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

Overview

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

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

Second Quarter Financial Highlights and Other Information

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

• Net revenues of $171.2 million for the second quarter of fiscal 2009 increased sequentially by $2.8 million, or 2%, from $168.4 million in the first quarter of fiscal 2009.

• Gross profit as a percentage of net revenues increased to 67.9% for the second quarter of fiscal 2009 from 66.9% for the first quarter of fiscal 2009.

• Operating income as a percentage of net revenues increased to 29.2% for the second quarter of fiscal 2009 from 28.4% in the first quarter of fiscal 2009.

• Net income of $27.2 million, or $0.20 per diluted share, in the second quarter of fiscal 2009 decreased from $31.6 million, or $0.24 per diluted share, in the first quarter of fiscal 2009. Net income included stock-based compensation expense, acquisition-related charges, impairment charges related to marketable securities, and the related income tax effects and valuation allowance on deferred tax assets, totaling $18.0 million for the second quarter of fiscal 2009 compared to $10.3 million for the first quarter of fiscal 2009.

• Cash, cash equivalents and marketable securities of $421.0 million at September 28, 2008 increased $15.6 million from $405.4 million at June 29, 2008.

• Accounts receivable was $77.9 million as of September 28, 2008, compared to $86.7 million as of June 29, 2008. Days sales outstanding (DSO) in receivables improved to 41 days as of September 28, 2008 from 47 days as of June 29, 2008.

• Inventories were $33.3 million as of September 28, 2008, compared to $26.2 million as of June 29, 2008. Our annualized inventory turns in the second quarter of fiscal 2009 were 6.6, a decrease from 8.5 turns in the first quarter of fiscal 2009.

As a result of the worldwide economic slowdown, it is extremely difficult for us and our customers to forecast future sales levels based on historical information and trends. Portions of our expenses are fixed and other expenses are tied to expected levels of sales activities. To the extent that we do not achieve our anticipated level of sales, our gross profit and net income could be adversely affected until such expenses are reduced to an appropriate level.

Results of Operations

Net Revenues

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


                                                Three Months Ended                          Six Months Ended
                                        September 28,         September 30,        September 28,         September 30,
                                            2008                  2007                  2008                 2007
                                                                    (Dollars in millions)

Net revenues:
Host Products                          $         119.7       $         104.4      $          240.3      $         208.7
Network Products                                  29.8                  22.0                  59.7                 46.4
Silicon Products                                  15.6                  11.5                  31.2                 21.1
Royalty and Service                                6.1                   2.4                   8.4                  3.9

Total net revenues                     $         171.2       $         140.3      $          339.6      $         280.1

Percentage of net revenues:
Host Products                                       70 %                  74 %                  71 %                 74 %
Network Products                                    17                    16                    18                   17
Silicon Products                                     9                     8                     9                    8
Royalty and Service                                  4                     2                     2                    1

Total net revenues                                 100 %                 100 %                 100 %                100 %

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

Our net revenues are derived primarily from the sale of Host Products and Network Products. Net revenues increased 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.

Net revenues by geographic area are as follows:

                                                Three Months Ended                          Six Months Ended
                                        September 28,         September 30,        September 28,         September 30,
                                            2008                  2007                  2008                 2007
                                                                        (In millions)

United States                          $          83.7       $          68.5      $          164.3      $         146.3
Europe, Middle East and Africa                    42.0                  34.6                  83.0                 65.2
Asia-Pacific and Japan                            36.5                  28.8                  72.4                 51.8
Rest of the world                                  9.0                   8.4                  19.9                 16.8

Total net revenues                     $         171.2       $         140.3      $          339.6      $         280.1

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:


                                                Three Months Ended                          Six Months Ended
                                        September 28,         September 30,        September 28,         September 30,
                                            2008                  2007                  2008                 2007
                                                                    (Dollars in millions)

Gross profit                           $         116.2       $          91.3      $          228.9      $         180.2
Percentage of net revenues                        67.9 %                65.1 %                67.4 %               64.3 %

