10-Q

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 July 2, 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
(State of incorporation) 33-0537669
(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 July 24, 2006, 159,337,170 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 July 2, 2006 and April 2, 2006		1
	Condensed Consolidated Statements of Income for the three months ended July 2, 2006 and July 3, 2005		2
	Condensed Consolidated Statements of Cash Flows for the three months ended July 2, 2006 and July 3, 2005		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 6.	Exhibits		40
	Signatures		41
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32

i

PART I.
FINANCIAL INFORMATION

Item 1.   Financial Statements

QLOGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 2,			April 2,
	2006			2006
	(Unaudited; In thousands, except share and per
	share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	30,259		$	125,192
Short-term investments		528,180			540,448
Accounts receivable, less allowance for doubtful accounts of $1,625 and $1,239 as of July 2, 2006 and April 2, 2006, respectively		71,088			67,571
Inventories		41,289			39,440
Other current assets		48,406			46,441
Total current assets		719,222			819,092
Property and equipment, net		87,957			82,630
Goodwill		87,573			24,725
Purchased intangible assets, net		42,459			7,954
Other assets		16,335			3,306
	$	953,546		$	937,707
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,531		$	32,160
Accrued compensation		14,164			22,990
Income taxes payable		28,172			12,920
Deferred revenue		5,632			3,662
Other current liabilities		14,076			6,621
Total current liabilities		89,575			78,353
Deferred tax liabilities		5,383			—
Total liabilities		94,958			78,353
Commitments and contingencies
Subsequent event (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); no shares issued and outstanding		—			—
Common stock, $0.001 par value; 500,000,000 shares authorized; 195,417,000 and 195,289,000 shares issued at July 2, 2006 and April 2, 2006, respectively		195			195
Additional paid-in capital		548,199			537,648
Retained earnings		904,386			883,310
Accumulated other comprehensive loss		(4,931	)		(1,799	)
Treasury stock, at cost; 34,856,000 and 33,197,000 shares at July 2, 2006 and April 2, 2006, respectively		(589,261	)		(560,000	)
Total stockholders’ equity		858,588			859,354
	$	953,546		$	937,707

See accompanying notes to condensed consolidated financial statements.

1

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	July 2,		July 3,
	2006		2005
	(Unaudited; In thousands, except per share amounts)
Net revenues	$	136,692	$	115,430
Cost of revenues		43,320		33,993
Gross profit		93,372		81,437
Operating expenses:
Engineering and development		32,920		20,359
Sales and marketing		22,401		15,233
General and administrative		8,442		3,892
Purchased in-process research and development		1,910		—
Total operating expenses		65,673		39,484
Operating income		27,699		41,953
Interest and other income, net		6,842		6,119
Income from continuing operations before income taxes		34,541		48,072
Income taxes		13,465		19,786
Income from continuing operations		21,076		28,286
Income from discontinued operations, net of income taxes		—		13,491
Net income	$	21,076	$	41,777
Income from continuing operations per share:
Basic	$	0.13	$	0.15
Diluted	$	0.13	$	0.15
Income from discontinued operations per share:
Basic	$	—	$	0.08
Diluted	$	—	$	0.08
Net income per share:
Basic	$	0.13	$	0.23
Diluted	$	0.13	$	0.23
Number of shares used in per share calculations:
Basic		161,548		183,065
Diluted		162,897		185,344

See accompanying notes to condensed consolidated financial statements.

2

QLOGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(Unaudited; In thousands)
Cash flows from operating activities:
Net income	$	21,076		$	41,777
Income from discontinued operations, net of income taxes		—			(13,491	)
Income from continuing operations		21,076			28,286
Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:
Depreciation and amortization		9,027			4,275
Stock-based compensation		8,664			175
Acquisition-related non-cash compensation charges		2,879			—
Purchased in-process research and development		1,910			—
Deferred income taxes		(4,134	)		3,119
Provision for losses on accounts receivable		326			(75	)
Loss on disposal of property and equipment		117			32
Tax benefit from issuance of stock under stock plans		—			804
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(3,576	)		(4,670	)
Inventories		(1,849	)		(2,194	)
Other assets		719			1,350
Accounts payable		(4,629	)		(1,126	)
Accrued compensation		(9,238	)		(8,947	)
Income taxes payable		15,252			13,396
Deferred revenue		1,970			430
Other liabilities		1,467			1,831
Net cash provided by continuing operating activities		39,981			36,686
Cash flows from investing activities:
Purchases of marketable securities		(73,966	)		(252,087	)
Sales and maturities of marketable securities		81,194			134,849
Additions to property and equipment		(9,676	)		(5,338	)
Acquisition of business, net of cash acquired		(92,092	)		—
Restricted cash placed in escrow		(15,000	)		—
Net cash used in continuing investing activities		(109,540	)		(122,576	)
Cash flows from financing activities:
Proceeds from issuance of stock under stock plans		1,691			4,891
Tax benefit from issuance of stock under stock plans		196			—
Purchase of treasury stock		(27,261	)		(54,999	)
Net cash used in continuing financing activities		(25,374	)		(50,108	)
Net cash used in continuing operations		(94,933	)		(135,998	)
Cash flows from discontinued operations:
Net cash provided by operating activities		—			18,096
Net cash used in investing activities		—			(62	)
Net cash provided by discontinued operations		—			18,034
Net decrease in cash and cash equivalents		(94,933	)		(117,964	)
Cash and cash equivalents at beginning of period		125,192			165,644
Cash and cash equivalents at end of period	$	30,259		$	47,680

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 (QLogic or 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 2, 2006. The results of operations for the three months ended July 2, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year.

