##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

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

SECURITIES EXCHANGE ACT of 1934


For the fiscal year ended March 28,
2004

Commission File No. 0-23298

QLogic Corporation


(Exact name of registrant as specified in its
charter)


|                                                                                                  |  |                                                   
|------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State of incorporation)                                                                  |  | 33-0537669(I.R.S. Employer Identification
    No.)
|26650 Aliso Viejo Parkway
    Aliso Viejo, California(Address of principal executive
    offices) |  | 92656(Zip Code)                                   

(949) 389-6000

(Registrants telephone number, including
area code)




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

None


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


Common Stock, $0.001 Par Value


Series A Junior Participating Preferred
Stock, $0.001 Par Value


(Title of class)




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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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TABLE OF CONTENTS



|              |                                                                                                                      |                                                                          |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                                    
|              | Item 2. Properties                                                                                                  
|              | Item 3. Legal Proceedings                                                                                           
|              | Item 4. Submission of Matters to a Vote of Security Holders                                                         
|PART II      
|              | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|              | Item 6. Selected Financial Data                                                                                     
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                       
|              | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                                                 
|              | Item 8. Financial Statements and Supplementary Data                                                                 
|              |                                                                                                                      | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 
|              |                                                                                                                      | CONSOLIDATED BALANCE SHEETS                                             
|              |                                                                                                                      | CONSOLIDATED STATEMENTS OF INCOME                                       
|              |                                                                                                                      | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
|              |                                                                                                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|              |                                                                                                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                        
|              | Item 9A. Controls and Procedures                                                                                    
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                                         
|              | Item 11. Executive Compensation                                                                                     
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                                             
|              | Item 13. Certain Relationships and Related Transactions                                                             
|              | Item 14. Principal Accountant Fees and Services                                                                     
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                           
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.7 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32   



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PART I






|        |         
|------- | --------
|Item 1. | Business

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.



| |                                        
| | ---------------------------------------
| | Customers, Markets and
    Applications

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.



| |                       
| | ----------------------
| | Alliance Relationships

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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Corporation, VERITAS Software Corporation,
Computer Associates International, Inc., Legato Systems, Inc.
and McData Corporation.


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

2



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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 RAID storage systems.
These include Fibre Channel host port connections and RAID
controller to Fibre Channel and SCSI disk drive port
connections. In addition, we are a leading, independent
designer, developer and supplier of enterprise disk drive
controllers.


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 SANbladeTM
HBAs, SANboxTM Fibre Channel Switches and SANsurfer
Management SuiteTM 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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tions. Finally, to ensure and promote
multi-vendor interoperation, we maintain extensive
interoperability certification programs and testing laboratories.


Engineering and Development

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

We are engaged in the design and development of
integrated circuits for Fibre Channel switches; switch
components; 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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Technologies, Inc. and LSI Logic Corporation. The
second market relates to controllers for enterprise disk drives
where our primary competitor is LSI Logic Corporation.


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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security measures. Although we intend to protect
our rights vigorously, there can be no assurance that these
measures will be successful. In addition, the laws of certain
countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may
not protect our products and intellectual property rights to the
same extent as the laws of the United States, or at all.


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.






|        |           
|------- | ----------
|Item 2. | Properties

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.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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.






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

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

7



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PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

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.

|               |  |              |       |     |  |   |       | 
|-------------- |  | ------------ | ----- | --- |  | - | ----- | 
|               |  |             
|               |  | Sales Prices
|               |  |             
|Fiscal 2003    |  | High         |       | Low
|               |  |              |       |    
|First Quarter  |  | $            | 52.95 |     |  | $ | 34.68 | 
|Second Quarter |  |              | 44.80 |     |  |   | 26.07 | 
|Third Quarter  |  |              | 45.39 |     |  |   | 19.66 | 
|Fourth Quarter |  |              | 43.68 |     |  |   | 32.13 | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal 2004    |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 53.35 |     |  | $ | 36.90 | 
|Second Quarter |  |      | 53.57 |     |  |   | 41.26 | 
|Third Quarter  |  |      | 58.72 |     |  |   | 46.76 | 
|Fourth Quarter |  |      | 53.14 |     |  |   | 40.13 | 

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.

8



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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.

|                                         |       |                  |         |                |  |                     |       |                      |  |  |         |         |  |   |            |            | 
|---------------------------------------- | ----- | ---------------- | ------- | -------------- |  | ------------------- | ----- | -------------------- |  |  | ------- | ------- |  | - | ---------- | ---------- | 
|                                         |       |                  |         |                |  | 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      
|                                         |       |                  |         |                |  |                     |       |                     
|December 29, 2003 - January 25,
    2004 |       |                  | 52,081  |                |  | $                   | 47.57 |                      |  |  | 52,081  |         |  | $ | 75,000,000 |           
|January 26, 2004 - February 22,
    2004 |       |                  | 565,594 |                |  | $                   | 44.20 |                      |  |  | 565,594 |         |  | $ | 50,000,000 |           
|February 23, 2004 - March 28, 2004       |       |                  | 237,200 |                |  | $                   | 42.12 |                      |  |  | 237,200 |         |  | $ | 40,000,000 |           
|                                         |       |                  |         |                |  |                     |       |                      |  |  |         |         |  |   |            |           
|                                         | Total |                  |         | 854,875        |  |                     | $     | 43.83                |  |  |         | 854,875 |  |   | $          | 40,000,000 | 
|                                         |       |                  |         |                |  |                     |       |                      |  |  |         |         |  |   |            |           

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

9



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

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.

|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |        |         | 
|------------------------------------------------------- | --------------------------- | ---------------------------------------- | ------- | --------- | ------- | --------- | ------- | -------- | ------- | -------- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                        |                             |                                         
|                                                        |                             | Fiscal Year Ended                       
|                                                        |                             |                                         
|                                                        |                             | March 28,                                |         | March 30, |         | March 31, |         | April 1, |         | April 2,
|                                                        |                             | 2004                                     |         | 2003      |         | 2002      |         | 2001     |         | 2000    
|                                                        |                             |                                          |         |           |         |           |         |          |         |         
|                                                        |                             |                                         
|                                                        |                             | (In thousands, except per share amounts)
|Statement of Operations Data                            |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net revenues                                            |                             | $                                        | 523,860 |           |         | $         | 440,809 |          |         | $        | 344,189 |        |         | $ | 357,542 |        |         | $ | 216,093 |       
|Cost of revenues                                        |                             |                                          | 166,294 |           |         |           | 159,370 |          |         |          | 133,005 |        |         |   | 128,739 |        |         |   | 70,982  |       
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                        |                             | Gross profit                             |         |           | 357,566 |           |         |          | 281,439 |          |         |        | 211,184 |   |         |        | 228,803 |   |         |        | 145,111 | 
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Operating expenses:                                     |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                        | Engineering and development |                                          |         | 87,755    |         |           |         | 81,253   |         |          |         | 69,684 |         |   |         | 56,315 |         |   |         | 47,451 |        
|                                                        | Sales and marketing         |                                          |         | 52,952    |         |           |         | 44,312   |         |          |         | 38,323 |         |   |         | 36,482 |         |   |         | 22,623 |        
|                                                        | General and administrative  |                                          |         | 18,102    |         |           |         | 14,011   |         |          |         | 16,673 |         |   |         | 14,828 |         |   |         | 11,202 |        
|                                                        | Merger and related expenses |                                          |         |          |         |           |         |         |         |          |         |       |         |   |         | 22,947 |         |   |         |       |        
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                        |                             | Total operating expenses                 |         |           | 158,809 |           |         |          | 139,576 |          |         |        | 124,680 |   |         |        | 130,572 |   |         |        | 81,276  | 
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Operating income                                        |                             |                                          | 198,757 |           |         |           | 141,863 |          |         |          | 86,504  |        |         |   | 98,231  |        |         |   | 63,835  |       
|Interest and other income                               |                             |                                          | 16,844  |           |         |           | 17,356  |          |         |          | 19,036  |        |         |   | 18,706  |        |         |   | 9,181   |       
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Income before income taxes                              |                             |                                          | 215,601 |           |         |           | 159,219 |          |         |          | 105,540 |        |         |   | 116,937 |        |         |   | 73,016  |       
|Income taxes                                            |                             |                                          | 81,928  |           |         |           | 55,746  |          |         |          | 34,814  |        |         |   | 48,168  |        |         |   | 24,701  |       
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net income                                              |                             |                                          | 133,673 |           |         |           | 103,473 |          |         |          | 70,726  |        |         |   | 68,769  |        |         |   | 48,315  |       
|Accretion on convertible preferred stock                |                             |                                          |        |           |         |           |        |          |         |          |        |        |         |   |        |        |         |   | 12      |       
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net income attributable to common stockholders          |                             | $                                        | 133,673 |           |         | $         | 103,473 |          |         | $        | 70,726  |        |         | $ | 68,769  |        |         | $ | 48,303  |       
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net income per share:                                   |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                        | Basic                       |                                          | $       | 1.42      |         |           | $       | 1.11     |         |          | $       | 0.76   |         |   | $       | 0.76   |         |   | $       | 0.56   |        
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                        | Diluted                     |                                          | $       | 1.39      |         |           | $       | 1.09     |         |          | $       | 0.74   |         |   | $       | 0.72   |         |   | $       | 0.52   |        
|                                                        |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Balance Sheet Data                                      |                             |                                          |         |           |         |           |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Cash and cash equivalents and marketable
    securities |                             | $                                        | 743,034 |           |         | $         | 643,197 |          |         | $        | 492,546 |        |         | $ | 355,483 |        |         | $ | 244,449 |       
|Working capital                                         |                             |                                          | 792,783 |           |         |           | 681,496 |          |         |          | 535,612 |        |         |   | 442,702 |        |         |   | 257,127 |       
|Total assets                                            |                             |                                          | 928,515 |           |         |           | 817,419 |          |         |          | 670,015 |        |         |   | 571,497 |        |         |   | 394,969 |       
|Total stockholders equity                              |                             |                                          | 867,718 |           |         |           | 750,735 |          |         |          | 618,983 |        |         |   | 523,702 |        |         |   | 359,325 |       






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This Discussion and Analysis of Financial
Condition and Results of Operations 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

10



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##### Table of Contents



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.


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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we continue to expect favorable growth momentum
for our Fibre Channel products. However, as previously
mentioned, the hard disk drive controller chip product
transition will continue into the first quarter of fiscal 2005.
Overall, we expect that our total revenues for the first quarter
of fiscal 2005 will range from flat to a 3% increase from the
revenues recorded in the fourth quarter of fiscal 2004.


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:

|                            |               |                    |   |       |       |      |   |       |       |   |   |       |       |  
|--------------------------- | ------------- | ------------------ | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                            |               | 2004               |   | 2003  |       | 2002
|                            |               |                    |   |       |       |     
|                            |               |                   
|                            |               | (In millions)     
|Net revenues:               |               |                    |   |       |       |      |   |       |       |   |   |      
|                            | Fibre Channel |                    | $ | 405.1 |       |      | $ | 307.9 |       |   | $ | 224.6 |      
|                            | SCSI          |                    |   | 118.8 |       |      |   | 132.9 |       |   |   | 117.9 |      
|                            | IDE           |                    |   |      |       |      |   |      |       |   |   | 1.7   |      
|                            |               |                    |   |       |       |      |   |       |       |   |   |      
|                            |               | Total net revenues |   | $     | 523.9 |      |   | $     | 440.8 |   |   | $     | 344.2 |  
|                            |               |                    |   |       |       |      |   |       |       |   |   |      
|Percentage of net revenues: |               |                    |   |       |       |      |   |       |       |   |   |      
|                            | Fibre Channel |                    |   | 77    | %     |      |   | 70    | %     |   |   | 65    | %    
|                            | SCSI          |                    |   | 23    |       |      |   | 30    |       |   |   | 34    |      
|                            | IDE           |                    |   |      |       |      |   |      |       |   |   | 1     |      
|                            |               |                    |   |       |       |      |   |       |       |   |   |      
|                            |               | Total net revenues |   |       | 100   | %    |   |       | 100   | % |   |       | 100   | %
|                            |               |                    |   |       |       |      |   |       |       |   |   |      

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:

|                 |  |      |    |      |  |      |    |   |  |  |    |  
|---------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                 |  | 2004 |    | 2003 |  | 2002
|                 |  |      |    |      |  |     
|Sun Microsystems |  |      | 15 | %    |  |      | 17 | % |  |  | 16 | %
|Fujitsu          |  |      | 14 | %    |  |      | 18 | % |  |  | 17 | %
|Hitachi          |  |      | *  |      |  |      | 11 | % |  |  | *  |  



---



|  |                               
|- | ------------------------------
|* | 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:

|               |  |               |       |      |  |      |       |  |  |   |       | 
|-------------- |  | ------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |  | 2004          |       | 2003 |  | 2002
|               |  |               |       |      |  |     
|               |  |              
|               |  | (In millions)
|United States  |  | $             | 231.3 |      |  | $    | 202.1 |  |  | $ | 180.8 | 
|Japan          |  |               | 133.2 |      |  |      | 130.1 |  |  |   | 98.4  | 
|United Kingdom |  |               | 57.8  |      |  |      | 31.8  |  |  |   | 34.7  | 
|Rest of world  |  |               | 101.6 |      |  |      | 76.8  |  |  |   | 30.3  | 
|               |  |               |       |      |  |      |       |  |  |   |       | 
|               |  | $             | 523.9 |      |  | $    | 440.8 |  |  | $ | 344.2 | 
|               |  |               |       |      |  |      |       |  |  |   |       | 

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:

|                           |  |               |       |      |  |      |       |   |  |   |       |  
|-------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                           |  | 2004          |       | 2003 |  | 2002
|                           |  |               |       |      |  |     
|                           |  |              
|                           |  | (In millions)
|Gross profit               |  | $             | 357.6 |      |  | $    | 281.4 |   |  | $ | 211.2 |  
|Percentage of net revenues |  |               | 68.3  | %    |  |      | 63.8  | % |  |   | 61.4  | %

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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addition, the gross profit percentage was
favorably affected by manufacturing efficiencies realized from
the increase in production and improved inventory management
during fiscal 2004, as well as the $3.4 million increase in
royalty revenues.


