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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File No. 0-23298

(949) 389-6000

Securities registered pursuant to Section 12(b) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      As of May 31, 2002 the aggregate market value of the voting stock held by non-affiliates of the registrant was $2,641,007,570.

      As of May 31, 2002, the registrant had 93,307,742 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

      Portions of the following documents are incorporated herein by reference in the Parts of this report indicated below:

	Part III, Items 10, 11, 12 and 13 —	Definitive proxy statement for the 2002 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2002 fiscal year.

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PART I

Item 1.     Business

Introduction

      QLogic Corporation was organized as a Delaware corporation in 1992. In August 2000, we merged with Ancor Communications, Inc., in a pooling-of-interests transaction. Unless the context indicates otherwise, the “Company” and “QLogic” each refer to the Registrant and its subsidiaries.

      All references to years refer to the Company’s fiscal years ended March 31, 2002, April 1, 2001, and April 2, 2000 as applicable, unless the calendar years are specified. All references to share and per share data have been restated to reflect our stock splits.

Overview

      QLogic Corporation simplifies the process of networking storage for original equipment manufacturers, or OEMs, resellers and system integrators with the only end-to-end storage area network, or SAN, infrastructure in the industry. With a vision of a SAN in every business, QLogic produces the controller chips, management enclosure chips, host bus adapters, or HBAs, fabric switches and management software that are the backbone of storage networks for large corporations and small to medium-sized businesses. The Company serves customers with solutions based on all SAN technologies including Small Computer Systems Interface, or SCSI, Internet SCSI, or iSCSI, InfiniBand^TM and Fibre Channel.

	QLogic’s products are sold directly to OEMs and through QLogic-authorized distributors and resellers. QLogic customers rely on our SAN infrastructure technology to deliver storage solutions to information technology professionals in virtually every business sector.
	QLogic technology is found in solutions for:

	•	Storage-intensive enterprise applications such as data warehousing, data mining and online transaction processing;
	•	Media-rich file types such as film/video, broadcast, medical imaging and computer-aided design, or CAD and computer-aided manufacturing or CAM;
	•	Server clustering and local area network-free, or LAN-free, high-speed backup.

	QLogic products are incorporated in hundreds of OEM customer solutions from: Cisco Systems, Inc., Dell Computer Corporation, EMC Corporation, Fujitsu Limited, Hitachi Limited, Hewlett Packard Company, Intel Corporation, IBM Corporation, Quantum Corp., Sony, Storage Technology Corporation (StorageTek), Sun Microsystems, Inc. and many others.

	To ensure interoperability within the SAN, QLogic works closely with independent hardware vendors and software vendors, as well as developers and integrators who create, test, and evaluate complementary storage networking products. Key partners include: Computer Associates International, Inc., Legato Systems, Inc., McData Corporation, Microsoft Corporation, and VERITAS Software Corporation.

Storage Industry

      The University of California at Berkeley report entitled “How Much Information?” published in late 2000, attempted to measure how much digital information is generated in the world each year. The report concluded the world currently generates over 1.6 million terabytes (1 terabyte equals roughly 1 million books) of magnetically recorded information per year. It also appears this volume is doubling every year. The ability

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      In the mid-1980’s the need to distribute information quickly and efficiently drove client access from a “mainframe direct connect” environment to a LAN environment. More recently, the need to access growing volumes of information by large numbers of homogeneous and heterogeneous computing platforms has led to a rapid adoption of storage area networking environments. As indicated in the University of California at Berkeley study, the explosive expansion of the Internet and the growing use of digital information servers act as a catalyst for ever increasing storage requirements and drives the need to network storage for accessibility, maintainability and simplicity of management.

      IBM first introduced storage area networking in the early 1990’s with the Enterprise System Connection, or ESCON. While this was an effective solution for IBM mainframe environments, it did nothing for the rapidly expanding open systems environment. Fibre Channel, which was introduced in 1994, promised superior connectivity, distance and access benefits over ESCON in a standard protocol.

      Initially deployed in a loop environment and used primarily for its tremendous bandwidth advantages over existing SCSI solutions, Fibre Channel gradually moved into networked environments. At first, deployments used hubs to connect networked servers and storage subsystems. Subsequently, switches replaced hubs and now represent the vast majority of deployments.

      As was the case in the adoption of LANs, software was necessary for the successful adoption of storage area networking. The ability to consolidate multiple computing environments and share connectivity of previously dedicated storage offered significant cost advantages. The only remaining issue was managing such a sophisticated environment. SANs followed much the same adoption path as LANs, with storage manufacturers, original equipment manufacturers and third parties all developing and delivering SAN management solutions. Today there are many SAN management solutions available, from relatively basic solutions for small environments to extensive software packages capable of managing thousands of SAN nodes.

      SANs are rapidly being adopted with Fibre Channel the primary enabling technology for their implementation. According to International Data Corporation and Dataquest market reports, SANs will dominate the storage market by 2004 and Fibre Channel will be the dominant technology used to deploy SANs through 2004 and beyond.

The QLogic Solution

      Our ability to serve the storage industry stems from our highly leveraged product line that provides a complete SAN infrastructure solution. On the server side of the SAN, we provide enclosure management products, HBA technology on the motherboard (Fibre Down technology), baseboard management solutions and Fibre Channel HBAs. Connecting servers to storage, we provide the backbone of the network with a full suite of Fibre Channel switches. On the storage side of the network, we provide controller chips for the Redundant Array of Independent Disks, or RAID, Fibre Channel host port, RAID Fibre Channel drive port, along with controller chips for hard drives and tape drives.

      One of our key strategies has been to provide our customers with solutions that simplify their product design requirements. Complete storage networking solutions that are pre-tested and easy to install significantly reduce the implementation efforts and time-to-market in both manufacturing and enterprise information technology environments. Today our SAN infrastructure components are found in a broad range of SAN products, including workstations, department servers, blade servers, network attached storage, or NAS, servers, storage routers, virtualization appliances, tape drives and disk arrays.

