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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

Or

Commission File Number 0-23298

QLogic Corporation

(949) 389-6000

      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

      As of November 1, 2002, the registrant had 93,487,386 shares of common stock outstanding. All references to share and per share data for all periods presented have been restated to take into account prior stock splits.

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QLOGIC CORPORATION

INDEX

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PART I.     FINANCIAL INFORMATION

QLOGIC CORPORATION

See accompanying notes to condensed consolidated financial statements.

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QLOGIC CORPORATION

See accompanying notes to condensed consolidated financial statements.

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QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

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QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note (1) Basis of Presentation

      In the opinion of management of QLogic Corporation (“QLogic” or the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the Company’s financial position as of September 29, 2002, the statements of income for the three months and the six months ended September 29, 2002 and September 30, 2001 and the statements of cash flows for the six months ended September 29, 2002 and September 30, 2001. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended March 31, 2002. The results of operations for the three months and six months ended September 29, 2002 are not necessarily indicative of the results to be expected for the entire fiscal year. Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

Note (2) Inventories

      Components of inventories are as follows:

Note (3) Net Income Per Share

      The Company computed basic net income per share based on the weighted average number of common shares outstanding during the period presented. Diluted net income per share was computed based on the weighted average number of common and dilutive potential common shares outstanding during the periods presented. The Company has granted certain stock options which have been treated as dilutive potential common shares.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      Options to purchase 7,052,900 and 4,591,633 shares of common stock with exercise prices that exceed the average market price of $35.94 and $36.87 during the three months ended September 29, 2002 and September 30, 2001, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive.

      Options to purchase 5,899,512 and 3,819,557 shares of common stock with exercise prices that exceed the average market price of $40.96 and $41.50 during the six months ended September 29, 2002 and September 30, 2001, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive.

Note (4) Other Comprehensive Income

      Statement of Financial Accounting Standards (SFAS) No. 130, separates comprehensive income into two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that are recorded as an element of stockholders’ equity, but are excluded from net income. The Company’s other comprehensive income is comprised solely of unrealized gains and losses on marketable securities categorized as “available for sale” under SFAS No. 115, net of income taxes. The components of total comprehensive income were as follows:

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Item 2.     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 report 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 and discussed under “Factors That May Affect Future Results” and elsewhere in this report, which include without limitation the fact that that our operating results fluctuate significantly, that our business is dependent on the storage area network market that is new and unpredictable, and that our financial condition will be materially harmed if we do not maintain and gain market or industry acceptance of our products. Readers of this Quarterly Report on Form 10-Q are urged to read those sections in their entirety. In light of the significant uncertainties inherent in the forward-looking information included in this document, the inclusion of information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. QLogic undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

     Results of Operations

      The following table sets forth, for the periods indicated, certain income and expense items expressed in absolute terms and as a percentage of our net revenues.

     Net Revenues

      Our net revenues are derived primarily from the sale of SCSI and Fibre Channel-based products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues in the three months ended September 29, 2002 increased $26.2 million or 32.4% from the three months ended September 30, 2001 to $107.1 million. The increase was the result of an $18.0 million increase in sales of Fibre Channel product combined with an $8.2 million increase in sales of SCSI products.

      Net revenues in the six months ended September 29, 2002 increased $35.3 million or 20.7% from the six months ended September 30, 2001, to $206.1 million. The increase was the result of a $31.2 million increase in sales of Fibre Channel products along with a $4.7 million increase in sales of SCSI products, offset by a $0.6 million decrease in IDE-based royalties.

      Export revenues (primarily to the Pacific Rim countries) in the three months ended September 29, 2002 increased $18.1 million or 46.8% from the three months ended September 30, 2001, to approximately $56.8 million, primarily due to increased sales to our peripheral chip customers in Japan. As a percentage of net revenues, export revenues accounted for 53 % in the three months ended September 29, 2002, and 48% in the three months ended September 30, 2001.

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Note (5) Goodwill

      Effective April 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangibles Assets”. As a result, the Company ceased amortizing goodwill of $4.4 million beginning April 1, 2002. In conjunction with the adoption of SFAS No. 142, the Company completed its transitional goodwill impairment test during the three months ended June 30, 2002, with no impairment charges resulting. The goodwill will be tested for impairment at least annually.