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:

|                            |                             |                          |   |      |       |      |   |      |       |   |   |      |       |  
|--------------------------- | --------------------------- | ------------------------ | - | ---- | ----- | ---- | - | ---- | ----- | - | - | ---- | ----- | -
|                            |                             | 2004                     |   | 2003 |       | 2002
|                            |                             |                          |   |      |       |     
|                            |                             |                         
|                            |                             | (In millions)           
|Operating expenses:         |                             |                          |   |      |       |      |   |      |       |   |   |     
|                            | Engineering and development |                          | $ | 87.8 |       |      | $ | 81.3 |       |   | $ | 69.7 |      
|                            | Sales and marketing         |                          |   | 52.9 |       |      |   | 44.3 |       |   |   | 38.3 |      
|                            | General and administrative  |                          |   | 18.1 |       |      |   | 14.0 |       |   |   | 16.7 |      
|                            |                             |                          |   |      |       |      |   |      |       |   |   |     
|                            |                             | Total operating expenses |   | $    | 158.8 |      |   | $    | 139.6 |   |   | $    | 124.7 |  
|                            |                             |                          |   |      |       |      |   |      |       |   |   |     
|Percentage of net revenues: |                             |                          |   |      |       |      |   |      |       |   |   |     
|                            | Engineering and development |                          |   | 16.7 | %     |      |   | 18.4 | %     |   |   | 20.2 | %    
|                            | Sales and marketing         |                          |   | 10.1 |       |      |   | 10.1 |       |   |   | 11.1 |      
|                            | General and administrative  |                          |   | 3.5  |       |      |   | 3.2  |       |   |   | 4.9  |      
|                            |                             |                          |   |      |       |      |   |      |       |   |   |     
|                            |                             | Total operating expenses |   |      | 30.3  | %    |   |      | 31.7  | % |   |      | 36.2  | %
|                            |                             |                          |   |      |       |      |   |      |       |   |   |     

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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investments and the 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 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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2004 from the prior year was due to a decline in
investment income during fiscal 2004, partially offset by the
$4.0 million of write-downs of non-marketable investments
recorded in fiscal 2003. Excluding the effect of the write-downs
of non-marketable securities, interest and other income
decreased by $4.5 million during fiscal 2004, primarily due
to a $3.1 million reduction of gains on sales of
investments from the prior year. In addition, interest income
decreased by $1.6 million due to declining yields on our
portfolio of marketable securities, partially offset by
increased earnings due to larger investment balances.


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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changes in our customers procurement models
and our current customer mix. In addition, the increase in
non-cash components of working capital included an
$8.5 million decrease in income taxes payable, partially
offset by an increase in operating liabilities associated with
the expansion of our business and the related timing of the
payment obligations.


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:

|                                    |       |               |      |      |  |      |     |      |  |       |     |       |  |   |     |     |  |   |     |     |  |   |      |      | 
|----------------------------------- | ----- | ------------- | ---- | ---- |  | ---- | --- | ---- |  | ----- | --- | ----- |  | - | --- | --- |  | - | --- | --- |  | - | ---- | ---- | 
|                                    |       |               |      |      |  |      |     |      |  | 2009- |     |      
|                                    |       | 2005          |      | 2006 |  | 2007 |     | 2008 |  | 2010  |     | Total
|                                    |       |               |      |      |  |      |     |      |  |       |     |      
|                                    |       |              
|                                    |       | (In millions)
|Operating leases                    |       | $             | 6.2  |      |  | $    | 4.9 |      |  | $     | 3.2 |       |  | $ | 1.2 |     |  | $ | 1.8 |     |  | $ | 17.3 |     
|Non-cancelable purchase obligations |       |               | 35.0 |      |  |      | 0.2 |      |  |       |    |       |  |   |    |     |  |   |    |     |  |   | 35.2 |     
|                                    |       |               |      |      |  |      |     |      |  |       |     |       |  |   |     |     |  |   |     |     |  |   |      |     
|                                    | Total |               | $    | 41.2 |  |      | $   | 5.1  |  |       | $   | 3.2   |  |   | $   | 1.2 |  |   | $   | 1.8 |  |   | $    | 52.5 | 
|                                    |       |               |      |      |  |      |     |      |  |       |     |       |  |   |     |     |  |   |     |     |  |   |      |     

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, InfinibandTM, 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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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

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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.

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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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 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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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data




REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors

QLogic Corporation:


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

April 28, 2004, except as to the


third paragraph of
Note 7,


which is as of
May 28, 2004


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QLOGIC CORPORATION






CONSOLIDATED BALANCE SHEETS


March 28, 2004 and March 30,
2003


|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |         |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                                                                                       | 2004                       |         | 2003   
|                                         |                                                                                                                                                                                                       |                            |         |        
|                                         |                                                                                                                                                                                                       |                           
|                                         |                                                                                                                                                                                                       | (In thousands, except     
|                                         |                                                                                                                                                                                                       | share and per share       
|                                         |                                                                                                                                                                                                       | amounts)                  
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         | Cash and cash equivalents                                                                                                                                                                             |                            | $       | 156,593 |         |   | $       | 137,810 |        
|                                         | Short-term investments                                                                                                                                                                                |                            |         | 586,441 |         |   |         | 505,387 |        
|                                         | Accounts receivable, less allowance for doubtful
    accounts of $1,372 and $2,830 as of March 28, 2004 and
    March 30, 2003, respectively                                                          |                            |         | 67,355  |         |   |         | 49,694  |        
|                                         | Inventories                                                                                                                                                                                           |                            |         | 20,935  |         |   |         | 19,365  |        
|                                         | Other current assets                                                                                                                                                                                  |                            |         | 22,256  |         |   |         | 35,924  |        
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         |                                                                                                                                                                                                       | Total current assets       |         |         | 853,580 |   |         |         | 748,180 | 
|Property and equipment, net              |                                                                                                                                                                                                       |                            | 67,224  |         |         |   | 59,813  |        
|Other assets                             |                                                                                                                                                                                                       |                            | 7,711   |         |         |   | 9,426   |        
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         |                                                                                                                                                                                                       | $                          | 928,515 |         |         | $ | 817,419 |        
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         | Accounts payable                                                                                                                                                                                      |                            | $       | 18,570  |         |   | $       | 15,301  |        
|                                         | Accrued compensation                                                                                                                                                                                  |                            |         | 18,849  |         |   |         | 21,997  |        
|                                         | Income taxes payable                                                                                                                                                                                  |                            |         | 10,691  |         |   |         | 19,201  |        
|                                         | Other current liabilities                                                                                                                                                                             |                            |         | 12,687  |         |   |         | 10,185  |        
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         |                                                                                                                                                                                                       | Total current liabilities  |         |         | 60,797  |   |         |         | 66,684  | 
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|Commitments and contingencies            |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|Subsequent event (Note 7)                |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|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; 95,440,000 and
    93,945,000 shares issued at March 28, 2004 and
    March 30, 2003, respectively                                 |                            |         | 95      |         |   |         | 94      |        
|                                         | Additional paid-in capital                                                                                                                                                                            |                            |         | 482,039 |         |   |         | 442,594 |        
|                                         | Retained earnings                                                                                                                                                                                     |                            |         | 442,126 |         |   |         | 308,453 |        
|                                         | Accumulated other comprehensive income                                                                                                                                                                |                            |         | 4,028   |         |   |         | 4,346   |        
|                                         | Treasury stock, at cost: 1,330,000 and
    91,000 shares at March 28, 2004 and March 30,
    2003, respectively                                                                                       |                            |         | (59,992 | )       |   |         | (2,978  | )      
|                                         | Deferred stock-based compensation                                                                                                                                                                     |                            |         | (578    | )       |   |         | (1,774  | )      
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         |                                                                                                                                                                                                       | Total stockholders equity |         |         | 867,718 |   |         |         | 750,735 | 
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        
|                                         |                                                                                                                                                                                                       | $                          | 928,515 |         |         | $ | 817,419 |        
|                                         |                                                                                                                                                                                                       |                            |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

31



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##### Table of Contents



QLOGIC CORPORATION






CONSOLIDATED STATEMENTS OF INCOME


Years Ended March 28, 2004,
March 30, 2003 and March 31, 2002


|                                                |                             |                           |         |         |         |      |         |         |         |   |         |         |         | 
|----------------------------------------------- | --------------------------- | ------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                |                             | 2004                      |         | 2003    |         | 2002
|                                                |                             |                           |         |         |         |     
|                                                |                             |                          
|                                                |                             | (In thousands, except per
|                                                |                             | share amounts)           
|Gross revenues                                  |                             | $                         | 523,860 |         |         | $    | 444,037 |         |         | $ | 349,690 |        
|Stock-based sales discounts                     |                             |                           |        |         |         |      | 3,228   |         |         |   | 5,501   |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Net revenues                                    |                             |                           | 523,860 |         |         |      | 440,809 |         |         |   | 344,189 |        
|Cost of revenues                                |                             |                           | 166,294 |         |         |      | 159,370 |         |         |   | 133,005 |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Gross profit                |                           |         | 357,566 |         |      |         | 281,439 |         |   |         | 211,184 |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Operating expenses:                             |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Engineering and development |                           |         | 87,755  |         |      |         | 81,253  |         |   |         | 69,684  |        
|                                                | Sales and marketing         |                           |         | 52,952  |         |      |         | 44,312  |         |   |         | 38,323  |        
|                                                | General and administrative  |                           |         | 18,102  |         |      |         | 14,011  |         |   |         | 16,673  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                |                             | Total operating expenses  |         |         | 158,809 |      |         |         | 139,576 |   |         |         | 124,680 | 
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Operating income                                |                             |                           | 198,757 |         |         |      | 141,863 |         |         |   | 86,504  |        
|Interest and other income                       |                             |                           | 16,844  |         |         |      | 17,356  |         |         |   | 19,036  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Income before income taxes                      |                             |                           | 215,601 |         |         |      | 159,219 |         |         |   | 105,540 |        
|Income taxes                                    |                             |                           | 81,928  |         |         |      | 55,746  |         |         |   | 34,814  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Net income                                      |                             | $                         | 133,673 |         |         | $    | 103,473 |         |         | $ | 70,726  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Net income per share:                           |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Basic                       |                           | $       | 1.42    |         |      | $       | 1.11    |         |   | $       | 0.76    |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Diluted                     |                           | $       | 1.39    |         |      | $       | 1.09    |         |   | $       | 0.74    |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|Number of shares used in per share calculation: |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Basic                       |                           |         | 94,281  |         |      |         | 93,469  |         |   |         | 92,645  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        
|                                                | Diluted                     |                           |         | 96,246  |         |      |         | 95,354  |         |   |         | 95,126  |        
|                                                |                             |                           |         |         |         |      |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

