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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the fiscal year ended March 28, 2004

Commission File No. 0-23298

(949) 389-6000

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

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

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

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant was $4,450,460,071 (based on the closing price for shares of the Registrant’s common stock as reported by The Nasdaq National Market on September 26, 2003).

      As of May 21, 2004, 93,227,661 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2004 Annual Meeting of Stockholders, to be held on August 24, 2004, are incorporated by reference into Part III of this Form 10-K where indicated.

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PART I

Introduction

      QLogic Corporation was organized as a Delaware corporation in 1992. Our principal executive offices are located at 26650 Aliso Viejo Parkway, Aliso Viejo, California 92656, and our telephone number at that location is (949) 389-6000. Our Internet address is www.qlogic.com. Our periodic and current reports, together with any amendments to these reports, are available free of charge on our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

      Unless the context indicates otherwise, “we,” “our,” “us” and the “Company” each refer to the Registrant and its subsidiaries.

      All references to years refer to our fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002, as applicable, unless the calendar years are specified. All references to share and per share data have been restated to reflect our stock splits.

Overview

      We design and develop storage networking infrastructure components sold to original equipment manufacturers, or OEMs, distributors, resellers and system integrators. We produce the controller chips, management enclosure chips, host bus adapters, or HBAs, fabric switches and management software that provide the connectivity infrastructure for every size of storage network. We serve customers with solutions based on various storage area network, or SAN, technologies including Small Computer Systems Interface, or SCSI, Internet SCSI, or iSCSI, and Fibre Channel.

      Our products are sold directly to OEMs and through our authorized distributors and resellers. Our customers rely on our SAN infrastructure technology to deliver storage solutions to information technology professionals in virtually every business sector.

      Our technology is found primarily in server, workstation, storage subsystem and hard disk drive solutions targeted at:

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

      Our products are incorporated in a large number of solutions from OEM customers, including Cisco Systems, Inc., Dell Computer Corporation, EMC Corporation, Fujitsu Limited, Hitachi, Ltd., Hewlett-Packard Company, International Business Machines Corporation, Network Appliance, Inc., Quantum Corporation, Storage Technology Corporation, Sun Microsystems, Inc. and many others. For information regarding our major customers and their impact on our revenues, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.

      To ensure interoperability within the SAN, we work closely with independent hardware vendors and software vendors, as well as developers and integrators who create, test, and evaluate complementary storage networking products. We have key alliance relationships with Cisco Systems, Inc., Microsoft

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Storage Industry

      In late 2003, the University of California, Berkeley published a follow-up to their 2000 report entitled “How Much Information?” This report measures how much digital information is generated in the world each year. The 2003 report confirmed original growth estimates made in the 2000 report, which 2000 report concluded that the world was generating over 1.6 million terabytes (1 terabyte equals roughly 1 million books) of magnetically recorded information per year and that this volume is doubling every year. In addition, the 2003 report tracked the growth of various storage mediums over the period between 1999 and 2003. Of particular interest was the growth in storage utilized in enterprise and departmental business environments. The report shows that storage capacity in these environments grew at an annual rate of 75% during the period. The ability to access, share and, most importantly, manage this amount of information represents a large market opportunity.

      The storage industry took its first steps in helping corporations to access corporate data in the mid-1980s when the need to distribute information quickly and efficiently drove client access from a mainframe environment to a local area network, or LAN, environment. More recently, the need to access growing volumes of information led to a rapid adoption of storage area networking environments. As indicated in the University of California, Berkeley study, the explosive expansion of the Internet and the growing use of digital information servers were driving the need to go to network storage for accessibility, maintainability and simplicity of management.

      IBM first introduced storage area networking in the early 1990s with the Enterprise System Connection, or ESCON, an effective solution for IBM mainframe environments. Fibre Channel, which was introduced in 1994, promised superior connectivity, distance and access benefits over ESCON in a standard protocol. Fibre Channel gradually moved into networked environments. At first, SANs used hubs to connect networked servers and storage subsystems. Then, switches replaced hubs to represent the current majority of network deployments.

      SANs followed much the same adoption path as LANs, with storage manufacturers, OEMs and third parties all developing and delivering SAN management solutions. Today, there are many SAN management solutions available, from relatively basic solutions for small environments to extensive software packages capable of managing thousands of SAN nodes.

      During 2003, SANs continued to be the fastest growing method for connecting external Redundant Array of Independent Disks, or RAID, storage. According to an IDC August 2003 report, Worldwide Disk Storage Systems Market Forecast and Analysis, 2000 to 2007, Fibre Channel SAN storage accounted for over 38% of all storage revenue during 2002. In addition, IDC forecasts that Fibre Channel and iSCSI SANs will account for nearly 56% of all externally attached RAID storage subsystems by 2007. This report also indicated that Fibre Channel is expected to be the dominant technology employed for SAN connectivity during the forecast period. This conclusion is further demonstrated in the report, which indicated that Fibre Channel technology will represent 44% of the SAN market compared to 12% for iSCSI.

      During the past few years, iSCSI has emerged as a new additional SAN technology, which allows standard SCSI commands to be transported over standard Ethernet infrastructure. This technology provides an excellent entry point for small and medium-sized businesses to incorporate the benefits of SANs. By utilizing an Ethernet infrastructure that already exists in almost every business environment, small and medium-sized businesses can implement SANs without needing to train new people on the deployment or management of the network.