      The adoption of SFAS No. 142 resulted in a reduction of amortization expense of approximately $0.2 million, net of tax, in the three month period ended September 29, 2002 to the three month period ended September 30, 2001, and $0.4 million, net of tax, in the six month period ended September 29, 2002 to the six month period ended September 30, 2001. There was no impact to reported basic or diluted earnings per share as a result of the adoption of SFAS No. 142.

      Export revenues in the six months ended September 29, 2002 increased $22.5 million or 26.5% from the six months ended September 30, 2001, to approximately $107.5 million. As a percentage of net revenues, export revenues accounted for 52% in the six months ended September 29, 2002, and 50% in the six months ended September 30, 2001. Export revenues are denominated in U.S. dollars.

      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 for the foreseeable future. We believe that our major customers continually evaluate whether or not to purchase products from alternate or additional sources. Additionally, our 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 our 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 the three months ended September 29, 2002 was 62.5%, an increase from 59.7% in the three months ended September 30, 2001. The increase in gross profit percentage was due primarily to sales of higher margin Fibre Channel-based products, as well as economies-of-scale impacts associated with increased revenues.

      The gross profit percentage in the six months ended September 29, 2002 was 62.5%, an increase from 60.8% in the six months ended September 30, 2001. The percentage increase resulted primarily from sales of and product mix of higher margin Fibre Channel-based products.

      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, the level of royalties received and our ability to achieve manufacturing cost reductions. We anticipate that it will be increasingly more difficult to reduce manufacturing costs. Also, royalty revenues may be irregular or unpredictable. As a result of these and other factors, we do not anticipate the gross profit percentage to remain constant or increase at a rate consistent with historic trends and it may decline in future quarters.

     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. We expect the dollar amount of engineering and development expenses will continue to increase in fiscal 2003.

      During the three months ended September 29, 2002, engineering and development expenses increased $3.3 million to $19.6 million from $16.3 million in the three months ended September 30, 2001. The increase

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      During the six months ended September 29, 2002, engineering and development expenses increased $4.1 million to $37.8 million from $33.7 million in the six months ended September 30, 2001. As a percentage of net revenues this amounted to 18.4% in the six months ended September 29, 2002, and 19.7% in the six months ended September 30, 2001. The increase in dollars was due to our continued investments in new product development, while the decrease as a percentage of net revenues was the result of an increased focus on the management of our new product development expenses.

      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 increase in the future, and may increase as a percentage of net revenues.

      During the three months ended September 29, 2002, selling and marketing expenses increased $2.3 million to $11.4 million from $9.1 million in the three months ended September 30, 2001. As a percentage of net revenues, sales and marketing expenses decreased to 10.7% in the three months ended September 29, 2002 from 11.2% in the similar prior year period. The increase in spending was due to an increase in net revenues combined with our decision to expand our sales efforts in the OEM and distribution channel sales area. The decrease as a percentage of net revenue resulted from economies-of-scale benefits realized from the increases in net revenue.

      During the six months ended September 29, 2002, sales and marketing expenses increased $2.8 million from the similar period in the prior fiscal year. As a percentage of net revenues this amounted to 10.7% in the six months ended September 29, 2002 compared to 11.2% in the similar prior year period. The increase in spending for sales and marketing expenses is a result of an increase in net revenues combined with our decision to expand our sales efforts in the distribution channel sales area. The decrease as a percentage of net revenue resulted from economies-of-scale benefits realized from the increases in net revenue.

      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 incur additional costs relating to the growth of the business.

      During the three months ended September 29, 2002, general and administrative expenses decreased $0.2 million to $3.7 million from $3.9 million in the three months ended September 30, 2001. The decrease in spending was primarily due to discontinuing amortization of goodwill that was partially offset by growth in administrative personnel and professional services. As a percentage of net revenues, general and administrative expenses decreased to 3.4% in the three months ended September 29, 2002 from 4.8% in the similar prior year period.