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 Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to be presented as discontinued operations. As a result of the divestiture of the Business, the Company’s condensed consolidated financial statements for all periods present the operations of the Business separate from continuing operations. See Note 3 — Discontinued Operations.

In March 2006, the Company completed a two-for-one stock split through the payment of a stock dividend. As a result, share numbers and per share amounts for all periods presented in the condensed consolidated financial statements reflect the effects of this stock split.

Certain other reclassifications have been made to prior year amounts to conform to the current year presentation.

Note 2.   Business Combinations

PathScale, Inc.

On April 3, 2006, the Company acquired by merger all outstanding shares of PathScale, Inc. (PathScale). PathScale designed and developed system area network fabric interconnects targeted at high-performance clustered system environments. The acquisition of PathScale expands the Company’s portfolio of solutions to include InfiniBand^tm, a high-performance, low-latency, server area fabric interconnect. Consideration paid for this acquisition was $110.2 million in cash consisting of $109.7 million for all outstanding common stock and vested PathScale stock options and $0.5 million of direct acquisition costs. The acquisition agreement required that $15 million of the consideration paid be placed into an escrow for 18 months in connection with certain standard representations and warranties. The Company has accounted for the escrowed amount as contingent consideration and, as such, has not recorded it as a component of the purchase price as the outcome of the related contingencies is not yet determinable beyond a reasonable doubt. The escrowed amount is included in other assets in the accompanying condensed consolidated balance sheet as of July 2, 2006. Upon satisfaction of the contingency, the escrowed amount will be recorded as additional purchase price and allocated to goodwill.

The Company also converted unvested PathScale stock options for continuing employees into options to purchase approximately 308,000 shares of QLogic common stock with a weighted-average exercise price of $3.00 per share. The total fair value of the converted options is $5.2 million, calculated using the Black-Scholes option model.

4

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The acquisition has been accounted for as a purchase business combination. Based on a preliminary purchase price allocation, the Company allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as in-process research and development, based on their respective fair values at the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. None of the goodwill resulting from this acquisition will be tax deductible. The following table summarizes the preliminary allocation of the purchase price to the fair value of the assets and liabilities acquired, excluding the $15.0 million of contingent consideration:

	(In thousands)
Cash	$	3,096
Accounts receivable		267
Other current assets		801
Property and equipment		1,315
Goodwill		70,848
Identifiable intangible assets		30,100
Other assets		255
Accrued compensation		(412	)
Other current liabilities		(1,109	)
Deferred tax liabilities		(11,573	)
In-process research and development		1,600
Total preliminary purchase price allocation	$	95,188

A summary of the purchased intangible assets acquired as part of the acquisition of PathScale and their respective estimated lives are as follows:

	Estimated
	Useful Lives
	(Years)	Amount
		(In thousands)
Intangible Assets:
Core/developed technology	2.5 - 5	$	28,400
Customer relationships	3		700
Other	1 - 3		1,000
		$	30,100

The Company has not yet completed the valuation of the assets acquired and liabilities assumed and expects to finalize the purchase price allocation within the next six months, which may result in adjustments to the amounts recorded.

The Company also entered into performance plans with certain former PathScale employees who became employees of QLogic as of the acquisition date. The performance plans provide for the issuance of QLogic common stock based on the achievement of certain performance milestones and continued employment with QLogic. In connection with the performance plans, the Company recognized $2.2 million of compensation expense during the three months ended July 2, 2006 and could recognize up to $12.8 million of additional compensation expense through April 2010.

The results of operations for PathScale have been included in the condensed consolidated financial statements from the date of acquisition. Pro forma results of operations have not been presented as the results of operations for PathScale are not material in relation to the consolidated financial statements of the Company.

5

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Troika Networks

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 acquisition has been accounted for as a purchase business combination. The assets 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 software solutions. The acquisition of Troika expanded the Company’s product line and through the acquired intellectual property enhanced certain of the Company’s current products, thereby providing greater functionality to customers. The consideration paid in excess of the fair market value of the tangible net assets acquired totaled $34.8 million. Based on a preliminary purchase price allocation in the fourth quarter of fiscal 2006, the Company had recorded goodwill of $20.7 million and core technology of $3.6 million and recognized a charge of $10.5 million for in-process research and development (IPR&D). During the first quarter of fiscal 2007, the Company finalized its valuation of the intangible assets acquired resulting in an increase in core technology of $7.7 million, an increase in IPR&D of $0.3 million and a corresponding decrease in goodwill of $8.0 million. As this acquisition was an asset purchase, the goodwill resulting from this acquisition will be tax deductible.

