UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended January 1, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number 0-23298

QLogic Corporation

(Exact name of registrant as specified in its charter)

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

26650 Aliso Viejo Parkway

Aliso Viejo, California 92656

(Address of principal executive office and zip code)

(949) 389-6000

(Registrant’s telephone number, including area code)

     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 whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

      Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o          No þ

      As of January 23, 2006, 80,673,996 shares of the Registrant’s common stock were outstanding.

QLOGIC CORPORATION

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets at January 1, 2006 and April 3, 2005		1
	Condensed Consolidated Statements of Income for the three and nine months ended January 1, 2006 and December 26, 2004		2
	Condensed Consolidated Statements of Cash Flows for the nine months ended January 1, 2006 and December 26, 2004		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 6.	Exhibits		32
	Signatures		33
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

i

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

			January 1,			April 3,
			2006			2005
			(Unaudited; In thousands,
			except share and per
			share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	65,881		$	165,644
	Short-term investments			652,865			646,694
	Accounts receivable, less allowance for doubtful accounts of $1,450 and $1,311 as of January 1, 2006 and April 3, 2005, respectively			70,504			54,245
	Inventories			29,788			22,661
	Current assets related to discontinued operations			2,898			17,576
	Other current assets			40,515			32,699
		Total current assets		862,451			939,519
Property and equipment, net				77,517			71,322
Long-term assets related to discontinued operations				—			6,454
Other assets				44,335			9,045
			$	984,303		$	1,026,340
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	23,311		$	19,975
	Accrued compensation			17,451			19,629
	Income taxes payable			120,733			17,999
	Current liabilities related to discontinued operations			16			3,774
	Other current liabilities			10,605			7,444
		Total current liabilities		172,116			68,821
Deferred tax liabilities				—			1,336
		Total liabilities		172,116			70,157
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.001 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); no shares issued and outstanding			—			—
	Common stock, $0.001 par value; 500,000,000 shares authorized; 96,966,000 and 96,401,000 shares issued at January 1, 2006 and April 3, 2005, respectively			97			96
	Additional paid-in capital			519,462			504,760
	Retained earnings			850,761			599,722
	Accumulated other comprehensive income (loss)			1,867			(3,394	)
	Treasury stock, at cost; 16,598,000 and 4,192,000 shares at January 1, 2006 and April 3, 2005, respectively			(560,000	)		(145,001	)
		Total stockholders’ equity		812,187			956,183
			$	984,303		$	1,026,340

See accompanying notes to condensed consolidated financial statements.

1

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

			Three Months Ended				Nine Months Ended
			January 1,		December 26,		January 1,		December 26,
			2006		2004		2006		2004
			(Unaudited; In thousands, except per share amounts)
Net revenues			$	129,185	$	116,041	$	363,627	$	316,992
Cost of revenues				36,900		32,962		105,888		90,387
	Gross profit			92,285		83,079		257,739		226,605
Operating expenses:
	Engineering and development			22,797		21,059		64,573		62,025
	Sales and marketing			16,100		13,890		46,950		39,980
	General and administrative			4,362		4,319		12,444		12,743
		Total operating expenses		43,259		39,268		123,967		114,748
Operating income				49,026		43,811		133,772		111,857
Interest and other income				5,151		4,468		17,381		12,334
Income from continuing operations before income taxes				54,177		48,279		151,153		124,191
Income taxes				22,496		16,237		60,696		43,894
Income from continuing operations				31,681		32,042		90,457		80,297
Discontinued operations:
	Income from operations, net of income taxes			4,570		11,314		30,595		31,144
	Gain on sale, net of income taxes			129,987		—		129,987		—
Income from discontinued operations				134,557		11,314		160,582		31,144
Net income			$	166,238	$	43,356	$	251,039	$	111,441
Income from continuing operations per share:
	Basic		$	0.39	$	0.35	$	1.04	$	0.87
	Diluted		$	0.39	$	0.34	$	1.03	$	0.86
Income from discontinued operations per share:
	Basic		$	1.67	$	0.12	$	1.84	$	0.33
	Diluted		$	1.65	$	0.12	$	1.81	$	0.33
Net income per share:
	Basic		$	2.06	$	0.47	$	2.88	$	1.20
	Diluted		$	2.04	$	0.46	$	2.84	$	1.19
Number of shares used in per share calculation:
	Basic			80,659		92,157		87,213		92,663
	Diluted			81,547		93,484		88,248		93,604

See accompanying notes to condensed consolidated financial statements.

2

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

				Nine Months Ended
				January 1,			December 26,
				2006			2004
				(Unaudited; In thousands)
Cash flows from operating activities:
	Net income			$	251,039		$	111,441
		Income from discontinued operations, net of income taxes			(30,595	)		(31,144	)
		Gain on sale of discontinued operations, net of income taxes			(129,987	)		—
	Income from continuing operations				90,457			80,297
	Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
		Depreciation and amortization			12,851			10,809
		Deferred income taxes			(7,117	)		(5,720	)
		Tax benefit from issuance of stock under stock plans			2,134			1,358
		Stock-based compensation			175			472
		Provision for losses on accounts receivable			57			414
		Loss on disposal of property and equipment			130			245
		Changes in operating assets and liabilities, net of acquisition:
			Accounts receivable		(15,894	)		(9,518	)
			Inventories		(6,578	)		1,877
			Other assets		3,014			486
			Accounts payable		3,056			4,126
			Accrued compensation		(2,276	)		1,262
			Income taxes payable		22,223			7,100
			Other liabilities		2,727			2,028
			Net cash provided by continuing operating activities		104,959			95,236
Cash flows from investing activities:
	Purchases of marketable securities				(639,830	)		(509,271	)
	Sales and maturities of marketable securities				689,038			468,846
	Additions to property and equipment				(18,139	)		(12,898	)
	Acquisition of business, net of cash acquired				(35,241	)		—
	Restricted cash placed in escrow				(12,000	)		—
	Purchase of other assets				—			(4,000	)
			Net cash used in continuing investing activities		(16,172	)		(57,323	)
Cash flows from financing activities:
	Proceeds from issuance of stock under stock plans				12,394			7,622
	Purchase of treasury stock				(414,999	)		(80,009	)
			Net cash used in continuing financing activities		(402,605	)		(72,387	)
Cash used in continuing operations					(313,818	)		(34,474	)
Cash flows from discontinued operations:
		Net cash provided by operating activities			32,719			26,295
		Net cash provided by (used in) investing activities, including proceeds from sale			181,336			(1,929	)
			Cash provided by discontinued operations		214,055			24,366
Net decrease in cash and cash equivalents					(99,763	)		(10,108	)
Cash and cash equivalents at beginning of period					165,644			62,911
Cash and cash equivalents at end of period				$	65,881		$	52,803

See accompanying notes to condensed consolidated financial statements.

