8.5% in 2005. The increase in general and administrative expenses in absolute dollars for 2007 as compared to 2006 is primarily due to an increase in facility expenses of $496,000 with the acquisition of MCSI in January 2007, an increase in audit fees and outside consulting fees for Sarbanes-Oxley compliance of $213,000, an increase in compensation expense of $200,000 and an increase in depreciation expense of $120,000. The increase in general and administrative expenses in absolute dollars for 2006 as compared to 2005 is primarily due to an increase of $294,000 in facilities expenses for new regional office lease agreements entered into during the second and third quarters of 2005, an increase of $135,000 for board compensation expense and an increase of $50,000 for sales and use tax expense for several state audits. Our general and administrative expenses were lower as a percentage of net sales for 2007 as compared to 2006, and for 2006 as compared to 2005, primarily due to more controlled spending coupled with an increase in revenues.

Engineering. Engineering expenses include employee wages and travel, hiring and training expenses for our field and customer support engineers and technicians. We allocate engineering costs associated with installation and configuration services and with consulting services to our cost of service sales. Engineering expenses increased to $9.2 million, or 5.2% of net sales in 2007 compared to $6.1 million, or 4.2% of net sales in 2006 and $5.1 million, or 4.4% of net sales in 2005. The increase in engineering expenses in absolute dollars for 2007 over 2006 is due primarily to an increase in compensation expense of $3.6 million related to our MCSI acquisition. The MCSI acquisition increased our engineering headcount approximately 26%. The increase in engineering expenses in absolute dollars for 2006 as compared to 2005 is due primarily to a $908,000 increase in compensation expense related to a 30% increase in headcount coupled with higher health insurance expenses. The increase in engineering expenses as a percentage of sales for 2007 as compared to 2006 is primarily the result of investments in regional management. The decrease in engineering expenses as a percentage of sales for 2006 as compared to 2005 is primarily the result of more controlled spending coupled with an increase in revenues.

Integration Costs. We had integration expenses of $442,000 in 2007 related to the January 31, 2007 acquisition of MCSI. Integration expenses include salaries and benefits of MCSI employees who assisted with the initial integration but whom we ultimately did not retain, together with retention bonuses and severance payments.

Sublease Arrangements. In December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied as our corporate headquarters in Chanhassen, Minnesota. The initial sublease term is co-terminal with our lease and is for 85 months starting in April 2005 and ending in April 2012. The sublessee will pay us rent ranging from approximately $55,000 per month at the beginning of the term to approximately $60,000 per month by the end of the term. We also negotiated with our landlord to sell the 2.5 acre lot adjoining our facility for $200,000. In the first quarter of 2005, we incurred a one-time, non-cash charge of $3.5 million related to the sublease and lot sale. We obtained cost savings of approximately $950,000 in 2007, 2006 and 2005 as a result of the sublease agreement and expect to achieve comparable savings in future years during the sublease term.

Intangible Amortization. We had expenses related to the amortization of finite-lived intangible assets of $727,000, $0 and $224,000 in 2007, 2006 and 2005, respectively. Amortization of intangible assets increased to $727,000 in 2007 from $0 in 2006. The increase in finite-lived intangible assets and subsequent amortization is due to our acquisition of MCSI on January 31, 2007. The finite lived intangibles we acquired, consisting of customer relationships and backlog, have estimated lives of six years and two months, respectively, and we are amortizing them using the straight line method. Amortization of finite-lived intangible assets decreased to $0 in 2006 from $224,000 in 2005. At the end of 2005, we fully amortized all intangible assets primarily related to our acquisition in November 2000 of the data storage and services business of OpenSystems. For 2007, 2006 and 2005, we determined that our goodwill was not impaired.

Operating Earnings (Loss). We realized operating earnings of $1.2 million in 2007 and $5.6 million in 2006 and incurred an operating loss of $3.2 million in 2005. The decrease in our operating earnings in 2007 as compared to 2006 is due to our lower gross margin and increased operating expenses in 2007 primarily as a result of our acquisition of MCSI. Our operating earnings in 2006 increased over our operating loss in 2005 primarily as a result of higher revenues and gross margins partially offset by higher operating expenses. Excluding the sublease charge of $3.5 million in the first quarter of 2005, we generated operating earnings of $284,000 in 2005.