Our SAN Solutions

      Our ability to serve the storage industry stems from our highly leveraged product line that addresses virtually every connection point in a SAN infrastructure solution. On the server side of the SAN, we provide

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      One of our key strategies has been to provide our customers with solutions that simplify their product design requirements. Complete storage networking solutions that are pre-tested and easy to install significantly reduce the critical implementation and time-to-market effort for OEMs. Today, our SAN infrastructure components are found in solutions from most major server and storage OEMs worldwide.

Product Overview

      We design and supply storage network infrastructure components and software for the world’s largest server and storage subsystem manufacturers that ultimately are used by small to medium-sized enterprises, and companies that have large information technology environments.

      Our products include our SANblade^TM HBAs, SANbox^TM Fibre Channel Switches and SANsurfer Management Suite^TM HBA and Switch management software. Our Fibre Channel HBAs support SCSI protocol, Internet Protocol, or IP, Virtual Interface, or VI, and FICON protocol. In addition, we design and supply controller chips used in hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure.

Sales and Marketing

      We market and distribute our products through OEMs, system integrators, value-added resellers, or VARs, and our direct sales organization supported by field sales and systems engineering personnel. In addition, we utilize a network of independent manufacturers’ representatives and regional and international distributors.

      In national and in certain international markets, we maintain both a direct sales force to serve our large OEM customers and multiple outside representatives that are focused on medium-sized and emerging accounts. National distributors carrying our products serve the VAR market. We maintain a focused business development and outbound marketing organization to assist, train, equip and augment the sales organizations of our major OEM customers and their respective reseller organizations and partners. Recently, in order to expand into the Asia-Pacific region, we opened a sales office in Taiwan to support both customers and partners in that region. For information regarding revenue from independent customers by geographic area, see Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7 of this report.

      We work with our large peripheral and computer system manufacturer customers during their design cycles. We support these customers with extensive applications and system design support and services, as well as training classes and seminars conducted both in the field and from our offices in Aliso Viejo and Roseville, California, Eden Prairie, Minnesota, and Austin, Texas. We also maintain customer support and service through technical support call centers and web-based or Internet communications.

      Our sales efforts are focused on establishing and developing long-term relationships with our OEM customers. The sales cycle typically begins with one of our product designs being selected as a component in a potential customer’s computer system or data storage peripheral. Then, we work closely with the customer to integrate our components with the customer’s current and next generation products or platforms. The time to product shipment can typically range from six to eighteen months.

      In addition to sales and marketing efforts, we actively participate with industry organizations relating to the development and acceptance of industry standards. We collaborate with peer companies through co-marketing activities, collateral development, joint training, road tours and cooperative testing and certifica-

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Engineering and Development

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

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

      We continue to invest heavily in research and development to expand our capabilities to address the emerging technologies in the rapid evolution of the storage networking industry. During fiscal 2004, 2003 and 2002, we incurred engineering and development expenses of $87.8 million, $81.3 million and $69.7 million, respectively.

      As of March 28, 2004, we had 434 employees engaged in the development of new products and the improvement of existing products, including engineers, technicians and support personnel.

Backlog

      Our sales are made primarily pursuant to standard purchase orders for the delivery of products. Because industry practice allows customers to cancel or change orders with limited advance notice, we believe that backlog at any particular date is not a reliable indicator of our future revenue levels.

Competition

      The markets for SAN infrastructure components are highly competitive and characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. We believe the principal competitive factors in our industry include:

	•	time-to-market;
	•	product quality, reliability and performance;
	•	new product innovation;
	•	customer relationships;
	•	price;
	•	design capabilities;
	•	customer service and technical support; and
	•	interoperability of SAN components.

      We believe that we compete favorably with respect to each of these factors

      Due to the broad array of components required in the SAN infrastructure, we compete with several companies. In the Fibre Channel HBA market, our primary competitors are Emulex Corporation, LSI Logic Corporation and Applied Micro Circuits Corporation. In the SCSI sector of the I/ O market, we compete primarily with Adaptec, Inc. and LSI Logic Corporation. Our switch products compete primarily with Brocade Communications Systems, Inc., Cisco Systems, Inc., McData Corporation and Emulex Corporation.

      There are two markets in the Fibre Channel semiconductor controller business. The first market is associated with server and storage controller interfaces. In this market our primary competitors are Agilent

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

Manufacturing

      We subcontract the manufacturing of our semiconductor chips and HBA boards and switches to independent foundries and subcontractors, which allows us to avoid the high costs of owning, operating and constantly upgrading wafer fabrication and assembly facilities. As a result, we focus our resources on product design and development, quality assurance, sales and marketing and customer support. Prior to the sale of our semiconductors, switches and HBA products, final tests are performed on the products, including tests required under our ISO 9001 Certification. We also provide fabrication process reliability tests and conduct failure analysis to confirm the integrity of our quality assurance procedures.

      Our semiconductors are currently manufactured by a number of domestic and offshore foundries. Our major semiconductor suppliers are LSI Logic Corporation, Samsung Semiconductor, Inc. and Taiwan Semiconductor Manufacturing Company. Most of our products are manufactured using 0.18 or 0.25 micron process technology.