The Company also entered into a performance plan with certain former Troika employees upon employment with QLogic. The performance plan provides for the issuance of stock based on the achievement of certain performance milestones and continued employment with QLogic. In connection with the performance plan, the Company recognized $0.7 million of compensation expense during the three months ended July 2, 2006 and could recognize up to $5.0 million of additional compensation expense through November 2009.

The results of operations for Troika have been included in the condensed consolidated financial statements from the date of acquisition. Pro forma results of operations have not been presented as the results of operations for Troika are not material in relation to the consolidated financial statements of the Company.

In-Process Research and Development

A summary of the IPR&D charges for acquisitions completed during the three months ended July 2, 2006 is as follows:

	Three Months Ended
	July 2, 2006
	(In thousands)
Acquisition
Troika	$	310
PathScale		1,600
Total IPR&D	$	1,910

The amounts allocated to IPR&D were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed.

The fair value of the IPR&D for each of the acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted-average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were

6

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

estimated based on forecasted revenue and costs, taking into account product life cycles, and market penetration and growth rates.

The IPR&D charge includes only the fair value of IPR&D performed as of the respective acquisition dates. The fair value of core/developed technology is included in identifiable purchase intangible assets. The Company believes the amounts recorded as IPR&D, as well as core/developed technology, represent the fair values and approximate the amounts an independent party would pay for these projects at the time of the respective acquisition dates.

Note 3.   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. During the fourth quarter of fiscal 2006, the Company sold 525,000 shares of the Marvell stock received in the transaction. The remaining shares are accounted for as available-for-sale marketable securities and are included in short-term investments in the accompanying condensed consolidated balance sheets as of July 2, 2006 and April 2, 2006.

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. During fiscal 2006, the Company 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 was determinable beyond a reasonable doubt. The escrowed amount is included in other current assets in the accompanying condensed consolidated balance sheets as of July 2, 2006 and April 2, 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 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
	July 2,		July 3,
	2006		2005
	(In thousands)
Net revenues	$	—	$	43,404
Income from operations before income taxes	$	—	$	21,554
Income taxes		—		8,063
Income from discontinued operations	$	—	$	13,491

There were no assets or liabilities related to discontinued operations as of July 2, 2006 or April 2, 2006.

Note 4.   Inventories

The components of inventories are as follows:

	July 2,		April 2,
	2006		2006
	(In thousands)
Raw materials	$	11,241	$	13,810
Finished goods		30,048		25,630
	$	41,289	$	39,440

7

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5.   Goodwill and Purchased Intangible Assets

Goodwill

A rollforward of the activity in goodwill during the three months ended July 2, 2006 is as follows:

	April 2,					July 2,
	2006		Activity			2006
Acquisition
PathScale	$	—	$	70,848		$	70,848
Troika		20,651		(8,000	)		12,651
Other		4,074		—			4,074
	$	24,725	$	62,848		$	87,573

Purchased Intangible Assets

Purchased intangible assets consists of the following:

	July 2,						April 2,
	2006						2006
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Value		Amortization		Value		Value		Amortization		Value
	(In thousands)
Acquisition-related intangibles:
Core/developed technology	$	39,700	$	3,187	$	36,513	$	3,610	$	201	$	3,409
Customer relationships		700		58		642		—		—		—
Other		1,000		67		933		—		—		—
		41,400		3,312		38,088		3,610		201		3,409
Other purchased intangibles:
Technology-related		4,297		1,293		3,004		4,102		1,024		3,078
Other		2,000		633		1,367		2,000		533		1,467
		6,297		1,926		4,371		6,102		1,557		4,545
	$	47,697	$	5,238	$	42,459	$	9,712	$	1,758	$	7,954

The Company amortizes intangible assets that have definite lives on a straight-line basis over the estimated useful lives of the related assets ranging from one to five years. Amortization expense related to core/developed technology acquired or other purchased technology-related intangible assets is included in cost of revenues in the accompanying condensed consolidated statements of income. The Company recorded amortization expense related to intangible assets of $3.5 million and $0.3 million during the three months ended July 2, 2006 and July 3, 2005, respectively.

8

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents the estimated future amortization expense of intangible assets as of July 2, 2006:

Fiscal	(In thousands)
2007 (remaining nine months)	$	8,265
2008		11,148
2009		9,481
2010		7,606
2011		5,959
	$	42,459

Note 6.   Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(In thousands)
Net income	$	21,076		$	41,777
Other comprehensive income (loss):
Change in unrealized gains/losses on available-for-sale investments		(3,132	)		1,184
	$	17,944		$	42,961

Note 7.   Treasury Stock

In November 2005, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to purchase up to $200 million of its outstanding common stock for a two-year period. During the three months ended July 2, 2006, the Company purchased 1.7 million shares of its common stock under this program for an aggregate purchase price of $29.3 million, of which $2.0 million is accrued purchases of treasury stock included in other current liabilities in the accompanying condensed consolidated balance sheet as of July 2, 2006. Accrued purchases of treasury stock consist of transactions entered into near the end of the quarter and which settled subsequent to quarter end.