Income Taxes. We had income tax expense of $864,000 in 2007 as a result of our estimated effective tax rate of 42%. We had an income tax benefit of $2.2 million in 2006. We had no income tax benefit or expense in 2005. Prior to fiscal 2006, we recorded a full valuation allowance against our deferred tax assets due to the uncertainty of the realization and timing of the benefits from those deferred tax assets as we had not achieved a sufficient level of sustained profitability. During 2006, we utilized approximately $4.8 million of our net operating loss carryforwards. Furthermore, we concluded that we had attained a sufficient level of sustained profitability to reverse the remaining $2.8 million valuation allowance. We utilized approximately $1.9 million, $4.8 million and $200,000 of our federal net operating loss carryforwards in 2007, 2006 and 2005, respectively. For 2007 and 2006, respectively, we recorded approximately $104,000 and $392,000 to equity for tax benefits associated with the exercises of stock options. In future periods of taxable earnings, we expect to report an income tax provision using an effective tax rate of approximately 42%.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS



On January 30, 2007 we entered into an agreement and plan of merger with Midrange Computer Systems Inc. (MCSI), a storage consulting solutions and services provider. Our results of operations for the three months ended March 31, 2007 reflect the addition of MCSI for two months.

Net Sales . Our total net sales increased by $6.8 million, or 16.7%, to $47.7 million for the three months ended March 31, 2008, from $40.9 million for the comparable quarter in 2007. Our product sales increased $960,000, or 3.5%, to $28.5 million for the three months ended March 31, 2008 from $27.6 million for the comparable quarter in 2007. Our service sales increased $5.9 million, or 43.9%, to $19.2 million for the three months ended March 31, 2008 from $13.3 million for the comparable quarter in 2007.



We had a modest increase in our product sales for the three month period ended March 31, 2008, as compared to the same period in 2007. Our product revenues continue to reflect our customers’ closer scrutiny of expenditures as they focus more attention on the impact or potential impact that macro economic conditions will have on the growth and profitability of their business. This resulted in a lull in bookings activity during the first half of the quarter. We saw a pick up in orders beginning in late February that continued throughout March, and we ended the quarter with a backlog of over $30 million.



Our service sales increase for the three month period ended March 31, 2008 as compared to the same periods in 2007 was due to an increase in customer support contracts of $5.2 million. With the growth in our product revenues, we continue to successfully sell our installation and configuration services and customer support contracts.



We had no single customer account for greater than 10% of our revenues for the three months ended March 31, 2008. We derived 12% of our revenues for the three months ended March 31, 2007, from AT&T Inc.

Net Sales . Our total net sales increased by $6.8 million, or 16.7%, to $47.7 million for the three months ended March 31, 2008, from $40.9 million for the comparable quarter in 2007. Our product sales increased $960,000, or 3.5%, to $28.5 million for the three months ended March 31, 2008 from $27.6 million for the comparable quarter in 2007. Our service sales increased $5.9 million, or 43.9%, to $19.2 million for the three months ended March 31, 2008 from $13.3 million for the comparable quarter in 2007.



We had a modest increase in our product sales for the three month period ended March 31, 2008, as compared to the same period in 2007. Our product revenues continue to reflect our customers’ closer scrutiny of expenditures as they focus more attention on the impact or potential impact that macro economic conditions will have on the growth and profitability of their business. This resulted in a lull in bookings activity during the first half of the quarter. We saw a pick up in orders beginning in late February that continued throughout March, and we ended the quarter with a backlog of over $30 million.



Our service sales increase for the three month period ended March 31, 2008 as compared to the same periods in 2007 was due to an increase in customer support contracts of $5.2 million. With the growth in our product revenues, we continue to successfully sell our installation and configuration services and customer support contracts.



We had no single customer account for greater than 10% of our revenues for the three months ended March 31, 2008. We derived 12% of our revenues for the three months ended March 31, 2007, from AT&T Inc.

our estimated tax rate of 40%. In future periods of taxable earnings, we expect to continue reporting an income tax provision using an effective tax rate of approximately 41%.