      We depend on our foundries to allocate a portion of their foundry capacity sufficient to meet our needs and to produce products of acceptable quality and with satisfactory manufacturing yields in a timely manner. These foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. We do not have long-term agreements with any of our foundries; we purchase both wafers and finished chips on a purchase order basis. Therefore, the foundries generally are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We work with our existing foundries, and intend to qualify new foundries, as needed, to obtain additional manufacturing capacity. However, there can be no assurance that we will be able to maintain our current foundry relationships or obtain additional capacity.

      We currently purchase our semiconductor products from our foundries either in finished form or wafer form. We use subcontractors to assemble our semiconductor products purchased in wafer form, and to assemble our switches and HBA products. In the assembly process for our semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packages and tested. For our HBA products, we outsource the material procurement and assembly in a turnkey model. Following the assembly of our semiconductor and HBA products, we further test and inspect the products prior to shipment to our customers. For our switch products, we subcontract the material procurement, management, assembly and test processes.

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

Intellectual Property

      Although we have several patents issued and many additional patent applications pending in the United States, Canada, Europe and Asia, we rely primarily on our trade secrets, trademarks and copyrights to protect our intellectual property. We attempt to protect our proprietary information through confidentiality agreements and contractual provisions with our customers, suppliers, employees and consultants, and through other

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

      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. 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. In the event of a patent or other intellectual property dispute, we may be required to expend significant resources to defend such claims, develop non-infringing technology or to obtain licenses to the technology which is the subject of the claim. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all. In the event of litigation to determine the validity of any third party’s claims, such litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor.

Employees

      We had 819 employees as of March 28, 2004. We believe our future prospects will depend, in part, on our ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. Our employees are not represented by a labor union. We believe that our relations with our employees are good.

      Our principal product development, operations, sales and corporate offices are currently located in three buildings comprising approximately 165,000 square feet in Aliso Viejo, California. We own these three buildings without encumbrance. We have recently entered into a lease for additional facilities in Aliso Viejo, California, which comprise approximately 37,000 square feet. We also lease design centers in Eden Prairie, Minnesota, Roseville, California and Austin, Texas comprising approximately 50,000 square feet, 15,000 square feet and 15,000 square feet, respectively.

      In January 2003, Raytheon Company filed suit in the United States District Court for the Eastern District of Texas, alleging that we, along with seven other defendants, infringe a Raytheon patent directed to a mass data storage system. The suit sought injunctive relief and damages in an unspecified amount. We filed an answer to the complaint in March 2003 and trial was scheduled to begin in September 2004. In February 2004, we settled the lawsuit. Under the terms of the settlement, the lawsuit was dismissed, Raytheon licensed three patents to us (including the patent in dispute), and we paid Raytheon a one-time license fee (which was not material to our financial condition or results of operations).

      In February 2003, Vixel Corporation filed suit in the United States District Court for the District of Delaware (the “First Delaware Action”) 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. We filed an answer to the complaint in April 2003 denying all allegations. The suit is in its very early stages and discovery has commenced. We dispute the plaintiff’s claims in the First Delaware Action and intend to defend this lawsuit vigorously.

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      In December 2003, we filed suit against Emulex (the new parent company of Vixel) in the United States District Court for the Central District of California (the “California Action”) alleging that Emulex infringes one of the our patents related to a digital switch element used in Fibre Channel systems. The suit seeks unspecified monetary damages as well as injunctive relief.

      During December 2003, we engaged with Emulex in negotiations to settle the First Delaware Action and the California Action. As a result of those discussions, the parties signed a document entitled “terms of agreement” which the parties intended would outline the basis for a settlement agreement. During January and February 2004, the parties attempted to negotiate a settlement agreement based on the previously discussed outline and to date have not been successful in such efforts. In late February 2004, Emulex filed suit in the United States District Court for the District of Delaware (the “Second Delaware Action”) asking the Delaware court for declaratory relief that: (i) the patent in dispute in the California Action is invalid and, if the patent is valid, then Emulex does not infringe the patent; and (ii) the “terms of agreement” is a final and binding settlement of the First Delaware Action and the California Action. This suit is in the very early stages. We dispute the plaintiff’s claims in the Second Delaware Action and intend to defend this lawsuit vigorously.

      Various lawsuits, claims and proceedings have been or may be instituted against us, including the matters discussed above. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims and proceedings may be disposed of unfavorably to us. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on our financial condition or results of operations. Based on an evaluation of matters which are pending or asserted, we believe the disposition of such matters will not have a material adverse effect on our financial condition or results of operations.

      No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

Principal Market and Prices

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

Number of Common Stockholders

      The approximate number of record holders of our common stock was 632 as of May 21, 2004.

Dividends

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

Recent Sales of Unregistered Securities

      In January 2004, in connection with our prior acquisition of Little Mountain Group, Inc. (LMG), we issued approximately 131,000 shares of common stock to the former stockholders of LMG. These shares were issued in connection with the achievement of certain future performance milestones that were specified at the date of the acquisition. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. For information regarding the issuance of these shares of common stock, see Note 2 to the Consolidated Financial Statements, included in Part II, Item 8 of this report.

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Issuer Purchases of Equity Securities

      On October 16, 2002, we announced a stock repurchase program covering repurchases of up to $100 million of our common stock. The stock repurchase program expires October 14, 2004. Set forth below is information regarding our stock repurchases made during the fourth quarter of fiscal year 2004 under our stock repurchase program.

      The Company had previously purchased 475,200 shares at an average price of $47.40 per share under the program.