In July 2006, subsequent to the end of the first fiscal quarter, the Company purchased an additional 1.3 million shares of its outstanding common stock for an aggregate purchase price of $21.3 million.

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 8.   Share-Based Payment

As of the beginning of the first quarter of fiscal 2007, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options, restricted stock units and stock purchases under the Company’s Employee Stock Purchase Plan (the ESPP) based on estimated fair values. SFAS 123R supersedes SFAS No. 123, “Accounting for Stock-Based Compensation,” and Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” and requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash inflow, rather than as an operating cash inflow as required under previous literature. This requirement may reduce future net operating cash flows and increase net financing cash flows. In March 2005, the Securities and Exchange Commission issued Staff

9

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounting Bulletin (SAB) No. 107 relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified prospective transition method and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized beginning in fiscal 2007 includes: (1) amortization related to the remaining unvested portion of stock-based awards granted prior to the adoption of SFAS 123R based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (2) amortization related to stock-based awards granted subsequent to the adoption date based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In addition, the Company records expense over the offering period in connection with the ESPP. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated financial statements. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. The Company’s employee stock options have certain characteristics that are significantly different from traded options and changes in the subjective assumptions can materially affect the estimate of their fair value.

Incentive Compensation Plans

The Company may grant to employees and directors options to purchase shares of the Company’s common stock under the QLogic 2005 Performance Incentive Plan (the 2005 Plan). Prior to the adoption of the 2005 Plan in August 2005, the Company granted options to purchase shares of the Company’s common stock under the QLogic Corporation Stock Awards Plan (the Stock Awards Plan) and the QLogic Corporation Non-Employee Director Stock Option Plan (the Director Plan, and together with the Stock Awards Plan and the 2005 Plan, the Stock Option Plans). Additionally, the Company has issued options on an ad hoc basis from time to time and has assumed stock options as part of acquisitions.

The Stock Awards Plan and the 2005 Plan provide for the issuance of incentive and non-qualified stock options, restricted stock units and other stock-based incentive awards for officers and employees. The Stock Awards Plan and the 2005 Plan permit the Compensation Committee of the Board of Directors to select eligible employees to receive awards and to determine the terms and conditions of awards.

All stock options granted to employees under the Company’s Stock Awards Plan and the 2005 Plan have ten-year terms and vest over four years from the date of grant.

In the first quarter of fiscal 2007, the Company granted restricted stock units to employees under the 2005 Plan. Restricted stock units represent a right to receive a share of stock at a future vesting date with no cash payment from the holder. All restricted stock units granted to employees under the 2005 Plan vest over four years from the date of grant.

Under the terms of the 2005 Plan, new directors receive an option grant, at fair market value, to purchase 50,000 shares of common stock of the Company upon election to the Board. The 2005 Plan provides for annual grants to each non-employee director (other than the Chairman of the Board) of options to purchase 25,000 shares of common stock and annual grants of options to purchase 75,000 shares of common stock to any non-employee

10

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Chairman of the Board. All stock options granted to directors under the Director Plan and the 2005 Plan have ten-year terms and vest over three years from the date of grant.

In connection with the acquisition of PathScale, the Company assumed the PathScale, Inc. 2001 Equity Incentive Plan (the PathScale Plan). Options assumed in the acquisition are subject to the terms of the PathScale Plan. These options have ten-year terms from the original grant date and generally vest over four years from the date of grant. No further shares can be granted under the PathScale Plan.

The Company also entered into share-based performance plans in connection with the acquisitions of PathScale and Troika. See Note 2 — Business Combinations.

As of July 2, 2006, options to purchase 26.7 million shares and 1.7 million shares of common stock were held by employees and directors, respectively, and 0.6 million restricted stock units were outstanding, all of which were held by employees. Shares available for future grant were 10.9 million under the 2005 Plan as of July 2, 2006. Upon the adoption of the 2005 Plan, no further shares can be granted under the Stock Awards Plan or the Director Plan. In addition, options to purchase 4,500 shares of common stock were outstanding as of July 2, 2006 for options granted outside of the Company’s Stock Option Plans in August 1996. These options had four-year vesting terms and have a ten-year expiration date.

A summary of stock option activity for the three months ended July 2, 2006 is as follows:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
	(In thousands)							(In thousands)
Outstanding at beginning of period		24,854		$	20.90
Options assumed as part of acquisition		308			3.00
Granted		3,681			18.24
Exercised		(58	)		8.48
Forfeited (cancelled pre-vesting)		(265	)		13.70
Expired (cancelled post-vesting)		(90	)		27.49
Outstanding at end of period		28,430		$	20.44		6.8	$	39,623
Vested and expected to vest at end of period		26,753		$	20.68		6.7	$	37,290
Exercisable at end of period		18,074		$	22.94		5.6	$	20,771

A summary of restricted stock unit activity for the three months ended July 2, 2006 is as follows (shares in thousands):

				Weighted-
				Average
	Number of			Grant-Date
	Shares			Fair Value
Outstanding and unvested at beginning of period		—		$	—
Granted		581			18.09
Vested		—			—
Cancelled		(3	)		18.09
Outstanding and unvested at end of period		578			18.09

11

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation Expense

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The fair value of stock options granted during the three months ended July 2, 2006 and shares to be purchased under the ESPP has been estimated at the date of grant using a Black-Scholes option-pricing model. The weighted-average fair value and underlying assumptions are as follows:

				Employee
				Stock
	Stock			Purchase
	Options			Plan
Fair value	$	8.39		$	4.44
Expected volatility		47	%		30	%
Risk-free interest rate		5.0	%		4.8	%
Expected life (years)		5.0			0.25
Dividend yield		—			—

Restricted stock units granted during the three months ended July 2, 2006 were valued based on the closing market price on the date of grant.