32



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##### Table of Contents



QLOGIC CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME


Years Ended March 28, 2004,
March 30, 2003 and March 31, 2002


|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |         |         | 
|------------------------- | --------------------------------------------------------------------------------- | -------------------- | ------ | ---------- | - | ------- | -- | ----------- |  | ------------- | ------- | -------- |  | ------------ | ------- | ------------- |  | - | ----- | ------ | - | - | ------- | ------- | - | - | ------ | ----- |  | - | ------- | ------- | ------- | 
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |             
|                          |                                                                                   | Common Stock         |        |            |   |         |    | Accumulated |  |               |         |          |  |             
|                          |                                                                                   |                      |        | Additional |   |         |    | Other       |  |               |         | Deferred |  | Total       
|                          |                                                                                   | Outstanding          |        |            |   | Paid-In |    | Retained    |  | Comprehensive |         | Treasury |  | Stock-Based  |         | Stockholders
|                          |                                                                                   | Shares               |        | Amount     |   | Capital |    | Earnings    |  | Income        |         | Stock    |  | Compensation |         | Equity       
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |              
|                          |                                                                                   |                     
|                          |                                                                                   | (In thousands)      
|Balance at April 1, 2001  |                                                                                   |                      | 92,324 |            |   | $       | 92 |             |  | $             | 393,383 |          |  | $            | 134,253 |               |  | $ | 1,724 |        |   | $ |        |         |   | $ | (5,751 | )     |  | $ | 523,702 |        
|                          | Net income                                                                        |                      |        |           |   |         |    |            |  |               |         |         |  |              |         | 70,726        |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 70,726  |        
|                          | Change in unrealized gains on Investments, net of
    tax                         |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       | (1,479 | ) |   |         |        |   |   |        |      |  |   |         | (1,479  | )      
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|                          |                                                                                   | Comprehensive income |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |         | 69,247  | 
|                          | Issuance of common stock under stock plans
    (including tax benefit of $7,512)  |                      |        | 664        |   |         |    | 1           |  |               |         | 16,277   |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 16,278  |        
|                          | Common stock issued related to business
    acquisition                           |                      |        | 41         |   |         |    |            |  |               |         | 2,182    |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 2,182   |        
|                          | Warrants issued in connection with product sales                                  |                      |        |           |   |         |    |            |  |               |         | 5,501    |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 5,501   |        
|                          | Amortization of deferred stock-based compensation                                 |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        | 2,073 |  |   |         | 2,073   |        
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|Balance at March 31, 2002 |                                                                                   |                      | 93,029 |            |   |         | 93 |             |  |               | 417,343 |          |  |              | 204,980 |               |  |   | 245   |        |   |   |        |         |   |   | (3,678 | )     |  |   | 618,983 |        
|                          | Net income                                                                        |                      |        |           |   |         |    |            |  |               |         |         |  |              |         | 103,473       |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 103,473 |        
|                          | Change in unrealized gains on investments, net of
    tax                         |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       | 4,101  |   |   |         |        |   |   |        |      |  |   |         | 4,101   |        
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|                          |                                                                                   | Comprehensive income |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |         | 107,574 | 
|                          | Issuance of common stock under stock plans
    (including tax benefit of $6,037)  |                      |        | 807        |   |         |    | 1           |  |               |         | 17,659   |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 17,660  |        
|                          | Common stock issued related to business
    acquisition                           |                      |        | 109        |   |         |    |            |  |               |         | 4,364    |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 4,364   |        
|                          | Purchase of treasury stock                                                        |                      |        | (91        | ) |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         | (2,978  | ) |   |        |      |  |   |         | (2,978  | )      
|                          | Warrants issued in connection with product sales                                  |                      |        |           |   |         |    |            |  |               |         | 3,228    |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 3,228   |        
|                          | Amortization of deferred stock-based compensation                                 |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        | 1,904 |  |   |         | 1,904   |        
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|Balance at March 30, 2003 |                                                                                   |                      | 93,854 |            |   |         | 94 |             |  |               | 442,594 |          |  |              | 308,453 |               |  |   | 4,346 |        |   |   | (2,978  | )       |   |   | (1,774 | )     |  |   | 750,735 |        
|                          | Net income                                                                        |                      |        |           |   |         |    |            |  |               |         |         |  |              |         | 133,673       |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 133,673 |        
|                          | Change in unrealized gains on investments, net of
    tax                         |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       | (318   | ) |   |         |        |   |   |        |      |  |   |         | (318    | )      
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|                          |                                                                                   | Comprehensive income |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |         | 133,355 | 
|                          | Issuance of common stock under stock plans
    (including tax benefit of $10,640) |                      |        | 1,084      |   |         |    | 1           |  |               |         | 32,899   |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 32,900  |        
|                          | Common stock issued related to business
    acquisition                           |                      |        | 131        |   |         |    |            |  |               |         | 6,546    |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         | 6,546   |        
|                          | Common stock issued upon exercise of warrants                                     |                      |        | 280        |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        |      |  |   |         |        |        
|                          | Purchase of treasury stock                                                        |                      |        | (1,239     | ) |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         | (57,014 | ) |   |        |      |  |   |         | (57,014 | )      
|                          | Amortization of deferred stock-based compensation                                 |                      |        |           |   |         |    |            |  |               |         |         |  |              |         |              |  |   |       |       |   |   |         |        |   |   |        | 1,196 |  |   |         | 1,196   |        
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        
|Balance at March 28, 2004 |                                                                                   |                      | 94,110 |            |   | $       | 95 |             |  | $             | 482,039 |          |  | $            | 442,126 |               |  | $ | 4,028 |        |   | $ | (59,992 | )       |   | $ | (578   | )     |  | $ | 867,718 |        
|                          |                                                                                   |                      |        |            |   |         |    |             |  |               |         |          |  |              |         |               |  |   |       |        |   |   |         |         |   |   |        |       |  |   |         |        

See accompanying notes to consolidated financial
statements.

33



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##### Table of Contents



QLOGIC CORPORATION






CONSOLIDATED STATEMENTS OF CASH
FLOWS


Years Ended March 28, 2004,
March 30, 2003 and March 31, 2002


|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |          |        |          |  
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | -------- | ------- | -------- | ------ | -------- | ------- | -------- | ------ | -------- | -
|                                                                          |                                                                                       | 2004                                                     |                                                         | 2003     |        | 2002    
|                                                                          |                                                                                       |                                                          |                                                         |          |        |         
|                                                                          |                                                                                       |                                                         
|                                                                          |                                                                                       | (In thousands)                                          
|Cash flows from operating activities:                                     |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Net income                                                                            |                                                          | $                                                       | 133,673  |        |          | $       | 103,473  |        |          | $       | 70,726   |       
|                                                                          | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                          |                                                         |          |        |          |         |          |        |          |         |          |       
|                                                                          |                                                                                       | Depreciation and amortization                            |                                                         |          | 14,829 |          |         |          | 14,706 |          |         |          | 12,967 |         
|                                                                          |                                                                                       | Deferred income taxes                                    |                                                         |          | 15,420 |          |         |          | 5,937  |          |         |          | 9,338  |         
|                                                                          |                                                                                       | Tax benefit from issuance of stock under stock
    plans |                                                         |          | 10,640 |          |         |          | 6,037  |          |         |          | 7,512  |         
|                                                                          |                                                                                       | Amortization of deferred stock-based compensation        |                                                         |          | 1,196  |          |         |          | 1,904  |          |         |          | 2,073  |         
|                                                                          |                                                                                       | Provision for losses on accounts receivable              |                                                         |          | (450   | )        |         |          | (550   | )        |         |          | 1,125  |         
|                                                                          |                                                                                       | Loss on disposal of property and equipment               |                                                         |          | 43     |          |         |          | 1,478  |          |         |          | 254    |         
|                                                                          |                                                                                       | Stock-based sales discounts                              |                                                         |          |       |          |         |          | 3,228  |          |         |          | 5,501  |         
|                                                                          |                                                                                       | Write-down of non-marketable investments                 |                                                         |          |       |          |         |          | 4,000  |          |         |          |       |         
|                                                                          |                                                                                       | Changes in assets and liabilities:                       |                                                         |          |        |          |         |          |        |          |         |          |        |         
|                                                                          |                                                                                       |                                                          | Accounts receivable                                     |          |        | (17,211  | )       |          |        | (10,784  | )       |          |        | 14,103   |  
|                                                                          |                                                                                       |                                                          | Inventories                                             |          |        | (1,570   | )       |          |        | 5,393    |         |          |        | 21,752   |  
|                                                                          |                                                                                       |                                                          | Other assets                                            |          |        | (37      | )       |          |        | (1,229   | )       |          |        | (2,808   | )
|                                                                          |                                                                                       |                                                          | Accounts payable                                        |          |        | 3,269    |         |          |        | 276      |         |          |        | (2,992   | )
|                                                                          |                                                                                       |                                                          | Accrued compensation                                    |          |        | (3,148   | )       |          |        | 6,855    |         |          |        | (271     | )
|                                                                          |                                                                                       |                                                          | Income taxes payable                                    |          |        | (8,510   | )       |          |        | 10,606   |         |          |        | 2,300    |  
|                                                                          |                                                                                       |                                                          | Other liabilities                                       |          |        | 9,048    |         |          |        | 3,974    |         |          |        | 7,606    |  
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          |                                                                                       |                                                          | Net cash provided by operating activities               |          |        | 157,192  |         |          |        | 155,304  |         |          |        | 149,186  |  
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Cash flows from investing activities:                                     |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Purchases of marketable securities                                                    |                                                          |                                                         | (974,494 | )      |          |         | (858,202 | )      |          |         | (404,751 | )     
|                                                                          | Sales and maturities of marketable securities                                         |                                                          |                                                         | 893,122  |        |          |         | 773,338  |        |          |         | 214,059  |       
|                                                                          | Additions to property and equipment                                                   |                                                          |                                                         | (22,283  | )      |          |         | (15,704  | )      |          |         | (14,486  | )     
|                                                                          | Acquisition of business, net of cash acquired                                         |                                                          |                                                         |         |        |          |         | (1,695   | )      |          |         | (1,923   | )     
|                                                                          | Purchase of non-marketable investments                                                |                                                          |                                                         |         |        |          |         |         |        |          |         | (3,000   | )     
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          |                                                                                       |                                                          | Net cash used in investing activities                   |          |        | (103,655 | )       |          |        | (102,263 | )       |          |        | (210,101 | )
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Cash flows from financing activities:                                     |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Proceeds from issuance of stock under stock plans                                     |                                                          |                                                         | 22,260   |        |          |         | 11,623   |        |          |         | 8,766    |       
|                                                                          | Purchase of treasury stock                                                            |                                                          |                                                         | (57,014  | )      |          |         | (2,978   | )      |          |         |         |       
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          |                                                                                       |                                                          | Net cash provided by (used in) financing
    activities |          |        | (34,754  | )       |          |        | 8,645    |         |          |        | 8,766    |  
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Net increase (decrease) in cash and cash
    equivalents                  |                                                                                       |                                                          | 18,783                                                  |          |        |          | 61,686  |          |        |          | (52,149 | )       
|Cash and cash equivalents at beginning of year                            |                                                                                       |                                                          | 137,810                                                 |          |        |          | 76,124  |          |        |          | 128,273 |         
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Cash and cash equivalents at end of year                                  |                                                                                       | $                                                        | 156,593                                                 |          |        | $        | 137,810 |          |        | $        | 76,124  |         
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Supplemental disclosure of cash flow information:                         |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Cash paid during the year for:                                            |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Interest                                                                              |                                                          | $                                                       |         |        |          | $       |         |        |          | $       | 17       |       
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Income taxes                                                                          |                                                          | $                                                       | 64,783   |        |          | $       | 35,370   |        |          | $       | 14,993   |       
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|Supplemental schedule of non-cash investing and
    financing activities: |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         
|                                                                          | Common stock issued in connection with business
    acquisition                       |                                                          | $                                                       | 6,546    |        |          | $       | 4,364    |        |          | $       | 2,182    |       
|                                                                          |                                                                                       |                                                          |                                                         |          |        |          |         |          |        |          |         |         

See accompanying notes to consolidated financial
statements.

34



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##### Table of Contents



QLOGIC CORPORATION






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|        |                                                                           
|------- | --------------------------------------------------------------------------
|Note 1. | Description of Business and Summary of
    Significant Accounting Policies



| |                             
| | ----------------------------
| | General Business Information

QLogic Corporation (QLogic or the Company)
designs and supplies semiconductor and board level input/output
(I/ O) products, full fabric switches, and enclosure management
semiconductors. The Companys I/ O products provide a high
performance interface between computer systems and their
attached data storage peripherals, such as hard disk drives,
tape drives, removable disk drives and redundant array of
independent disks subsystems, or RAID subsystems. The Company
markets and distributes its products through a direct sales
organization supported by field application engineers, as well
as through a network of independent manufacturers
representatives and regional and international distributors. The
Companys primary original equipment manufacturer
(OEM) customers are major domestic and international
suppliers and manufacturers of servers, workstations and data
storage peripherals.



| |                                                               
| | --------------------------------------------------------------
| | Principles of Consolidation and Financial
    Reporting Period

The consolidated financial statements include the
financial statements of QLogic Corporation and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

The Company maintains a fifty-two/fifty-three
week fiscal year ending on the Sunday nearest March 31.
Fiscal years 2004, 2003 and 2002 each comprised fifty-two weeks
and ended on March 28, 2004, March 30, 2003 and
March 31, 2002, respectively.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. Actual
results could differ from these estimates.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue from product sales
when goods are shipped and title and risk of loss transfers to
the customer. The customers obligation to pay, and the
payment terms, are set at the time of shipment and are not
dependent on subsequent resale of the Companys product.
However, certain of the Companys sales are made to
distributors under agreements allowing for a limited right to
return unsold product. The Company recognizes 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.



| |                         
| | ------------------------
| | Research and Development

Research and development costs, including costs
related to the development of new products and process
technology, as well as acquired in-process technology, are
expensed as incurred.