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      The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto appearing elsewhere in this report.

      This Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and related notes. This Discussion and Analysis of Financial Condition and Results of Operations also 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. 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

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Overview

      We design and supply storage network infrastructure components and software for many of the world’s largest server and storage subsystem manufacturers that ultimately are used by small to medium-sized enterprises, and companies that have large information technology environments. We serve customers with solutions based on various storage area network, or SAN, technologies. Our products are currently based on Fibre Channel, Small Computer Systems Interface, or SCSI, and Internet SCSI, or iSCSI standards, and we expect that future products may also be based on technology standards such as Serial Attached SCSI. We produce the controller chips, management enclosure chips, host bus adapters, or HBAs, fabric switches and management software that provide the connectivity infrastructure for every size of storage network.

      Our ability to serve the storage industry stems from our highly leveraged product line that addresses virtually every connection point in a SAN infrastructure solution. On the server side of the SAN, we provide enclosure management products, HBA technology on the motherboard (“Fibre Down” technology), baseboard management solutions and Fibre Channel HBAs. Connecting servers to storage, we provide the network infrastructure with a full suite of Fibre Channel switches. On the storage side of the network, we provide controller chips for Redundant Array of Independent Disks, or RAID, storage systems. These include Fibre Channel host port connections and RAID controller to Fibre Channel and SCSI disk drive port connections.

      Our products are sold to original equipment manufacturers, or OEMs, and through our authorized distributors and resellers. These connectivity solutions are incorporated into a variety of products from OEM customers, including Cisco Systems, Inc., Dell Computer Corporation, EMC Corporation, Fujitsu Limited, Hitachi, Ltd., Hewlett-Packard Company, International Business Machines Corporation, Network Appliance, Inc., Quantum Corporation, Storage Technology Corporation, Sun Microsystems, Inc. and many others.

     Fiscal Year and Fourth Quarter Financial Highlights and Other Information

      During fiscal 2004, we established new records for annual net revenues and net income. Net revenues during fiscal 2004 of $523.9 million were up 19% from last year; net income of $133.7 million in fiscal 2004 increased 29% from the prior year. The results for fiscal 2004 were highlighted by a 32% increase in Fibre Channel sales and an improvement in gross profit percentage of 450 basis points to 68.3% in fiscal 2004.

      During the fourth quarter of fiscal 2004, we experienced a sequential decline of 6% in our total net revenues from the third quarter of fiscal 2004. Fibre Channel revenues during the fourth quarter declined 4% sequentially primarily due to weaker than expected demand at the end of the quarter for our host bus adapters from two OEMs. Revenues derived from SCSI products declined 15% sequentially during the fourth quarter due to the continued technology transition in our hard disk drive controller product line from SCSI to Fibre Channel technology.

      Overall, sales of our hard disk drive controller chips declined during the fourth quarter of fiscal 2004 due to an expected product transition by one of our hard disk drive manufacturer customers. We expect this transition to begin to ramp in the first quarter of fiscal 2005 with full production expected during the successive two quarters.

      Our long-term outlook for our core Fibre Channel business remains favorable. Based on a foundation of design wins in existing markets, as well as emerging markets such as the small-to-medium business market,

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      A summary of the key factors and significant events, which impacted our financial performance during the fourth quarter of fiscal 2004 are as follows:

	•	Net revenues of $128.3 million for the fourth quarter of fiscal 2004 decreased sequentially $8.8 million, or 6%, from the $137.1 million reported in the third quarter of fiscal 2004.
	•	Gross profit as a percentage of net revenues was 69.6% for the fourth quarter of fiscal 2004, increasing 90 basis points from 68.7% in the third quarter of fiscal 2004. The improvement in our gross profit margin was attributable to a favorable change in product mix and technology mix, and manufacturing related efficiencies. Although we have experienced increases in our gross profit margin during fiscal 2004, there can be no assurance that we will be able to maintain our gross profit margin consistent with historical trends and it may decline in the future.
	•	Operating income as a percentage of net revenues was 37.9% for the fourth quarter of fiscal 2004 compared to 38.6% in the third quarter of fiscal 2004, primarily due to the sequential decline in net revenues.
	•	Net income of $32.9 million, or $0.34 per diluted share, decreased sequentially 6% from the $35.0 million, or $0.36 per diluted share, in the third quarter of fiscal 2004.
	•	During the fourth quarter of fiscal 2004, we repurchased $37.5 million of our common stock in the open market under our corporate stock repurchase program.
	•	Cash and cash equivalents and short-term investments of $743.0 million at March 28, 2004 increased $3.9 million (net of the $37.5 million of cash used to repurchase our common stock) during the fourth quarter, due primarily to our net income and the related cash generated from operations.
	•	Working capital of $792.8 million at March 28, 2004 increased $1.5 million during the fourth quarter primarily due to our net income and the related cash generated from operations, partially offset by the $37.5 million of cash used to repurchase our common stock.
	•	Accounts receivable was $67.4 million as of March 28, 2004, compared to $75.9 million at December 28, 2003. Days sales outstanding (DSO) in receivables as of March 28, 2004 decreased to 48 days from 51 days as of December 28, 2003. Our accounts receivable and DSO are primarily affected by shipment linearity within the quarter and collections performance. The decrease in our accounts receivable and DSO during the fourth quarter of fiscal 2004 was primarily caused by the decline in revenues during the quarter and improved collections in the March quarter. Based on changes in our customers’ procurement models and our current customer mix, we expect that DSO will continue to be in the 45 to 55 day range during fiscal 2005. However, there can be no assurance that we will be able to maintain our DSO consistent with historical trends and it may increase in the future.
	•	Inventories were $20.9 million as of March 28, 2004, compared to $17.9 million at December 28, 2003. Our annualized inventory turns in the fourth quarter of fiscal 2004 of 7.5 turns declined from the 9.6 turns in the third quarter of fiscal 2004, principally due to the increase in inventories related to the buildup to satisfy the expected level of customer purchases at the end of the fourth quarter.