QLogic Product Overview

      QLogic designs and supplies storage network infrastructure components and software for the world’s largest server and storage subsystem manufacturers that ultimately are used by small to medium-sized

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      We have the unique position as the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Our products include our SANblade^TM HBAs, SANbox^TM Fibre Channel Switches and SANsurfer Tool Kit^TM management software. QLogic is the only HBA vendor to support SCSI, Internet Protocol, or IP, Virtual Interface, or VI, and FICON protocols with the same Fibre Channel HBA. In addition, we design and supply controller chips used in hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure.

QLogic’s SANblade HBA family consists of board-level solutions based on Fibre Channel, iSCSI and Infiniband. Our SANblade products are engineered around a standard, common driver interface, so developers can migrate between topologies with minimal investment and bring new technology products to market quickly. We produce a broad line of HBAs and SANblade ManagerTM as part of our SANsurfer Toolkit software, for both direct connect and SAN connected environments.

The SANblade 2300 Series are PCI-X, CompactPCI, or cPCI and SBus to 2Gb Fibre Channel HBAs. Targeted specifically for SANs and server clustering environments, the 2300 Series is optimized for peak performance and real-world scalability. Our 2Gb/sec HBAs support a wide range of operating system environments and provide reliable, high-performance connectivity for the world’s leading server and storage subsystem platforms.

The SANblade 2200 Series is designed for performance in the SAN environment. The 2200 Series provides all the benefits of Fibre Channel technology — fabric connections for hundreds of devices, bandwidth to 200MB/s (in full duplex) all in a highly integrated cost-effective package. With PCI, cPCI, and SBus models, the high-performance 2200 Series supports SAN-enabled features, like F-port fabric login, full duplex, Fibre Channel-tape and IP protocol, creating a powerful SAN connectivity solution.

	Designed for maximum performance in real world applications, QLogic’s PCI-SCSI host bus adapter family enables a powerful combination of speed and host-CPU independence, making QLogic SCSI products among the most scalable solutions on the market.

We develop and market Fibre Channel switches and SANbox Manager as part of our SANsurfer Tool Kit software. QLogic SANbox switches provide a high performance and flexible solution for networking storage. With solutions ranging from 8-port fabric switches to 16-port fabric switches, the SANbox product line meets the needs of both small to medium business as well as requirements in the global enterprise information technology environment. Deployed in single or multi-stage “fabrics” of almost any size, these products are essential to the creation of resilient, intelligent SANs. Linking multiple host and storage resources, SANbox products create the connectivity framework that allows users to share and efficiently access stored data.

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QLogic’s SANbox2 is a 2Gb and 1Gb Fibre Channel switch that ensures complete investment protection for current and future SAN infrastructures. It provides a new 2Gb standard of performance, reliability and simplicity for SANs. Providing both 8 and 16 ports, the SANbox2 is the fastest, most scalable and easiest to manage Fibre Channel switch on the market. Built on the industry’s most advanced technology from the original SANbox series, SANbox2 breaks new ground with enhanced functionality that meets or exceeds mission-critical requirements.

QLogic’s SANboxTM 8, 16 and 16HA (High Availability) port switches provide the essential foundation for scalable high-performance SANs. Linking multiple hosts and storage resources, SANbox products provide a reliable high performance connectivity framework to help users share and efficiently access stored data. The SANbox-8’s small size makes it the ideal 8-port switch for either “edge switch” or “core switch” use, supporting applications ranging from server clustering to storage consolidation and enterprise backup. The SANbox 16 and 16HA is ideal for storage consolidation, server clustering, and enterprise backup for any application requiring maximum reliability, availability and performance. The SANbox-16HA includes all the features of our standard 16-port switch, plus optional dual redundant power supplies.

SANsurfer Tool Kit is included with all QLogic SANblade HBAs and SANbox switches. Through its SANblade Manager and SANsurfer Manager, it provides everything needed to configure and manage a QLogic SAN fabric, all from a single intelligent interface. Beginning with easy-to-follow installation instructions and incorporating all the necessary drivers and firmware, SANsurfer Tool Kit is capable of handling any aspect of SANbox and SANblade management, including accurate detection of device failures, diagnostic tools to help managers troubleshoot, and statistical tools to measure metrics. SANsurfer Tool Kit can also be launched from multi-vendor SAN management software packages from VERITAS®, Computer Associates®, BMC Software®, Tivoli®, McData and others. QLogic partners with industry leading SAN software providers to ensure that our products interoperate with our partners’ software.

     Silicon Chips

	QLogic’s PCI/PCI-X Fibre Channel controllers are highly integrated, cost effective solutions. Interoperability is key in our unique single-chip design and ultra-scalable architecture, making QLogic Fibre Channel products the easiest to implement and evolve.

	QLogic’s Peripheral Controllers are the industry standard for stand-alone SCSI and Fibre Channel solutions, providing the flexibility and performance required for applications in hard drives, tape drives, scanners, and other peripheral products.

	QLogic’s Management Controller products monitor and control the physical environment within server or storage enclosure environments. These products detect the presence or absence of functional disk drives, power supplies and fans, as well as monitor the temperature within the enclosure, and pass the information back to a system for display and/or programmed action.

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Sales and Marketing

      We market and distribute our products through OEM partners, system integrators, resellers and our direct sales organization supported by sales and field engineering personnel. We also utilize a network of independent manufacturers’ representatives and regional and international distributors.

      In North America, we maintain a direct sales force to serve our large original equipment manufacturer customers and multiple outside representatives that are focused on medium and emerging accounts. National distributors carrying our products serve the value added reseller, or VAR market.

      We also utilize a focused sales organization to assist, train, equip and augment the sales organizations of our major original equipment manufacturer customers and their respective reseller organizations and partners.

      We market and sell our products throughout the world. Internationally, we utilize an extensive network of distributors and master distributors to focus on the original equipment manufacturer and VAR markets. We maintain direct sales and technical relationships with our major original equipment manufacturer customers.

      We believe that it is important to work closely with our large peripheral and computer system manufacturers during their design cycles. We support these customers with extensive applications and system design support, as well as training classes and seminars, conducted both in the field and from our offices in Eden Prairie, Minnesota and Aliso Viejo, California. We also maintain a high level of customer support through technical hotlines and Internet communications.

