QLOGIC CORP - 10-Q Quarterly Report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

As of October 18, 2004, 92,532,861 shares of the Registrant’s common stock were outstanding.

In the opinion of management of QLogic Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company’s financial position, results of operations and cash flows. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2004. The results of operations for the three and six months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

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

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

Options to purchase 11,894,000 and 5,062,000 shares of common stock have been excluded from the diluted net income per share calculation for the three months ended September 26, 2004 and September 28, 2003, respectively. Options to purchase 11,445,000 and 4,673,000 shares of common stock have been excluded from the diluted net income per share calculation for the six months ended September 26, 2004 and September 28, 2003, respectively. These options have been excluded from the diluted net income per share calculations because their effect was antidilutive.

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

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

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

In October 2002, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $100 million of the Company’s outstanding common stock for a two-year period. The Company has repurchased the entire amount authorized pursuant to the program, including 1.4 million shares of common stock for an aggregate purchase price of $40.0 million during the three months ended June 27, 2004.

In June 2004, the Company’s Board of Directors approved a new stock repurchase program that authorizes the Company to repurchase up to an additional $100 million of the Company’s outstanding common stock for a two-year period through June 30, 2006. The Company repurchased 0.4 million shares of common stock under the program for an aggregate purchase price of $10.0 million during the three months ended September 26, 2004.

This Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. 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 fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed under “Risk Factors” and elsewhere in this report. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

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 Inexpensive 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.

During the second quarter of fiscal 2005, our net revenues were $134.6 million and increased 4% sequentially from the first quarter of fiscal 2005. Fibre Channel product revenues during the second quarter increased 3% sequentially from the first quarter and represented 81% of our total net revenues. Revenues derived from SCSI products also increased 3% sequentially during the second quarter, however we expect our SCSI product revenues to decline over time due to the transition in our business from SCSI to Fibre Channel technology.

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, we continue to expect favorable growth momentum for our Fibre Channel products. Overall, we expect that our total revenues for the third quarter of fiscal 2005 will increase 1% to 6% from the revenues recorded in the second quarter of fiscal 2005.

A summary of the key factors and significant events which impacted our financial performance during the second quarter of fiscal 2005 are as follows:


	•	Net revenues of $134.6 million for the second quarter of fiscal 2005 increased sequentially $4.8 million, or 4%, from the $129.8 million reported in the first quarter of fiscal 2005.

	•	Gross profit as a percentage of net revenues was 69.4% for the second quarter of fiscal 2005, increasing slightly from 69.2% in the first quarter of fiscal 2005. While our gross profit margin was relatively consistent with the prior quarter, we continue to expect downward pressure on our gross profit margin as a result of declining average selling prices on older products, as well as changes in product and technology mix. 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 37.8% for the second quarter of fiscal 2005, up slightly from 37.2% in the first quarter of fiscal 2005.

	•	Our income tax rate declined in the second quarter of fiscal 2005 due to the favorable resolution of routine tax examinations, resulting in a $0.01 per share benefit to the reported diluted earnings per share for the quarter. We expect our tax rate to approximate 36.5% for the remaining quarters and full year of fiscal 2005.

	•	Net income of $35.9 million, or $0.38 per diluted share, in the second quarter of fiscal 2005 increased sequentially 11% from the $32.2 million, or $0.34 per diluted share, reported in the first quarter of fiscal 2005.

	•	During the second quarter of fiscal 2005, we repurchased $10.0 million of our common stock in the open market under our new $100 million corporate stock repurchase program, which was announced in June 2004. This stock repurchase program commenced July 1, 2004 and will continue for two years through June 30, 2006.

	•	Cash and cash equivalents and short-term investments of $754.7 million at September 26, 2004, increased $16.7 million from the balance at the end of the first quarter of fiscal 2005. During the second quarter of fiscal 2005, we generated $26.1 million of cash from operations and used $10.0 million to repurchase our common stock.

	•	Working capital of $811.4 million at September 26, 2004 increased $31.3 million during the second quarter primarily due to cash generated by operations.

	•	Accounts receivable was $72.0 million as of September 26, 2004, compared to $67.2 million at June 27, 2004. Days sales outstanding (DSO) in receivables as of September 26, 2004 increased to 49 days from 47 days as of June 27, 2004. Our accounts receivable and DSO are primarily affected by shipment linearity within the quarter and collections performance. Based on 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 $22.4 million as of September 26, 2004, compared to $22.3 million at June 27, 2004. Our annualized inventory turns in the second quarter of fiscal 2005 of 7.4 turns increased slightly from the 7.2 turns in the first quarter of fiscal 2005.