3

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

      In the opinion of management of QLogic Corporation (the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring accruals) necessary to present fairly the Company’s financial position, results of operations and cash flows. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 3, 2005. The results of operations for the three and nine months ended January 1, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

      In November 2005, the Company completed the sale of its hard disk drive controller and tape drive controller business (the “Business”). The Business meets all of the criteria in Statement of Financial Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to be presented as discontinued operations. Accordingly, all current and prior period financial information related to the hard disk drive controller and tape drive controller business has been presented as discontinued operations in the accompanying condensed consolidated financial statements. See Note 8 — Discontinued Operations.

Note 2. Inventories

      The components of inventories are as follows:

	January 1,		April 3,
	2006		2005
	(In thousands)
Raw materials	$	8,472	$	9,024
Finished goods		21,316		13,637
	$	29,788	$	22,661

Note 3. Other Comprehensive Income

      The components of total comprehensive income are as follows:

		Three Months Ended					Nine Months Ended
		January 1,		December 26,			January 1,		December 26,
		2006		2004			2006		2004
		(In thousands)
Net income		$	166,238	$	43,356		$	251,039	$	111,441
Other comprehensive income (loss):
	Change in unrealized gains/losses on available-for-sale investments		4,749		(1,179	)		5,261		(5,165	)
		$	170,987	$	42,177		$	256,300	$	106,276

Note 4. Income Per Share

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

4

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

		Three Months Ended				Nine Months Ended
		January 1,		December 26,		January 1,		December 26,
		2006		2004		2006		2004
		(In thousands, except per share amounts)
Income from continuing operations		$	31,681	$	32,042	$	90,457	$	80,297
Income from discontinued operations			134,557		11,314		160,582		31,144
Net income		$	166,238	$	43,356	$	251,039	$	111,441
Shares:
	Weighted-average shares outstanding — basic		80,659		92,157		87,213		92,663
	Dilutive potential common shares, using treasury stock method		888		1,327		1,035		941
	Weighted-average shares outstanding — diluted		81,547		93,484		88,248		93,604
Income from continuing operations per share:
	Basic	$	0.39	$	0.35	$	1.04	$	0.87
	Diluted	$	0.39	$	0.34	$	1.03	$	0.86
Income from discontinued operations per share:
	Basic	$	1.67	$	0.12	$	1.84	$	0.33
	Diluted	$	1.65	$	0.12	$	1.81	$	0.33
Net income per share:
	Basic	$	2.06	$	0.47	$	2.88	$	1.20
	Diluted	$	2.04	$	0.46	$	2.84	$	1.19

      Options to purchase 8,585,000 and 9,337,000 shares of common stock have been excluded from the diluted income per share calculations for the three months ended January 1, 2006 and December 26, 2004, respectively. Options to purchase 8,605,000 and 10,337,000 shares of common stock have been excluded from the diluted income per share calculations for the nine months ended January 1, 2006 and December 26, 2004, respectively. These options have been excluded from the diluted income per share calculations because their effect was antidilutive.

Note 5. Stock-Based Compensation

      The Company accounts for its employee stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has adopted the disclosure only alternative of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. APB 25 provides that compensation expense relative to the Company’s stock-based employee compensation plans (including shares to be 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 consolidated statements of income using the straight-line method over the vesting period for fixed awards. Under SFAS 123, the fair

5

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

value of the Options at the date of grant is recognized in earnings over the vesting period on a straight-line basis.

      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:

		Three Months Ended						Nine Months Ended
		January 1,			December 26,			January 1,			December 26,
		2006			2004			2006			2004
		(In thousands, except per share amounts)
Net income, as reported		$	166,238		$	43,356		$	251,039		$	111,441
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			—			101			105			305
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(7,025	)		(8,034	)		(21,404	)		(25,166	)
Pro forma net income		$	159,213		$	35,423		$	229,740		$	86,580
Net income per share:
	Basic, as reported	$	2.06		$	0.47		$	2.88		$	1.20
	Diluted, as reported	$	2.04		$	0.46		$	2.84		$	1.19
	Basic, pro forma	$	1.97		$	0.38		$	2.63		$	0.93
	Diluted, pro forma	$	1.95		$	0.38		$	2.60		$	0.92

      The fair value of the Options granted has been estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. The Options have characteristics significantly different than those of traded options and changes in the subjective input assumptions can materially affect the estimate of their fair value.

Note 6. Treasury Stock

      In October 2002, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $100 million of the Company’s outstanding common stock for a two-year period. In June 2004, the Company’s Board of Directors approved a second stock repurchase program that authorized the Company to repurchase up to an additional $100 million of the Company’s outstanding common stock for a two-year period. As of July 3, 2005, the Company had repurchased the entire amount authorized pursuant to these programs, including 1.7 million shares for an aggregate purchase price of $55.0 million, during the first quarter of fiscal 2006.

      In August 2005, the Company’s Board of Directors approved a third stock repurchase program that authorized the Company to repurchase up to an additional $350 million of the Company’s outstanding common stock for a two-year period. During the three months ended January 1, 2006, the Company repurchased 3.1 million shares of common stock under this program for an aggregate purchase price of $102.8 million. As of January 1, 2006, the Company had completed the purchase of the entire $350 million authorized pursuant to this program and repurchased an aggregate of 10.4 million shares of common stock.

      In November 2005, the Company’s Board of Directors approved a fourth stock repurchase program that authorized the Company to repurchase up to an additional $200 million of the Company’s outstanding

6

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock for a two-year period. During the three months ended January 1, 2006, the Company repurchased 0.3 million shares of common stock under this program for an aggregate purchase price of $10.0 million.

      The repurchased shares have been recorded as treasury shares and will be held until the Company’s Board of Directors designates that these shares be retired or used for other purposes.

