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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 0-23298

QLogic Corporation

26650 Aliso Viejo Parkway

(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.

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      As of October 31, 2003, 94,462,537 shares of the Registrant’s common stock were outstanding.

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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

See accompanying notes to condensed consolidated financial statements.

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QLOGIC CORPORATION

      In the opinion of management of QLogic Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company’s financial position, results of operations and cash flows. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2003. The results of operations for the three months and six months ended September 28, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

      Components of inventories are as follows:

      The Company’s product warranty obligation was $2.8 million at September 28, 2003. The changes in the product warranty obligation during the three and six months ended September 28, 2003 were not significant.

      The components of total comprehensive income are as follows:

      Basic net income per share is based on the weighted-average number of common shares outstanding during the periods presented. Diluted net income per share is 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 and warrants 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 computation of basic and diluted net income per share:

      Options to purchase 5,062,000 and 7,053,000 shares of common stock have been excluded from the diluted net income per share calculation for the three months ended September 28, 2003 and September 29, 2002, respectively. Options to purchase 4,673,000 and 5,900,000 shares of common stock have been excluded from the diluted net income per share calculation for the six months ended September 28, 2003 and September 29, 2002, respectively. These options have been excluded from the diluted net income per share calculations because their effect was antidilutive.

      The Company accounts for its stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” APB 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted and the Company recognizes compensation expense in its statement of income using the straight-line method over the vesting period for fixed awards. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table shows pro forma net income as if the fair value method of SFAS 123 had been used to account for stock-based compensation expense:

      The fair value of stock options granted has been estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company’s stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing models do not provide a reliable single measure of the fair value of the Company’s stock options.

      In January 2003, Raytheon Company filed suit in the United States District Court for the Eastern District of Texas alleging that the Company, along with several other defendants, infringed a Raytheon patent directed to a mass data storage system. The suit seeks injunctive relief and damages in an unspecified amount. The Company filed an answer to the complaint in March 2003 and a trial is currently scheduled to begin in June 2004. The parties are currently engaged in discovery. The Company disputes the plaintiff’s claims and intends to defend the lawsuit vigorously.

      In February 2003, Vixel Corporation filed suit in the United States District Court for the District of Delaware alleging infringement of a Vixel patent directed to a method and apparatus for Fibre Channel interconnection of private loop devices. In March 2003, Vixel amended its complaint to add two additional Vixel patents. These additional patents are directed to substantially the same technology as the original Vixel patent. The suit seeks injunctive relief and damages in an unspecified amount. The Company filed an answer to the complaint in March 2003 denying all allegations. The parties are currently engaged in discovery. The court has scheduled mediation for December 2003 and a trial date has been set for November 2004. The Company disputes the plaintiff’s claims and intends to defend the lawsuit vigorously.

      Various lawsuits, claims and proceedings have been or may be instituted against the Company, including the matters discussed above. The outcome of litigation cannot be predicted with certainty and some lawsuits,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

claims and proceedings may be disposed of unfavorably to the Company. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted to the Company. Injunctive relief could have a material adverse effect on the financial condition or results of operations of the Company. Based on an evaluation of matters which are pending or asserted, management believes the disposition of such matters will not have a material adverse effect on the financial condition or results of operations of the Company.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      You should read the following Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 30, 2003 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.

Results of Operations

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

     Net Revenues

      Our net revenues are derived primarily from the sale of Small Computer Systems Interface (SCSI) and Fibre Channel-based products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues for the three months ended September 28, 2003 increased $25.2 million, or 23%, from the three months ended September 29, 2002. The increase was primarily the result of a $26.8 million increase in sales of Fibre Channel products, partially offset by a $1.6 million decrease in sales of SCSI products. During the three months ended September 28, 2003, Fibre Channel revenues represented 76% of our net revenues compared to 69% in the corresponding period of the prior year.

      Net revenues for the six months ended September 28, 2003 increased $52.4 million, or 25%, from the six months ended September 29, 2002. The increase was primarily the result of a $53.7 million increase in sales of Fibre Channel products, partially offset by a $1.3 million decrease in sales of SCSI products. During the six

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      During the three months and six months ended September 28, 2003, the increase in Fibre Channel revenues resulted from increased shipments of host bus adapters and switches. In addition, revenues of our Fibre Channel hard disk controllers increased due to overall growth in demand, as well as a continued transition from SCSI-based to Fibre Channel-based products.