Stock-based compensation expense for stock options, restricted stock units and employee stock purchases recognized under the provisions of SFAS 123R for the three months ended July 2, 2006 was $8.7 million ($7.2 million after tax). The Company also recognized $2.9 million of compensation expense related to the PathScale and Troika performance plans. Share-based compensation costs capitalized as part of the cost of assets for the three months ended July 2, 2006 were not material.

As of July 2, 2006, there was $78.8 million of total unrecognized compensation costs related to outstanding stock-based awards. These costs are expected to be recognized over a weighted average period of 2.8 years.

During the three months ended July 2, 2006, the grant date fair value of options vested totaled $5.4 million and the intrinsic value of options exercised totaled $0.6 million. Intrinsic value of options exercised is calculated as the difference between the market price on the date of exercise and the exercise price multiplied by the number of options exercised.

The Company currently issues new shares to deliver common stock under its share based payment plans.

Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2007

Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and non-employee directors using the intrinsic value method in accordance with APB 25, and related interpretations, and adopted the disclosure only alternative allowed under SFAS 123, as amended.

12

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of stock-based awards granted has been estimated at the date of grant using the Black-Scholes option-pricing model. 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
	July 3, 2005
	(In thousands, except
	per share amounts)
Net income, as reported	$	41,777
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		105
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(7,273	)
Pro forma net income	$	34,609
Net income per share:
Basic, as reported	$	0.23
Diluted, as reported	$	0.23
Basic, pro forma	$	0.19
Diluted, pro forma	$	0.19

Note 9.   Interest and Other Income, Net

The components of interest and other income, net are as follows:

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(In thousands)
Interest income	$	6,638		$	6,255
Loss on sale of marketable securities		(274	)		(127	)
Other		478			(9	)
	$	6,842		$	6,119

13

QLOGIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10.   Income Per Share

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

	Three Months Ended
	July 2,		July 3,
	2006		2005
	(In thousands)
Income from continuing operations	$	21,076	$	28,286
Income from discontinued operations		—		13,491
Net income	$	21,076	$	41,777
Shares:
Weighted-average shares outstanding — basic		161,548		183,065
Dilutive potential common shares		1,349		2,279
Weighted-average shares outstanding — diluted		162,897		185,344
Income from continuing operations per share:
Basic	$	0.13	$	0.15
Diluted	$	0.13	$	0.15
Income from discontinued operations per share:
Basic	$	—	$	0.08
Diluted	$	—	$	0.08
Net income per share:
Basic	$	0.13	$	0.23
Diluted	$	0.13	$	0.23

Stock-based awards, including stock options and restricted stock units, representing 19,138,000 and 17,328,000 shares of common stock have been excluded from the diluted income per share calculations for the three months ended July 2, 2006 and July 3, 2005, respectively. These stock-based awards have been excluded from the diluted income per share calculations because their effect was antidilutive. Contingently issuable shares of the Company’s common stock pursuant to performance plans associated with certain acquisitions are included, as appropriate, in the calculation of diluted income per share as of the beginning of the period in which the respective performance conditions are met.

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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 in Part II, Item 1A “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 do not intend to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We design and develop storage network infrastructure components sold to original equipment manufacturers, or OEMs, and distributors. We produce host bus adapters, or HBAs, Fibre Channel blade switches, Fibre Channel stackable switches and other fabric switches. In addition, we design and develop storage routers for bridging Fibre Channel and Internet Small Computer System Interface (SCSI), or iSCSI, networks and storage services platforms that provide performance improvements to third-party and OEM storage management software that has been ported to the platform. All of these products address the storage area network, or SAN, connectivity infrastructure requirements of small, medium and large enterprises. We also design and develop InfiniBand^tm Host Channel Adapters, or HCAs, that provide connectivity infrastructure for clustered server fabrics in high-performance computing and enterprise-clustered database markets. Finally, we design and produce management controller chips for use in entry-level servers and storage subsystems. We serve our customers with solutions based on various connectivity technologies including Fibre Channel, InfiniBand, iSCSI and SCSI.

Our ability to serve the storage industry stems from our highly leveraged product line that addresses virtually every connection point in a SAN infrastructure solution. On the server side of the SAN, we provide Fibre Channel and iSCSI HBAs, and HBA technology on the motherboard (“Fibre Down^tm” technology). Connecting servers to storage, we provide the network infrastructure with a broad line of Fibre Channel switches.