      For our original equipment manufacturer customers, our sales efforts are focused on establishing and developing long-term relationships. The sales cycle typically begins with one of our product designs being selected as a component into a potential customer’s computer system or data storage peripheral. Once we secure this design win with a given customer, the time to product shipment can range between six and eighteen months. After winning a design with a potential customer, we work closely with the customer to integrate our product with the customer’s current and next generation products.

      We actively participate within industry organizations relating to the development and acceptance of industry standards. We also collaborate with peer companies in respective markets through co-marketing activities, joint training, road tours and cooperative testing. To ensure multi-vendor inter-operation, we maintain extensive interoperability and testing laboratories.

Engineering and Development

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

      We are engaged in the design and development of integrated circuits for Fibre Channel switches, switch components, SCSI I/O controllers and Fibre Channel host bus adapters. We also design and develop SCSI and Fibre Channel hard disk controllers and management controller semiconductors used in storage peripherals and server enclosures and circuit boards.

      We continue to invest heavily in research and development and have expanded our capabilities through our merger with Ancor Communications, Inc. and our acquisition of Little Mountain Group, Inc. Recognizing the rapid technological evolution in the industry, we maintain research and development activities in the areas of emerging technologies including Infiniband and iSCSI.

      As of March 31, 2002, we employed approximately 373 engineers, including technicians and support personnel engaged in the development of new products and the improvement of existing products. There can be no assurance that we will continue to be successful in attracting and retaining key personnel with the skills and expertise necessary to develop new products in the future.

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Backlog

      Our backlog of orders was approximately $56.5 million on March 31, 2002, compared to approximately $86.2 million on April 1, 2001. These backlog figures include only orders scheduled for shipment within six months. Most orders are subject to rescheduling and/or cancellation with little or no penalty. Purchase order release lead times depend upon the scheduling practices of the individual customer, and the rate of booking new orders fluctuates from month to month. Our customers have in the past encountered uncertain and changing demand for their products. Orders are typically placed based on customer forecasts. If demand falls below customers’ forecasts, or if customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from us. Additionally, the percentage of business that is booked and billed within the same quarter is increasing. Therefore, the level of backlog at any particular date is not necessarily indicative of sales for any future period.

Competition

      The markets for SAN infrastructure components are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards.

      Due to the broad array of components required in the storage area network infrastructure, we compete with several companies. In the HBA market our primary competitors are LSI Logic Corporation, Emulex Corporation, Adaptec Inc. and JNI Corporation. Our switch products compete with McData Corporation and Brocade Communications Systems, Inc., however, there are also many other smaller companies in these markets.

      There are two markets in the Fibre Channel semiconductor controller business. The first market is associated with host applications and controller interfaces. In this market our primary competitors are Agilent Technologies and LSI Logic Corporation. The other market is the hard drive controller business. Although there are no direct competitors currently, potential competitors are Marvel Technologies and LSI Logic Corporation and vertically integrated hard disk drive manufacturers.

      Finally, our enclosure and baseboard management semiconductor controllers compete primarily with Vitesse Semiconductor Corporation.

Manufacturing

      We subcontract the manufacturing of our semiconductor chips and host bus adapter boards and switches to independent foundries and subcontractors, which allows us to avoid the high costs of owning, operating and constantly upgrading a wafer fabrication facility and assembly factory. As a result, we focus our resources on product design and development, quality assurance, sales and marketing and customer support. We design our semiconductors, switches, and host adapter board products, and perform final tests on products, including tests required under our ISO9001/ TickIT Certification. We also provide fabrication process reliability tests, conduct failure analysis and audit the finished goods inventory to confirm the integrity of our quality assurance procedures.

      Our semiconductors are currently manufactured by a number of domestic and offshore foundries. Our major semiconductor suppliers are Toshiba, NEC Electronics, LSI Logic Corporation and Samsung Semiconductor, Inc. Most of our products are manufactured using 0.35 or 0.25 micron process technology.

      We depend on our foundries to allocate a portion of their foundry capacity sufficient to meet our needs and to produce products of acceptable quality and with satisfactory manufacturing yields in a timely manner. These foundries fabricate products for other companies and manufacture products of their own design. We do not have long-term agreements with any of our foundries; we purchase both wafers and finished chips on a purchase order basis. Therefore, the foundries generally are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We work with our existing foundries, and intend to qualify new foundries, as needed, to obtain

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      We currently purchase our semiconductor products from our foundries either in finished form or wafer form. We use subcontractors to die assemble our semiconductor products purchased in wafer form, and to assemble our switches and host adapter board products. In the assembly process for our semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packages and tested. Following assembly, we further test and inspect the packaged devices prior to shipment to our customers. For our host adapter board products, we purchase components in kit form. We provide these items to contract manufacturing companies that work together with our component suppliers to assemble the boards to our specifications. For our switch products, we subcontract the material, management, test and assembly to a subcontractor.

      Most component parts used in our host bus adapter boards are standard off-the-shelf items, which are, or can be, dual-sourced. We select suppliers on the basis of technology, manufacturing capacity, quality and cost. Whenever possible and practicable, we strive to have at least two manufacturing locations for each host adapter board and chip product. Nevertheless, our reliance on third-party manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, unavailability of, or delays in obtaining access to certain product technologies and the absence of complete control over delivery schedules, manufacturing yields, and total production costs. The inability of our suppliers to deliver products of acceptable quality and in a timely manner or the inability by us to procure adequate supplies of our products could have a material adverse effect on our business, financial condition and results of operations.

Intellectual Property

      Although we have seventeen patents issued and nine additional patent applications pending in the United States, we rely primarily on our trade secrets, trademarks and copyrights to protect our intellectual property. We attempt to protect our proprietary information through confidentiality agreements and contractual provisions with our customers, suppliers, employees and consultants, and through other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States.

      While our ability to compete may be affected by our ability to protect our intellectual property, we believe our technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property.

      We have received notices of claimed infringement of trademark rights in the past. There can be no assurance that third parties will not assert claims of infringement of trademarks or any other intellectual property rights against us with respect to existing and future products. In the event of a patent or other intellectual property dispute, we may be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the claim. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all. In the event of litigation to determine the validity of any third party’s claims, such litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.