Note 7. Interest and Other Income

      The components of interest and other income are as follows:

	Three Months Ended						Nine Months Ended
	January 1,			December 26,			January 1,			December 26,
	2006			2004			2006			2004
	(In thousands)
Interest income	$	5,715		$	4,607		$	18,572		$	12,856
Loss on sale of marketable securities, net		(564	)		(137	)		(1,184	)		(520	)
Other		—			(2	)		(7	)		(2	)
	$	5,151		$	4,468		$	17,381		$	12,334

Note 8. Discontinued Operations

      In November 2005, the Company completed the sale of its hard disk drive controller and tape drive controller business to Marvell Technology Group Ltd. (“Marvell”) for cash and 980,000 shares of Marvell’s common stock. The Company received $184.0 million in cash, including a $4.0 million purchase price adjustment due to inventory levels on the date of closing, as specified in the agreement. The number of shares of Marvell’s common stock received by the Company was calculated based on $45.0 million, as specified in the agreement, divided by the average closing price of Marvell stock for the ten days ending the day before the closing date. The shares received by the Company were valued at $47.0 million based upon the market price of the shares received on the closing date. The shares are accounted for as available-for-sale marketable securities and are included in short-term investments in the accompanying condensed consolidated balance sheet at January 1, 2006. As specified in the agreement, the assets sold to Marvell consisted primarily of intellectual property, inventories and property and equipment. All other assets and liabilities of the Business have been or will be recovered or settled by the Company. Income taxes payable in the accompanying condensed consolidated balance sheet at January 1, 2006 includes $84.4 million related to the discontinued operations.

      The agreement also provided for $12.0 million of the consideration to be placed in escrow with respect to certain standard representations and warranties made by the Company. The Company has included the escrowed amount in the calculation of the gain on sale of the Business due to the Company’s assessment that compliance with the representations and warranties is determinable beyond a reasonable doubt. The escrowed amount is included in other current assets in the accompanying condensed consolidated balance sheet as of January 1, 2006.

      Income from discontinued operations consists of direct revenues and direct expenses of the Business, including cost of revenues, as well as other fixed and allocated costs to the extent that such costs were eliminated as a result of the transaction. General corporate overhead costs have not been allocated to

7

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discontinued operations. A summary of the operating results of the Business included in discontinued operations in the accompanying condensed consolidated statements of income is as follows:

	Three Months Ended				Nine Months Ended
	January 1,		December 26,		January 1,		December 26,
	2006		2004		2006		2004
	(In thousands)
Net revenues	$	13,181	$	34,211	$	94,674	$	97,680
Income from operations before income taxes	$	7,519	$	16,994	$	47,825	$	48,092
Income taxes		2,949		5,680		17,230		16,948
Income from operations, net of income taxes	$	4,570	$	11,314	$	30,595	$	31,144
Gain from sale before income taxes	$	213,869	$	—	$	213,869	$	—
Income taxes		83,882		—		83,882		—
Gain from sale, net of income taxes	$	129,987	$	—	$	129,987	$	—

      Assets and liabilities related to discontinued operations as of January 1, 2006 consist of accounts receivable and accounts payable. Assets and liabilities related to discontinued operations as of April 3, 2005 consist primarily of accounts receivable, inventory, property and equipment, and accrued compensation.

Note 9. Acquisition of Troika

      In November 2005, the Company completed the purchase of substantially all of the assets of Troika Networks, Inc. (“Troika”) for $36.5 million in cash and the assumption of certain liabilities. The assets acquired include intellectual property (including patents and trademarks), inventory and property and equipment. Troika developed, marketed and sold a storage services platform that hosted third-party solutions. The consideration paid in excess of the fair market value of the tangible assets acquired totaled $34.8 million and is included in other assets in the accompanying condensed consolidated balance sheet as of January 1, 2006. The Company is in the process of evaluating the net assets acquired and expects to finalize the purchase price allocation during the fourth quarter of fiscal 2006 at which time amounts may be allocated to intangible assets, goodwill and in-process research and development (“IPR&D). To the extent a portion of the purchase price is allocated to IPR&D, the Company will recognize a charge to operating expenses for such amount. The acquisition of Troika was not material.

8

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

      This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes. This Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains descriptions of our expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this report are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, descriptions of our expectations regarding future trends affecting our business and other statements regarding future events or our objectives, goals, strategies, beliefs and underlying assumptions that are other than statements of historical fact. When used in this report, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will” and similar expressions or the negative of such expressions are intended to identify these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth and discussed under “Risk Factors” and elsewhere in this report. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. We undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

      We design and supply storage network infrastructure components for many of the world’s largest server and storage subsystem manufacturers. 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 future products may also be based on other technology standards. We produce the controller chips, management enclosure chips, host bus adapters, or HBAs, and fabric switches that provide the connectivity infrastructure for every size of storage network.

      Our ability to serve the storage industry stems from our 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^tm” technology), baseboard management solutions, Fibre Channel HBAs and iSCSI HBAs. Connecting servers to storage, we provide the network infrastructure with a broad suite of Fibre Channel switches. On the storage side of the network, we provide controller chips for redundant array of inexpensive disks, or RAID, storage systems.

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

Acquisitions and Dispositions

      In November 2005, we completed the sale of our hard disk drive controller and tape drive controller business, or the Business, to Marvell Technology Group Ltd. for cash and shares of Marvell’s common stock. We received $184.0 million in cash, including a $4.0 million purchase price adjustment due to inventory levels on the date of closing, and 980,000 shares of Marvell’s common stock valued at $47.0 million based upon the market price of the shares on the closing date. We recorded a gain on the sale of the Business of $130.0 million, net of $83.9 million of income taxes. As a result of this transaction, all current and prior period financial information related to the Business has been presented as discontinued operations. The following discussion and analysis excludes the Business and amounts related to the Business unless otherwise noted.

      Also in November 2005, we completed the purchase of substantially all of the assets of Troika Networks, Inc., or Troika, for $36.5 million in cash and the assumption of certain liabilities. The assets

9

acquired included intellectual property (including patents and trademarks), inventory and property and equipment. Troika developed, marketed and sold a storage services platform that hosted third-party solutions. We expect the acquisition of Troika to expand our product line and the acquired intellectual property to enhance certain of our current products and provide greater functionality to our customers. The consideration paid in excess of the fair market value of the tangible assets acquired totaled $34.8 million. We are in the process of evaluating the net assets acquired and expect to finalize the purchase price allocation during the fourth quarter of fiscal 2006, at which time amounts may be allocated to intangible assets, goodwill and in-process research and development, or IPR&D. To the extent a portion of the purchase price is allocated to IPR&D, we will recognize a charge to operating expenses for such amount.

Third Quarter Financial Highlights and Other Information

      During the third quarter of fiscal 2006, our net revenues from continuing operations were $129.2 million and increased 9% sequentially from the second quarter of fiscal 2006. Revenues from SAN Infrastructure Products, which are comprised of HBAs, switches and silicon, during the third quarter increased 9% sequentially from the second quarter and represented 93% of our total net revenues. Revenues derived from Management Controllers, which are comprised of enclosure management and baseboard management products, decreased 14% sequentially during the third quarter.