      Export revenues (primarily to Pacific Rim countries) for the three months ended September 28, 2003 of $74.2 million increased $17.4 million, or 31%, from the three months ended September 29, 2002. As a percentage of net revenues, export revenues accounted for 56% in the three months ended September 28, 2003 and 53% in the three months ended September 29, 2002.

      Export revenues (primarily to Pacific Rim countries) for the six months ended September 28, 2003 of $143.3 million increased $35.8 million, or 33%, from the six months ended September 29, 2002. As a percentage of net revenues, export revenues accounted for 55% in the six months ended September 28, 2003 and 52% in the six months ended September 29, 2002. Export revenues are denominated in U.S. dollars.

      A small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our top five customers accounted for 58% of net revenues during the six months ended September 28, 2003 and 60% of net revenues during the fiscal year ended March 30, 2003.

      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 our business, financial condition or results of operations.

      Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of raw materials (including silicon chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. Gross profit for the three months ended September 28, 2003 was $89.9 million, an increase of $23.0 million or 34%, from gross profit of $66.9 million for the three months ended September 29, 2002. The gross profit percentage for the three months ended September 28, 2003 was 68.0%, an increase from 62.5% for the three months ended September 29, 2002.

      Gross profit for the six months ended September 28, 2003 was $174.1 million, an increase of $45.3 million or 35%, from gross profit of $128.8 million for the six months ended September 29, 2002. The gross profit percentage for the six months ended September 28, 2003 was 67.4%, an increase from 62.5% for the six months ended September 29, 2002.

      The increase in gross profit percentage during the three and six months ended September 28, 2003 compared to the corresponding periods in the prior year was due primarily to favorable shifts in the product mix associated with increased sales of higher margin Fibre Channel-based products. In addition, the gross profit percentage was favorably affected by manufacturing efficiencies realized from the increase in production during the three and six months ended September 28, 2003.

      Our ability to maintain our current gross profit percentage can be significantly affected by factors such as the results of our investment in engineering and development activities, supply costs and, in particular, the cost of silicon chips, 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 have been irregular or unpredictable. As a result of these and other factors, it may be difficult to maintain our gross profit percentage consistent with historical trends and it may decline in the future.

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      Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel-related costs, development-related engineering and material costs, occupancy costs and related computer support costs. Engineering and development expenses for the three months ended September 28, 2003 of $21.5 million increased $1.9 million, or 9%, from the three months ended September 29, 2002. During the six months ended September 28, 2003, engineering and development expenses of $44.2 million increased $6.4 million, or 17%, from the six months ended September 29, 2002.

      The increase in engineering and development expenses during the three and six months ended September 28, 2003 compared to the corresponding periods in the prior year was due primarily to an increase in our headcount and related compensation and benefit costs associated with our expanded development efforts in support of existing and future technologies and the accelerated launch of new products.

      We believe continued investments in engineering and development activities are critical to achieving our strategic objectives. As a result, we expect engineering and development expenses will continue to increase in the future.

      Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other personnel-related costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses for the three months ended September 28, 2003 of $12.4 million increased $1.0 million, or 9%, from the three months ended September 29, 2002. During the six months ended September 28, 2003, sales and marketing expenses of $24.2 million increased $2.1 million, or 10%, from the six months ended September 29, 2002.

      The increase in sales and marketing expenses during the three and six months ended September 28, 2003 compared to the corresponding periods in the prior year was due primarily to an increase in the headcount and related compensation and benefit costs associated with the expansion of our sales and marketing groups and an increase in travel-related costs.

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

      General and Administrative. General and administrative expenses consist primarily of salaries and personnel-related costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-personnel related costs consist of legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses for the three months ended September 28, 2003 of $4.4 million increased $0.7 million, or 21%, from the three months ended September 29, 2002. During the six months ended September 28, 2003, general and administrative expenses of $8.5 million increased $1.7 million, or 24%, from the six months ended September 29, 2002.

      The increase in general and administrative expenses during the three and six months ended September 28, 2003 compared to the corresponding periods in the prior year was primarily due to increased legal costs associated with the defense of outstanding legal proceedings.