Employees

      We had 668 employees as of March 31, 2002. We believe our future prospects will depend, in part, on our ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. None of our employees are represented by a labor union. We believe that our relations with our employees are good.

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      Our principal product development, operations, sales and corporate offices are currently located in three buildings comprising approximately 165,000 square feet in Aliso Viejo, California. We purchased the Aliso Viejo facility on March 23, 2000 and the facility is held without encumbrance. Additionally, we have leased design centers in Austin, Texas, Roseville, California and Eden Prairie, Minnesota comprising 5,973 square feet, 15,622 square feet and 50,182 square feet, respectively.

      Periodically, we are a party to ordinary disputes arising in the normal course of business. We do not believe that the outcome of any current legal proceedings will have a material adverse effect on our business, financial condition or results of operations.

      No matter was submitted during the fourth quarter of fiscal 2002 to a vote of security holders.

PART II

Principal Market and Prices

      Shares of our common stock are traded and quoted in The NASDAQ National Market under the symbol QLGC. The following table sets forth the range of high and low sales prices per share of our common stock for each quarterly period of the two most recent years as reported on The NASDAQ National Market.

Number of Common Stockholders

      The approximate number of record holders of our common stock was 675 as of March 31, 2002.

Dividends

      We have never paid cash dividends on our common stock and currently have no intention to do so. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our operating results, financial condition and other factors as the board of directors, in its discretion, deems relevant.

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Item 6.     Selected Financial Data

      The following table of certain selected data regarding QLogic should be read in conjunction with the consolidated financial statements and notes thereto.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 under “Factors That May Affect Future Results” and elsewhere in this document, which include without limitation the fact that our stock price may be volatile which could affect the value of your investment, that our operating results fluctuate significantly, that a long lasting economic downturn in the global economy impacting information technology spending could negatively impact our business, that our business is dependent on the storage area network market that is new and unpredictable, and that our financial

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RESULTS OF OPERATIONS

      The following table sets forth the results of operations and percentage of net revenues in our consolidated statements of income:

Net Revenues

      Our net revenues are derived primarily from the sale of SCSI and Fibre Channel based I/O products and enclosure management products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues in fiscal 2002 decreased $13.4 million or 4% from fiscal 2001 to $344.2 million. The decrease was the result of a $39.5 million increase in sales of Fibre Channel products, which was more than offset by a $49.6 million decrease in sales of SCSI products, and a $3.2 million decrease in IDE-based royalties.

      Net revenues in fiscal 2001 increased $141.4 million or 65% from fiscal 2000 to $357.5 million. The increase was the result of a $35.8 million increase in sales of SCSI products, a $112.1 million increase in sales of Fibre Channel products, partially offset by a $6.4 million decrease in IDE-based royalties.

      Export revenues (primarily to Pacific Rim Countries) in fiscal year 2002 decreased $35.5 million or 18% from fiscal 2001 to approximately $163.4 million. Export revenues in fiscal 2001 increased $84.0 million or 73% from fiscal 2000, to approximately $198.9 million. As a percentage of net revenues, export revenues accounted for 47% in fiscal year 2002, 56% in fiscal year 2001, and 53% in fiscal year 2000. The decrease in export net revenues as a percentage of total revenues is due to a decrease in net revenues in Pacific Rim countries. The decreases in export revenue dollars are primarily due to decreased sales to customers in Japan. Export revenues are denominated in U.S. Dollars. We do not expect the uncertainty in selected Pacific Rim foreign currency markets to have a material adverse effect on the results of our operations.

      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 four largest customers accounted for approximately 48% of net revenues in fiscal year 2002, 64% in fiscal year 2001, and 55% in fiscal year 2000. In fiscal 2002, Fujitsu Limited accounted for 17% of

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      We believe that our major customers continually evaluate whether or not to purchase products from alternate or additional sources. Additionally, customers’ economic and market conditions frequently change. Accordingly, there can also 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 the Company’s business, financial condition and results of operations.

Gross Profit

      Cost of revenues consist primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The gross profit percentage in fiscal 2002 was 61%, a decrease from 64% in fiscal 2001. The percentage decline was due to a reduction in the contribution of license fees and a decrease in margins on sales of earlier generation SCSI products.

      The gross profit percentage in fiscal 2001 was 64%, a decrease from 67% in fiscal 2000. The percentage decline was due to a reduction in the contribution of license fees combined with an increase in sales of switch products with lower margins.

      Our ability to maintain our current gross profit percentage can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the worldwide semiconductor foundry capacity, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and our ability to achieve manufacturing cost reductions. We anticipate that it will be increasingly more difficult to reduce manufacturing costs. As a result, we anticipate gross profit percentages to decrease in the future.

Operating Expenses

      Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development related material, occupancy costs, and computer support. We believe continued investments in engineering and development activities are critical to achieving our strategic objectives. As a result, we expect that engineering and development expenses will increase in absolute dollars in fiscal 2003.

      Engineering and development expenses were $69.7 million in fiscal year 2002, $56.3 million in fiscal year 2001, and $47.5 million in fiscal year 2000. As a percentage of net revenues this amounted to 20% in fiscal 2002, 16% in fiscal 2001, and 22% in fiscal 2000. The increase in spending each fiscal year was largely due to increased levels of Fibre Channel and SCSI design and engineering support. The increase as a percentage of net revenues in fiscal year 2002 is attributed to the increase in development expenses during a period in which we experienced moderate revenue declines.

      In fiscal year 2000 we incurred a $7.5 million charge for acquired in-process technology relating to the acquisition of AdaptiveRAID®technology from Borg Adaptive Technologies, Inc., a wholly-owned subsidiary of nStor Corporation. The Company recorded the purchase price as a one-time charge for in-process research and development of $7.5 million to engineering and development expense in the fourth fiscal quarter ended April 2, 2000.

      Selling and Marketing. Selling and marketing expenses consist primarily of sales and marketing salaries, sales commissions and related expenses, promotional activities and travel for sales and marketing personnel. We believe continued investments of these types of expenses are critical to the success of our strategy of expanding relationships with our customers. As a result, we expect sales and marketing expenditures will continue to increase in the future.