      Based on a foundation of design wins in existing markets, as well as emerging markets, we expect to see continued growth in our revenue from SAN Infrastructure Products. We expect that revenue from our Management Controllers will continue to decline over time, as these products are not part of our core business and we are not investing in the development of new products.

      In our continuing effort to be more responsive and increase customer satisfaction, we established operations in Ireland during the first quarter of fiscal 2006. As a key element of our expanded global supply chain program, the Ireland operations are expected to deliver customer-specific configure-on-demand services, regionally-based customer support, order fulfillment services and reverse logistics for our international customers. During the second quarter of fiscal 2006, we commenced shipments to customers from our Ireland facility.

      A summary of the key factors and significant events which impacted our financial performance during the third quarter of fiscal 2006 are as follows:

•  Net revenues of $129.2 million for the third quarter of fiscal 2006 increased sequentially by $10.2 million, or 9%, from $119.0 million in the second quarter of fiscal 2006.

•  Gross profit as a percentage of net revenues was 71.4% in the third quarter, an increase from 70.6% for the second quarter of fiscal 2006. Although our gross profit percentage increased during the third quarter, we continue to expect downward pressure on our gross profit percentage as a result of changes in product and technology mix, as well as declining average selling prices. There can be no assurance that we will be able to maintain our gross profit percentage consistent with historical trends and it may decline in the future.

•  Operating income as a percentage of net revenues was 38.0% for the third quarter of fiscal 2006, compared to 36.0% in the second quarter of fiscal 2006.

•  Income from continuing operations was $31.7 million, or $0.39 per diluted share, in the third quarter of fiscal 2006 and increased sequentially 4% from $30.5 million, or $0.34 per diluted share, in the second quarter of fiscal 2006. The increase in income from continuing operations was primarily due to the increase in revenue, offset by an increase in our estimated annual effective income tax rate. The increase in diluted earnings per share was also favorably impacted by the decrease in weighted average shares outstanding as a result of our stock repurchase programs.

•  During the third quarter of fiscal 2006, we repurchased $112.8 million of our common stock in the open market under our corporate stock repurchase programs. In November 2005, we announced a new stock repurchase program authorizing the repurchase of up to $200 million of our common stock over a two-

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	year period. Since fiscal year 2003, we have repurchased a total of $560 million of our common stock under programs authorized by our Board of Directors.
•	Cash and cash equivalents and short-term investments of $718.7 million at January 1, 2006, increased $84.6 million from the balance at the end of the second quarter of fiscal 2006. During the third quarter of fiscal 2006, we generated $36.9 million of cash from continuing operating activities.
•	Working capital of $690.3 million at January 1, 2006 increased by $30.3 million during the third quarter from $660.0 million at October 2, 2005 primarily due to the cash generated from sale of our hard disk drive controller and tape drive controller business and from continuing operations, offset by our stock repurchases and the acquisition of Troika.
•	Accounts receivable was $70.5 million as of January 1, 2006, compared to $64.4 million as of October 2, 2005. Days sales outstanding (DSO) in receivables as of January 1, 2006 increased to 50 days from 49 days as of October 2, 2005. Our accounts receivable and DSO are primarily affected by linearity of shipments within the quarter and collections performance. Based on our customers’ procurement models and our current customer mix, we expect that DSO in the future will range from 45 to 55 days. 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 $29.8 million as of January 1, 2006, compared to $25.2 million as of October 2, 2005. Our annualized inventory turns in the third quarter of fiscal 2006 of 5.0 turns decreased from the 5.5 turns in the second quarter of fiscal 2006.

Results of Operations

Net Revenues

      A summary of the components of our net revenues is as follows:

			Three Months Ended						Nine Months Ended
			January 1,			December 26,			January 1,			December 26,
			2006			2004			2006			2004
			(In millions)
Net revenues:
	SAN Infrastructure Products		$	120.4		$	105.6		$	338.2		$	286.0
	Management Controllers			6.1			9.2			20.0			29.0
	Other			2.7			1.2			5.4			2.0
		Total net revenues	$	129.2		$	116.0		$	363.6		$	317.0
Percentage of net revenues:
	SAN Infrastructure Products			93	%		91	%		93	%		90	%
	Management Controllers			5			8			6			9
	Other			2			1			1			1
		Total net revenues		100	%		100	%		100	%		100	%

      The global marketplace for SANs continues to expand in response to the information storage requirements of enterprise business environments, as well as the emerging market for SAN-based solutions for small and medium-sized businesses. This market expansion has resulted in increased volume shipments of our SAN Infrastructure 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 units sold as a result of market expansion, increases in market share and the release of new products. The favorable effect on our revenues as a result of increases in volume has been partially offset by the impact of declining prices.

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      Our net revenues are derived primarily from the sale of SAN Infrastructure Products and Management Controllers. Other revenue includes non-product related revenues, such as royalties, non-recurring engineering fees and service fees. Net revenues for the three months ended January 1, 2006 increased $13.2 million, or 11%, from the three months ended December 26, 2004. This increase was primarily the result of a $14.8 million, or 14%, increase in revenue from SAN Infrastructure Products, partially offset by a $3.1 million, or 34%, decrease in revenue from Management Controllers. The increase in revenue from SAN Infrastructure Products was primarily due to a 34% increase in shipments of Fibre Channel and iSCSI HBAs partially offset by a 13% decrease in average selling prices of Fibre Channel and iSCSI HBAs, and a 49% increase in shipments of switches partially offset by a 10% decrease in average selling prices of switches. The decrease in revenue from Management Controllers was due to a 27% decrease in shipments and a 10% decrease in average selling prices. We expect revenue from Management Controllers to decrease over time, as these products are not part of our core business and we are not investing in the development of new products. Net revenues for the three months ended January 1, 2006 included $2.7 million of other revenue. Other revenues are unpredictable and we do not expect them to be significant to our overall revenues.

      Net revenues for the nine months ended January 1, 2006 increased $46.6 million, or 15%, from the nine months ended December 26, 2004. The increase was principally due to a $52.2 million, or 18%, increase in revenue from SAN Infrastructure Products, partially offset by a $9.0 million, or 31%, decrease in revenue from Management Controllers. The increase in revenue from SAN Infrastructure Products was primarily due to a 35% increase in shipments of Fibre Channel and iSCSI HBAs partially offset by an 11% decrease in average selling prices of Fibre Channel and iSCSI HBAs, and a 64% increase in shipments of switches partially offset by a 13% decrease in average selling prices of switches. The decrease in revenue from Management Controllers was due to a 25% decrease in shipments and an 8% decrease in average selling prices. Net revenues for the nine months ended January 1, 2006 included $5.4 million of other revenue.