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RESULTS OF OPERATIONS

Net Revenues

      A summary of our net revenues grouped by technology standard is as follows:

      The global marketplace for SANs continues to expand in response to the information storage requirements of enterprise and departmental business environments, as well as the emerging small and medium-sized business market. This market expansion has resulted in increased volume shipments of our Fibre Channel products. However, the SAN market has been characterized by rapid advances in technology and related product performance, which has generally resulted in declining average selling prices over time. Our revenues have generally been favorably affected by increases in volume shipments (as a result of market expansion and increases in market share) and the release of new products, which tend to have higher average selling prices than the products they are replacing. The favorable effect on our revenues as a result of increases in volume has been partially offset by the impact of declining prices on older products.

      Our net revenues are derived primarily from the sale of Fibre Channel and SCSI-based products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues for fiscal 2004 increased $83.1 million, or 19%, from fiscal 2003. The increase was primarily the result of a $97.2 million, or 32%, increase in Fibre Channel net revenues, due principally to increased shipments of HBAs and switches, which volume increases aggregated 53% and 59%, respectively. These volume increases were partially offset by lower average selling prices. The increase in Fibre Channel net revenues was partially offset by a $14.1 million decrease in sales of SCSI products, primarily due to the continued technology transition in our hard disk drive controller product line from SCSI to Fibre Channel technology. During fiscal 2004, Fibre Channel revenues represented 77% of our net revenues compared to 70% in the prior year. Net revenues for fiscal 2004 included $4.3 million of royalty revenues and $0 non-recurring engineering fees, compared to $0.9 million of royalty revenues and $1.2 million non-recurring engineering fees, respectively, recorded in the prior year. Although royalty revenues are unpredictable, we do not expect them to be significant to our overall revenues in the future.

      Net revenues in fiscal 2003 of $440.8 million increased $96.6 million, or 28%, from fiscal 2002. The increase was the result of an $83.3 million increase in Fibre Channel net revenues and a $15.0 million increase in SCSI net revenues, partially offset by a $1.7 million decrease in IDE-based royalties, which had ceased during fiscal 2002. The increase in Fibre Channel revenues in fiscal 2003 was primarily the result of increased shipments of HBAs, hard disk drive controller chips and management controller chips. The increase in SCSI revenues in fiscal 2003 was primarily due to increased shipments of our hard disk drive controllers. During fiscal 2003, Fibre Channel revenues represented 70% of our net revenues compared to 65% in fiscal 2002, and we expect our Fibre Channel revenues to continue to increase as a percentage of our total revenues due to the transition in our hard disk drive controller product line from SCSI to Fibre Channel technology.

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      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 56% of net revenues during fiscal 2004, 60% of net revenues during fiscal 2003 and 55% of net revenues during fiscal 2002.

      A summary of our customers, including their manufacturing subcontractors, that represent 10% or more of our net revenues during each of the fiscal years is as follows:

*	Less than 10% of net revenues.

      We believe that our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Additionally, customers’ economic and market conditions frequently change. Accordingly, there can 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.

      Export revenues (primarily to Pacific Rim countries) for fiscal 2004 of $292.6 million increased $53.9 million, or 23%, from fiscal 2003, primarily due to increased sales of Fibre Channel HBAs in the United Kingdom and the Asia-Pacific region. Export revenues in fiscal 2003 of $238.7 million increased $75.3 million, or 46%, from fiscal 2002, primarily due to increased sales to our peripheral chip customers in Japan. As a percentage of net revenues, export revenues accounted for 56% in fiscal 2004, 54% in fiscal 2003 and 47% in fiscal 2002. Export revenues are denominated in U.S. dollars.

      Revenues by geographic area are presented based upon the country of destination. No other country represented 10% or more of net revenues for any of the fiscal years presented. Net revenues by geographic area are as follows:

Gross Profit

      Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of the cost of purchased products (including silicon chips from third-party manufacturers), assembly and test services, and costs associated with product procurement, inventory management and product quality. A summary of our gross profit and related percentage of net revenues is as follows:

      Gross profit for fiscal 2004 increased $76.2 million or 27%, from gross profit for fiscal 2003. The gross profit percentage for fiscal 2004 increased 450 basis points from the prior year to 68.3%. The increase in gross profit percentage during for fiscal 2004 compared to fiscal 2003 was due primarily to favorable shifts in the product mix and technology mix, including increased sales of higher margin Fibre Channel-based products. In

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      During fiscal 2003, gross profit increased $70.3 million or 33%, from gross profit for fiscal 2002. The gross profit percentage for fiscal 2003 increased 240 basis points from the prior year to 63.8%. The increase in gross profit percentage was due primarily to increased sales of higher margin Fibre Channel-based products, as well as manufacturing efficiencies realized from the increase in production.