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period

35



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

that includes the enactment date. A valuation
allowance to reduce deferred tax assets is established when it
is more likely than not that some portion or all of the deferred
tax assets will not be realized.



| |                     
| | --------------------
| | Net Income per Share

The Company computes basic net income per share
based on the weighted-average number of common shares
outstanding during the periods presented. Diluted net income per
share is computed based on the weighted-average number of common
and dilutive potential common shares outstanding using the
treasury stock method during the periods presented. The Company
has granted certain stock options and warrants which have been
treated as dilutive potential common shares in computing diluted
net income per share.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
principally of cash equivalents, investments in marketable
securities and trade accounts receivable. The Company invests
its marketable securities primarily in municipal bonds,
corporate bonds and government securities, all of which are high
investment grade. The Company, by policy, limits the amount of
credit exposure through diversification and investment in highly
rated securities. Sales to customers are denominated in
U.S. dollars. As a result, the Company believes its foreign
currency risk is minimal.

The Company sells its products to OEMs and
distributors throughout the world. As of March 28, 2004 and
March 30, 2003, the Company had three and two customers,
respectively, which individually accounted for 10% or more of
the Companys accounts receivable. Such customers accounted
for an aggregate of 40% and 29% of the Companys accounts
receivable at March 28, 2004 and March 30, 2003. The
Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments
purchased with original maturities of three months or less on
their acquisition date to be cash equivalents. The carrying
amounts of cash and cash equivalents approximate their fair
values.



| |                                          
| | -----------------------------------------
| | Marketable Securities and
    Investments

The Companys marketable securities are
invested primarily in debt securities, including municipal
bonds, corporate bonds and government securities. All of the
Companys marketable securities are classified as available
for sale and are recorded at fair value, based on quoted market
prices. The Companys available-for-sale marketable
securities are included in short-term investments in the
accompanying consolidated balance sheets. Unrealized gains and
losses, net of related income taxes, are excluded from earnings
and reported as a separate component of other comprehensive
income until realized. Realized gains or losses and other than
temporary declines in fair value are determined on a specific
identification basis and reported in other income and expense as
incurred. Net realized gains on marketable securities are
included in interest and other income in the accompanying
consolidated statements of income and aggregated
$1.1 million, $4.2 million and $0.8 million in
fiscal year 2004, 2003 and 2002, respectively.

Non-marketable investments, where the Company is
unable to exercise significant influence over the investee, are
accounted for under the cost method. Under the cost method,
investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of
earnings or additional investments.

During fiscal 2003, the Company recorded charges
of $4.0 million to write down the carrying value of certain
non-marketable investments to their estimated fair value of
zero. These investments consisted of equity

36



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interests in early stage technology companies
which the Company had accounted for under the cost method.
Management estimated the fair value of these investments based
upon available financial and other information, including
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.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost
(first-in, first-out) or net realizable value.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over
estimated useful lives of 39.5 years for buildings, five to
fifteen years for building and land improvements, and two to
five years for equipment. Leasehold improvements are amortized
on a straight-line basis over the shorter of the lease term or
the estimated useful life of the related asset.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

On April 1, 2002, the Company adopted
Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS 142 requires that goodwill and
intangible assets that have indefinite lives not be amortized
but rather be tested at least annually for impairment, or more
frequently when events or changes in circumstances indicate that
the asset might be impaired.

The following table presents the impact of
SFAS 142 on net income and net income per share had
SFAS 142 been in effect for all periods presented:

|                         |                      |                                 |         |      |  |      |         |      |  |   |        |      | 
|------------------------ | -------------------- | ------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------ | ---- | 
|                         |                      | 2004                            |         | 2003 |  | 2002
|                         |                      |                                 |         |      |  |     
|                         |                      |                                
|                         |                      | (In thousands, except per share
|                         |                      | amounts)                       
|Net income, as reported  |                      | $                               | 133,673 |      |  | $    | 103,473 |      |  | $ | 70,726 |     
|Amortization of goodwill |                      |                                 |        |      |  |      |        |      |  |   | 1,109  |     
|                         |                      |                                 |         |      |  |      |         |      |  |   |        |     
|Net income, as adjusted  |                      | $                               | 133,673 |      |  | $    | 103,473 |      |  | $ | 71,835 |     
|                         |                      |                                 |         |      |  |      |         |      |  |   |        |     
|Net income per share:    |                      |                                 |         |      |  |      |         |      |  |   |        |     
|                         | Basic, as reported   |                                 | $       | 1.42 |  |      | $       | 1.11 |  |   | $      | 0.76 | 
|                         | Diluted, as reported |                                 | $       | 1.39 |  |      | $       | 1.09 |  |   | $      | 0.74 | 
|                         | Basic, as adjusted   |                                 | $       | 1.42 |  |      | $       | 1.11 |  |   | $      | 0.78 | 
|                         | Diluted, as adjusted |                                 | $       | 1.39 |  |      | $       | 1.09 |  |   | $      | 0.76 | 

The adjusted net income and related per share
amounts do not reflect an adjustment for the income tax effect
related to the amortization of goodwill, since no income tax
benefit was recorded in connection with the goodwill
amortization included in the Companys consolidated
financial statements.



| |                                                 
| | ------------------------------------------------
| | Impairment of Goodwill and Long-Lived
    Assets

In accordance with the provisions of
SFAS No. 142, goodwill is tested for impairment at the
reporting unit level annually and in interim periods if certain
events occur indicating that the carrying value of the goodwill
may be impaired. The two-step impairment test is used to
identify potential goodwill impairments and to measure the
amount of any goodwill impairment loss to be recognized. During
the first step of the impairment analysis, the fair value of the
reporting unit (as defined by SFAS No. 142) is
compared to its net book value. If the carrying value of the
reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of
any impairment loss.

37



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company performs the annual test for
impairment as of the first day of its fiscal fourth quarter and
utilizes the two-step process. As part of the first step, the
Company determined that it has one reporting unit for purposes
of performing the fair-value based test of goodwill. During the
annual goodwill impairment test in fiscal 2004, the Company
completed step one and determined that there was no impairment
of goodwill since the fair value (based on quoted market price)
of the reporting unit exceeded its carrying value.

Long-lived assets, including other purchased
intangibles, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Recoverability of assets to
be held and used is measured by the comparison of the carrying
amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.



| |         
| | --------
| | Warranty

The Companys products typically carry a
warranty for periods of one to five years. The Company records a
liability for product warranty obligations at the time of sale
based on historical warranty experience. Warranty expense is not
material to the accompanying consolidated financial statements.



| |                     
| | --------------------
| | Comprehensive Income

Comprehensive income includes all changes in
equity other than transactions with stockholders. The
Companys accumulated other comprehensive income consists
of unrealized gains on the available-for-sale securities, net of
income taxes.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for its employee stock-based
compensation 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
SFAS No. 123, Accounting for Stock Based
Compensation. APB 25 provides that compensation
expense relative to the Companys stock-based employee
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 stock 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.
In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. SFAS 148 amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method on reported results. The Company adopted
the disclosure provisions of SFAS 148 as of March 30,
2003 and continues to follow APB 25 for stock-based
employee compensation.

38



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                                                                                  |                      |                                 |         |      |  |      |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                                                  |                      | 2004                            |         | 2003 |  | 2002
|                                                                                                                                                  |                      |                                 |         |      |  |     
|                                                                                                                                                  |                      |                                
|                                                                                                                                                  |                      | (In thousands, except per share
|                                                                                                                                                  |                      | amounts)                       
|Net income, as reported                                                                                                                           |                      | $                               | 133,673 |      |  | $    | 103,473 |      |  | $ | 70,726  |     
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                    |                      |                                 | 742     |      |  |      | 1,237   |      |  |   | 1,369   |     
|Deduct: Stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of related tax effects |                      |                                 | (35,463 | )    |  |      | (37,613 | )    |  |   | (29,961 | )   
|                                                                                                                                                  |                      |                                 |         |      |  |      |         |      |  |   |         |     
|Pro forma net income                                                                                                                              |                      | $                               | 98,952  |      |  | $    | 67,097  |      |  | $ | 42,134  |     
|                                                                                                                                                  |                      |                                 |         |      |  |      |         |      |  |   |         |     
|Net income per share:                                                                                                                             |                      |                                 |         |      |  |      |         |      |  |   |         |     
|                                                                                                                                                  | Basic, as reported   |                                 | $       | 1.42 |  |      | $       | 1.11 |  |   | $       | 0.76 | 
|                                                                                                                                                  | Diluted, as reported |                                 | $       | 1.39 |  |      | $       | 1.09 |  |   | $       | 0.74 | 
|                                                                                                                                                  | Basic, pro forma     |                                 | $       | 1.05 |  |      | $       | 0.72 |  |   | $       | 0.45 | 
|                                                                                                                                                  | Diluted, pro forma   |                                 | $       | 1.03 |  |      | $       | 0.70 |  |   | $       | 0.44 | 

The fair value of Options granted has been
estimated at the date of grant using the Black-Scholes
option-pricing model, with the following weighted-average
assumptions:

|                        |  |               |       |                              |  |      |       |      |  |      |       |      |  |   |       |   |  |   |       |   |  |   |       |  
|----------------------- |  | ------------- | ----- | ---------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                        |  |               |       |                             
|                        |  | Stock Options |       | Employee Stock Purchase Plan
|                        |  |               |       |                             
|                        |  | 2004          |       | 2003                         |  | 2002 |       | 2004 |  | 2003 |       | 2002
|                        |  |               |       |                              |  |      |       |      |  |      |       |     
|Fair value              |  | $             | 20.22 |                              |  | $    | 21.13 |      |  | $    | 37.15 |      |  | $ | 10.45 |   |  | $ | 11.71 |   |  | $ | 14.09 |  
|Expected volatility     |  |               | 50    | %                            |  |      | 74    | %    |  |      | 106   | %    |  |   | 50    | % |  |   | 74    | % |  |   | 106   | %
|Risk-free interest rate |  |               | 2.4   | %                            |  |      | 2.5   | %    |  |      | 5.4   | %    |  |   | 1.0   | % |  |   | 1.6   | % |  |   | 2.9   | %
|Expected life (years)   |  |               | 4.0   |                              |  |      | 4.0   |      |  |      | 5.0   |      |  |   | 0.25  |   |  |   | 0.25  |   |  |   | 0.25  |  
|Dividend yield          |  |               |      |                              |  |      |      |      |  |      |      |      |  |   |      |   |  |   |      |   |  |   |      |  

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.



| |                           
| | --------------------------
| | Performance-Based Warrants

Warrants granted in connection with sales
transactions are accounted for at their fair value, using the
Black-Scholes valuation model, in the period earned in
accordance with the provisions of Emerging Issues Task Force
(EITF) Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services. The warrants are recorded as stock-based sales
discounts and presented as a reduction to gross revenues in the
accompanying consolidated statements of income.

39



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform to the current year presentation.

Note 2. Acquisitions and
Dispositions



| |                            
| | ---------------------------
| | Little Mountain Group, Inc.

On January 23, 2001, the Company acquired
the outstanding common stock of Little Mountain Group, Inc.
(LMG), for cash, stock and additional consideration related to
performance milestones which could aggregate up to
$30 million over a four-year period. LMG is a designer of
iSCSI silicon and board level products to enable an Ethernet
Storage Area Network. The Company accounted for the transaction
as a purchase. Accordingly, the excess purchase price paid over
the fair value of the LMG net assets acquired of
$5.7 million was recorded as goodwill. This goodwill was
being amortized over five years until the adoption of
SFAS 142 in fiscal 2003. The structure of the acquisition
includes payments of stock based on performance milestones to be
achieved over the next four fiscal years. These payments will be
charged to engineering and development expense as the
performance milestones are achieved. During fiscal 2004, 2003
and 2002, the Company issued approximately 131,000, 109,000 and
41,000 shares of common stock in connection with the
achievement of the performance milestones. The fair value of the
shares issued in fiscal 2004, 2003 and 2002 was
$6.5 million, $4.4 million and $2.2 million,
respectively.

At March 28, 2004, a performance payment to
the former stockholders of LMG of $1.2 million was included
in other current liabilities in the accompanying consolidated
balance sheets.



| |                                   
| | ----------------------------------
| | Silicon Design Resources,
    Inc.

On August 20, 1998, the Company acquired the
net assets of Silicon Design Resources, Inc. (SDR) for
$2 million in cash. In addition, the Company was obligated
to pay up to an additional $8 million in cash provided that
certain performance targets were achieved through fiscal year
2002. These payments were accounted for as additional purchase
price and allocated to the intangible assets acquired,
specifically the in-process technology and the completed
technology.