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 of 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 the three months ended September 26, 2004 increased $2.3 million, or 2%, from the three months ended September 28, 2003. The increase was primarily the result of an $8.6 million increase in Fibre Channel product revenues, due principally to a 47% increase in shipments of Fibre Channel HBAs compared to the prior year. The increase in Fibre Channel product revenues was partially offset by a $6.3 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 the three months ended September 26, 2004, the volume of SCSI hard disk drive controllers declined 18% from the same period in the prior year. Net revenues for the three months ended September 26, 2004 included $1.3 million of other revenue, consistent with other revenue recorded in the corresponding period of last year. Other revenue includes iSCSI product revenues, royalties, non-recurring engineering fees and service fees. Other revenues are unpredictable and we do not expect them to be significant to our overall revenues.

Net revenues for the six months ended September 26, 2004 increased $5.9 million, or 2%, from the six months ended September 28, 2003. The increase was primarily the result of a $20.0 million increase in Fibre Channel product revenues, due principally to the increase in shipments of Fibre Channel HBAs compared to the prior year. The increase in Fibre Channel product revenues was partially offset by a $14.5 million decrease in sales of SCSI products, due principally to the decrease in volume of SCSI hard disk drive controllers from the same period in the prior year. Net revenues for the six months ended September 26, 2004 included $2.2 million of other revenue, up from the $1.8 million of other revenue recorded in the corresponding period of last year.

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 57% of net revenues during the six months ended September 26, 2004 and 56% of net revenues during the fiscal year ended March 28, 2004.

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.

Revenues by geographic area are presented based upon the country of destination. Net revenues by geographic area are as follows:

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 the three months ended September 26, 2004 increased $3.5 million, or 3.9%, from gross profit for the three months ended September 28, 2003. The gross profit percentage for the three months ended September 26, 2004 was 69.4%, an increase from 68.0% for the three months ended September 28, 2003. The increase in gross profit percentage during the three months ended September 26, 2004 compared to the corresponding period in the prior year was due primarily to favorable shifts in the product mix and technology mix, including increased sales of higher margin Fibre Channel-based products. In addition, the gross profit percentage was favorably affected by manufacturing efficiencies realized from the increase in production during the three months ended September 26, 2004.

Gross profit for the six months ended September 26, 2004 increased $9.2 million, or 5.3%, from gross profit for the six months ended September 28, 2003. The gross profit percentage for the six months ended September 26, 2004 was 69.3%, an increase from 67.4% for the six months ended September 28, 2003. The increase in gross profit percentage during the six months ended September 26, 2004 compared to the corresponding period in the prior year was due primarily to favorable shifts in the product mix and technology mix, as well as the manufacturing efficiencies described above.

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.

Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel-related costs, development-related engineering and material costs, occupancy costs and related computer support costs. During the three months ended September 26, 2004, engineering and development expenses of $24.2 million increased from $21.5 million for the three months ended September 28, 2003. The increase in engineering and development expenses during the three months ended September 26, 2004 was primarily due to a $1.1 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, external engineering costs associated with new product development increased $1.1 million.

During the six months ended September 26, 2004, engineering and development expenses of $47.3 million increased from the $44.2 million for the six months ended September 28, 2003. The increase in engineering and development expenses during the six months ended September 26, 2004 was primarily due to the aforementioned increases in compensation and related benefit costs, and external engineering costs.

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 and increasing costs associated with new product development, we expect engineering and development expenses will continue to increase in the future.

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 for the three months ended September 26, 2004 of $14.2 million increased $1.8 million, or 14%, from the three months ended September 28, 2003. The increase in sales and marketing expenses during the three months ended September 28, 2004 compared to the corresponding period in the prior year was due primarily to an increase in various promotional activities directed at increasing market awareness and acceptance of our products, and an increase in the headcount and related compensation and benefit costs associated with the expansion of our sales and marketing groups. During the three months ended September 26, 2004, promotional costs increased $1.2 million and compensation and benefits costs increased $0.4 million compared to the corresponding period of fiscal 2004.

Sales and marketing expenses for the six months ended September 26, 2004 of $28.4 million increased $4.2 million, or 17%, from the six months ended September 28, 2003. During the six months ended September 26, 2004, promotional costs increased $2.7 million and compensation and benefits costs increased $1.4 million compared to the corresponding period of fiscal 2004, primarily due to the aforementioned increases in promotional activities and headcount of our sales and marketing groups.