      During the six months ended September 29, 2002, general and administrative expenses decreased $1.5 million to $6.8 million from $8.3 million in the six months ended September 30, 2001. As a percentage of net revenues this amounted to 3.3% in the six months ended September 29, 2002, and 4.9% in the six months ended September 30, 2001. In the six months ended September 29, 2002, general and administrative expenses decreased in both dollars and as a percentage of net revenues due primarily to discontinuing amortization of goodwill.

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     Non-Operating Income

      Interest and other income, net of interest expense, was $2.2 million in the three months ended September 29, 2002, and $4.7 million in the three months ended September 30, 2001. The decrease was largely due to the $3.0 million write-down of a minority investment combined with a decrease in investment returns.

      In the six months ended September 29, 2002, interest and other income, net of interest expense, was $6.8 million and $9.8 million in the six months ended September 30, 2001. The decrease in interest and other income in the six months ended September 29, 2002 was largely due to the write-down of two equity investments totaling $4.0 million combined with a decrease in investment returns.

     Income Tax Provision

      Our effective tax rate was 33% in the three and six months ended September 29, 2002, and 33% in the three and six months ended September 30, 2001.

     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.

      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 with right of return privileges is recognized when these distributors ship our products to their customers based on data we receive from such distributors. Reserves for uncollectable accounts and allowances for estimated sales returns are provided at the time revenue is recognized. We reserve for uncollectable accounts and product returns based on our historical experience and expectations regarding account collectability 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 a binding purchase order and/or signed agreement as evidence of an arrangement.

      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

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      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, 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 (SFAS) No. 141 “Business Combinations”. SFAS No. 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 No. 141 did not have a material impact on our financial position or results of operations.

      SFAS No. 142 “Goodwill and Other Intangible Assets” requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested at least annually for impairment. We adopted SFAS No. 142 on April 1, 2002. The adoption of SFAS No. 142 resulted in a decrease of goodwill amortization of $0.3 million in the quarter ended September 29, 2002 from the quarter ended September 30, 2001, and a decrease of $0.6 million in the six months ended September 29, 2002 from the six months ended September 30, 2001.

      In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144 “Accounting for the Impairment and Disposal of Long Lived Assets.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position or results of operations.

      In July 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146) was issued. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, we cannot determine the potential effects that adoption of SFAS No. 146 will have on our consolidated financial statements.

     Liquidity and Capital Resources

      Our combined balances of cash and cash equivalents and short-term investments have increased to $571.9 million at September 29, 2002 compared to $492.5 million at March 31, 2002. The increase was

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      Our primary source of liquidity is derived from working capital and cash from operations. Working capital increased $74.6 million to $610.2 million at September 29, 2002. The increase in working capital in the six months ended September 29, 2002 was largely attributable to cash flow from operations. Historically, we have had a $5.0 million line of credit facility with Silicon Valley Bank that allowed us to borrow at the bank’s prime rate. The credit facility expired on July 5, 2002 and has not been renewed.

      Our cash flow provided by operations was $76.6 million in the six months ended September 29, 2002, and $70.6 million in the six months ended September 30, 2001. The growth in cash provided by operations was primarily due to increases in profitability. Additionally, in the six months ended September 29, 2002, cash flow from operations was improved by an increase in accounts payable and a reduction in accounts receivable and other assets and partially offset by an increase in inventories and a reduction in income taxes payable.

      Our cash flow used in investing activities was $29.3 million in the six months ended September 29, 2002 compared to $54.2 million in the six months ended September 30, 2001. The decrease in cash used in investing activities for the six months ended September 29, 2002 was primarily due to decreased purchases of short-term investments, net of investment maturities. Additionally, capital expenditures were $6.9 million in the six months ended September 29, 2002 and $6.5 million in the six months ended September 30, 2001. The increase in capital expenditures was due to our commitment to improve equipment and infrastructure in operations and engineering.

      Our cash flow provided by financing activities was $4.8 million in the six months ended September 29, 2002 compared to $3.4 million in the six months ended September 30, 2001. The increase in cash provided by financing activities in the six months ended September 29, 2002 was primarily due to increases 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 September 29, 2002, there were $23.7 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 in our 10-K for March 31, 2002.