      Sales and marketing expenses were $38.3 million in fiscal 2002, $36.5 million in fiscal 2001, and $22.6 million in fiscal 2000. As a percentage of net revenues this amounted to 11% in fiscal 2002, 10% in fiscal

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      General and Administrative. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, human resources and information technology personnel. Non-personnel related expenses consist of recruiting fees, professional services, and corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs relating to the growth of the business and our operation as a public company.

      General and administrative expenses were $16.7 million in fiscal 2002, $14.8 million in fiscal 2001, and $11.2 million in fiscal 2000. As a percentage of net revenues this amounted to 5% in fiscal 2002, 4% in fiscal 2001, and 5% in fiscal 2000. The increase in both dollars and as a percentage of net revenues from fiscal 2001 to fiscal 2002 was due to increased costs for depreciation related to improved business systems and insurance.

      General and administrative expenses increased in fiscal 2001 by $3.6 million due to an increase in personnel, combined with increases in the bad debt reserves related to accounts receivable growth.

      Merger and Related Expenses. Merger and related expenses in fiscal year 2001 consisted primarily of direct and incremental transaction costs, such as fees for investment bankers, attorneys, accountants, and other related fees and expenses. Merger and related costs of approximately $22.9 million were incurred in connection with the merger with Ancor accounted for as a pooling-of-interests.

Non-Operating Income

      Interest and other income, was $19.0 million in fiscal 2002, $18.7 million in fiscal 2001, and $9.2 million in 2000. The increases in interest and other income in fiscal 2002, 2001 and 2000 are largely due to increases in cash equivalents and investment balances due to $64.9 million in net proceeds received from a secondary stock offering in the second quarter of 2000 and $14.8 million in net proceeds received from Intel pursuant to a stock purchase agreement in the third quarter of fiscal 2000. Additionally, cash equivalent and investment balances have increased due to cash flow from operations in each of the last three fiscal years.

Income Tax Provision

      Our effective tax rates were approximately 33% in fiscal 2002, 41% in fiscal 2001, and 34% in fiscal 2000. The elevated tax rate in fiscal 2001 was due to nondeductible costs incurred in conjunction with the merger with Ancor Communications, Inc. For more information on the merger, please see Note (2) in Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

      The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

      We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

	•	revenue recognition;
	•	inventory valuation; and
	•	accounting for investments.

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      Revenue recognition. We sell our products domestically and internationally primarily through OEM and distribution channel customers including distributors, system integrators and value added resellers who sell directly to end-users. Our significant customers include leading storage solution providers, server OEMs and storage OEMs.

      We recognize revenue from product sales upon shipment except for sales to distributor customers, most of which have contractual rights of return and/or price protection. Revenue from sales to distributors is recognized when these distributors ship our products to their end-user customers based on data we receive from such distributors. Reserves for uncollectible accounts and allowances for estimated sales returns are provided at the time revenue is recognized. We reserve for uncollectible accounts and product returns based on our historical experience and expectations regarding account collectibility and future returns related to products shipped. Royalty and product development revenue is recognized when earned and when receipt is assured.

      For all sales, we use either a binding purchase order or signed agreement as evidence of an arrangement. Sales through our distributors and major OEMs are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis.

      Our products are generally covered by a warranty of one to five years. We accrue a warranty reserve for the estimated costs to provide warranty services, which is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase resulting in decreased gross profit.

      Inventory valuation. Inventories are valued at the lower of cost or market on a first-in, first-out basis. We use a standard cost system for purposes of determining cost. The standards are adjusted periodically to ensure they approximate actual costs. We write down the carrying value of our inventory to market value for estimated obsolete or excess inventory based upon assumptions about future demand and market conditions. We compare current inventory levels on a product basis to our current sales forecasts in order to assess our inventory balance. Our sales forecasts are based on economic conditions and trends (both current and projected), anticipated customer demand and acceptance of our current products, expected future products and other assumptions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.

      Accounting for Investments. We classify our investments in marketable securities as “available for sale”, based on the criteria set forth in Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” We carry these investments at fair value, based on quoted market prices, and unrealized gains and losses are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity. Realized gains and losses are recognized upon the sale of our marketable securities in our statements of operations. We have established investment policy guidelines that we use to manage the financial institutions that have custody of our funds. Based on our guidelines, our investments generally consist of U.S. government, state and local, and corporate debt obligations with maturities ranging from one to sixty months. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. The fair market value of our investments in marketable securities may be adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. Additionally, the amount of interest income that we earn on our investments may be adversely affected by changes in interest rates.

New Accounting Standards

      Effective July 1, 2001, we adopted Statement of Financial Accounting Standards No. (SFAS) 141 “Business Combinations”. SFAS 141 addresses financial accounting and reporting for business combinations and requires that all business combinations initiated after June 30, 2001 be accounted for by a single method — the purchase method. The adoption of SFAS 141 did not have a material impact on our financial position or results of operations.

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      SFAS 142 “Goodwill and Other Intangible Assets” requires that goodwill and intangible assets that have indefinite useful lives not to be amortized but rather be tested at least annually for impairment. We are required to adopt SFAS 142 on April 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 are subject to the amortization provisions of SFAS 142. The adoption of SFAS 142 is expected to reduce general and administrative expenses by $1.0 million annually through December 2005.

      In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS 144 “Accounting for the Impairment and Disposal of Long Lived Assets.” SFAS 144 is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of SFAS 144 to have a material impact on our financial position or results of operations.

Liquidity and Capital Resources

      Our combined balances of cash and cash equivalents and short-term investments have increased to $492.5 million at March 31, 2002 compared to $355.5 million at April 1, 2001. The increase was attributable to positive cash flow from operations, primarily net income, during the twelve months ended March 31, 2002.

      Our primary source of liquidity is derived from working capital and cash from operations. We also have an unused $5.0 million unsecured line of credit with Silicon Valley Bank. Working capital increased $92.9 million to $535.6 million from April 1, 2001 to March 31, 2002. The increase in working capital in the fiscal year ended March 31, 2002 was largely attributable to positive cash flow from operations. The $5.0 million line of credit facility with Silicon Valley Bank allows us to borrow at the bank’s prime rate. The credit facility expires on July 5, 2002, and, although there can be no assurance, we currently expect to renew this line of credit. There were no borrowings under this credit facility on March 31, 2002.