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 the three months ended September 26, 2004 of $4.2 million decreased slightly from the $4.4 million for the three months ended September 28, 2003. General and administrative expenses for the six months ended September 26, 2004 of $8.4 million decreased slightly from the $8.5 million for the three months ended September 28, 2003.

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

Interest and other income is primarily comprised of interest income and investment gains (losses) related to our portfolio of marketable securities. Interest and other income for the three months ended September 26, 2004 increased by $0.7 million compared to the same period in the prior year, primarily due to a $0.5 million increase in interest income resulting from increased balances of marketable securities.

Interest and other income for the six months ended September 26, 2004 decreased by $1.1 million compared to the same period in the prior year. This decrease was primarily related to the $1.5 million change in the net gain (loss) on the sale of investments, partially offset by the $0.7 million increase in interest income resulting from increased balances of marketable securities during the three months ended September 26, 2004, as compared to the corresponding period of the prior year.

Our effective income tax rate declined from 38% in fiscal 2004 to 34.9% and 36.4% during the three and six months ended September 26, 2004, respectively. This decline was due to the favorable resolution of routine tax examinations during the three months ended September 26, 2004. We expect our tax rate to approximate 36.4% for the remaining quarters and full year of fiscal 2005. This item will not have any impact on our income tax rate beyond fiscal 2005.

Our combined balances of cash and cash equivalents and short-term investments have increased to $754.7 million at September 26, 2004, compared to $743.0 million at March 28, 2004. The increase was primarily attributable to cash generated from operations, offset by our $50.0 million purchase of treasury stock and additions to property and equipment. Our working capital, during the six months ended September 26, 2004, increased $18.6 million to $811.4 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 $70.0 million for the six months ended September 26, 2004 and $68.0 million for the six months ended September 28, 2003. The increase in the cash provided by operating activities was due to the increase in net income and the timing of certain working capital items, including accounts receivable, offset by changes in certain non-cash tax items during the six months ended September 26, 2004 compared to the corresponding period of the prior year. The operating cash flow for the six months ended September 26, 2004 reflects our net income of $68.1 million, $7.8 million of non-cash charges (depreciation and amortization, deferred income taxes and other), and a net increase in the non-cash components of our working capital of $5.9 million. The increase in the non-cash components of working capital was primarily due to a $5.1 million increase in accounts receivable and a $1.6 million increase in inventory and other operating accounts associated with the expansion of our business and a $4.9 million decrease in accrued compensation resulting from payments made in fiscal 2005, partially offset by a $5.8 million increase in income taxes payable.

Cash provided by investing activities of $17.2 million for the six months ended September 26, 2004 includes net sales and maturities of marketable securities of $25.2 million and additions to property and equipment of $8.0 million. During the six months ended September 26, 2003, cash used in investing activities of $39.5 million included net purchases of marketable securities of $29.6 million and additions to property and equipment of $9.9 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 $46.4 million for the six months ended September 26, 2004 resulted from our purchase of $50.0 million of treasury stock, partially offset by $3.6 million of proceeds from the issuance of common stock under our stock plans. During the six months ended September 28, 2003, the $8.0 million of cash provided by financing activities resulted from the proceeds from the issuance of common stock under stock plans, partially offset by a $1.0 million purchase of treasury stock.

In October 2002, the Board of Directors approved a stock repurchase program that authorized us to repurchase up to $100 million of our outstanding common stock for a two-year period. We completed the repurchase of the authorized amount pursuant to the program, including 1.4 million shares of common stock for an aggregate purchase price of $40.0 million during the three months ended June 27, 2004. In June 2004, the Board of Directors approved a new stock repurchase program that authorizes us to repurchase up to an additional $100 million of our outstanding common stock for a two-year period through June 30, 2006. We repurchased 0.4 million shares of common stock under the new program for an aggregate purchase price of $10.0 million during the three months ended September 26, 2004.

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:

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.

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 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.

Set forth below 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. The factors set forth below are risks relating to our business and investors are urged to review and consider these risk factors carefully.