During fiscal year 2002, the Company recorded the
final performance payment to the former stockholders of SDR of
$1.7 million, which was comprised of $1.1 million
written-off as acquired in-process technology and
$0.6 million was capitalized as completed technology.

Adaptive RAID
Technology

On February 26, 2001, the Company sold its
Adaptive RAID technology to Yotta Yotta, Inc. in exchange for a
$7.5 million note receivable. The note was immediately
payable upon completion of Yotta Yotta, Inc.s qualified
financing, or at the notes maturity in January 2004. Due
to the uncertainty regarding collection of the note, the Company
deferred the gain from the sale of this technology until the
collection of the note receivable from Yotta Yotta, Inc.

In September 2003, the Company and Yotta Yotta
amended the purchase agreement and the original consideration
consisting of the $7.5 million note receivable was
substituted with a future royalty arrangement. Under the amended
agreement, Yotta Yotta is required to pay future royalties on
certain of its products for ten years or until all amounts
previously owed to the Company pursuant to the original
agreement are repaid. During fiscal 2004, royalty revenues
recognized by the Company were immaterial.

Note 3. Net Income per
Share

Basic net income per share is based on the
weighted-average number of common shares outstanding during the
periods presented. Diluted income per share is based on the
weighted-average number of common

40



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 computations
of basic and diluted net income per share:

|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |        |      | 
|--------------------- | ----------------------------------------------------------------- | ------------------------------- | ------- | ------ | ---- | ---- | ------- | ------ | ---- | - | ------ | ------ | ---- | 
|                      |                                                                   | 2004                            |         | 2003   |      | 2002
|                      |                                                                   |                                 |         |        |      |     
|                      |                                                                   |                                
|                      |                                                                   | (In thousands, except per share
|                      |                                                                   | amounts)                       
|Net income            |                                                                   | $                               | 133,673 |        |      | $    | 103,473 |        |      | $ | 70,726 |       
|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|Shares:               |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|                      | Weighted-average shares outstanding 
    basic                   |                                 |         | 94,281 |      |      |         | 93,469 |      |   |        | 92,645 |     
|                      | Dilutive potential common shares, using treasury
    stock method |                                 |         | 1,965  |      |      |         | 1,885  |      |   |        | 2,481  |     
|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|                      | Weighted-average shares outstanding 
    diluted                 |                                 |         | 96,246 |      |      |         | 95,354 |      |   |        | 95,126 |     
|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|Net income per share: |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|                      |                                                                   | Basic                           |         | $      | 1.42 |      |         | $      | 1.11 |   |        | $      | 0.76 | 
|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       
|                      |                                                                   | Diluted                         |         | $      | 1.39 |      |         | $      | 1.09 |   |        | $      | 0.74 | 
|                      |                                                                   |                                 |         |        |      |      |         |        |      |   |        |       

Options to purchase 5,063,000, 6,879,000 and
4,089,000 shares of common stock have been excluded from
the diluted net income per share calculation for fiscal 2004,
2003 and 2002, respectively. These options have been excluded
from the diluted net income per share calculations because their
effect was antidilutive.

41



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4. Marketable
Securities

As of March 28, 2004, unrealized gains of
$4.0 million (net of related income taxes of
$2.4 million) are included in accumulated other
comprehensive income. The Companys portfolio of
available-for-sale securities consist of the following:

|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |         | 
|------------------------------------------- | ----------------------------------- | -------------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                                            |                                     |                |         | Gross      |  | Gross      |       |           
|                                            |                                     | Amortized      |         | Unrealized |  | Unrealized |       | Estimated 
|                                            |                                     | Cost           |         | Gains      |  | Losses     |       | Fair Value
|                                            |                                     |                |         |            |  |            |       |           
|                                            |                                     |               
|                                            |                                     | (In thousands)
|March 28, 2004                              |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|Municipal bonds                             |                                     | $              | 73,102  |            |  | $          | 28    |            |  | $ |     |      |   | $ | 73,130  |        
|Corporate bonds                             |                                     |                | 137,166 |            |  |            | 2,828 |            |  |   | (35  | )    |   |   | 139,959 |        
|U.S. Government securities                  |                                     |                | 393,724 |            |  |            | 3,519 |            |  |   | (111 | )    |   |   | 397,132 |        
|Other debt securities                       |                                     |                | 134,886 |            |  |            | 248   |            |  |   | (19  | )    |   |   | 135,115 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|                                            | Total available-for-sale securities |                |         | 738,878    |  |            |       | 6,623      |  |   |      | (165 | ) |   |         | 745,336 | 
|Less amounts classified as cash equivalents |                                     |                | 158,895 |            |  |            |      |            |  |   |     |      |   |   | 158,895 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|                                            |                                     | $              | 579,983 |            |  | $          | 6,623 |            |  | $ | (165 | )    |   | $ | 586,441 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|March 30, 2003                              |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|Municipal bonds                             |                                     | $              | 18,960  |            |  | $          | 212   |            |  | $ |     |      |   | $ | 19,172  |        
|Corporate bonds                             |                                     |                | 107,967 |            |  |            | 2,808 |            |  |   | (95  | )    |   |   | 110,680 |        
|U.S. Government securities                  |                                     |                | 399,220 |            |  |            | 3,778 |            |  |   | (166 | )    |   |   | 402,832 |        
|Other debt securities                       |                                     |                | 111,943 |            |  |            | 180   |            |  |   |     |      |   |   | 112,123 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|                                            | Total available-for-sale securities |                |         | 638,090    |  |            |       | 6,978      |  |   |      | (261 | ) |   |         | 644,807 | 
|Less amounts classified as cash equivalents |                                     |                | 139,420 |            |  |            |      |            |  |   |     |      |   |   | 139,420 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        
|                                            |                                     | $              | 498,670 |            |  | $          | 6,978 |            |  | $ | (261 | )    |   | $ | 505,387 |        
|                                            |                                     |                |         |            |  |            |       |            |  |   |      |      |   |   |         |        

The amortized cost and estimated fair value of
debt securities as of March 28, 2004, by contractual
maturity, are as follows:

|                                       |  |                |         |            |  |   |         | 
|-------------------------------------- |  | -------------- | ------- | ---------- |  | - | ------- | 
|                                       |  | Amortized      |         | Estimated 
|                                       |  | Cost           |         | Fair Value
|                                       |  |                |         |           
|                                       |  |               
|                                       |  | (In thousands)
|Due in one year or less                |  | $              | 288,929 |            |  | $ | 289,404 | 
|Due after one year through three years |  |                | 361,921 |            |  |   | 366,363 | 
|Due after three years                  |  |                | 88,028  |            |  |   | 89,569  | 
|                                       |  |                |         |            |  |   |         | 
|                                       |  | $              | 738,878 |            |  | $ | 745,336 | 
|                                       |  |                |         |            |  |   |         | 

Note 5. Inventories

Components of inventories are as follows:

|               |  |                |        |      |  |   |        | 
|-------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|               |  | 2004           |        | 2003
|               |  |                |        |     
|               |  |               
|               |  | (In thousands)
|Raw materials  |  | $              | 4,024  |      |  | $ | 10,887 | 
|Finished goods |  |                | 16,911 |      |  |   | 8,478  | 
|               |  |                |        |      |  |   |        | 
|               |  | $              | 20,935 |      |  | $ | 19,365 | 
|               |  |                |        |      |  |   |        | 

42



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6. Property and
Equipment

Components of property and equipment are as
follows:

|                                               |  |                |         |      |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                               |  | 2004           |         | 2003
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Land                                           |  | $              | 11,663  |      |  | $ | 11,663  | 
|Building and improvements                      |  |                | 23,082  |      |  |   | 22,402  | 
|Product and test equipment                     |  |                | 68,805  |      |  |   | 60,310  | 
|Furniture and fixtures                         |  |                | 4,916   |      |  |   | 3,840   | 
|Semiconductor tooling                          |  |                | 11,534  |      |  |   | 6,589   | 
|                                               |  |                |         |      |  |   |         | 
|                                               |  |                | 120,000 |      |  |   | 104,804 | 
|Less accumulated depreciation and amortization |  |                | 52,776  |      |  |   | 44,991  | 
|                                               |  |                |         |      |  |   |         | 
|                                               |  | $              | 67,224  |      |  | $ | 59,813  | 
|                                               |  |                |         |      |  |   |         | 



|        |                     
|------- | --------------------
|Note 7. | Stockholders Equity



| |              
| | -------------
| | Capital Stock

The Companys authorized capital consists of
1 million shares of preferred stock, par value
$0.001 per share, and 500 million shares of common
stock, par value $0.001 per share. The preferred stock, of
which no shares have been issued, includes 200,000 shares
designated as Series A Junior Participating Preferred Stock
(Series A Preferred Stock). As of March 28, 2004 and
March 30, 2003, the Company had 95.4 million and
93.9 million shares of common stock issued, respectively.
At March 28, 2004, 17.5 million shares of common stock
were reserved for the exercise of issued and unissued common
stock options and 1.9 million shares were reserved for
issuance in connection with the Companys Employee Stock
Purchase Plan.



| |               
| | --------------
| | Treasury Stock

In October 2002, the Companys Board of
Directors approved a stock repurchase program that authorizes
the Company to repurchase up to $100 million of the
Companys outstanding common stock for a two-year period.
During fiscal 2004 and 2003, the Company purchased treasury
stock totaling $57.0 million and $3.0 million,
respectively. As of March 28, 2004, the Company had
purchased 1.3 million shares of treasury stock under the
stock repurchase program. The shares repurchased have been taken
in as treasury shares and will be held as treasury shares until
the Companys Board of Directors designates that these
shares be retired or used for some other purpose.

During April and May 2004, the Company purchased
an additional 1.4 million shares of common stock under the
stock repurchase program for an aggregate purchase price of
$40.0 million. With these purchases of common stock, the
Company has repurchased the entire amount authorized pursuant to
the program.

Stockholder
Rights Plan

On June 4, 1996, the Board of Directors of
the Company unanimously adopted a Stockholder Rights Plan (the
Rights Plan) pursuant to which it declared a dividend
distribution of preferred stock purchase rights (a Right) upon
all of the outstanding shares of the common stock.

The Rights dividend was paid on June 20,
1996 to the holders of record of shares of common stock on that
date, at the rate of one-eighth of one whole Right per one share
of common stock, as adjusted pursuant to the Companys
stock splits. Each share of common stock presently outstanding
that had been issued since

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QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

June 20, 1996 also includes one-eighth
Right, and each share of common stock that may be issued after
the date hereof and prior to the Distribution Date (as defined
below) also will include one-eighth Right.

The Rights become exercisable (i) the 10th
business day following the date of a public announcement that a
person or a group of affiliated or associated persons (an
Acquiring Person) has acquired beneficial ownership of 15% or
more of the outstanding shares of common stock, or (ii) the
10th business day following the commencement of, or announcement
of an intention to make a tender offer or exchange offer the
consummation of which would result in the person or group making
the offer becoming an Acquiring Person (the earlier of the dates
described in clauses (i) and (ii) being called the
Distribution Date).

The Rights held by an Acquiring Person or its
affiliates are not exercisable. All shares of common stock that
will be issued prior to the Distribution Date will include such
Rights. The Rights will expire at the close of business on
June 4, 2006 (the Scheduled Expiration Date), unless prior
thereto the Distribution Date occurs, or unless the Scheduled
Expiration Date is extended.

Pursuant to the Rights Plan, as amended to date,
each Right entitles the registered holder, on and after the
Distribution Date and until redemption of all Rights, to
purchase from the Company 1/100th of one whole share (a Unit) of
the Companys Series A Preferred Stock. The purchase
price is $425.00 per Unit. In the event of certain
acquisitions involving the Acquiring Person, directly or
indirectly, the holder of each Right will be entitled to
purchase for $425.00 certain shares or assets of the Company or
an Acquiring Person that have a market value of $850.00 at such
time.