      Our cash flow provided by operations was $149.2 million in fiscal 2002, and $98.1 million in fiscal 2001. The growth in cash provided by operations compared to the prior year was primarily due to decreases in inventories and accounts and notes receivable, and increases in other accrued liabilities. Our inventory turns increased to 5.4 in fiscal 2002 from 2.8 in the comparable prior year period largely due to a decrease in inventory resulting from improved management controls in the inventory management function.

      Our cash flow used in investing activities was $210.1 million in fiscal 2002 compared to $86.7 million in fiscal 2001. The increase in net cash used in investing activities in fiscal 2002 was primarily due to increases in purchases of investments, net of maturities that were partially offset by decreases in additions to property and equipment. Additions to property and equipment were $14.5 million in fiscal 2002, compared to $16.7 million in fiscal 2001.

      Our cash flow provided by financing activities was $8.8 million in fiscal 2002 compared to $30.0 million in the prior year. The fiscal year 2002 decrease in cash provided by financing activities was primarily due to a reduction in proceeds from issuance of stock under employee stock plans.

      We have certain obligations and commitments to make future payments in the form of non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements. At March 31, 2002, there were $31.9 million in non-cancelable purchase orders all due within one year. Disclosure of operating lease commitments can be located in Note (10) of the Notes to Consolidated Financial Statements.

      We believe that existing cash and cash equivalent balances, short term investments, debt facilities and cash flows from operating activities will provide the Company with sufficient funds to finance its operations for at least the next 12 months.

FACTORS THAT MAY AFFECT FUTURE RESULTS

      Except for the historical information contained herein, the information in this report constitutes forward-looking statements. When used in this report the words “shall,” “should,” “forecast,” “all of,” “projected,” “believes,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. In addition, we may from time to time make oral forward-looking statements. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the

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Our stock price may be volatile which could affect the value of your investment.

      The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. From January 1, 2001 through April 30, 2002, the market price has ranged from a low of $17.21 per share to a high of $99.13 per share. Several factors could impact our stock price including, but not limited to:

	•	announcements concerning QLogic, our competitors or customers;
	•	quarterly fluctuations in our operating results;
	•	introduction of new products or changes in product pricing policies by us or our competitors;
	•	conditions in the semiconductor industry;
	•	changes in market projections by industry forecasters;
	•	changes in estimates of our earnings by industry analysts; and
	•	market conditions for high technology equities in general.

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

Our operating results fluctuate significantly, which could cause our stock price to decline if our results fail to meet investors’ and analysts’ expectations.

      We have experienced, and expect to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that we will maintain our current profitability in the future. A significant portion of our net revenues in each fiscal quarter result from orders booked in that quarter. Orders placed by major customers are typically based on their forecasted sales and inventory levels for our products. Fluctuations in our quarterly operating results may be the result of:

	•	changes in purchasing patterns by one or more of our major customers, order changes or rescheduling;
	•	gain or loss of significant customers;
	•	customer policies pertaining to desired inventory levels of our products;
	•	negotiations of rebates and extended payment terms;
	•	changes in our ability to anticipate in advance the mix of customer orders;
	•	level of inventory our customers require us to maintain in our field warehouses;
	•	the time, availability and sale of new products;
	•	changes in the mix of products having differing gross margins;
	•	variations in manufacturing capacities, efficiencies and costs;
	•	the availability and cost of components, including silicon wafers;
	•	warranty expenses;

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	•	variations in product development and other operating expenses;
	•	revenue adjustments related to product returns;
	•	adoption of new accounting pronouncements and/or changes in our policies; or
	•	general economic and other conditions affecting the timing of customer orders and capital spending.

      Our quarterly results of operations are also influenced by competitive factors, including the pricing and availability of our products and our competitors’ products. Although we do not maintain our own wafer manufacturing facility, large portions of our expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet our expectations, our fixed expenses would magnify the effect on net income of such shortfall in net revenues. Furthermore, announcements regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely effected our quarterly results of operations. Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease.

A long lasting downturn in the global economy that impacts information technology spending could negatively affect our business.

      The global economy is in the midst of a slowdown that has had wide ranging effects on markets that we serve, particularly information technology, data storage and networking industries. This downturn has had a negative effect on our revenues and operating results, and many analysts have predicted that the recent terrorist attacks on the United States and the resulting worldwide conflict will prolong the downturn. We cannot predict the depth or duration of this downturn, and if it grows more severe or continues for a long period of time, our ability to increase or maintain our revenues and operating results may be impaired. In addition, because we intend to continue to make significant investments in research and development during this downturn, and to maintain extensive ongoing customer service and support capability, any further decline in the rate of growth of our revenues will have a significant adverse impact on our operating results.

Our business is dependent on the storage area network market that is relatively new and unpredictable, and if this market does not develop and expand as we anticipate, our business will suffer.

      Fibre Channel-based storage area networks, or SANs, were first deployed in 1997. As a result, the market for SANs and related storage router products has only recently begun to develop and is rapidly evolving. Because this market is new, it is difficult to predict its potential size or future growth rate. A significant number of our products are used exclusively in SANs and, therefore, our business is dependent on the SAN market. Accordingly, the widespread adoption of SANs for use in organizations’ computing systems is critical to our future success. Most of the organizations that potentially may purchase our products from our customers have invested substantial resources in their existing computing and data storage systems and, as a result, may be reluctant or slow to adopt a new approach like SANs. SANs are often implemented in connection with the deployment of new storage systems and servers. Therefore, our future success is also substantially dependent on the market for new storage systems and servers. Furthermore, the ability of the different components used in a SAN to function effectively, or interoperate, with each other when placed in a computing system has not yet been achieved on a widespread basis. Until greater interoperability is achieved, customers may be reluctant to deploy SANs. Our success in generating revenue in the emerging SAN market will depend on, among other things, our ability to:

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

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	•	predict and base our products on standards which ultimately become industry standards; and
	•	achieve interoperability between our products and other SAN components from diverse vendors.