      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 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.

Operating Expenses

      Our operating expenses are summarized in the following table:

      Engineering and Development. Engineering and development expenses consist primarily of compensation and related benefit costs, development-related engineering and material costs, occupancy costs and related computer support costs. Engineering and development expenses of $87.8 million for fiscal 2004 increased $6.5 million, or 8%, from fiscal 2003. The increase in engineering and development expenses in fiscal 2004 was due primarily to a $5.1 million increase in compensation and related benefit costs. The increase in our headcount and associated costs during fiscal 2004 was primarily the result of our continued development efforts in support of products based on the Fibre Channel and iSCSI technologies.

      During fiscal 2003, engineering and development expenses of $81.3 million increased $11.6 million, or 17%, from fiscal 2002. The increase in engineering and development expenses in fiscal 2003 primarily reflects an $8.6 million increase in compensation and related benefit costs associated with increases in headcount for our expanded development efforts in support of existing and future technologies and the accelerated launch of new products. In addition, costs associated with depreciation, leased assets and maintenance contracts increased $2.7 million as result of increased requirements for assets used in engineering and development activities.

      We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities. As a result of continued

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      Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses of $52.9 million for fiscal 2004 increased $8.6 million, or 19%, from fiscal 2003. The increase in sales and marketing expenses in fiscal 2004 was due primarily to a $3.5 million increase in promotional activities directed at increasing market awareness and acceptance of our products, a $2.8 million increase in compensation and related benefit costs associated with the continued expansion of our sales and marketing groups and a $1.2 million increase in travel costs in support of new market and customer opportunities.

      During fiscal 2003, sales and marketing expenses of $44.3 million increased $6.0 million, or 16%, from fiscal 2002. The increase in sales and marketing expenses for fiscal 2003 primarily reflects an increase of $2.6 million in compensation and related benefit costs associated with the expansion of our sales and marketing groups, an increase of $2.0 million in sales commissions earned by independent sales representatives as a result of the significant increase in our net revenues and an increase of $1.0 million for costs associated with promotional and marketing-related programs in support of increased revenues.

      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 compensation and related benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses for fiscal 2004 of $18.1 million increased $4.1 million, or 29%, from fiscal 2003. The increase in general and administrative expenses in fiscal 2004 was primarily due to the accrual of settlement costs totaling $1.8 million associated with legal claims and increased legal costs aggregating $1.2 million associated with the defense of legal proceedings.

      During fiscal 2003, general and administrative expenses of $14.0 million decreased $2.7 million, or 16%, from fiscal 2002. The decrease in general and administrative expenses for fiscal 2003 resulted principally from a reduction in amortization expense associated with certain intangible assets and a lower provision for uncollectible accounts receivable, partially offset by increases in headcount and personnel-related expenses. The reduction in the amortization expense in fiscal 2003 includes $1.1 million associated with certain intangible assets that were fully amortized in fiscal 2002, and the elimination of $1.1 million of goodwill amortization in connection with our adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” as of April 1, 2002. The provision for uncollectible accounts receivable of $(0.6) million for fiscal 2003 resulted from accounts receivable collections more favorable than previously estimated; in fiscal 2002 the provision for uncollectible accounts receivable was $1.1 million. Excluding the effect of the reduction of the amortization expense and the provision for uncollectible accounts, our general and administrative expenses for fiscal 2003 increased by $1.2 million, primarily due to an increase in compensation and related benefit costs for additional personnel for the expansion of our corporate infrastructure.

      In connection with the growth of our business, we expect general and administrative expenses (excluding the costs for legal defense and settlements associated with legal proceedings) will continue to increase in the future.

Non-Operating Income

      Interest and other income for fiscal 2004 of $16.8 million is comprised principally of interest income related to our portfolio of marketable securities. The $0.5 million decline in interest and other income in fiscal

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      During fiscal 2003, interest and other income of $17.4 million is comprised principally of interest income and investment gains related to our portfolio of marketable securities, partially offset by write-downs of non-marketable investments. The $1.7 million decline in interest and other income in fiscal 2003 from the prior year was primarily due to a $4.0 million write-down of non-marketable investments and a $1.2 million decrease in interest income due to declining interest rates on our portfolio of marketable securities, partially offset by a $3.5 million increase in realized gains on sales of marketable securities. During fiscal 2003, the carrying values of certain non-marketable investments were written down to their estimated fair value of zero. These investments consisted of equity interests in early stage technology companies which we had accounted for under the cost method. We estimated the fair value of these investments based on available financial and other information, including the then-current and projected business prospects for the subject companies, and determined that the decline in the fair value of these investments was other than temporary.

Income Taxes

      Our effective tax rate approximated 38% in fiscal 2004, 35% in fiscal 2003 and 33% in fiscal 2002. The increase in the tax rate in fiscal 2004 and 2003 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. Although we do not expect our effective tax rate to increase at a rate consistent with the recent historical trend, we do expect upward pressure on our effective tax rate in fiscal 2005 for substantially the same reason experienced in fiscal 2004 and 2003. Furthermore, the pending expiration of the federal research credit on June 30, 2004 and the anticipated repeal of tax benefits associated with export sales may have an adverse effect on our effective tax rate during fiscal 2005.