Our products are sold directly to OEMs and to authorized distributors. Our products are incorporated in a large number of solutions from OEM customers, including Cisco Systems, Inc., Dell Computer Corporation, EMC Corporation, Hitachi Data Systems, Hewlett-Packard Company, International Business Machines Corporation, Network Appliance, Inc., Sun Microsystems, Inc. and many others.

Share-Based Payment

As of the beginning of the first quarter of fiscal 2007, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options, restricted stock units and stock purchases under our Employee Stock Purchase Plan (ESPP) based on estimated fair values. SFAS 123R supersedes SFAS No. 123, “Accounting for Stock-Based Compensation,” and Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” and requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash inflow, rather than as an operating cash inflow as required under the previous rules. This requirement may

15

reduce future net operating cash flows and increase net financing cash flows. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107 relating to SFAS 123R. We have applied the provisions of SAB 107 in its adoption of SFAS 123R.

We adopted SFAS 123R using the modified prospective transition method and consequently have not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized beginning in fiscal 2007 includes: (1) amortization related to the remaining unvested portion of stock-based awards granted prior to the adoption of SFAS 123R based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (2) amortization related to stock-based awards granted subsequent to the adoption date based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In addition, we record expense over the offering period in connection with our ESPP and over the vesting term in connection with restricted stock unit awards. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense on a straight-line basis over the requisite service period.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated financial statements. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Our employee stock options have certain characteristics that are significantly different from traded options and changes in the subjective assumptions can materially affect the estimate of their fair value.

Business Combinations

On April 3, 2006, we acquired by merger all outstanding shares of PathScale, Inc. (PathScale). PathScale designed and developed system area network fabric interconnects targeted at high-performance clustered system environments. The acquisition of PathScale expands our portfolio of solutions to include InfiniBand, a high-performance, low-latency, server area fabric interconnect. Consideration paid for this acquisition was $110.2 million in cash consisting of $109.7 million for all outstanding common stock and vested PathScale stock options and $0.5 million of direct acquisition costs. The acquisition agreement required that $15 million of the consideration paid be placed into an escrow account for 18 months in connection with certain standard representations and warranties. We accounted for the escrowed amount as contingent consideration and, as such, have not recorded it as a component of the purchase price as the outcome of the related contingencies is not yet determinable beyond a reasonable doubt. In addition, we converted unvested PathScale stock options for continuing employees into options to purchase approximately 308,000 shares of QLogic common stock with a weighted-average exercise price of $3.00 per share. The total fair value of the converted options is $5.2 million, calculated using the Black-Scholes option model.

The acquisition has been accounted for as a purchase business combination. Based on a preliminary purchase price allocation, we allocated the total purchase consideration to the tangible assets, liabilities and identifiable intangible assets acquired as well as in-process research and development, or IPR&D, based on their respective fair values at the acquisition date. The excess of the purchase price over the aggregate fair values were recorded as goodwill of $70.8 million. Identifiable intangible assets included core/developed technology, customer relationships and other intangible assets totaled $30.1 million which will be amortized on a straight-line basis over their respective estimated useful lives ranging from one to five years. We also recognized a charge of $1.6 million for IPR&D. We have not yet completed the valuation of the assets acquired and liabilities assumed and expect to finalize the purchase price allocation within the next six months, which may result in adjustments to the amounts recorded.

16

We also entered into performance plans with certain former PathScale employees who became employees of QLogic as of the acquisition date. The performance plans provide for the issuance of stock based on the achievement of certain performance milestones and continued employment with QLogic. In connection with the performance plans, we recognized $2.2 million of compensation expense during the three months ended July 2, 2006 and could recognize up to $12.8 million of additional compensation expense through April 2010.

In November 2005, we 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 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 software solutions. The acquisition of Troika expanded our product line and through the acquired intellectual property enhanced certain of our current products, thereby providing greater functionality to our customers. The consideration paid in excess of the fair market value of the tangible net assets acquired totaled $34.8 million. Based on a preliminary purchase price allocation in the fourth quarter of fiscal 2006, we recorded goodwill of $20.7 million and core technology of $3.6 million and recognized a charge of $10.5 million for IPR&D. During the first quarter of fiscal 2007, we finalized our evaluation of the intangible assets acquired resulting in an increase in core technology of $7.7 million, an increase in IPR&D of $0.3 million and a corresponding decrease in goodwill of $8.0 million.

In addition, we entered into a performance plan with certain former Troika employees upon their employment with QLogic. The performance plan provides for the issuance of stock based on the achievement of certain performance milestones and continued employment with QLogic. In connection with the performance plan, we recognized $0.7 million of compensation expense during the three months ended July 2, 2006 and could recognize up to $5.0 million of additional compensation expense through November 2009.

Discontinued Operations

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. (Marvell) for cash and shares of Marvell’s common stock. 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.

First Quarter Financial Highlights and Other Information

During the first quarter of fiscal 2007, our net revenues were $136.7 million and increased sequentially 5% from the fourth quarter of fiscal 2006. Revenues from SAN Infrastructure Products, which include HBAs, switches and silicon, increased 5% sequentially from the prior quarter and represented 93% of our total revenues.