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 timing, availability and sale of new products;

	•	changes in the mix or average selling prices of our products;

	•	variations in manufacturing capacities, efficiencies and costs;


	•	the availability and cost of components, including silicon chips;

	•	warranty expenses;

	•	variations in product development costs, especially related to advanced technologies;

	•	variations in operating expenses;

	•	adjustments related to product returns;

	•	changes in effective income tax rates, including those resulting from changes in tax laws;

	•	adoption of new accounting pronouncements or changes in our policies;

	•	general economic and other conditions affecting the timing of customer orders and capital spending; or

	•	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 (particularly small and medium size businesses) about the benefits of SANs;

	•	maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators and storage system providers;

	•	predict and base our products on standards which ultimately become industry standards; and

	•	achieve interoperability between our products and other SAN components from diverse vendors.

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

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


	•	enhance our current products and develop and introduce in a timely manner new products that keep pace with technological developments and industry standards;


	•	compete effectively on the basis of price and performance; and

	•	adequately address OEM customer and end-user customer requirements and achieve market acceptance.

We believe that to remain competitive in the future, we will need to continue to develop new products, which will require a significant investment in new product development. 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 57% of net revenues during the six months ended September 26, 2004 and 56% of net revenues during the fiscal year ended March 28, 2004. 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 on which they purchase from us, 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.

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 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 competitors. Any loss of demand for our products by value-added resellers and system integrators could have a material adverse effect on our business or operating results.

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 forecasting demand, as well as possible product and software defects. If any of these factors were to occur, it could have a material adverse effect on our business, financial condition or results of operations.

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.

Public companies in the United States are required to review their internal controls over financial reporting under the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardless of how remote. We are currently undergoing a comprehensive effort in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This effort includes the documentation, testing and review of our internal controls over financial reporting under the direction of senior management. If our internal controls over financial reporting are not adequate or in conformity with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Securities and Exchange Commission, we may be required to disclose deficiencies and take other actions which could result in the use of significant financial and managerial resources, as well as be subject to penalties and other enforcement actions, any of which may have a material adverse effect on our business, financial condition, results of operations and/or market price of our common stock.

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.

Revenues from international shipments accounted for 59% and 56% of our net revenues for the first six months of fiscal 2005 and the fiscal year ended March 28, 2004, respectively. We expect that export revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. As a result, we are subject to several risks, which include:


	•	a greater difficulty of administering and managing our business globally;

	•	compliance with multiple and potentially conflicting regulatory requirements, such as export requirements, tariffs and other barriers;


	•	differences in intellectual property protections;

	•	potentially longer accounts receivable cycles;

	•	currency fluctuations;

	•	export control restrictions;

	•	overlapping or differing tax structures;

	•	political and economic instability; and

	•	general trade restrictions.

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

We may need to enter into agreements to guarantee 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 amortiza-

tion/impairment charges related to intangible assets, all of which could materially adversely affect our financial position or results of operations.

We have made, and could make in the future, investments in technology companies, including privately held companies in a development stage. Many of these private equity investments are inherently risky because the companies’ businesses may never develop, and we may incur losses related to these investments. In addition, we may be required to write down the carrying value of these investments to reflect other than temporary declines in their value, which could have a materially adverse effect on our financial position and results of operations.

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

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

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

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

We have experienced a period of growth and expansion. Our 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.

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

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.

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.

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

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 26, 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 September 26, 2004, unrealized gains of less than $0.1 million (net of related income taxes) on these securities are included in accumulated other comprehensive income.

As of the end of the quarter ended September 26, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 26, 2004 to ensure that information required to be disclosed by us in reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our quarter ended September 26, 2004 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In June 2004, we announced a stock repurchase program covering repurchases of up to $100 million of our common stock. Set forth below is information regarding our stock repurchases made during the second quarter of fiscal year 2005 under our stock purchase program.

a) The QLogic Corporation Annual Meeting of Stockholders was held on August 24, 2004.

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

c) The following is a tabulation of the votes of the stockholders of QLogic Corporation with respect to the proposals presented at the 2004 Annual Meeting of Stockholders:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	By:	/s/ H.K. DESAI



	H.K. Desai
	Chairman of the Board,
	Chief Executive Officer and President


	By:	/s/ ANTHONY J. MASSETTI



	Anthony J. Massetti
	Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 26, 2004

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		33-0537669
(State of incorporation)		(I.R.S. Employer Identification No.)