The Company has 200,000 whole shares of
Series A Preferred Stock authorized (40,000,000 Units
authorized), of which no shares or Units are issued or
outstanding at March 28, 2004. Each Unit would entitle the
holder to (A) one vote, voting together with the shares of
common stock; (B) in the event the Companys assets
are liquidated, a payment of one dollar ($1.00) or an amount
equal to the payment to be distributed per share of common
stock, whichever is greater; and (C) in the event of any
merger, consolidation or other transaction in which shares of
common stock are exchanged, a payment in an amount equal to the
payment received per share of common stock. The number of Rights
per share of common stock, and the purchase price, is subject to
adjustment in the event of each and any stock split, stock
dividend or similar event.



|        |            
|------- | -----------
|Note 8. | Stock Plans



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan
(the ESPP) that operates in accordance with Section 423 of
the Internal Revenue Code. The ESPP is administered by the
Compensation Committee of the Board of Directors. Under the
ESPP, employees of the Company who elect to participate are
granted options to purchase common stock at a 15% discount from
the lower of the market value of the common stock at the
beginning or end of each three-month offering period. The ESPP
permits an enrolled employee to make contributions to purchase
shares of common stock by having withheld from their salary an
amount between 1% and 10% of compensation. As of March 28,
2004 and March 30, 2003, ESPP participant contributions of
$0.8 million and $0.5 million, respectively, were
included in other current liabilities in the accompanying
consolidated balance sheets. The total number of shares issued
under the ESPP was 136,000, 121,000 and 104,000 during fiscal
2004, 2003 and 2002, respectively.



| |                             
| | ----------------------------
| | Incentive Compensation Plans

On January 12, 1994, the Companys
Board of Directors adopted the QLogic Corporation Stock Awards
Plan (the Stock Awards Plan) and the QLogic Corporation
Non-Employee Director Stock Option Plan (the Director Plan)
(collectively, the Stock Option Plans). Additionally, the
Company has issued options on an ad hoc basis from time to time.

44



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Stock Awards Plan provides for the issuance
of incentive and non-qualified stock options, restricted stock
and other stock-based incentive awards for officers and key
employees. The Stock Awards Plan permits the Compensation
Committee of the Board of Directors to select eligible employees
to receive awards and to determine the terms and conditions of
awards. No shares of restricted stock have been issued under the
Stock Awards Plan.

Options granted under the Companys Stock
Awards Plan provide that an employee holding a stock option may
exchange mature stock, which the employee already owns, as
payment against the exercise of an option. This provision
applies to all options outstanding as of March 28, 2004.
All stock options granted under the Companys Stock Awards
Plan have ten-year terms and vest over four years from the date
of grant.

Under the terms of the Director Plan, new
directors receive an option grant, at fair market value, to
purchase 40,000 shares of common stock of the Company
upon election to the Board, and the plan provides for annual
grants to each non-employee director (other than the Chairman of
the Board) of options to purchase 20,000 shares of
common stock. The plan also provides for annual grants of
options to purchase 54,000 shares of common stock to
any non-employee Chairman of the Board. All stock options
granted under the Director Plan have ten-year terms and vest
over three years from the date of grant.

As of March 28, 2004, options to
purchase 11.6 million shares and 616,000 shares
of common stock were held by employees and directors,
respectively. Shares available for future grant aggregated
4.7 million and 565,000 under the Stock Awards Plan and the
Director Plan, respectively.

In addition, options granted in fiscal 1995
outside of the Companys Stock Option Plans to purchase an
additional 30,000 shares of common stock were outstanding
as of March 28, 2004. These options had four-year vesting
terms and have a ten-year expiration date.

Warrants

As part of an agreement with Sun Microsystems,
Inc. (Sun), the Company granted a warrant to Sun to purchase a
certain number of shares of the Companys common stock
based upon the volume of revenue received from Sun. The warrant
shares were earned at the rate of one share for each $127.00 of
switch product revenue the Company received from Sun through
September 30, 2002. In each period in which the warrant
shares were earned, a non-cash sales discount was recorded. The
amount of the non-cash sales discount was the fair value of the
warrant shares, which were earned in the period. The fair value
of the warrant shares was calculated by using the Black-Scholes
valuation model. The assumptions used in the fair value
calculation of the warrant shares were generally consistent with
those assumptions used in computing the Companys
stock-based compensation pro forma disclosures (see
Note 1), except as to the term of the warrants, which was
the contractual term. In connection with this agreement, the
Company issued warrants to purchase 390,000 shares of
its common stock with an exercise price of $13.84 per
share. As of March 30, 2003, all of warrants were
outstanding.

In January 2004, the warrant holder, using a
cashless exercise feature pursuant to the original agreement,
exercised the warrants and the Company issued
280,000 shares of common stock in full settlement of its
obligation under the warrants.

45



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock
Options

A summary of stock option activity follows
(shares in thousands):

|                                 |  |           |        |           |  |           |       |           |  |           |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|-------------------------------- |  | --------- | ------ | --------- |  | --------- | ----- | --------- |  | --------- | ------ | --------- |  | - | ----- |  |  |  | ----- | - |  | - | ----- | 
|                                 |  |           |        |           |  |          
|                                 |  | 2004      |        | 2003      |  | 2002     
|                                 |  |           |        |           |  |          
|                                 |  |           |        | Weighted- |  |           |       | Weighted- |  |           |        | Weighted-
|                                 |  |           |        | Average   |  |           |       | Average   |  |           |        | Average  
|                                 |  | Number of |        | Exercise  |  | Number of |       | Exercise  |  | Number of |        | Exercise 
|                                 |  | Shares    |        | Price     |  | Shares    |       | Price     |  | Shares    |        | Price    
|                                 |  |           |        |           |  |           |       |           |  |           |        |          
|Outstanding at beginning of year |  |           | 10,844 |           |  | $         | 43.34 |           |  |           | 9,352  |           |  | $ | 42.41 |  |  |  | 7,499 |   |  | $ | 39.94 | 
|Granted                          |  |           | 2,830  |           |  |           | 47.78 |           |  |           | 2,924  |           |  |   | 42.00 |  |  |  | 2,928 |   |  |   | 46.83 | 
|Exercised                        |  |           | (948   | )         |  |           | 18.57 |           |  |           | (686   | )         |  |   | 11.20 |  |  |  | (560  | ) |  |   | 9.46  | 
|Cancelled                        |  |           | (473   | )         |  |           | 56.59 |           |  |           | (746   | )         |  |   | 55.94 |  |  |  | (515  | ) |  |   | 67.34 | 
|                                 |  |           |        |           |  |           |       |           |  |           |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|Outstanding at end of year       |  |           | 12,253 |           |  |           | 45.77 |           |  |           | 10,844 |           |  |   | 43.34 |  |  |  | 9,352 |   |  |   | 42.41 | 
|                                 |  |           |        |           |  |           |       |           |  |           |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|Exercisable at end of year       |  |           | 6,795  |           |  |           | 45.38 |           |  |           | 5,565  |           |  |   | 40.22 |  |  |  | 4,232 |   |  |   | 33.35 | 
|                                 |  |           |        |           |  |           |       |           |  |           |        |           |  |   |       |  |  |  |       |   |  |   |       | 

The following table summarizes stock options
outstanding at March 28, 2004 (shares in thousands):

|                         |  |             |        |                |  |              |       |           |  |                |     |  |  |  |       |  |  |   |       | 
|------------------------ |  | ----------- | ------ | -------------- |  | ------------ | ----- | --------- |  | -------------- | --- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |             |        |               
|                         |  | Outstanding |        | Exercisable   
|                         |  |             |        |               
|                         |  |             |        | Weighted-      |  | Remaining    |       |           |  | Weighted-     
|                         |  | Number of   |        | Average        |  | Contractual  |       | Number    |  | Average       
|Range of Exercise Prices |  | Shares      |        | Exercise Price |  | Life (Years) |       | of Shares |  | Exercise Price
|                         |  |             |        |                |  |              |       |           |  |               
|$ 0.00 to $ 30.00        |  |             | 1,083  |                |  | $            | 7.15  |           |  |                | 4.1 |  |  |  | 1,036 |  |  | $ | 6.51  | 
|30.01 to   40.00         |  |             | 2,410  |                |  |              | 34.75 |           |  |                | 6.9 |  |  |  | 1,620 |  |  |   | 33.47 | 
|40.01 to   50.00         |  |             | 4,102  |                |  |              | 44.75 |           |  |                | 8.6 |  |  |  | 1,194 |  |  |   | 44.49 | 
|50.01 to   60.00         |  |             | 2,681  |                |  |              | 52.81 |           |  |                | 8.1 |  |  |  | 1,116 |  |  |   | 54.34 | 
|60.01 to  151.00         |  |             | 1,977  |                |  |              | 72.95 |           |  |                | 6.2 |  |  |  | 1,829 |  |  |   | 73.03 | 
|                         |  |             |        |                |  |              |       |           |  |                |     |  |  |  |       |  |  |   |       | 
|                         |  |             | 12,253 |                |  |              | 45.77 |           |  |                | 7.4 |  |  |  | 6,795 |  |  |   | 45.38 | 
|                         |  |             |        |                |  |              |       |           |  |                |     |  |  |  |       |  |  |   |       | 



|        |                                 
|------- | --------------------------------
|Note 9. | Employee Retirement Savings Plan

The Company has established a pretax savings and
profit sharing plan under Section 401(k) of the Internal
Revenue Code for substantially all domestic employees. Under the
plan, eligible employees are able to contribute up to 15% of
their compensation. Company contributions match up to 3% of a
participants compensation. The Companys direct
contributions on behalf of its employees were $1.8 million,
$1.5 million and $1.3 million in fiscal 2004, 2003 and
2002, respectively.

46



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                              
|-------- | -----------------------------
|Note 10. | Commitments and Contingencies

Leases

The Company leases certain equipment and
facilities under non-cancelable operating lease agreements,
which expire at various dates through fiscal year 2008. A
summary of the future minimum lease commitments under operating
leases is as follows:

|                                    |  |                |        | 
|----------------------------------- |  | -------------- | ------ | 
|Fiscal Year:                        |  |               
|                                    |  |               
|                                    |  | (In thousands)
|2005                                |  | $              | 6,237  | 
|2006                                |  |                | 4,880  | 
|2007                                |  |                | 3,227  | 
|2008                                |  |                | 1,166  | 
|2009                                |  |                | 1,183  | 
|Thereafter                          |  |                | 634    | 
|                                    |  |                |        | 
|Total future minimum lease payments |  | $              | 17,327 | 
|                                    |  |                |        | 

Rent expense for fiscal 2004, 2003 and 2002 was
$5.6 million, $4.0 million and $1.3 million,
respectively.



| |           
| | ----------
| | Litigation

In January 2003, Raytheon Company filed suit in
the United States District Court for the Eastern District of
Texas, alleging that the Company, along with 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. The Company filed an answer to the
complaint in March 2003 and trial was scheduled to begin in
September 2004. In February 2004, the Company settled the
lawsuit. Under the terms of the settlement, the lawsuit was
dismissed, Raytheon licensed three patents to the Company
(including the patent in dispute), and the Company paid Raytheon
a one-time license fee, which was recorded in the fourth quarter
of fiscal 2004. The license fee was not material to the
Companys financial position 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. The
Company filed an answer to the complaint in April 2003 denying
all allegations. The suit is in its very early stages and
discovery has commenced. The Company disputes the
plaintiffs claims in the First Delaware Action and intends
to defend this lawsuit vigorously.

In December 2003, the Company 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 Companys 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, the Company and Emulex
engaged 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

47



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QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. The Company disputes the plaintiffs
claims in the Second Delaware Action and intends to defend this
lawsuit vigorously.

During the third quarter of fiscal 2004, the
Company accrued estimated settlement costs aggregating
$1.75 million associated with the legal claims for
(i) a dispute with a former customer, and (ii) the
First Delaware Action and the California Action. The Company has
paid the accrued settlement to the former customer and the
parties have mutually released each other from all liability
associated with their claims. Although the First Delaware Action
and the California Action are still ongoing, management believes
the accrued settlement costs will be consistent with any
settlement payment due upon the final resolution of these
matters.

Various lawsuits, claims and proceedings have
been or may be instituted against the Company, including the
matters discussed above. The outcome of litigation cannot be
predicted with certainty and some lawsuits, claims and
proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief
and there can be no assurance that a license will be granted.
Injunctive relief could have a material adverse effect on the
Companys financial condition or results of operations. The
Company is unable to estimate the range of possible loss from
any outstanding litigation, except as described above. However,
based on an evaluation of matters which are pending or asserted,
management believes the disposition of such matters will not
have a material adverse effect on the Companys financial
condition or results of operations.



|         |             
|-------- | ------------
|Note 11. | Income Taxes

Income before income taxes consists of the
following components:

|              |  |                |         |      |  |      |         |   |  |   |         |  
|------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|              |  | 2004           |         | 2003 |  | 2002
|              |  |                |         |      |  |     
|              |  |               
|              |  | (In thousands)
|United States |  | $              | 216,127 |      |  | $    | 159,276 |   |  | $ | 105,795 |  
|Foreign       |  |                | (526    | )    |  |      | (57     | ) |  |   | (255    | )
|              |  |                |         |      |  |      |         |   |  |   |         |  
|              |  | $              | 215,601 |      |  | $    | 159,219 |   |  | $ | 105,540 |  
|              |  |                |         |      |  |      |         |   |  |   |         |  

The components of the income tax provision are as
follows:

|                           |         |                |        |        |        |      |        |        |        |   |        |        |        | 
|-------------------------- | ------- | -------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                           |         | 2004           |        | 2003   |        | 2002
|                           |         |                |        |        |        |     
|                           |         |               
|                           |         | (In thousands)
|Current:                   |         |                |        |        |        |      |        |        |        |   |        |       
|                           | Federal |                | $      | 57,770 |        |      | $      | 42,200 |        |   | $      | 22,620 |       
|                           | State   |                |        | 8,896  |        |      |        | 7,609  |        |   |        | 2,855  |       
|                           | Foreign |                |        | (158   | )      |      |        |       |        |   |        | 1      |       
|                           |         |                |        |        |        |      |        |        |        |   |        |       
|                           |         | Total current  |        |        | 66,508 |      |        |        | 49,809 |   |        |        | 25,476 | 
|Deferred:                  |         |                |        |        |        |      |        |        |        |   |        |       
|                           | Federal |                |        | 13,550 |        |      |        | 6,174  |        |   |        | 8,572  |       
|                           | State   |                |        | 1,870  |        |      |        | (237   | )      |   |        | 766    |       
|                           |         |                |        |        |        |      |        |        |        |   |        |       
|                           |         | Total deferred |        |        | 15,420 |      |        |        | 5,937  |   |        |        | 9,338  | 
|                           |         |                |        |        |        |      |        |        |        |   |        |       
|Total income tax provision |         | $              | 81,928 |        |        | $    | 55,746 |        |        | $ | 34,814 |       
|                           |         |                |        |        |        |      |        |        |        |   |        |       

48



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax benefits associated with dispositions
from employee stock compensation plans of approximately
$10.6 million, $6.0 million and $7.5 million in
fiscal 2004, 2003 and 2002, respectively, were recorded directly
to additional paid-in capital.