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

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

	•	enhance our current products and to develop and introduce in a timely manner new products that keep pace with technological developments and industry standards;
	•	compete effectively on the basis of price and performance; and
	•	adequately address original equipment manufacturer customer and end-user customer requirements and achieve market acceptance.

      We believe that to remain competitive in the future we will need to continue to develop new products, which will require a significant investment in new product development. A significant portion of our revenues is generated from Fibre Channel technology. We, and some of our competitors, are developing alternative technologies that may compete with the market acceptance of our Fibre Channel products, such as iSCSI and Infiniband. If alternative standards are adopted by the industry, we may not be able to develop products for new standards in a timely manner. Further, even if alternative technologies do augment Fibre Channel revenues, our products may not be fully developed in time to be accepted by our customers. Even if our new products are developed on time, we may not be able to manufacture them at competitive prices in sufficient volumes.

We depend on a limited number of customers, and any decrease in revenue or cash flows from any one of our customers could cause our stock price to decline.

      A small number of customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues in the foreseeable future. Additionally, we are also subject to credit risk associated with the concentration of our accounts receivable. The loss of any of our major customers would have a material adverse effect on our business, financial condition and results of operations. Some of these customers are based in the Pacific Rim, which is subject to economic and political uncertainties. In addition, a majority of our customers order products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase products from us for any extended period. Major customers also have significant leverage over us and may attempt to change the terms, including pricing, which could materially adversely effect our business, financial condition and results of operations. This risk is increased due to the potential for some of these customers to merge with or acquire another of our customers. As our original equipment manufacturer customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be obtained. If we are unable to achieve such cost reductions, our gross margins could decline and such decline could have a material adverse effect on our business, financial condition and results of operations.

Competition within our product markets is intense and includes numerous established competitors.

      The markets for our products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. We currently compete primarily with Adaptec Inc. and LSI Logic Corporation in the SCSI sector of the I/O market. In the Fibre Channel host bus adapter sector of the I/O market, we compete primarily with LSI Logic Corporation, Emulex Corporation, JNI Corporation and Adaptec Inc. In the Fibre Channel host controller chip sector of the market we compete primarily with Agilent Technologies and LSI Logic Corporation. In the switch products sector, we compete with Brocade Communications, McData Corporation

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      We will need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved performance characteristics. While we continue to devote significant resources to research and development, these efforts may not be successful, or may not be developed and introduced in a timely manner. Further, several of our competitors have greater resources devoted to securing semiconductor foundry capacity because of long-term agreements regarding supply flow, equity or financing agreements or direct ownership of a foundry. In addition, while relatively few competitors offer a full range of storage area networking products, additional domestic and foreign manufacturers may increase their presence in these markets. We may not be able to compete successfully against these or other competitors. If we are unable to design, develop and introduce competitive new products on a timely basis, our future operating results will be materially and adversely affected.

Our distributors may not adequately distribute our products which could negatively affect our operations.

      Our distributors generally offer a diverse array of products from several different manufacturers and suppliers. Accordingly, we are at risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell our products. A reduction in sales efforts by our current distributors could materially adversely impact our business or operating results. Our distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as we anticipate, distributors may decrease the amount of product ordered from us in subsequent quarters. In addition, if we decrease our distributor-incentive programs, our distributors may temporarily decrease the amounts of product purchased from us. This could result in a change of business habits, and distributors may decide to decrease the amount of product held and reduce their inventory levels. In addition, we may from time to time take actions to reduce levels of our products at distributors.

We depend on our relationships with wafer suppliers and other subcontractors, and a loss of these relationships may lead to unpredictable consequences which may harm our results of operations if alternative supply sources are not available.

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

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

      We use multiple sources of supply for some of our products, which may require customers to perform separate product qualifications. We have not developed alternate sources of supply for all of our products and our newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. In particular, our integrated single chip Fibre Channel controller is manufactured by LSI Logic and

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

      Products as complex as ours frequently contain undetected software or hardware errors when first introduced or as newer versions are released. We have from time to time found errors in existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

Terrorist activities and resulting military actions could adversely affect our business.

      The terrorist attacks in New York and Washington, D.C. have disrupted commerce throughout the United States and Europe. The continued threat of terrorism within the United States and Europe and the military action and heightened security measures in response to such threat may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, delays in collecting cash, a general decrease in corporate spending on information technology, or our inability to effectively market, manufacture or ship our products, our business and results of operations could be materially and adversely affected. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have any long-term material adverse effect on our business, financial condition or results of operations.

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

      We expect that export revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. As a result, we are subject to several risks, which include:

	•	a greater difficulty of administering our business globally;
	•	compliance with multiple and potentially conflicting regulatory requirements, such as export requirements, tariffs and other barriers;
	•	differences in intellectual property protections;
	•	difficulties in staffing and managing foreign operations;
	•	potentially longer accounts receivable cycles;
	•	currency fluctuations;
	•	export control restrictions;
	•	overlapping or differing tax structures;
	•	political and economic instability; and
	•	general trade restrictions.

      A significant number of our customers and suppliers are located in Japan. Historically, the Asian markets have suffered from economic uncertainty. This uncertainty has taken place especially in countries that have

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We may need to engage in high risk transactions to guarantee we have production capacity which may require us to seek additional financing and result in dilution to our stockholders.

      The semiconductor industry has, in the past, experienced shortages of available foundry capacity. Accordingly, in order to secure an adequate supply of wafers, we may consider various possible supply agreements. Those types of agreements include the use of “take or pay” contracts, making equity investments in, or advances to, wafer manufacturing companies in exchange for guaranteed production capacity, or the formation of joint ventures to own and operate or construct foundries or to develop certain products. Any of these arrangements would involve financial risk to us and could require us to commit a substantial amount of our funds or provide technology licenses in return for guaranteed production capacity. The need to commit our own funds may require us to seek additional equity or debt financing. The sale or issuance of additional equity or convertible debt securities could result in dilution to our stockholders. This kind of additional financing, if necessary, may not be available on terms acceptable to us.

We anticipate engaging in mergers, acquisitions and strategic investments, however, these activities may adversely affect our results of operations and stock price if they do not complement our business.