      We believe that existing cash and cash equivalent balances, short term investments, facilities and equipment leases, and cash flows from operating activities will provide the Company with sufficient funds to finance our 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 forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or elsewhere in this report.

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, 2002 through November 1, 2002, the market price has

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	•	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
	•	overall market conditions for high technology equities.

      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;
	•	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.

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      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. 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 (SAN) market that is relatively new and unpredictable, and if this market does not develop and expand as we anticipate, our business will suffer.

      A significant number of our products are used in SANs and, therefore, our business is dependent on the SAN market. Accordingly, the widespread adoption of SANs for use in organizations’ computing systems is critical to our future success. 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;
	•	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;

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	•	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. Our competitors are developing alternative technologies that may compete with the market acceptance of our Fibre Channel products, such as iSCSI, Infiniband, Serial Attached SCSI (SAS) and Serial Advanced Technology Attachment (SATA). 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 one or more of our other 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 and several smaller companies. In the enclosure management sector, we compete primarily with Vitesse Semiconductor Corporation. We may compete with some of our larger disk drive and computer systems customers, some of which have the capability to develop integrated circuits for use in their own products. At least one large original equipment manufacturer customer in the past has decided to vertically integrate and has therefore stopped purchasing from us.

      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,

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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. 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 which could impact availability to their customers.

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 multiple foundries to manufacture our semiconductor products either in finished form or wafer form. Usually, 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 have not developed alternate sources of supply for our products. For example, our integrated single chip Fibre Channel controller is manufactured by LSI Logic and integrates LSI Logic’s transceiver technology. In the event that LSI Logic is unable or unwilling to satisfy our requirements for this technology, our marketing efforts related to Fibre Channel products would be delayed and, as such, our results of operations could be materially and adversely affected. The requirement that a customer perform separate product qualifications, or a customer’s inability to obtain a sufficient supply of products from us, may cause that customer to satisfy its product requirements from our competitors. Constraints or delays in the supply of our products, due to capacity constraints, unexpected disruptions at our foundries or with our subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials or other reasons, could result in the loss of customers.

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 may 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

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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, Europe and the Pacific Rim, 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 and the Pacific Rim. Historically, the Asian markets have suffered from economic uncertainty. This uncertainty has taken place especially in countries that have had a collapse in both their currency and stock markets. These economic pressures have reduced liquidity in the banking systems of the affected countries and, when coupled with spare industrial production capacity, could lead to widespread financial difficulty among the companies in this region. Our export sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations.

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

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We may engage in mergers, acquisitions and strategic investments, however, these activities may adversely affect our results of operations and stock price.

      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 No. 141 “Business Combinations”. SFAS No. 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 No. 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 our results of operations. In addition, if we incur a charge to reflect other than temporary declines in the value of our private equity investments below our recorded value, our balance sheet and results of operations will be reduced. For example, in the three months ended June 30, 2002, we recorded a $1.0 million impairment, and in the three months ended September 29, 2002, we recorded a $3.0 million impairment of these equity investments.

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.

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      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 experienced a period of rapid growth and expansion in the past. 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.

      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.

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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 accounting principles generally accepted in the United States of America, 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.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

      At September 29, 2002, our investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, of $443.7 million. The carrying amount of these securities approximates fair market value. 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 September 29, 2002, the decline in the fair value of the portfolio would not be material to our financial position, results of operations and cash flows.

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Item 4.     Controls and Procedures

      Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC filings relating to the Company.

      There have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation.

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PART II.     OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders

      (a)  The QLogic Annual Meeting of Stockholders was held on August 27, 2002.

      (b)  The following persons were duly elected to serve as directors of QLogic: H.K. Desai, Larry R. Carter, James R. Fiebiger, Kenneth E. Hendrickson, Carol L. Miltner and George D. Wells.

      (c)  The following is a tabulation of the votes of the stockholders of QLogic with respect to the proposals presented at the QLogic Annual Meeting of Stockholders:

Item 6.     Exhibits and Reports On Form 8-K

      (a) Exhibits

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