      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 ten customers accounted for 77% of net revenues during the nine months ended January 1, 2006 and 78% of net revenues during the fiscal year ended April 3, 2005. Four of our customers each represented 10% or more of net revenues for fiscal 2005, of which three of these customers each represented 10% or more of net revenues for the nine months ended January 1, 2006.

      We believe that our major customers continually evaluate whether or not to purchase products from alternative or additional sources. Additionally, customers’ economic and market conditions frequently change. Accordingly, there can also be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition or results of operations.

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

		Three Months Ended				Nine Months Ended
		January 1,		December 26,		January 1,		December 26,
		2006		2004		2006		2004
		(In millions)
United States		$	68.4	$	60.6	$	199.1	$	166.9
Europe, Middle East and Africa			31.6		26.2		83.7		69.7
Asia-Pacific and Japan			27.7		27.3		78.7		76.7
Rest of the world			1.5		1.9		2.1		3.7
	Total net revenues	$	129.2	$	116.0	$	363.6	$	317.0

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,

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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:

	Three Months Ended						Nine Months Ended
	January 1,			December 26,			January 1,			December 26,
	2006			2004			2006			2004
	(In millions)
Gross profit	$	92.3		$	83.1		$	257.7		$	226.6
Percentage of net revenues		71.4	%		71.6	%		70.9	%		71.5	%

      Gross profit for the three months ended January 1, 2006 increased $9.2 million, or 11%, from gross profit for the three months ended December 26, 2004. The gross profit percentage for the three months ended January 1, 2006 was 71.4% and declined slightly from 71.6% for the corresponding period in the prior year.

      Gross profit for the nine months ended January 1, 2006 increased $31.1 million, or 14%, from gross profit for the nine months ended December 26, 2004. The gross profit percentage for the nine months ended January 1, 2006 was 70.9% and declined from 71.5% for the corresponding period in the prior year. This gross profit percentage decrease was principally due to an unfavorable shift in product and technology mix, as well as a decrease in the average selling prices.

      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, 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:

			Three Months Ended						Nine Months Ended
			January 1,			December 26,			January 1,			December 26,
			2006			2004			2006			2004
			(In millions)
Operating expenses:
	Engineering and development		$	22.8		$	21.1		$	64.6		$	62.0
	Sales and marketing			16.1			13.9			47.0			40.0
	General and administrative			4.4			4.3			12.4			12.7
		Total operating expenses	$	43.3		$	39.3		$	124.0		$	114.7
Percentage of net revenues:
	Engineering and development			17.7	%		18.1	%		17.8	%		19.6	%
	Sales and marketing			12.5			12.0			12.9			12.6
	General and administrative			3.3			3.7			3.4			4.0
		Total operating expenses		33.5	%		33.8	%		34.1	%		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. During the three months ended January 1, 2006, engineering and development expenses of $22.8 million increased $1.7 million, or 8%, from $21.1 million for the three months ended December 26, 2004. The increase in engineering and development expenses during the three months ended January 1, 2006 was primarily due to a $2.3 million increase in compensation and related benefit costs associated with increases in headcount for our expanded development efforts in support of new products, a

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$0.6 million increase in equipment and supplies costs, a $0.3 million increase in external engineering costs associated with new product development and $0.2 million of non-cash compensation charges related to the acquisition of Troika, partially offset by a reduction of $1.8 million of non-cash compensation charges incurred during the three months ended December 26, 2004. The non-cash charges in fiscal 2005 related to the acquisition of the Little Mountain Group, Inc. in January 2001 and ended in the fourth quarter of fiscal 2005.

      During the nine months ended January 1, 2006, engineering and development expenses of $64.6 million increased $2.6 million, or 4%, from $62.0 million for the nine months ended December 26, 2004. Engineering and development expenses increased primarily due to a $5.0 million increase in compensation and related benefit costs associated with increases in headcount for our expanded development efforts in support of new products, a $1.2 million increase in equipment and supplies costs, a $0.8 million increase in external engineering costs associated with new product development and $0.2 million of non-cash compensation charges related to the acquisition of Troika, partially offset by a $5.4 million reduction in the non-cash compensation charges related to the acquisition of the Little Mountain Group, Inc.

      We believe continued investments in engineering and development activities are critical to achieving future design wins, expansion of our customer base and revenue growth opportunities. As a result of continued and increasing costs associated with new product development, we expect engineering and development expenses will continue to increase in the future.

      Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related benefit costs, sales commissions, promotional activities and travel for sales and marketing personnel. Sales and marketing expenses for the three months ended January 1, 2006 of $16.1 million increased $2.2 million, or 16%, from the three months ended December 26, 2004. The increase in sales and marketing expenses during the three months ended January 1, 2006 was due primarily to a $0.6 million increase in various promotional activities directed at increasing market awareness and acceptance of our products, a $0.5 million increase in the compensation and benefit costs due to increased headcount associated with the expansion of our sales and marketing groups and a $0.5 million increase in commissions expense as a result of higher revenues.

      Sales and marketing expenses for the nine months ended January 1, 2006 of $47.0 million increased $7.0 million, or 17%, from the nine months ended December 26, 2004. The increase in sales and marketing expenses during the nine months ended January 1, 2006 was due primarily to a $2.7 million increase in various promotional activities including amounts related to our worldwide partner conference, a $1.8 million increase in compensation and benefit costs due to increased headcount associated with the expansion of our sales and marketing groups, a $0.7 million increase in commissions expense as a result of higher revenues and a $0.7 million increase in travel-related expenses.

      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 accounting, legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses for the three months ended January 1, 2006 of $4.4 million were consistent with the $4.3 million for the three months ended December 26, 2004 and included an increase of $0.8 million in professional fees, primarily due to consulting expenses related to the structuring of our expanded international operations, offset by a $0.7 million reimbursement received from an insurance carrier related to the settlement of a prior legal matter. General and administrative expenses for the nine months ended January 1, 2006 of $12.4 million decreased slightly from $12.7 million for the nine months ended December 26, 2004 and included an increase of $1.1 million in professional fees, primarily due to the consulting expenses discussed above, offset by the $0.7 million insurance reimbursement noted above and a $0.4 million decrease in bad debt expense.

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

Non-Operating Income

      A summary of the components of our interest and other income are as follows:

	Three Months Ended						Nine Months Ended
	January 1,			December 26,			January 1,			December 26,
	2006			2004			2006			2004
	(In millions)
Interest income	$	5.7		$	4.6		$	18.6		$	12.8
Loss on sale of marketable securities		(0.5	)		(0.1	)		(1.2	)		(0.5	)
	$	5.2		$	4.5		$	17.4		$	12.3

      Interest income for the three months ended January 1, 2006 of $5.7 million increased by $1.1 million compared to the same period in the prior year, due to increased rates of return on our portfolio of marketable securities. Interest income for the nine months ended January 1, 2006 of $18.6 million increased by $5.8 million compared to the same period in the prior year, also due to increased yields on our portfolio of marketable securities.