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

Our operating expenses are summarized in the following table:


                                                   Three Months Ended                           Six Months Ended
                                         September 28,           September 30,         September 28,         September 30,
                                              2008                   2007                   2008                 2007
                                                                       (Dollars in millions)

Operating expenses:
Engineering and development             $           33.1       $            33.1      $           67.4      $          67.7
Sales and marketing                                 24.0                    20.6                  47.0                 41.8
General and administrative                           9.2                     8.8                  16.7                 17.0
Special charges                                        -                     1.6                     -                  3.8

Total operating expenses                $           66.3       $            64.1      $          131.1      $         130.3

Percentage of net revenues:
Engineering and development                         19.3 %                  23.5 %                19.9 %               24.2 %
Sales and marketing                                 14.0                    14.7                  13.8                 14.9
General and administrative                           5.4                     6.3                   4.9                  6.1
Special charges                                        -                     1.2                     -                  1.3

Total operating expenses                            38.7 %                  45.7 %                38.6 %               46.5 %

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.

Interest and Other Income (Expense), Net

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


                                                    Three Months Ended                            Six Months Ended
                                          September 28,           September 30,         September 28,          September 30,
                                               2008                   2007                   2008                  2007
                                                                            (In millions)

Interest income                          $            3.0       $             5.6      $            6.5       $          11.8
Gain on sales of marketable securities                  -                       -                   0.4                   0.2
Loss on sales of marketable securities                  -                    (0.1 )                   -                  (0.2 )
Impairment of marketable securities                  (5.0 )                     -                  (7.7 )                   -
Other                                                   -                     0.3                   0.3                   0.2

                                         $           (2.0 )     $             5.8      $           (0.5 )     $          12.0

Interest and other income (expense) for the three months ended September 28, 2008 was comprised of a $5.0 million impairment charge on marketable securities, partially offset by interest income of $3.0 million related to our portfolio of marketable securities. Interest and other income (expense) for the three months ended September 30, 2007 was comprised primarily of interest income related to our portfolio of marketable securities. Interest income decreased primarily due to a decline in interest rates.

Interest and other income (expense) for the six months ended September 28, 2008 was comprised principally of a $7.7 million impairment charge on marketable securities, partially offset by interest income of $6.5 million related to our portfolio of marketable securities and $0.4 million of net realized gains on sales of marketable securities. Interest and other income (expense) for the six months ended September 30, 2007 was comprised primarily of interest income related to our portfolio of marketable securities. Interest income decreased primarily due to a decrease in the balance of our marketable securities and a decline in interest rates.

We reviewed various factors in determining whether to recognize an impairment charge related to our unrealized losses in marketable securities, including the current financial and credit market environment, the financial condition and near term prospects of the issuer of the marketable security, the magnitude of the unrealized loss compared to the cost of the investment, the length of time the investment has been in a loss position and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. Based on this analysis, we determined that a portion of the unrealized losses were other-than-temporary and recorded impairment charges of $5.0 million and $7.7 million related to our portfolio of marketable securities during the three and six months ended September 28, 2008, respectively.

Income Taxes

Our effective income tax rate was 40% and 33% for the six months ended September 28, 2008 and September 30, 2007, respectively. Our effective income tax rate for the six months ended September 28, 2008 was adversely impacted primarily by a valuation allowance against deferred tax assets related to impairment charges on certain marketable securities. Due to the recent turmoil in the financial and credit markets, and limitations on the deductibility of capital losses, we are currently unable to assert that it is more likely than not that we will realize the benefit of the related deferred tax assets. We expect the annual effective tax rate for fiscal 2009 to approximate 37%, which includes a benefit for federal research and development credits that were reinstated in October 2008. Our annual effective tax rate was 35% for fiscal 2008. Given the increased global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it has become increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially from our estimates, we may not achieve our expected effective tax rate. Additionally, our effective tax rate may be impacted by other items including the tax effects of acquisitions, stock-based compensation and uncertain tax positions.

. . .