Income from continuing operations for the first quarter of fiscal 2007 was $21.1 million, or $0.13 per diluted share and included stock-based compensation expense, acquisition-related charges and the related income tax effects totaling $12.6 million.

A summary of the key factors and significant events which impacted our financial performance during the first quarter of fiscal 2007 are as follows:

•  Net revenues of $136.7 million for the first quarter of fiscal 2007 increased sequentially by $6.2 million, or 5%, from $130.5 million in the fourth quarter of fiscal 2006.

•  Gross profit as a percentage of net revenues was 68.3% for the first quarter of fiscal 2007, which included $3.0 million of amortization expense for intangible assets related to our acquisitions of PathScale and Troika. 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 20.3% for the first quarter of fiscal 2007, compared to 26.1% in the fourth quarter of fiscal 2006. Operating income in the first quarter of fiscal 2007 was adversely

17

impacted by stock-based compensation, amortization of intangible assets, acquisition-related charges and the write-off of purchased in-process research and development totaling $16.6 million. Operating income in the fourth quarter of fiscal 2006 was adversely impacted by amortization of intangible assets, acquisition-related charges and the write-off of purchased in-process research and development totaling $11.0 million.

•  Income from continuing operations of $21.1 million, or $0.13 per diluted share, in the first quarter of fiscal 2007 decreased from $31.4 million, or $0.19 per diluted share, in the fourth quarter of fiscal 2006.

•  During the first quarter of fiscal 2007, we purchased $29.3 million of our common stock under our $200 million corporate stock repurchase program authorized by our Board of Directors in November 2005. Of the $29.3 million repurchased in the current quarter, $2.0 million related to transactions entered into near the end of the quarter and which settled subsequent to quarter end. In July 2006, subsequent to the end of the first fiscal quarter, we purchased an additional 1.3 million shares of its outstanding common stock for an aggregate purchase price of $21.3 million. Since fiscal 2003, we have purchased a total of $610.6 million of our outstanding common stock under various programs authorized by our Board of Directors.

•  Cash and cash equivalents and short-term investments of $558.4 million at July 2, 2006 decreased $107.2 million from the balance at the end of the fourth quarter of fiscal 2006. During the first quarter of fiscal 2007, we generated $40.0 million of cash from continuing operations, used $107.1 million for the acquisition of PathScale and used $27.3 million to repurchase our common stock.

•  Accounts receivable was $71.1 million as of July 2, 2006, compared to $67.6 million as of April 2, 2006. Days sales outstanding (DSO) in receivables as of July 2, 2006 remained consistent with the fourth quarter of fiscal 2006 at 47 days. 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 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 $41.3 million as of July 2, 2006, compared to $39.4 million as of April 2, 2006. Our annualized inventory turns in the first quarter of fiscal 2007 of 4.2 improved from 3.9 in the fourth quarter of fiscal 2006.

Results of Operations

Net Revenues

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

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(In millions)
Net revenues:
SAN Infrastructure Products	$	127.4		$	107.3
Management Controllers		6.9			6.9
Other		2.4			1.2
Total net revenues	$	136.7		$	115.4
Percentage of net revenues:
SAN Infrastructure Products		93	%		93	%
Management Controllers		5			6
Other		2			1
Total net revenues		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-

18

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 average selling prices.

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 July 2, 2006 increased $21.3 million, or 18%, from the three months ended July 3, 2005. This increase was primarily the result of a $20.1 million, or 19%, increase in revenue from SAN Infrastructure Products. The increase in revenue from SAN Infrastructure Products was primarily due to a 33% increase in the quantity of Fibre Channel and iSCSI HBAs sold partially offset by a 10% decrease in average selling prices of these products, and a 25% increase in the quantity of switches sold partially offset by a 13% decrease in average selling prices of switches. Although revenue from Management Controllers was consistent with the same period in the prior year, we expect this revenue 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 July 2, 2006 included $2.4 million of other revenue. Other revenues are unpredictable and we do not expect them to be significant to our overall revenues.

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 79% of net revenues during the three months ended July 2, 2006 and 77% of net revenues during the fiscal year ended April 2, 2006. Three of our customers each represented 10% or more of net revenues for fiscal 2006, all of which continued to be the only customers representing 10% or more of net revenues for the three months ended July 2, 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
	July 2,		July 3,
	2006		2005
	(In millions)
United States	$	78.4	$	65.2
Asia-Pacific and Japan		29.2		24.3
Europe, Middle East and Africa		26.8		25.5
Rest of the world		2.3		0.4
Total net revenues	$	136.7	$	115.4

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Gross Profit

Gross profit represents net revenues less cost of revenues. Cost of revenues consists primarily of the cost of purchased products, assembly and test services, and costs associated with product procurement, inventory management and product quality. A summary of our gross profit and related percentage of net revenues is as follows:

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(In millions)
Gross profit	$	93.4		$	81.4
Percentage of net revenues		68.3	%		70.6	%

Gross profit for the three months ended July 2, 2006 increased $12.0 million, or 15%, from gross profit for the three months ended July 3, 2005. The gross profit percentage for the three months ended July 2, 2006 was 68.3% and declined from 70.6% for the corresponding period in the prior year. This decrease in gross profit percentage was due primarily to $3.0 million of amortization expense for intangible assets related to our acquisitions of PathScale and Troika recorded in the first quarter of fiscal 2007.