A reconciliation of the income tax provision with
the amount computed by applying the federal statutory tax rate
to income before income taxes is as follows:

|                                                        |  |                |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | 2004           |        | 2003 |  | 2002
|                                                        |  |                |        |      |  |     
|                                                        |  |               
|                                                        |  | (In thousands)
|Expected income tax provision at the statutory
    rate |  | $              | 75,460 |      |  | $    | 55,727 |   |  | $ | 36,834 |  
|State income taxes, net of federal tax benefit          |  |                | 6,998  |      |  |      | 4,792  |   |  |   | 2,354  |  
|Benefit from research and other credits                 |  |                | (1,759 | )    |  |      | (2,500 | ) |  |   | (2,600 | )
|Benefit from export sales                               |  |                | (3,185 | )    |  |      | (3,465 | ) |  |   | (1,750 | )
|Nondeductible business combination related costs        |  |                | 3,841  |      |  |      | 2,246  |   |  |   | 1,435  |  
|Tax exempt income                                       |  |                | (161   | )    |  |      | (358   | ) |  |   | (571   | )
|Other, net                                              |  |                | 734    |      |  |      | (696   | ) |  |   | (888   | )
|                                                        |  |                |        |      |  |      |        |   |  |   |        |  
|                                                        |  | $              | 81,928 |      |  | $    | 55,746 |   |  | $ | 34,814 |  
|                                                        |  |                |        |      |  |      |        |   |  |   |        |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities are as follows:

|                          |                                                |                                      |   |        |        |  |   |        |        | 
|------------------------- | ---------------------------------------------- | ------------------------------------ | - | ------ | ------ |  | - | ------ | ------ | 
|                          |                                                | 2004                                 |   | 2003  
|                          |                                                |                                      |   |       
|                          |                                                |                                     
|                          |                                                | (In thousands)                      
|Deferred tax assets:      |                                                |                                      |   |        |        |  |   |       
|                          | Reserves and accruals not currently deductible |                                      | $ | 14,701 |        |  | $ | 24,180 |       
|                          | Net operating loss carryforwards               |                                      |   | 4,675  |        |  |   | 5,256  |       
|                          | State taxes                                    |                                      |   | 2,706  |        |  |   | 2,331  |       
|                          | Acquired in-process technology                 |                                      |   | 1,930  |        |  |   | 2,031  |       
|                          | Research credits                               |                                      |   | 701    |        |  |   | 613    |       
|                          | Property and equipment                         |                                      |   | 461    |        |  |   |       |       
|                          | Stock warrants                                 |                                      |   |       |        |  |   | 5,883  |       
|                          | Other                                          |                                      |   | 278    |        |  |   | 103    |       
|                          |                                                |                                      |   |        |        |  |   |       
|                          |                                                | Total gross deferred tax assets      |   |        | 25,452 |  |   |        | 40,397 | 
|                          |                                                |                                      |   |        |        |  |   |       
|Deferred tax liabilities: |                                                |                                      |   |        |        |  |   |       
|                          | Research and development expenditures          |                                      |   | 4,512  |        |  |   | 2,575  |       
|                          | Property and equipment                         |                                      |   |       |        |  |   | 1,462  |       
|                          |                                                |                                      |   |        |        |  |   |       
|                          |                                                | Total gross deferred tax liabilities |   |        | 4,512  |  |   |        | 4,037  | 
|                          |                                                |                                      |   |        |        |  |   |       
|                          | Net deferred tax assets                        |                                      | $ | 20,940 |        |  | $ | 36,360 |       
|                          |                                                |                                      |   |        |        |  |   |       

Based upon the Companys current and
historical pre-tax earnings, management believes it is more
likely than not that the Company will realize the benefit of the
existing net deferred tax assets as of March 28, 2004.
Management believes the existing net deductible temporary
differences will reverse during periods in which the Company
generates net taxable income or that there would be sufficient
tax carry backs available; however, there can be no assurance
that the Company will generate any earnings or any specific
level of continuing earnings in future years.

49



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of March 28, 2004, the Company has
federal net operating loss carryforwards of approximately
$12.5 million and aggregate state net operating loss
carryforwards of approximately $8.7 million. The federal
net operating loss carryforwards expire on various dates between
2011 and 2020. The aggregate state net operating loss
carryforwards expire on various dates between 2006 and 2015. All
net operating loss carryforwards relate to acquired companies
and are subject to limitations on their utilization.

As of March 28, 2004, the Company has state
tax credit carryforwards of approximately $1.1 million. If
not utilized, the state tax credit carryforwards will begin to
expire in 2014. Approximately $0.3 million of the state tax
credits carryforwards relate to acquired companies and are
subject to limitations on their utilization.

The Companys U.S. income tax returns
for the 2001 and 2002 fiscal years are presently under review by
the Internal Revenue Service. Management does not expect a
material impact on the consolidated financial statements from
this examination.



|          |                                                                    
|--------- | -------------------------------------------------------------------
|Note (12) | Product Revenues, Geographic Revenues and
    Significant Customers

Operating segments, as defined by SFAS 131,
are components of an enterprise for which separate financial
information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources
and in assessing performance. SFAS 131 also requires
disclosures about products and services, geographic areas and
significant customers. The Company operates in one operating
segment for purposes of SFAS 131.

Product
Revenues

The Company designs and supplies switch products,
semiconductor and board I/ O, and enclosure management products.
These products generally utilize one of three technology
standards: Fibre Channel, Small Computer Systems Interface
(SCSI) and Integrated Drive Electronics (IDE). Net revenues
grouped by technology standard as they function using similar
technologies are as follows:

|              |  |                |         |      |  |      |         |  |  |   |         | 
|------------- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  | 2004           |         | 2003 |  | 2002
|              |  |                |         |      |  |     
|              |  |               
|              |  | (In thousands)
|Fibre Channel |  | $              | 405,092 |      |  | $    | 307,920 |  |  | $ | 224,553 | 
|SCSI          |  |                | 118,768 |      |  |      | 132,889 |  |  |   | 117,936 | 
|IDE           |  |                |        |      |  |      |        |  |  |   | 1,700   | 
|              |  |                |         |      |  |      |         |  |  |   |         | 
|              |  | $              | 523,860 |      |  | $    | 440,809 |  |  | $ | 344,189 | 
|              |  |                |         |      |  |      |         |  |  |   |         | 

Geographic
Revenues

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:

|               |  |                |         |      |  |      |         |  |  |   |         | 
|-------------- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|               |  | 2004           |         | 2003 |  | 2002
|               |  |                |         |      |  |     
|               |  |               
|               |  | (In thousands)
|United States  |  | $              | 231,294 |      |  | $    | 202,119 |  |  | $ | 180,794 | 
|Japan          |  |                | 133,190 |      |  |      | 130,152 |  |  |   | 98,360  | 
|United Kingdom |  |                | 57,759  |      |  |      | 31,781  |  |  |   | 34,699  | 
|Rest of world  |  |                | 101,617 |      |  |      | 76,757  |  |  |   | 30,336  | 
|               |  |                |         |      |  |      |         |  |  |   |         | 
|               |  | $              | 523,860 |      |  | $    | 440,809 |  |  | $ | 344,189 | 
|               |  |                |         |      |  |      |         |  |  |   |         | 

50



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##### Table of Contents



QLOGIC CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant
Customers

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

|                 |  |      |     |      |  |      |     |  |  |  |     | 
|---------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                 |  | 2004 |     | 2003 |  | 2002
|                 |  |      |     |      |  |     
|Sun Microsystems |  |      | 15% |      |  |      | 17% |  |  |  | 16% | 
|Fujitsu          |  |      | 14% |      |  |      | 18% |  |  |  | 17% | 
|Hitachi          |  |      | *   |      |  |      | 11% |  |  |  | *   | 



---



|  |                               
|- | ------------------------------
|* | Less than 10% of net revenues.



|          |                                            
|--------- | -------------------------------------------
|Note (13) | Condensed Quarterly Results
    (Unaudited)

The following table summarizes certain unaudited
quarterly financial information for fiscal 2004 and 2003:

|                               |  |                                          |         |           |  |          |         |       |  |   |         |  |  |   |         | 
|------------------------------ |  | ---------------------------------------- | ------- | --------- |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                               |  |                                         
|                               |  | Three Months Ended                      
|                               |  |                                         
|                               |  | June                                     |         | September |  | December |         | March
|                               |  |                                          |         |           |  |          |         |      
|                               |  |                                         
|                               |  | (In thousands, except per share amounts)
|Fiscal 2004:                   |  |                                          |         |           |  |          |         |       |  |   |         |  |  |   |         | 
|Net revenues                   |  | $                                        | 126,235 |           |  | $        | 132,267 |       |  | $ | 137,064 |  |  | $ | 128,294 | 
|Gross profit                   |  |                                          | 84,233  |           |  |          | 89,901  |       |  |   | 94,183  |  |  |   | 89,249  | 
|Operating income               |  |                                          | 45,678  |           |  |          | 51,575  |       |  |   | 52,879  |  |  |   | 48,625  | 
|Net income                     |  |                                          | 31,676  |           |  |          | 34,181  |       |  |   | 34,952  |  |  |   | 32,864  | 
|Net income per share  basic   |  |                                          | 0.34    |           |  |          | 0.36    |       |  |   | 0.37    |  |  |   | 0.35    | 
|Net income per share  diluted |  |                                          | 0.33    |           |  |          | 0.35    |       |  |   | 0.36    |  |  |   | 0.34    | 
|                               |  |                                          |         |           |  |          |         |       |  |   |         |  |  |   |         | 
|Fiscal 2003:                   |  |                                          |         |           |  |          |         |       |  |   |         |  |  |   |         | 
|Net revenues                   |  | $                                        | 98,962  |           |  | $        | 107,115 |       |  | $ | 114,167 |  |  | $ | 120,565 | 
|Gross profit                   |  |                                          | 61,855  |           |  |          | 66,915  |       |  |   | 73,259  |  |  |   | 79,410  | 
|Operating income               |  |                                          | 29,864  |           |  |          | 32,196  |       |  |   | 37,234  |  |  |   | 42,569  | 
|Net income                     |  |                                          | 23,056  |           |  |          | 23,015  |       |  |   | 27,513  |  |  |   | 29,889  | 
|Net income per share  basic   |  |                                          | 0.25    |           |  |          | 0.25    |       |  |   | 0.29    |  |  |   | 0.32    | 
|Net income per share  diluted |  |                                          | 0.24    |           |  |          | 0.24    |       |  |   | 0.29    |  |  |   | 0.31    | 
|                               |  |                                          |         |           |  |          |         |       |  |   |         |  |  |   |         | 

51



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of the end of the quarter ended March 28,
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 March 28, 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
March 28, 2004 that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Reference is made to the Companys
Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2004,
for information about the Companys Directors under the
heading Proposal One  Election of
Directors, for information about the Companys
executive officers and code of ethics under the heading
Executive Officers, and for information about
reporting compliance under the heading Section 16(a)
Beneficial Ownership Reporting Compliance. Such
information is incorporated herein by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Reference is made to the Companys
Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2004,
for information about executive compensation under the heading
Executive Compensation and Other Information. Such
information is incorporated herein by reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Reference is made to the Companys
Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2004,
for information about security ownership of certain beneficial
owners and management under the headings Principal
Stockholders and Stock Ownership of Directors and
Executive Officers. Such information is incorporated
herein by reference.