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets at September 26, 2004 and March 28, 2004		1
	Condensed Consolidated Statements of Income for the three and six months ended September 26, 2004 and September 28, 2003		2
	Condensed Consolidated Statements of Cash Flows for the six months ended September 26, 2004 and September 28, 2003		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 4.	Submission of Matters to a Vote of Security Holders		26
Item 6.	Exhibits		26
	Signatures		27
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


			September 26,			March 28,
			2004			2004


			(Unaudited; In
			thousands, except share
			and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	197,379		$	156,593
	Short-term investments			557,296			586,441
	Accounts receivable, less allowance for doubtful accounts of $1,797 and $1,372 as of September 26, 2004 and March 28, 2004, respectively			72,031			67,355
	Inventories			22,404			20,935
	Other current assets			23,874			22,256

		Total current assets		872,984			853,580
Property and equipment, net				67,805			67,224
Other assets				7,036			7,711

			$	947,825		$	928,515

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	18,200		$	18,570
	Accrued compensation			13,943			18,849
	Income taxes payable			16,441			10,691
	Other current liabilities			13,020			12,687

		Total current liabilities		61,604			60,797

Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.001 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); no shares issued and outstanding			—			—
	Common stock, $0.001 par value; 500,000,000 shares authorized; 95,674,000 and 95,440,000 shares issued at September 26, 2004 and March 28, 2004, respectively			96			95
	Additional paid-in capital			486,121			482,039
	Retained earnings			510,211			442,126
	Accumulated other comprehensive income			42			4,028
	Treasury stock, at cost; 3,148,000 and 1,330,000 shares at September 26, 2004 and March 28, 2004, respectively			(110,000	)		(59,992	)
	Deferred stock-based compensation			(249	)		(578	)

		Total stockholders’ equity		886,221			867,718

			$	947,825		$	928,515



			Three Months Ended				Six Months Ended

			September 26,		September 28,		September 26,		September 28,
			2004		2003		2004		2003


			(Unaudited; In thousands, except per share amounts)
Net revenues			$	134,609	$	132,267	$	264,420	$	258,502
Cost of revenues				41,173		42,366		81,128		84,368

	Gross profit			93,436		89,901		183,292		174,134

Operating expenses:
	Engineering and development			24,146		21,482		47,301		44,217
	Sales and marketing			14,202		12,436		28,402		24,165
	General and administrative			4,232		4,408		8,445		8,499

		Total operating expenses		42,580		38,326		84,148		76,881

Operating income				50,856		51,575		99,144		97,253
Interest and other income				4,233		3,556		7,866		8,968

Income before income taxes				55,089		55,131		107,010		106,221
Income taxes				19,207		20,950		38,925		40,364

Net income			$	35,882	$	34,181	$	68,085	$	65,857

Net income per share:
	Basic		$	0.39	$	0.36	$	0.73	$	0.70

	Diluted		$	0.38	$	0.35	$	0.73	$	0.68

Number of shares used in per share calculation:
	Basic			92,485		94,282		92,915		94,150

	Diluted			93,222		96,360		93,664		96,181

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


		2005
		(Remaining								2009-
		six months)		2006		2007		2008		2010		Total


		(In millions)
Operating leases		$	3.2	$	4.7	$	2.9	$	0.8	$	0.8	$	12.4
Non-cancelable purchase obligations			38.4		1.7		—		—		—		40.1

	Total	$	41.6	$	6.4	$	2.9	$	0.8	$	0.8	$	52.5


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*


						Total Number of		Approximate Dollar
						Shares Purchased		Value of Shares that
		Total Number of		Average Price		as part of Publicly		May Yet be Purchased
Period		Shares Purchased		Paid per Share		Announced Plan		Under the Plan

June 28, 2004 — July 25, 2004			391,907	$	25.52		391,907	$	90,000,000
July 26, 2004 — August 22, 2004			—	$	—		—	$	90,000,000
August 23, 2004 — September 26, 2004			—	$	—		—	$	90,000,000

	Total		391,907	$	25.52		391,907	$	90,000,000


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


										Broker
		For		Against		Withheld		Abstain		Non-vote

(i)	Election of Directors:
	H.K. Desai		78,574,312		—		1,282,664		—		—
	Larry R. Carter		78,641,180		—		1,215,796		—		—
	James R. Fiebiger		76,545,382		—		3,311,594		—		—
	Balakrishnan S. Iyer		75,749,558		—		4,107,418		—		—
	Carol L. Miltner		76,516,694		—		3,340,282		—		—
	George D. Wells		78,643,662		—		1,213,314		—		—
(ii)	Ratification of the appointment of KPMG as independent auditors for fiscal year 2005		77,523,040		1,870,770		—		463,166		—


Exhibit No.			Item Caption

	31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Item 1.	*Financial Statements*


Note 1.	Basis of Presentation


Note 2.	Inventories


Note 3.	Other Comprehensive Income