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

      Interest and other income for the three months ended September 28, 2003 of $3.5 million is comprised principally of interest income and investment gains related to our portfolio of marketable securities. During the three months ended September 29, 2002, interest and other income included a $3.0 million write-down of a non-marketable investment.

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      During the six months ended September 28, 2003, interest and other income of $9.0 million is comprised principally of interest income and investment gains related to our portfolio of marketable securities. Interest and other income for the six months ended September 29, 2002 included $4.0 million of write-downs of non-marketable investments.

      Excluding the effect of these write-downs, interest and other income decreased by $1.6 million and $1.8 million during the three and six months ended September 28, 2003, respectively, from the comparable periods in the prior year, primarily due to lower investment income associated with declining yields on our portfolio of marketable securities, partially offset by increased earnings due to larger investment balances.

      Our effective tax rate is expected to be approximately 38% for the fiscal year ending March 28, 2004. The increase in the tax rate for fiscal 2004 from the 35% recorded in the prior year was due primarily to an increase in income before income taxes, without a corresponding increase in tax benefits associated with research activities and export sales.

Liquidity and Capital Resources

      Our combined balances of cash and cash equivalents and short-term investments have increased to $708.2 million at September 28, 2003, compared to $643.2 million at March 30, 2003. The increase was attributable to positive cash flow from operations, primarily net income, during the six months ended September 28, 2003.

      Our primary sources of liquidity are our existing cash and cash equivalent balances, available-for-sale marketable securities, and cash expected to be generated from operations. During the six months ended September 28, 2003, our working capital increased $80.7 million to $762.2 million.

      Cash provided by operating activities was $68.0 million for the six months ended September 28, 2003 and $76.6 million for the six months ended September 29, 2002. The decrease in the cash provided by operating activities was due to a larger investment in working capital, partially offset by the increase in net income during the six months ended September 28, 2003 compared to the corresponding period of the prior year. The operating cash flow for the six months ended September 28, 2003 reflects our net income of $65.9 million, $21.8 million of non-cash charges (depreciation and amortization, deferred income taxes and other), and a net increase in the non-cash components of our working capital of $19.7 million. The changes in non-cash components of working capital include a $15.2 million increase in accounts receivable, resulting from an increase in sales; a $5.8 million decrease in income taxes payable; and a $5.4 million decrease in accrued compensation. These changes in non-cash components of working capital were partially offset by a $5.4 million increase in accounts payable and other accrued liabilities and a $1.2 million decrease in prepaid expenses and other assets.

      Cash used in investing activities of $39.5 million for the six months ended September 28, 2003 includes net purchases of marketable securities of $29.6 million and additions to property and equipment of $9.9 million. During the six months ended September 29, 2002, cash used in investing activities of $29.3 million consisted of net purchases of marketable securities of $22.4 million and additions to property and equipment of $6.9 million.

      Cash provided by financing activities of $8.0 million for the six months ended September 28, 2003 resulted from $9.0 million of proceeds from the issuance of common stock under our stock plans, partially offset by our purchase of $1.0 million of treasury stock. During the six months ended September 29, 2002, the $4.8 million of cash provided by financing activities resulted from the proceeds from the issuance of common stock under 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 28, 2003, we had non-cancelable purchase orders of approximately $28 million, which are substantially all due within one year. Future commitments under operating leases as of September 28, 2003 totaled $10.2 million,

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      In October 2002, the Board of Directors authorized a stock repurchase program to acquire our outstanding common stock. Under the program, up to $100 million of our common stock may be repurchased over two years. During the six months ended September 28, 2003, we repurchased approximately 21,000 shares of our common stock for an aggregate purchase price of $1.0 million. As of September 28, 2003, we have repurchased approximately 112,000 shares of our common stock for an aggregate purchase price of $4.0 million since inception of the program.

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

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 several 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; and
	•	inventory valuation.

      Revenue recognition. We sell our products domestically and internationally primarily through original equipment manufacturers, or OEMs, and distribution channel customers including distributors, system integrators and value-added resellers. Our significant customers include leading storage solution providers, server OEMs and storage OEMs.