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

	•	uncertainties in identifying and pursuing target companies;
	•	difficulties in the assimilation of the operations, technologies and products of the acquired companies;
	•	the diversion of management’s attention from other business concerns;
	•	risks associated with entering markets or conducting operations with which we have no or limited direct prior experience;
	•	the potential loss of current customers and/or retention of the acquired company’s customers; and
	•	the potential loss of key employees of the acquired company.

      Further, we may never realize the perceived benefits of a business combination. Future acquisitions by us could dilute stockholders’ investment, and cause us to incur debt, contingent liabilities and amortization/ impairment expense related to intangible assets, all of which could materially adversely affect our results of operations. Effective July 1, 2001, the Financial Accounting Standards Board, or FASB, has issued, and we have adopted, SFAS 141 “Business Combinations”. SFAS 141 addresses financial accounting and reporting for business combinations and requires that all business combinations implemented after June 30, 2001 be accounted for using the purchase method of accounting. As a result, we will not be able to complete a business combination without incurring goodwill or other intangible assets. SFAS 142 “Goodwill and Other Intangible Assets” eliminates the quarterly and yearly recurring charges for the amortization of goodwill. A significant charge to earnings may be recorded if it can be determined that the goodwill or other intangible assets are impaired. This potential charge could have a material impact on our results of operations.

      We have made, and plan to continue to make, investments in technology companies including privately held companies in a development stage. Many of these private equity investments are inherently risky because the companies’ businesses may never develop, and we may incur losses related to these investments. We may be required to reduce the value of those investments as reflected on our balance sheet, which also may affect

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Our business could be materially adversely affected as a result of the risks associated with strategic alliances.

      We have alliances with leading information technology companies, and we plan to continue our strategy of developing key alliances in order to expand our reach into emerging markets. There can be no assurance that we will be successful in our ongoing strategic alliances or that we will be able to find further suitable business relationships as we develop new products and strategies. Any failure to continue or expand such relationships could have a material adverse effect on our business, results of operations or financial conditions.

      There can be no assurance that companies with which we have strategic alliances, certain of which have substantially greater financial, marketing and technological resources than us, will not develop or market products in competition with us in the future, discontinue their alliances with us or form alliances with our competitors.

Continued rapid growth will strain our operations and require that we incur costs to upgrade our infrastructure.

      We have recently experienced a period of rapid growth and expansion that has placed, and continues to place, a significant strain on our resources. Unless we manage this growth effectively, we may make mistakes in executing our business such as inaccurate sales forecasting, material planning, inventory management or financial reporting, which may result in unanticipated fluctuations in our operating results. We may not be able to install adequate control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. In addition, we test substantially all of our products prior to shipment. If our capacity to conduct this testing does not expand concurrently with the anticipated growth of our business, product shipments could be delayed, which could result in delayed or lost revenues and customer dissatisfaction.

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

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

Our proprietary rights may be inadequately protected, and infringement claims or adverse judgments could harm our competitive position.

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

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      Intellectual property claims have been made against us in the past, and patent or other intellectual property infringement claims could be made against us in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive and time consuming and could divert management’s attention from other matters. Our business could suffer regardless of the outcome of the litigation. Our supply of wafers and other components can also be interrupted by intellectual property infringement claims against our suppliers.

Our charter document and shareholder rights plan may discourage companies from acquiring us and offering our stockholders a premium for their stock.

      Pursuant to our certificate of incorporation, our board of directors is authorized to approve the issuance of shares of currently undesignated preferred stock without any vote or future action by the stockholders. Pursuant to this authority, in June 1996 our board of directors adopted a shareholder rights plan and declared a dividend of a right to purchase one one-hundredths of a share of preferred stock for each outstanding share of our common stock. After adjustment for each of the three two-for-one stock splits effected by us to date, our common stock now carries one-eighth of the preferred stock purchase right per share. The shareholder rights plan may have the effect of delaying, deferring or preventing a change in control of our stock. This may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock.

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates when interpreting and applying critical accounting policies.

      We use estimates when recording certain balances in our consolidated financial statements, in accordance with generally accepted accounting principles. These estimates impact the amounts reported in the financial statements, and include estimates with respect to the following:

	•	sales discounts and returns;
	•	allowances for bad debts;
	•	warranty expenses;
	•	deferred revenues; and
	•	valuation of inventory.

Actual results could materially differ from these estimates, which could in turn impact the amounts reported in our financial statements.

Our corporate headquarters and principal design facilities are located in a region that is subject to earthquakes and other natural disasters, as well as electricity shortages.

      Our California facilities, including our principal executive offices, our principal design facilities, and our critical business operations are located near major earthquake faults. We are not specifically insured for earthquakes, or other such natural disasters. Any personal injury or damage to the facilities as a result of such occurrences could have a material adverse effect on our business, results of operations and financial condition. Additionally, our operations depend upon a continuing adequate supply of electricity, natural gas and water. These energy sources have historically been available on a continuous basis and in adequate quantities for our needs. An interruption in the supply of raw materials or energy inputs for any reason would have an adverse effect on our manufacturing operations. Recently, California has had power shortages resulting in rolling blackouts, or the temporary and generally unannounced loss of electrical power. These shortages could affect our ability to supply products to our customers on a timely basis.

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Item 7a.     Quantitative and Qualitative Disclosures About Market Risk

      At March 31, 2002, our investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, with a fair value and carrying amount of $416.4 million (see Note 4 of Notes to Consolidated Financial Statements). These securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 2002, the decline in the fair value of the portfolio would not be material to our financial position, results of operations and cash flows.

      Our export revenues are denominated in U.S. dollars. We also have a subsidiary in the United Kingdom. Based on the size of its operations, the Company does not have a material exposure to fluctuation in foreign currency.

Item 8.     Financial Statements and Supplementary Data

      The financial statements of the Company are referenced in Item 14(a).

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors

      We have audited the consolidated financial statements of QLogic Corporation and subsidiaries as listed in Item 14(a). In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14(a). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QLogic Corporation and subsidiaries as of March 31, 2002 and April 1, 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Orange County, CA

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See accompanying notes to consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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