Income Taxes

      Our effective income tax rate related to continuing operations increased from approximately 35% in fiscal year 2005 to 41.5% and 40.2% during the three and nine months ended January 1, 2006, respectively. The estimated annual effective tax rate for the three and nine months ended January 1, 2006 increased due to investments in foreign operations and the continued reduction in benefits derived from both the extraterritorial income exclusion and research credits. Also while the estimated annual effective tax rate for fiscal 2006 was positively affected by the favorable resolution of a routine state tax examination, the annual effective tax rate for fiscal 2005 was positively affected by the favorable resolution of routine tax examinations to a greater degree. We expect the estimated annual effective tax rate related to continuing operations for the remainder of fiscal year 2006 to approximate 40%.

Discontinued Operations

      In November 2005, we completed the sale of our hard disk drive controller and tape drive controller business to Marvell Technology Group Ltd. In connection with this transaction, we recognized a pre-tax gain on sale of $213.9 million.

      Income from discontinued operations, net of income taxes, consists of direct revenues and direct expenses of the Business, including cost of revenues, as well as other fixed and allocated costs to the extent that such costs were eliminated as a result of the transaction. General corporate overhead costs have not been allocated to discontinued operations. A summary of the operating results of the Business included in discontinued operations in the accompanying condensed consolidated statements of income is as follows:

	Three Months Ended				Nine Months Ended
	January 1,		December 26,		January 1,		December 26,
	2006		2004		2006		2004
	(In millions)
Net revenues	$	13.2	$	34.2	$	94.7	$	97.7
Income from discontinued operations, net of income taxes	$	4.6	$	11.3	$	30.6	$	31.1
Gain on sale of discontinued operations, net of income taxes	$	130.0	$	—	$	130.0	$	—

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      As the sale of the Business closed on November 4, 2005, net revenues and income from discontinued operations for the three months ended January 1, 2006 do not include a full quarter of operating activity. Net revenues for the three months ended January 1, 2006 decreased $21.0 million, or 61%, from the three months ended December 26, 2004 and income from discontinued operations, net of income taxes, for the three months ended January 1, 2006 decreased by $6.7 million, or 60%. Net revenues for the nine months ended January 1, 2006 decreased $3.0 million, or 3%, from the nine months ended December 26, 2004 and income from discontinued operations, net of income taxes, for the nine months ended January 1, 2006 decreased by $0.5 million, or 2%, from the prior year.

Liquidity and Capital Resources

      Our combined balances of cash and cash equivalents and short-term investments have decreased to $718.7 million at January 1, 2006, compared to $812.3 million at April 3, 2005. Our working capital, during the nine months ended January 1, 2006, decreased $180.4 million to $690.3 million. The decrease in cash and short-term investments is due primarily to the repurchase of our common stock during the nine months ended January 1, 2006 pursuant to our stock repurchase programs and the acquisition of Troika, partially offset by our cash generated by operations and the cash received from the sale of our hard disk drive controller and tape drive controller business. 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 $105.0 million for the nine months ended January 1, 2006 and $95.2 million for the nine months ended December 26, 2004. The increase in the cash provided by operating activities was due to the increase in income from continuing operations and changes in certain non-cash tax items, offset by the timing of certain working capital items, during the nine months ended January 1, 2006 compared to the corresponding period of the prior year. Operating cash flow for the nine months ended January 1, 2006 reflects our income from continuing operations of $90.5 million, net non-cash charges (depreciation and amortization, deferred income taxes and other) of $8.2 million, and a net decrease in the non-cash components of our working capital of $6.3 million. The decrease in the non-cash components of working capital was primarily due to a $22.2 million increase in income taxes payable, an increase of $3.0 million in other assets and a $3.5 million increase in operating liabilities due to the timing of payment obligations, partially offset by an increase of $15.9 million in accounts receivable associated with the expansion of our business and a $6.6 million increase in inventories.

      Cash used in investing activities of $16.2 million for the nine months ended January 1, 2006 consists of net cash paid for the acquisition of Troika of $35.2 million, additions to property and equipment of $18.1 million and $12.0 million of cash placed in escrow under the terms of the sale agreement with Marvell. These cash outflows were partially offset by net sales and maturities of marketable securities of $49.2 million. During the nine months ended December 26, 2004, cash used in investing activities of $57.3 million included net purchases of marketable securities of $40.4 million, additions to property and equipment of $12.9 million and the purchase of other assets of $4.0 million.

      As our business grows, we expect capital expenditures to increase in the future 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 $402.6 million for the nine months ended January 1, 2006 resulted from our purchase of $415.0 million of treasury stock, partially offset by $12.4 million of proceeds from the issuance of common stock under our stock plans. During the nine months ended December 26, 2004, the

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$72.4 million of cash used in financing activities resulted from the use of $80.0 million for the purchase of treasury stock, partially offset by $7.6 million of proceeds from the issuance of common stock under our stock plans.

      Cash provided by discontinued operations was $214.0 million for the nine months ended January 1, 2006 and included $181.3 million of net proceeds from the sale of the Business and $32.7 million of net cash provided by discontinued operating activities. Future cash flows from discontinued operations will not be significant.

      Our Board of Directors approved stock repurchase programs: (i) in October 2002, that authorized us to repurchase up to $100 million of our outstanding common stock, (ii) in June 2004, that authorized us to repurchase up to an additional $100 million of our outstanding common stock, (iii) in August 2005, that authorized us to repurchase up to an additional $350 million of our outstanding common stock, and (iv) in November 2005, that authorized us to repurchase up to an additional $200 million of our outstanding common stock. During the nine months ended January 1, 2006, we repurchased the remaining $55 million available under the June 2004 plan, consisting of 1.7 million shares; repurchased 10.4 million shares for an aggregate purchase price of $350.0 million under the August 2005 plan; and repurchased 0.3 million shares for an aggregate purchase price of $10.0 million under the November 2005 plan. Since fiscal 2003, we have repurchased a total of $560 million of our common stock under programs authorized by our Board of Directors.

      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 expected impact on our cash flows in future fiscal years is as follows:

		2006
		(Remaining
		three months)		2007		2008		2009		Thereafter		Total
		(In millions)
Operating leases		$	1.4	$	4.6	$	1.6	$	0.9	$	0.1	$	8.6
Non-cancelable purchase obligations			31.2		7.2		—		—		—		38.4
	Total	$	32.6	$	11.8	$	1.6	$	0.9	$	0.1	$	47.0

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.