Liquidity and Capital Resources

      Our combined balances of cash and cash equivalents and short-term investments have increased to $743.0 million at March 28, 2004, compared to $643.2 million at March 30, 2003. The increase was attributable to positive cash flow from operations, primarily net income, during fiscal 2004. Our working capital, during fiscal 2004, increased $111.3 million to $792.8 million. 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. However, it is possible that we may need to supplement our existing sources of liquidity to finance our activities beyond the next 12 months or for the future acquisition of businesses, products or technologies. In addition, our future capital requirements will depend on a number of factors, including changes in the markets we address, our revenues and the related manufacturing and operating costs, product development efforts and requirements for production capacity. In order to fund any additional capital requirements, we may seek to obtain debt financing or issue additional shares of our common stock. There can be no assurance that any additional financing, if necessary, will be available on terms acceptable to us or at all.

      Cash provided by operating activities was $157.2 million for fiscal 2004 and $155.3 million for fiscal 2003. The increase in the cash provided by operating activities was due to the increase in net income, partially offset by a larger investment in working capital during fiscal 2004 compared to the prior year. The operating cash flow for fiscal 2004 reflects our net income of $133.7 million and $41.7 million of non-cash charges (depreciation and amortization, deferred income taxes and other), partially offset by a net increase in the non-cash components of our working capital of $18.2 million. The increase in the non-cash components of working capital was primarily due to a $17.2 million increase in accounts receivable as a result of an overall increase in sales during the fourth quarter of fiscal 2004 over the corresponding period of fiscal 2003 and an increase in days sales outstanding from 38 days at the end of fiscal 2003 to 48 days at the end of fiscal 2004 as a result of

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      Cash used in investing activities of $103.7 million for fiscal 2004 includes net purchases of marketable securities of $81.4 million and additions to property and equipment of $22.3 million. During fiscal 2003, cash used in investing activities of $102.3 million, included net purchases of marketable securities of $84.9 million and additions to property and equipment of $15.7 million.

      We expect capital expenditures to increase in the future consistent with the growth in our business, as we continue to invest in machinery and equipment, more costly engineering and production tools for new technologies, and enhancements to our corporate information technology infrastructure.

      Cash used in financing activities of $34.8 million for fiscal 2004 resulted from our purchase of $57.0 million of treasury stock, partially offset by $22.3 million of proceeds from the issuance of common stock under our stock plans. During fiscal 2003, the $8.6 million of cash provided by financing activities resulted from $11.6 million of proceeds from the issuance of common stock under our stock plans, partially offset by our purchase of $3.0 million of treasury stock.

      In October 2002, our 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 fiscal 2004, we repurchased 1,239,000 shares of our common stock for an aggregate purchase price of $57.0 million. As of March 28, 2004, we have repurchased 1,330,000 shares of our common stock for an aggregate purchase price of $60.0 million since inception of the program. The shares repurchased have been taken in as treasury shares and will be held as treasury shares until our Board of Directors designates that these shares be retired or used for some other purpose.

      During April and May 2004, we purchased an additional 1,426,000 shares of common stock under the stock repurchase program for an aggregate purchase price of $40.0 million. With these purchases of common stock, we have repurchased the entire amount authorized pursuant to the program.

      We have certain contractual obligations and commitments to make future payments in the form of non-cancelable purchase orders to our suppliers and commitments under operating lease arrangements. A summary of our contractual obligations and their impact on our cash flows in future fiscal years is as follows:

Critical Accounting Policies and Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe the accounting policies described below to be our most critical accounting policies. These accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of the financial statements and actual results could differ materially from the amounts reported based on these policies.

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     Revenue and Accounts Receivable

      We sell our products domestically and internationally primarily through 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 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.

      An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of our customers to make required payments. These reserves are determined by analyzing specific customer accounts and applying historical loss rates to the aging of remaining accounts receivable balances. If the financial condition of our customers were to deteriorate, resulting in their inability to pay their accounts when due, additional reserves might be required.

      We record provisions against revenue and cost of revenue for estimated product returns and allowances such as competitive pricing programs and rebates in the same period that revenue is recognized. These provisions are based on historical experience as well as specifically identified product returns and allowance programs. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates.

     Inventories

      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.

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RISK FACTORS

      Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results of operations to differ materially from the results contemplated by the forward-looking statements contained 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. 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 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 gross margins or 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 customers, order changes or rescheduling;
	•	gain or loss of significant customers;
	•	customer policies pertaining to desired inventory levels of our products;
	•	negotiated rebates and extended payment terms;
	•	changes in our ability to anticipate in advance the mix of customer orders;
	•	levels of inventory our customers require us to maintain in our inventory hub locations;
	•	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;

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	•	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
	•	changes in the global economy that impact 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 continued growth of the storage area network (SAN) market and if this market does not continue to 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. 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. Our success in generating revenue in the 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 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

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	•	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. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated from Fibre Channel technology. Our competitors are developing alternative technologies, such as iSCSI, Infiniband^TM, Serial Attached SCSI (SAS) and Serial Advanced Technology Attachment (sATA) that may compete with the market acceptance of our Fibre Channel products. 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 56% of net revenues during the fiscal year ended March 28, 2004 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 products from us for any extended period. Major customers also have significant leverage over us and may attempt to change the terms, including pricing and payment terms, which 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 merge with or acquire one or more of our other customers. As our OEM 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 or results of operations.