      We recognize revenue from product sales when goods are shipped and title and risk of loss transfers to the customer. For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. The customer’s obligation to pay and the payment terms are set at the time of shipment and are not dependent on subsequent resale of the our products. However, certain of our sales are made to distributors under agreements allowing for a limited right to return unsold product. We recognize revenue from these distributors when the product is sold by the distributor to a third party. Royalty and service revenue is recognized when earned and receipt is assured.

      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.

Recent Accounting Standards

      In November 2002, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The Consensus mandates the accounting for goods or services, or both, that are to be delivered separately in a bundled sales arrangement. EITF 00-21 is effective for transactions entered into in fiscal periods beginning after June 15, 2003. We adopted EITF 00-21

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FACTORS THAT MAY AFFECT FUTURE RESULTS

      Certain information included in the foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report includes forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, descriptions of our expectations regarding future trends affecting our business and other statements regarding future events or our objectives, goals, strategies, beliefs and underlying assumptions that are other than statements of historical fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including but not limited to, those factors set forth and discussed below, as well as those discussed above in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Additional information on these and other factors is contained in our Annual Report on Form 10-K for the fiscal year ended March 30, 2003 and our other periodic filings with the Securities and Exchange Commission. Readers of this quarterly report on Form 10-Q are urged to read these factors in their entirety. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that such forward-looking statements, including our objectives and plans, will be achieved. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

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. Several factors could impact our stock price including, but not limited to:

	•	announcements concerning our competitors, our customers, or us;
	•	quarterly fluctuations in our operating results;
	•	introduction of new products or changes in product pricing policies by our competitors or us;
	•	conditions in the semiconductor industry;
	•	changes in market projections by industry forecasters;
	•	changes in estimates of our earnings by industry analysts;
	•	overall market conditions for high technology equities;
	•	rumors or dissemination of false information; and
	•	general economic conditions, including terrorist activities or military actions.

      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 may 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

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	•	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;
	•	developing higher performance application specific integrated circuits, or ASICs, that create chip level solutions that replace selected board level solutions at significantly lower average selling prices;
	•	the time, availability and sale of new products;
	•	changes in the mix or average selling prices of our products;
	•	variations in manufacturing capacities, efficiencies and costs;
	•	the availability and cost of components, including silicon chips;
	•	warranty expenses;
	•	variations in product development costs, especially related to advanced technologies;
	•	variations in operating expenses;
	•	adjustments related to product returns;
	•	changes in effective income tax rates, including those resulting from changes in tax laws;
	•	adoption of new accounting pronouncements or changes in our policies;
	•	general economic and other conditions affecting the timing of customer orders and capital spending; or
	•	a downturn in the global economy that impacts information technology spending.

      Our quarterly results of operations are also influenced by competitive factors, including the pricing and availability of our products or our competitors’ products. Although we do not maintain our own silicon chip manufacturing facility, 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 could adversely affect our gross profit and net income until net revenues increase or until such fixed expenses are reduced to an appropriate level. 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 affected 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.

Our business is dependent on the emerging and unpredictable storage area network (SAN) market 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

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	•	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 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 OEM 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 substantial 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^TM, 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 adversely affect our results of operations and 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. Our top five customers accounted for 58% of net revenues during the six months ended September 28, 2003 and 60% of net revenues during the fiscal year ended March 30, 2003. Additionally, we are also subject to credit risk associated with the concentration of our accounts receivable. The loss of any of our major customers could have a material adverse effect on our business, financial condition or results of operations. This risk is increased due to the potential for some of these customers to exit the markets served by us, or to enter into a business combination with one of our competitors.

      Additionally, some of these customers are based in the Pacific Rim region, which is subject to economic and political uncertainties. Our customers generally order products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase

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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 input/ output, or I/O, market. In the Fibre Channel host bus adapter sector of the I/O market, we compete primarily with Emulex Corporation, LSI Logic Corporation and JNI Corporation. In the Fibre Channel host controller chip sector of the market, we compete primarily with Agilent Technologies, Inc. and LSI Logic Corporation. In the switch products sector, we compete primarily with Brocade Communications Systems, Inc., Cisco Systems, Inc. and McData Corporation. 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 OEM customer in the past has decided to vertically integrate and has therefore stopped purchasing products 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, equity or financing agreements or direct ownership of a foundry. In addition, while relatively few competitors offer a full range of SAN 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 or 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 and their reseller customers may purchase products from our competitors, 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.