Revenue and Accounts Receivable

      We sell our products domestically and internationally to OEMs and distributors. Our significant customers include leading server OEMs and storage OEMs.

      We recognize revenue from product sales when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.

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      For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfers to the customer, in accordance with the terms specified in the arrangement with the customer. The customer’s obligation to pay and the payment terms are set at the time of shipment and are not dependent on the subsequent resale of our products. However, certain of our sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions. We recognize revenue from these distributors when the product is sold by the distributor to a third party. At times, we provide standard incentive programs to our distributor customers and account for such programs in accordance with Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Accordingly, we account for our competitive pricing incentives, which generally reflect front-end price adjustments, as a reduction of revenue at the time of sale, and rebates as a reduction of revenue in the period the related revenue is recorded based on the specific program criteria. Royalty and service revenue is recognized when earned and receipt is reasonably assured.

      An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of our customers to make required payments. This reserve is 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 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.

New Accounting Pronouncement

      In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” which supersedes SFAS 123, Accounting Principles Board Opinion No. 25 and related interpretations, and amends SFAS No. 95, “Statement of Cash Flows.” The provisions of SFAS 123R are similar to those of SFAS 123, however SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest.

      We will be required to choose between the modified-prospective and modified-retrospective transition alternatives in adopting SFAS 123R. Under the modified-prospective transition method, compensation cost would be recognized in financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. As we previously adopted only the pro forma disclosure provisions of SFAS 123, we would, under this method, recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption generally using the same estimate of the grant-date fair value and

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the same attribution method used to determine the pro forma disclosures under SFAS 123. Under the modified-retrospective transition method, compensation cost would be recognized in a manner consistent with the modified-prospective transition method, however, prior period financial statements would also be restated by recognizing compensation cost as previously reported in the pro forma disclosures under SFAS 123. The restatement provisions can be applied to either (i) all periods presented or (ii) to the beginning of the fiscal year in which SFAS 123R is adopted.

      SFAS 123R is effective at the beginning of the first annual period beginning after June 15, 2005 (for us, fiscal 2007) and early adoption is encouraged. We will evaluate the use of certain option-pricing models as well as the assumptions to be used in such models. When such evaluation is complete, we will determine the transition method to use and the timing of adoption. We do not currently anticipate that the impact on net income on a full year basis of the adoption of SFAS 123R will be significantly different from the historical pro forma impact as disclosed in accordance with SFAS 123.

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 operating results may fluctuate, in future periods, which could cause our stock price to decline.

      We have experienced, and expect to experience in future periods, fluctuations in sales and operating results from quarter to quarter. 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:

•  the timing, size and mix of orders from customers;

•  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;

•  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;

•  actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements;

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•  changes in accounting rules;

•  changes in our accounting 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 and 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.

We expect gross margin to vary over time, and our recent level of gross margin may not be sustainable.

      Our recent level of gross margins may not be sustainable and may be adversely affected by numerous factors, including:

•  changes in customer, geographic or product mix;

•  introduction of new products, including products with price-performance advantages;

•  our ability to reduce production costs;

•  entry into new markets;

•  sales discounts;

•  increases in material or labor costs;

•  excess inventory and inventory holding charges;

•  increased price competition;

•  changes in distribution channels;

•  increased warranty costs; and

•  how well we execute our business strategy and operating plans.

Our revenues may be affected by changes in IT spending levels.

      In the past, unfavorable or uncertain economic conditions and reduced global IT spending rates have adversely affected the markets in which we operate. We are unable to predict changes in general economic conditions and when global IT spending rates will be affected. Furthermore, even if IT spending rates increase, we cannot be certain that the market for SAN solutions will be positively impacted. If there are future reductions in either domestic or international IT spending rates, or if IT spending rates do not increase, our revenues, operating results and financial condition may be adversely affected.

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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;

•  differences between our actual operating results and the published expectations of analysts;

•  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 and geopolitical conditions.

      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 business is dependent on the continued growth of the 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. Our competitors are developing alternative technologies, such as iSCSI software initiator, SAS, SATA and InfiniBand^® (a registered trademark of the InfiniBand Trade Association) that may compete with the market acceptance of our Fibre Channel products. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated from Fibre Channel technology. If alternative technologies are adopted by the industry, we may not be able to develop products for new technologies 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 ten customers accounted for 77% and 78% of net revenues for the nine months ended January 1, 2006 and fiscal year ended April 3, 2005, respectively. 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.

      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 some 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 customers increasingly require us to maintain products at hub locations near their facilities, it becomes easier for our customers to order products with very short lead times, which makes it increasingly difficult for us to predict sales trends. In addition, our quarterly fiscal periods often do not correspond with the fiscal quarters of our customers, and this may result in uneven sales patterns between quarters. It is difficult for us to evaluate the degree to which the seasonality and uneven sales patterns of our OEM customers may affect our business in the future because the historical growth of our business may have lessened the effect of this seasonality and uneven sales patterns on our business in the past.

Competition within our product markets is intense and includes numerous established competitors.

      The markets for our products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry

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standards. In the Fibre Channel HBA market, we compete primarily with Emulex Corporation. In the iSCSI HBA market, we compete primarily with Adaptec, Inc. In the switch products sector, we compete primarily with Brocade Communications Systems, Inc., Cisco Systems, Inc. and McDATA Corporation. We may compete with some of our computer and storage systems customers, some of which have the capability to develop integrated circuits for use in their own products.

      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 costs, 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 and 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

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distributors may decide to decrease the amount of product held and reduce their inventory levels, which could impact availability of our products to their customers.

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

We rely on the availability of third-party licenses.

      Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that necessary licenses will be available on acceptable terms, if at all. The inability to obtain certain licenses or to obtain such licenses on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse impact on our business, operating results and financial condition.

We are dependent on sole source and limited source suppliers for certain key components.

      We purchase certain key components used in the manufacture of our products from single or limited sources. We purchase application specific integrated circuits, or ASICs, from a single source, and we purchase microprocessors, certain connectors, logic chips, power supplies and programmable logic devices from limited sources.

      We use forecasts based on anticipated product orders to determine our component requirements. If we overestimate component requirements, we may have excess inventory, which would increase our costs. If we underestimate component requirements, we may have inadequate inventory, which could interrupt the manufacturing process and result in lost or deferred revenue. In addition, lead times for components vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We also may experience shortages of certain components from time to time, which could also delay the manufacturing processes.