LIQUIDITY AND CAPITAL RESOURCES



Net cash provided by operating activities was $1.4 million for the three months ended March 31, 2008 as compared to net cash provided by operating activities of $2.8 million for the three months ended March 31, 2007. Significant items which impacted our operating cash flows as of March 31, 2008 were:



• Net earnings of $505,000.

• A $622,000 net increase in deferred customer support contracts. While we amortize the revenues from these contracts over the life of the contract, the customer almost always pays for the contracts at the beginning of the contract period which favorably impacts our cash flows.

• A net increase in cash of approximately $1.4 million for accounts receivable, inventory and accounts payable. This was primarily due to a decrease in inventories related to a higher balance of inventories in transit at December 31, 2007.

• A decrease in cash of $1.7 million related to a decrease in variable compensation and sales and use tax accruals since December 31, 2007.



Net cash provided by investing activities was $2.4 million for the three months ended March 31, 2008. This cash was primarily provided by the sale of a short-term investment. We are planning for $500,000 of capital expenditures for the remainder of 2008 related primarily to computer and communication system upgrades or other management information system enhancements.



Net cash used in financing activities was $21,000 for the three months ended March 31, 2008, from tax withholding payments reimbursed by restricted stock. Net cash provided by financing activities was $7,000 for the three months ended March 31, 2007, from the exercise of stock options offset by tax withholding payments reimbursed by restricted stock.



We have elected not to pursue a credit facility at this time. With our current cash position, we believe we have the liquidity to meet our operating needs for the foreseeable future. We have no outstanding debt, and if the need should arise to borrow funds, we believe that we could obtain a secured facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of financial statements requires us to make estimates and assumptions that affect reported earnings. We evaluate these estimates and assumptions on an on-going basis based on historical experience and on other factors that we believe are reasonable. Estimates and assumptions include, but are not limited to, the areas of customer receivables, establishment of vendor specific objective evidence of fair value for customer contracts with multiple elements, inventories, income taxes, self-insurance reserves and commitments and contingencies.



Our significant accounting policies and estimates are summarized in our annual financial statements. Some of our accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. We believe these estimates and assumptions are reasonable based on the facts and circumstances as of March 31, 2008. However, actual results may differ from these estimates under different assumptions and circumstances.

We believe that the following represent the areas where we use more critical estimates and assumptions in the preparation of our financial statements:



Revenue Recognition. We realize revenue from the design, installation and support of data storage solutions, which may include hardware, software and services. We recognize revenue when we have met our obligations for installation or other services and collectability is reasonably assured.



Product Sales . We sell software and hardware products on both a “free-standing” basis without any services and as data storage solutions bundled with our installation and configuration services (“bundled arrangements”).



Product Sales Without Service . If we sell a software or hardware product and do not provide any installation or configuration services with it, we recognize the product revenues upon shipment.



Product Sales With Service . If we sell a bundled arrangement, then we defer recognizing any revenues on it until we finish our installation and/or configuration work. We account for the hardware, software and service elements of our bundled arrangements by applying the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9.



Pursuant to the provisions of SOP 97-2, we apply contract accounting to our bundled arrangements. In accordance with SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts,” we apply the completed contract method. Factors we have considered in applying the completed contract method accounting include (i) the relatively short duration of our contracts, (ii) the difficulty of estimating our revenues on a percentage-of-completion method and (iii) our use of acceptance provisions on larger bundled arrangements.



Service Sales . In addition to installation and configuration services that are part of our bundled arrangements described above, our service sales include customer support contracts and consulting services. On our balance sheet, deferred revenue relates to service sales for which our customer has paid us or has been invoiced but for which we have not yet performed the applicable services.



Customer Support Contracts . We sell service contracts to most of our customers. These contracts are support service agreements. We have an internal support desk that provides integrated customer support services, including configuration and usage assistance, technical advice and prompt incident detection and resolution. Our technical staff first assists a customer in identifying the source of system problems and in determining whether there is defective hardware or software. If our customer requires on-site maintenance or repair services, we arrange for a service call pursuant to underlying third-party support service agreements we have with our hardware and software vendors.