      As a result of the aforementioned factors regarding our distributors or other unrelated factors, the reseller customers of our distributors could decide to purchase products developed and manufactured by our competitors. Any loss of demand for our products by value-added resellers and system integrators could have a material adverse effect on our business or operating results.

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We depend on our relationships with silicon chip suppliers and other subcontractors, and a loss of any of these relationships may lead to unpredictable consequences that 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. We generally conduct business with 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 specific price, except as may be provided in a particular purchase order. 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 would 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 silicon chip 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.

      Our products are complex and may contain undetected software or hardware errors when first introduced or as newer versions are released. We are also exposed to risks associated with latent defects in existing products. We have from time to time found errors in existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect the 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.

The migration of our customers toward new products may result in fluctuations of our operating results.

      As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize the effects of product inventories that may become excess and obsolete, as well as ensure that sufficient supplies of new products can be delivered to meet customer demands. Our failure to manage the transition to newer products in the future or to develop and successfully introduce new products and product enhancements could adversely affect our business or financial results. When we introduce new products and product enhancements, we face risks relating to product transitions, including risks relating to forecasting demand, as well as possible product and software defects. If any of these factors were to occur, it could have a material adverse effect on our business, financial condition or results of operations.

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

      Terrorist attacks 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, political and other risks that could harm our financial condition and result of operations.

      Export revenues accounted for 55% of our net revenues for the six months ended September 28, 2003. 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 and managing our business globally;
	•	compliance with multiple and potentially conflicting regulatory requirements, such as export requirements, tariffs and other barriers;
	•	differences in intellectual property protections;
	•	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 Pacific Rim countries. 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 excess 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 or results of operations.

We may need to enter into agreements 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 silicon chips, we may consider various possible supply agreements. These agreements include the use of “take or pay” contracts, making equity investments in, or advances to, silicon chip 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

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We may engage in mergers, acquisitions and strategic investments and 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 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 charges related to intangible assets, all of which could materially adversely affect our financial position or results of operations.

      We have made, and could make in the future, 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. In addition, we may be required to write down the carrying value of these investments to reflect other than temporary declines in their value, which could have a materially adverse effect on our financial position and results of operations.

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, financial condition or results of operations.

      There can be no assurance that companies with which we have strategic alliances, some 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. This rapid growth and expansion has placed, and continues to place, a strain on our resources. Unless we manage this growth effectively, we may encounter challenges in executing our business, such as sales forecasting, material planning and inventory management, 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 most of our products prior to shipment. If our capacity to conduct this testing does not expand concurrently

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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 current and future infringement claims or adverse judgments could harm our competitive position.

      Although we have patent protection on certain 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.

      We have received notices of claimed infringement of intellectual property rights in the past. In addition, we are currently engaged in litigation with parties who claim we have infringed on their intellectual property rights. See Note 6 of Notes to Condensed Consolidated Financial Statements. There can be no assurance that third parties will not assert additional claims of infringement of intellectual property rights against us with respect to existing and future products. 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 silicon chips 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 preferred stock for each outstanding share of our common stock. After adjustment for stock splits, our common stock now carries one-eighth of a 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.

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

      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 or financial condition.

      We maintain a marketable securities investment portfolio of various holdings, types and maturities. In accordance with our investment guidelines, we only invest in instruments with high credit quality standards and we limit our credit exposure to any one issuer or type of investment. We do not use derivative financial instruments.

      Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 28, 2003, the carrying value of our cash and cash equivalents approximates fair value.

      Our short-term investment portfolio consists primarily of marketable debt securities, including government securities, corporate bonds, municipal bonds and other debt securities, which principally have remaining terms of two years or less. Consequently, such securities are not subject to significant interest rate risk. All of our marketable securities are classified as available for sale and, as of September 28, 2003, unrealized gains of $3.3 million (net of related income taxes) on these securities are included in accumulated other comprehensive income.

      As of the end of the quarter ended September 28, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated 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 were effective as of September 28, 2003 to ensure that information required to be disclosed by us in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our quarter ended September 28, 2003 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

      Reference is made to Note 6 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report. Such information is incorporated herein by reference.

      (a) The QLogic Corporation Annual Meeting of Stockholders was held on August 26, 2003.

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

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