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 these 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 some of our products. For example, our integrated single chip Fibre Channel controller is manufactured by LSI Logic and integrates LSI Logic’s transceiver

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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 foundries or with our subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials or other reasons, could result in the loss of customers.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.

      Our products are complex and may contain undetected software or hardware errors when first introduced or as newer versions are released. We are also exposed to risks associated with latent defects in existing products. From time to time, we have found errors in existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect the sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

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

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

      Historically, the electronics industry has developed higher performance 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.

If our internal control over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.

      Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate periodically the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal controls as of the end of each fiscal year. Section 404 also requires our independent public accountant to attest to, and report on, management’s assessment of our internal controls over financial reporting.

      Our management does not expect that our internal control over financial reporting will prevent all errors or frauds. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving us have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty

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and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of a person, or by collusion among two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or frauds may occur and not be detected.

      Our management has determined that our disclosure controls and procedures were effective as of January 1, 2006 and that there was no change in our internal control over financial reporting during our quarter ended January 1, 2006 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we cannot assure you that we or our independent public accountant will not identify a material weakness in our internal controls in the future. A material weakness in our internal control over financial reporting would require management and our independent public accountant to evaluate our internal controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

Environmental compliance costs could adversely affect our net income.

      Many of our products are subject to various laws governing chemical substances in products, including those regulating the manufacture and distribution of chemical substances and those restricting the presence of certain substances in electronic products. We could incur substantial costs, or our products could be enjoined from entering certain countries, if our products become non-compliant with environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances that will apply to specified electronic products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances Directive) and similar legislation currently proposed for China. The European Union has finalized the Waste Electrical and Electronic Equipment, or WEEE, Directive and related legislation which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. These and similar laws adopted in other countries could impose a significant cost of doing business in those countries.

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.

      International revenues accounted for 45% and 47% of our net revenues for the nine months ended January 1, 2006 and fiscal year ended April 3, 2005, respectively. We expect that international revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. In addition, a

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significant portion of our inventory purchases are from suppliers that are located in Pacific Rim countries. 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.

      Our international sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on our business, financial condition or results of operations.

We may 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 and 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.

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

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

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

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

      We have experienced a period of growth and expansion. Our growth and expansion has placed, and continues to place, a strain on our resources. Unless we manage this growth and future growth effectively, we may encounter challenges in executing our business, such as sales forecasting, material planning and inventory management, which may result in unanticipated fluctuations in our operating results. In addition, we test most of our products prior to shipment. If our capacity to conduct this testing does not expand concurrently with the anticipated growth of our business, product shipments could be delayed, which could result in delayed or lost revenues and customer dissatisfaction.

If we are unable to attract and retain key personnel, we may not be able to sustain or grow our business.

      Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers. If we lose the services of key personnel or fail to hire personnel for key positions, our business would be adversely affected. We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, periodically we have experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. We may not be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future or to manage our business, both in the United States and abroad.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and 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 reduces their value to employees and could affect our ability to retain or attract present and prospective employees. In addition, the FASB has adopted changes to United States generally accepted accounting principles that require us and other companies to record a charge to earnings for employee stock option grants and other equity incentives as of the beginning of the first annual period beginning after June 15, 2005 (for us, fiscal 2007). 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 relating to 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.

We may experience difficulties in transitioning to smaller geometry process technologies.

      We expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign

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some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product by product basis, of migrating to smaller geometry process technologies. Currently, most of our products are manufactured in 0.25, 0.18 and 0.13 micron geometry processes. In addition, we have begun to migrate some of our products to 90 nanometer process technology. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.

Our proprietary rights may be inadequately protected and difficult to enforce.

      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.

Disputes relating to claimed infringement of intellectual property rights may adversely affect our business.

      We have received notices of claimed infringement of intellectual property rights in the past, and have been involved in intellectual property litigation in the past. There can be no assurance that third parties will not assert future claims of infringement of intellectual property rights against us with respect to existing and future products. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive and time consuming and could divert management’s attention from other matters. Our business could suffer regardless of the outcome of the litigation. Our supply of silicon chips and other components can also be interrupted by intellectual property infringement claims against our suppliers.

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

      We are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rates have recently been and could in the future be adversely affected by changes in tax laws or interpretations thereof, by changes in the mix of earnings in countries with differing statutory tax rates, 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.

Computer viruses and other forms of tampering with our computer systems or servers may disrupt our operations and adversely affect net income.

      Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results or financial condition.

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Our certificate of incorporation, bylaws 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 facilities and the facilities of our suppliers and customers are located in regions that are subject to 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 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. Additionally, some of our products are manufactured or sold in regions which have historically experienced natural disasters. Any earthquake or other natural disaster, including a hurricane or tsunami, affecting a country in which our products are manufactured or sold could adversely affect our results of operations.

Item 3. 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 also hold shares of Marvell common stock that were received in connection with the sale of our hard disk drive controller and tape drive controller business. The shares of Marvell common stock are equity securities and, as such, inherently have higher risk than the securities in which we usually invest. We do not use derivative financial instruments.

      Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of January 1, 2006, the carrying value of our cash and cash equivalents approximates fair value.

      With the exception of the Marvell common stock noted above, 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 January 1, 2006, unrealized gains of $1.9 million (net of related income taxes) on these securities are included in accumulated other comprehensive income.

Item 4. Controls and Procedures

      As of the end of the quarter ended January 1, 2006, 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 January 1, 2006 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 January 1, 2006 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

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

      On August 29, 2005, we announced a stock repurchase program covering repurchases of up to $350 million of our common stock. As of October 17, 2005, the entire amount of this program had been repurchased. On November 7, 2005, we announced a new stock repurchase program authorizing the repurchase of up to $200 million of our common stock over a two-year period. Set forth below is information regarding our stock repurchases made during the third quarter of fiscal year 2006 under our stock repurchase programs.

						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
October 3, 2005 — October 30, 2005			3,091,451	$	33.25		3,091,451	$	—
October 31, 2005 — November 27, 2005			—	$	—		—	$	—
November 28, 2005 — January 1, 2006			301,431	$	33.18		301,431	$	190,000,000
	Total		3,392,882	$	33.25		3,392,882	$	190,000,000

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Item 6. Exhibits

      Exhibits

Exhibit No.
	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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SIGNATURES

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

QLogic Corporation

By:  /s/ H.K. Desai

H.K. Desai

Chairman of the Board,

Chief Executive Officer and President

By:  /s/ Anthony J. Massetti

Anthony J. Massetti

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: January 27, 2006

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EXHIBIT INDEX

Exhibit No.
	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.