When we sell a service contract as part of a bundled arrangement, we use vendor specific objective evidence to allocate revenue to the service contract element. In all cases, we defer revenues and direct costs resulting from our service contracts and amortize them into operations over the term of the contracts, which are generally twelve months. We are contractually obligated to provide or arrange to provide these underlying support services to our customers in the unlikely event that the hardware or software vendor, or its designee, fails to perform according to the terms of its contact.



Consulting Services . Some of our customers engage us to analyze their existing storage architectures and offer our recommendations. Other customers engage us to assist them on-site with extended data storage projects, to support their data storage environments and to help with long-term data storage design challenges. For these types of consulting services that do not include the sale of hardware or software products, we recognize revenues as we perform these services.



Gross Reporting of Revenues. We report our revenues from the sale of hardware and software products on a gross, rather than a net, basis. In reporting our revenues on a gross basis, we considered that:



• We are the primary obligor to our customers. We are responsible for fulfillment, including the acceptability of the products and services to our customers.

• We have the risk of loss for inventory and credit.

• We establish the prices for our products and services with our customers.

• We are responsible for the installation and configuration services ordered by our customers.



Inventory . We periodically review, estimate and adjust our reserves for obsolete or unmarketable inventory equal to the difference between the inventory cost and the estimated market value based upon assumptions about future demand and market conditions. Results could be materially different if demand for our products decreased because of economic or competitive conditions, length of industry downturn, or if products become obsolete because of technical advancements in the industry.

Valuation of Goodwill . We test goodwill for impairment annually or more frequently if changes in circumstance or the occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on total market capitalization as compared to the carrying value of our net assets. If our total market capitalization is at or below the carrying value of our net assets, it may prompt us to engage a third party valuation firm to perform a valuation of us to further assess whether our goodwill is impaired pursuant to SFAS 142. We consider our goodwill impairment test estimates critical due to the amount of goodwill recorded on our balance sheet and the judgment required in determining fair value amounts.



Valuation of Long-Lived Assets, Including Finite-Lived Intangibles . We evaluate long-lived assets and intangible assets with finite lives for impairment, as well as the related amortization periods, to determine whether adjustments to these amounts or useful lives are required based on current events and circumstances. We base the evaluation on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, we record a charge to reduce the carrying amount to its estimated fair value. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. We consider the estimates associated with the asset impairment tests critical due to the judgments required in determining fair value amounts, including projected future cash flows. Changes in these estimates may result in the recognition of an impairment loss.



Income Taxes . We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the likelihood that we will recover our deferred tax assets from future taxable income We consider projected future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.



Stock-Based Compensation . We adopted the provisions of FASB No. 123R, Share Based Payment on January 1, 2006. SFAS 123(R) requires us to measure and recognize in our statements of operations the expense associated with all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) requires the use of an option pricing model to determine the fair value of share-based payment awards. Our stock price, as well as assumptions regarding a number of highly complex and subjective variables, will affect our determination of fair value. We base recognition of compensation expense for our performance-based, non-vested shares on management’s estimate of the probable outcome of the performance condition. Management reassesses the probability of meeting these performance conditions on a quarterly basis. Changes in management’s estimate of meeting these performance conditions may result in significant fluctuations in compensation expense from period to period.

CONF CALL

Charles B. Westling

I’d like to welcome everyone to this afternoon’s conference call. With me today are Greg Barnum, our Vice President of Finance and Chief Financial Officer and Scott Robinson, our Chief Technology Officer. Let me first turn the call over to Greg to discuss the second quarter results and then I will provide some additional perspectives on Q2 and our outlook for the third quarter and the rest of the year.

Gregory T. Barnum

Before we start with Q2, let me first cover the Safe Harbor on forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. In this conference call we will be discussing our views regarding future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors. Please refer to our filings with the SEC for a full discussion of our company’s risk factors.

Also, let me remind everyone that when we talk about the second quarter and six months of 2008, it includes three months and six months respectively of the results of operations of MCSI which we acquired on January 31, 2007. When we refer to 2007 second quarter and six months this includes three months and five months respectively of MCSI.