There are no arrangements, known to the Company,
which might at a subsequent date result in a change in control
of the Company.

Reference is made to the Companys
Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2004,
for information about shares authorized for issuance under
equity compensation plans under the heading Equity
Compensation Plan Information. Such information is
incorporated herein by reference.

52



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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

None.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Reference is made to the Companys
Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 2004,
for information about audit and non-audit fees of the
Companys principal accountant, for information on the
audit committees pre-approval policies and procedures, and
for information on the audit committees approval of
certain services under the heading Principal
Accountants Fees. Such information is incorporated
herein by reference.






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)(1) Consolidated Financial
Statements

The following consolidated financial statements
of the Company for the years ended March 28, 2004,
March 30, 2003 and March 31, 2002 are filed as part of
this report:

FINANCIAL STATEMENT INDEX

|                                                                                                                                                       |  |        |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ | -- | 
|                                                                                                                                                       |  | Page  
|                                                                                                                                                       |  | Number
|                                                                                                                                                       |  |       
|Report of Independent Registered Public
    Accounting Firm                                                                                            |  |        | 30 | 
|Consolidated Balance Sheets as of March 28,
    2004 and March 30, 2003                                                                                |  |        | 31 | 
|Consolidated Statements of Income for the years
    ended March 28, 2004, March 30, 2003 and
    March 31, 2002                                        |  |        | 32 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income for the years ended
    March 28, 2004, March 30, 2003 and March 31, 2002 |  |        | 33 | 
|Consolidated Statements of Cash Flows for the
    years ended March 28, 2004, March 30, 2003 and
    March 31, 2002                                    |  |        | 34 | 
|Notes to Consolidated Financial Statements                                                                                                             |  |        | 35 | 

(a)(2) Financial Statement Schedule

The following consolidated financial statement
schedule of the Company for the years ended March 28, 2004,
March 30, 2003 and March 31, 2002 is filed as part of
this report and is incorporated herein by reference:

Schedule II  Valuation and
Qualifying Accounts

All other schedules have been omitted because the
required information is presented in the financial statements or
notes thereto, the amounts involved are not significant or the
schedules are not applicable.

(a)(3) Exhibits

An exhibit index has been filed as part of this
Report and is incorporated herein by reference.

(b) Reports on Form 8-K

Current Report on Form 8-K dated
January 14, 2004, furnishing the Companys press
release dated January 14, 2004 to announce its financial
results for the third quarter ended December 28, 2003
(Item 12).

Current Report on Form 8-K dated
February 13, 2004, furnishing the Companys press
release dated February 13, 2004 to announce the resignation
of the Companys Chief Financial Officer effective upon the
completion of the current fiscal year (Items 5 and 7).

53



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                   
| | ------------------
| | QLOGIC CORPORATION



| |     |               
| | --- | --------------
| | By: | /s/ H.K. DESAI

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

Date: June 2, 2004

POWER OF ATTORNEY

Each person whose signature appears below hereby
authorizes H.K. Desai and/or Anthony J. Massetti, as
attorney-in-fact, to sign on his or her behalf and in each
capacity stated below, and to file all amendments and/or
supplements to this Annual Report on Form 10-K.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                |  |                                                                  |  |              |  | 
|----------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------ |  | 
|                                                |  |                                                                  |  |             
|Signature                                       |  | Title                                                            |  | Date        
|                                                |  |                                                                  |  |             
|Principal Executive Officer:                    |  |                                                                  |  |             
|                                               
|/s/ H.K. DESAIH.K. Desai                        |  | Chairman of the Board, Chief Executive Officer
    and President |  | June 2, 2004
|Principal Financial and Accounting
    Officer: |  |                                                                  |  |             
|                                               
|/s/ ANTHONY J. MASSETTIAnthony J. Massetti      |  | Vice President and
    Chief Financial Officer                   |  | June 2, 2004
|                                               
|/s/ LARRY R. CARTERLarry R. Carter              |  | Director                                                         |  | June 2, 2004
|                                               
|/s/ JAMES R. FIEBIGERJames R. Fiebiger          |  | Director                                                         |  | June 1, 2004
|                                               
|/s/ BALAKRISHNAN S. IYERBalakrishnan S. Iyer    |  | Director                                                         |  | June 2, 2004
|                                               
|/s/ CAROL L. MILTNERCarol L. Miltner            |  | Director                                                         |  | June 1, 2004
|                                               
|/s/ GEORGE D. WELLSGeorge D. Wells              |  | Director                                                         |  | June 2, 2004

54



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##### Table of Contents



SCHEDULE II

QLOGIC CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

|                                 |                           |                |   |            |  |                  |   |            |   |  |   |       |  |  |   |       | 
|-------------------------------- | ------------------------- | -------------- | - | ---------- |  | ---------------- | - | ---------- | - |  | - | ----- |  |  | - | ----- | 
|                                 |                           |                |   | Additions: |  | Deductions:      |   |           
|                                 |                           | Balance at     |   | Charged to |  | Amounts          |   | Balance at
|                                 |                           | Beginning of   |   | Costs and  |  | Written Off, Net |   | End of    
|                                 |                           | Year           |   | Expenses   |  | of Recoveries    |   | Year      
|                                 |                           |                |   |            |  |                  |   |           
|                                 |                           |               
|                                 |                           | (In thousands)
|Allowance for doubtful accounts: |                           |                |   |            |  |                  |   |            |   |  |   |       |  |  |   |      
|                                 | Year ended March 28, 2004 |                | $ | 2,830      |  |                  | $ | (450       | ) |  | $ | 1,008 |  |  | $ | 1,372 | 
|                                 | Year ended March 30, 2003 |                | $ | 3,429      |  |                  | $ | (550       | ) |  | $ | 49    |  |  | $ | 2,830 | 
|                                 | Year ended March 31, 2002 |                | $ | 2,372      |  |                  | $ | 1,125      |   |  | $ | 68    |  |  | $ | 3,429 | 

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##### Table of Contents






EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Merger dated as of
    May 8, 2000 by and among QLogic Corporation, Amino
    Acquisition Corp. and Ancor Communications, Incorporated.
    (incorporated by reference to Exhibit 2.1 of the
    Registrants Amendment No. 1 to Registration Statement
    on Form S-4 filed on June 22, 2000)                                                                                                                                                                                            
|        | 3.1  |             |  | Certificate of Incorporation of Emulex Micro
    Devices Corporation, dated November 13, 1992. (incorporated
    by reference to Exhibit 3.1 of the Registrants
    Registration Statement on Form 10 filed on April 3,
    1994)                                                                                                                                                                                                                                                                               
|        | 3.2  |             |  | EMD Incorporation Agreement, dated as of
    January 1, 1993. (incorporated by reference to
    Exhibit 3.2 of the Registrants Registration Statement
    on Form 10 filed on April 3, 1994)                                                                                                                                                                                                                                                                                                                    
|        | 3.3  |             |  | Certificate of Amendment of Certificate of
    Incorporation, dated May 26, 1993. (incorporated by
    reference to Exhibit 3.3 of the Registrants
    Registration Statement on Form 10 filed on April 3,
    1994)                                                                                                                                                                                                                                                                                            
|        | 3.4  |             |  | Certificate of Amendment of Certificate of
    Incorporation, dated February 24, 1994. (incorporated by
    reference to Exhibit 3.4 of the Registrants Annual
    Report on Form 10-K for the year ended March 30, 2003)                                                                                                                                                                                                                                                                                       
|        | 3.5  |             |  | Certificate of Designation of Rights, Preferences
    and Privileges of Series A Junior Participating Preferred
    Stock, dated June 4, 1996. (incorporated by reference to
    Exhibit 3.5 of the Registrants Annual Report on
    Form 10-K for the year ended March 30, 2003)                                                                                                                                                                                                                               
|        | 3.6  |             |  | Certificate of Amendment of Certificate of
    Incorporation, dated February 5, 1999. (incorporated by
    reference to Exhibit 3.6 of the Registrants Annual
    Report on Form 10-K for the year ended March 28, 1999)                                                                                                                                                                                                                                                                                        
|        | 3.7  |             |  | Certificate of Amendment of Certificate of
    Incorporation, dated January 4, 2000. (incorporated by
    reference to Exhibit 3.7 of the Registrants Quarterly
    Report on Form 10-Q for the quarter ended December 26,
    1999)                                                                                                                                                                                                                                                                            
|        | 3.8  |             |  | Certificate of Amendment of Certificate of
    Incorporation, dated September 28, 2000. (incorporated by
    reference to Exhibit 3.8 of the Registrants Annual
    Report on Form 10-K for the year ended March 30, 2003)                                                                                                                                                                                                                                                                                      
|        | 3.9  |             |  | By-Laws of QLogic Corporation. (incorporated by
    reference to Exhibit 3.4 of the Registrants
    Registration Statement on Form 10 filed on April 3,
    1994)                                                                                                                                                                                                                                                                                                                                               
|        | 3.10 |             |  | Amendments to By-Laws of QLogic Corporation.
    (incorporated by reference to Exhibit 3.5 of the
    Registrants Annual Report on Form 10-K for the year
    ended April 2, 1995)                                                                                                                                                                                                                                                                                                                              
|        | 4.1  |             |  | Rights Agreement, dated as of June 4, 1996
    between QLogic Corporation and Harris Trust and Savings Bank, as
    Rights Agent, which includes as Exhibit A thereto a form of
    the Certificate of Designation for Preferred Stock, as
    Exhibit B thereto the form of Rights Certificate and as
    Exhibit C thereto a Summary of Terms of Stockholders Rights
    Plan. (incorporated by reference to Exhibit 2.1 of the
    Registrants Registration Statement on Form 8-A filed
    on June 19, 1996)
|        | 4.2  |             |  | Amendment to Rights Agreement, dated as of
    November 19, 1997 between QLogic Corporation and Harris
    Trust and Savings Bank, as Rights Agent. (incorporated by
    reference to Exhibit 2 of the Registrants
    Registration Statement on Form 8-A/A filed on
    November 25, 1997)                                                                                                                                                                                                                     
|        | 4.3  |             |  | Second Amendment to Rights Agreement, dated as of
    January 24, 2000 between QLogic Corporation and Harris
    Trust and Savings Bank, as Rights Agent. (incorporated by
    reference to Exhibit 3 of the Registrants
    Registration Statement on Form 8-A filed on June 1,
    2000)                                                                                                                                                                                                                      
|        | 4.4  |             |  | Third Amendment to Rights Agreement, dated as of
    January 9, 2003 between QLogic Corporation and Harris Trust
    and Savings Bank, as Rights Agent. (incorporated by reference to
    Exhibit 4 of the Registrants Registration Statement
    on Form 8-A filed on January 10, 2003)                                                                                                                                                                                                                        
|        | 10.1 |             |  | Form of QLogic Corporation Non-Employee Director
    Stock Option Plan, as amended.* (incorporated by reference to
    Exhibit 4.1 of the Registrants Registration Statement
    on Form S-8 filed on February 6, 2004 (File
    No. 333-112572))                                                                                                                                                                                                                                                               

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##### Table of Contents



|        |      |             |  |                                                                                                                                                                                                                                                                      
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 10.2 |             |  | Form of QLogic Corporation Stock Awards Plan, as
    amended.* (incorporated by reference to Exhibit 4.2 of the
    Registrants Registration Statement on Form S-8 filed
    on February 6, 2004 (File No. 333-112572))                                             
|        | 10.3 |             |  | Form of QLogic Corporation Savings Plan.*
    (incorporated by reference to Exhibit 10.8 of the
    Registrants Registration Statement on Form 10 filed
    on April 3, 1994)                                                                                       
|        | 10.4 |             |  | Form of QLogic Corporation Savings Plan Trust.*
    (incorporated by reference to Exhibit 10.9 of the
    Registrants Registration Statement on Form 10 filed
    on April 3, 1994)                                                                                 
|        | 10.5 |             |  | Form of Indemnification Agreement between QLogic
    Corporation and Directors.* (incorporated by reference to
    Exhibit 10.11 of the Registrants Annual Report on
    Form 10-K for the year ended April 2, 1995)                                                
|        | 10.6 |             |  | Form QLogic Corporation 1998 Employee Stock
    Purchase Plan.* (incorporated by reference to Exhibit 10.15
    of the Registrants Annual Report on Form 10-K for the
    year ended March 28, 1999)                                                                
|        | 10.7 |             |  | Key Employee Retention Agreement, dated
    August 4, 1995, between QLogic Corporation and
    Harshad K. Desai.*                                                                                                                                                    
|        | 21.1 |             |  | Subsidiaries of the Registrant. (incorporated by
    reference to Exhibit 21.1 of the Registrants Annual
    Report on Form 10-K for the year ended March 30, 2003)                                                                                                 
|        | 23.1 |             |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                 
|        | 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.



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|  |                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Compensation plan, contract or arrangement
    required to be filed as an exhibit pursuant to applicable rules
    of the Securities and Exchange Commission.

57