Our business may be subject to seasonal fluctuations and uneven sales patterns in the future.

      Many of our OEM customers experience seasonality and uneven sales patterns in their businesses. For example, some of our customers close a disproportionate percentage of their sales transactions in the last month, weeks and days of each quarter; and other customers experience spikes in sales during the fourth calendar quarter of each year. Since a large percentage of our products are sold to OEM customers who experience seasonal fluctuations and uneven sales patterns in their businesses, we could continue to experience similar seasonality and uneven sales patterns. In addition, as our business model moves to a “hub model” in which our customers increasingly require us to maintain products at hub locations near our customer facilities, it becomes easier for our customers to order products with very short lead times, and as a result makes it increasingly difficult for us to predict sales trends. In addition, our quarterly fiscal periods often do not correspond with the fiscal quarters of our customers, and this may result in uneven sales patterns between quarters. It is difficult for us to evaluate the degree to which the seasonality and uneven sales patterns of our OEM customers may affect our business in the future because the historical growth of our business may have lessened the effect of this seasonality and uneven sales patterns on our business in the past.

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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 Applied Micro Circuits 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., McData Corporation and Emulex Corporation. In the enclosure management sector, we compete primarily with Vitesse Semiconductor Corporation and Hitachi, Ltd. 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 decided to vertically integrate and therefore stopped purchasing products from us.

      We 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 competitive products 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.

We expect the pricing of our products to continue to decline, which could reduce our revenues, gross margins, and profitability.

      We expect the average unit prices of our products (on a product to product comparison basis) to decline in the future as a result of competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors, or other factors. If we are unable to offset these factors by increasing sales volumes, or reducing product manufacturing cost, our total revenues and gross margins may decline. In addition, to maintain our gross margins we must maintain or increase current shipment volumes, develop and introduce new products and product enhancements, and we must continue to reduce the manufacturing cost of our products. Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenue. As a result, we may not be able to decrease our spending to offset any unexpected shortfall in revenues. If this occurs, our operating results and gross margins may be below our expectations and the expectations of investors and stock market analysts, and our stock price could be negatively 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 (i.e., competitive pricing and rebates), 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 of our products 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

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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 additional 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. From time to time, we have 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

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      Historically, the electronics industry has developed higher performance application specific integrated circuits, or ASICs, which create chip level solutions that replace selected board level or box level solutions at a significantly lower average selling price. We have previously offered ASICs to customers for certain applications that have effectively resulted in a lower-priced solution when compared to an HBA solution. This transition to ASICs may also occur with respect to other current and future products. The result of this transition may have an adverse effect on our business, financial condition or results of operations. In the future, a similar adverse effect to our business could occur if there were rapid shifts in customer purchases from our midrange server and storage solutions to products for the small and medium-sized business market.

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, interruptions or delays in our receipt of products from our suppliers, 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 results of operations.

      Export revenues accounted for 56% of our net revenues for the fiscal year ended March 28, 2004. 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

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We may need to enter into agreements to guarantee that we have production capacity, which may require the expenditure of substantial funds.

      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 or convertible debt securities could result in dilution to our stockholders. This kind of additional financing, if necessary, may not be available on terms acceptable to us or at all.

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

      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 failure to retain 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.

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      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.

Rapid growth may strain our operations and require that we incur costs to upgrade our infrastructure.

      We have experienced a period of rapid growth and expansion. Our rapid growth and expansion has placed, and continues to place, a strain on our resources. Unless we manage this growth and future 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. In addition, we test most 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. If we lose the services of key personnel or fail to hire personnel for key positions, 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 10 of Notes to 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.

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Changes in income tax laws or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

      We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rates could be adversely affected by changes in tax laws or interpretations thereof, or by changes in the valuation of our deferred tax assets and liabilities. Additionally, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. However, there can be no assurance that the outcomes from these continuous examinations will not have a material adverse effect on our financial condition or results of operations.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and proposed changes in accounting for equity compensation could adversely affect earnings.

      We have historically used stock options and other forms of equity-related compensation as key components of our total rewards employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. In recent periods, many of our employee stock options have had exercise prices in excess of our stock price, which could affect our ability to retain or attract present and prospective employees. In addition, the Financial Accounting Standards Board and other agencies have proposed, and are currently considering, changes to United States generally accepted accounting principles that would require us and other companies to record a charge to earnings for employee stock option grants and other equity incentives. Moreover, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to employees in the future, which may result in changes in our equity compensation strategy. These and other developments in the provision of equity compensation to employees could make it more difficult to attract, retain and motivate employees and result in additional expense to us.

Our charter document and stockholder 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 stockholder 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 stockholder 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.

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.

Item 7a.     Quantitative and Qualitative Disclosures About Market Risk

      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.

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      Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of March 28, 2004, 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 March 28, 2004, unrealized gains of $4.0 million (net of related income taxes) on these securities are included in accumulated other comprehensive income.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

      We have audited the consolidated financial statements of QLogic Corporation and subsidiaries as listed in Item 15(a)(1). In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QLogic Corporation and subsidiaries as of March 28, 2004 and March 30, 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended March 28, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets as of April 1, 2002.

KPMG LLP

Orange County, California

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QLOGIC CORPORATION

See accompanying notes to consolidated financial statements.

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QLOGIC CORPORATION

See accompanying notes to consolidated financial statements.

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QLOGIC CORPORATION