Turning to the quarter, on a GAAP basis second quarter revenues were $49.7 million which is up 23% from revenues of $40.3 million in the second quarter of 2007 and a sequential increase of 4% from $47.7 million in the first quarter of 2008. Revenue for the six months ended June 30th were $97.4 million compared to $81.2 million for the prior year period which represents a 20% increase. For the second quarter, our overall gross margin was 26.8% compared to 25.2% in the second quarter of 2007. Our product gross margins for the second quarter of 2008 was 25.1% compared to 24.1% in the second quarter of 2007. The increase in product gross margin in the second quarter was due to the continuing effort by our sales force to sell higher margin storage solutions and from an increased percentage of our product sales coming from disc sales.

In the second quarter of 2008 40% of our revenue came from disc sales versus 35% in the second quarter of 2007. Tape sales declined to 7% of total revenues in Q2 of 2008 from 14% in the second quarter of 2007. Service gross margins in the second quarter of 2008 were 29.2% compared to 26.8% in the second quarter of 2007. This increase of 240 basis points is primarily due to the sale of more profitable Datalink delivered services to our customers. On a sequential basis service gross margins increased slightly. Going forward, we expect service margins to be in the range of 28% to 29% and we expect overall gross margins to be in the range of 25.5% to 26.5%.

For the quarter we saw revenues consisting of 40% disc, 7% tape, 6% software, 5% storage networking and 42% services. We continue to see a growing percentage of disc business in the overall mix as customers are using disc based solutions more frequently in their traditional back up environment. We’re also continuing to see leverage in our business model as total non-GAAP operating expenses as a percent of revenues decreased to 23% of revenues in the second quarter of this year as compared to 26% in the second quarter of 2007 and 25% in the first quarter of 2008. We expect to continue this leverage on a year-over-year basis in 2008 as our revenues grow.

Second quarter GAAP net earnings were approximately $1 million or $0.08 per share which compares to a net loss of $346,000 or $0.03 in the second quarter of 2007. GAAP net earnings for the first six months of 2008 were $1.5 million or $0.12 per share compared to a net loss of $1.1 million or $0.09 per share for the first six months of 2007. On a non-GAAP basis, net earnings for the second quarter of 2008 were $1.3 million or $0.10 per share compared to a non-GAAP breakeven in the second quarter of 2007. The non-GAAP net earnings for the first six months of 2008 were $2 million or $0.16 per share compared to non-GAAP net loss of $175,000 or $0.01 per share in the first six months of 2007.

The non-GAAP results for the second quarter were adjusted for the following items: $44,000 relating to the adjustment to the MCSI deferred revenue liability which is required by purchase accounting; $245,000 relating to stock-based compensation charges; $177,000 relating to the amortization of backlog and customer relationship intangibles; and $191,000 which represents the income tax expense relating to the above items.

Our cash and investment balance at the end of March was $28 million which was up from $26.4 million at the end of the first quarter. For the quarter we generated $1.8 million of cash from operations and our DSO at the end of the second quarter was 32 days compared to 27 days at the end of the first quarter.

Let me now turn the call back over to Charlie.

Charles B. Westling

Overall, I’m very pleased with the team’s performance during the quarter. There are a lot of highlights to recognize for the quarter. Among them revenues during the quarter were the highest second quarter revenues in the company’s history, we generated a significant improvement in operating earnings with a $2.3 million turnaround from the second quarter of 2007. Operating income on a non-GAAP basis was 4% which was solid increase sequentially from the 2.3% level in the first quarter of this year. Our cash position continues to grow reflecting our increased profitability and our continued very effective balance sheet management.

I’m also very pleased with the diversity of our business and the more balanced performance that we’re seeing across the sales teams. This is reflected in the fact that while our revenues grew 23% year-over-year in the second quarter, our top 15 customers during the second quarter of this year represented 36% of total revenues compared to 40% of revenues represented by our top 15 customers in Q2 of 2007. These results were delivered against the backdrop of macroeconomic conditions that continue to be challenging. We believe that our share of the market and our share of the customer storage spend is growing in many instances because we are keenly focused on delivering solutions that does meet our customers’ business needs while driving very compelling ROI and TCO results.

We’re also doing a better job of adding more value to our customers by wrapping our professional services and customer support capabilities around the products and technologies that we are selling. This is reflected in the continued strong growth of customer support revenues which increased 26% year-over-year and a record level of professional services revenue during the second quarter. One of our key initiatives coming in to this year was to create practice areas to more effectively tie together storage technologies, solutions and services with customers’ business needs while improving alignment and leveraging across the entire company. These practices are making a positive impact.

In the area of business and database applications we have seen revenues from storage software specifically addressing Oracle and SQL environments increase over 50% on a year-over-year basis. Our backup and recovery practices has grown significantly this year. There have been a couple of key drivers of this growth. First, customers continue to move aggressively towards disc based architectures for backup and recovery. These architectures increasingly include deduplication, virtualization and WAN optimization technologies to improve the efficiency and the manageability of backup and recovery environments. In addition, we are seeing positive momentum and growing opportunities related to our recently introduced backup reporting and assessment services offerings. To improve the quality and streamline deliver of these services, we are building a portfolio of services delivery tools and branding it StorageScape.

In the case of our backup and recovery services, by providing customers with a non-invasive tool to collect real time information on the performance of their backup jobs we’re able to identify success and failure rates for backup and we are able to identify opportunities to improve the timeframe for performing backups. This helps to address a significant challenge that most companies face which is how to deal with the growing volume of data to be backed up while compressing timeframes for backing up the data so that backup windows do not affect the performance of production data generated real time from applications of databases. While our backup and recovery reporting service has only recently be made available to our customers, we’ve already generated a pipeline of over $5 million in product drag along opportunities tied to the service offering. This offering coupled with our growing customer support business continues to help create more stickiness and loyalty with our customer relationships.

We continue to see growing opportunities in our virtualization and consolidation products. The server virtualization technology continues to penetrate the market. The opportunity to implement solutions that virtualize the storage infrastructure and leverage the benefits of server virtualization is increasing rapidly. Our pipeline in this area has grown significantly in the past year and many of our projects now have a virtualization component. The combination of all these factors both external and internal to Datalink has contributed to our strong performance in both the second quarter and during the first half of this year.

Let me now turn to our outlook for Q3 and the rest of 2008. We ended the second quarter with a backlog of $32 million which compares to a $30 million backlog at the end of the first quarter this year. And, we are encouraged by the higher backlog entering the quarter and we continue to see good levels of activity and opportunity within our sales pipeline across the sales teams. However, the third quarter of the year is typically impacted by summer vacations and other factors that make closing sales opportunities and implementing projects during the quarter more challenging than at other points during the year. We also continue to see the effects of growing customer caution and higher levels of scrutiny of IT projects in the midst of a challenging economic environment.

As we assess all of these variables we do believe that we can deliver another quarter of year-over-year growth and profitability in Q3. Specifically, we expect revenues for the third quarter to be in the range of $49 to $53 million with fully diluted earnings per share of $0.06 to $0.10 on a GAAP basis and $0.09 to $0.13 on a non-GAAP basis. As a point of comparison in the third quarter of 2007 we generated revenues of $45.8 million and earnings per share of $0.07 on a GAAP basis and $0.09 on a non-GAAP basis.

Our priorities for the rest of 2008 remain focused on driving our execution in five key areas: first, increasing employee productivity through training, sharing best practices and aligning our people and processes with technology tools to serve our customers better; second, investing in our customer support capabilities and services offerings to deliver more value to our customers whether by providing them with more proactive levels of support or implementing more impactful strategies for improving their backup environments through our StorageScape driven backup reporting assessment service; third, building critical mass in key geographies by hiring talented and experienced storage engineers, storage architects and account executives; fourth, accelerating the achievement of our strategic goals by acquiring companies that can enable us to achieve critical mass faster, more profitably in key areas or provide additional services that drive more value to our customers; and finally, delivering more compelling business value and technology solutions to our customers by leveraging our practice areas and go to market capabilities.

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