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, the transition to new products, 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 and continue to be 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
	July 2,			July 3,
	2006			2005
	(In millions)
Operating expenses:
Engineering and development	$	32.9		$	20.4
Sales and marketing		22.4			15.2
General and administrative		8.5			3.9
Purchased in-process research and development		1.9			—
Total operating expenses	$	65.7		$	39.5
Percentage of net revenues:
Engineering and development		24.1	%		17.6	%
Sales and marketing		16.4			13.2
General and administrative		6.1			3.4
Purchased in-process research and development		1.4			—
Total operating expenses		48.0	%		34.2	%

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 July 2, 2006, engineering and development expenses of $32.9 million increased $12.5 million from $20.4 million for the three months ended July 3, 2005. The increase in engineering and development expenses was primarily due to $2.8 million of stock-based compensation related to

20

the adoption of SFAS 123R and increases in expenses primarily due to the acquisitions of PathScale and Troika, including a $4.4 million increase in employment costs, $2.2 million of acquisition-related non-cash compensation charges, $1.3 million increase in depreciation and equipment costs and a $0.7 million increase in external engineering costs associated with new product development.

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. We expect engineering and development expenses will continue to increase in the future as a result of continued and increasing costs associated with new product development.

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 July 2, 2006 of $22.4 million increased $7.2 million from the three months ended July 3, 2005. The increase in sales and marketing expenses was due primarily to $2.7 million of stock-based compensation related to the adoption of SFAS 123R, increases in employment costs of $2.0 million and acquisition-related non-cash compensation charges of $0.6 million due to the acquisitions of PathScale and Troika, and a $0.9 million increase in promotional costs, which included the costs for our annual worldwide partner conference in May 2006.

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

General and Administrative.  General and administrative expenses consist primarily of compensation and related benefit costs for executive, finance, accounting, human resources, legal and information technology personnel. Non-compensation components of general and administrative expenses include legal and other professional fees, facilities expenses and other corporate expenses. General and administrative expenses for the three months ended July 2, 2006 of $8.5 million increased from $3.9 million for the three months ended July 3, 2005 primarily due to $2.6 million of stock-based compensation related to the adoption of SFAS 123R, an increase of $0.6 million in employment costs and an increase in bad debt expense of $0.4 million.

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

Purchased In-Process Research and Development.  The amounts allocated to IPR&D were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed.

The fair value of the IPR&D for each of the acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted-average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account product life cycles, and market penetration and growth rates.

In connection with our acquisition of PathScale, we expensed $1.6 million for IPR&D, based on a preliminary purchase price allocation, during the three months ended July 2, 2006. As of the date of the acquisition, the three identified IPR&D projects were estimated to be between 10% and 65% complete and were expected to be completed through July 2007. Total estimated costs to complete these projects was $4.9 million. Positive net cash inflows are expected for these projects beginning in fiscal year 2009. We utilized a discount rate of 20% for the in-process technologies.

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In connection with our acquisition of Troika, we expensed $10.5 million for IPR&D in the fourth quarter of fiscal 2006, based on a preliminary purchase price allocation. During the first quarter of fiscal 2007, we completed our valuation of the intangible assets and finalized the purchase price allocation, which resulted in an additional charge of $0.3 million.

Non-Operating Income, Net

A summary of the components of our interest and other income, net is as follows:

	Three Months Ended
	July 2,			July 3,
	2006			2005
	(In millions)
Interest income	$	6.6		$	6.2
Loss on sale of marketable securities		(0.3	)		(0.1	)
Other		0.5			—
	$	6.8		$	6.1

Non-operating income is comprised primarily of interest income related to our portfolio of marketable securities.

Income Taxes

Our effective income tax rate related to continuing operations approximated 39% in both the three months ended July 2, 2006 and for the year ended April 2, 2006. Our tax rate in the first quarter of fiscal 2007 was negatively impacted by the tax effects of the PathScale acquisition and the adoption of SFAS 123R, offset by the favorable resolution of routine tax examinations, the transfer of intellectual property rights to foreign subsidiaries and investments in foreign operations. We expect the estimated annual effective tax rate for the remainder of fiscal year 2007 to approximate 39%. However, given the increased global scope of our operations, and the complexity of global tax and transfer pricing rules and regulations, it has become increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings within each tax jurisdiction differ materially from our estimates, we may not achieve our expectation for our effective tax rate.

Liquidity and Capital Resources

Our combined balances of cash and cash equivalents and short-term investments decreased to $558.4 million at July 2, 2006, compared to $665.6 million at April 2, 2006. The decrease in cash, cash equivalents and short-term investments is due primarily to the acquisition of PathScale, the purchase of our common stock during the three months ended July 2, 2006 pursuant to our stock repurchase programs, and additions to property and equipment, offset by our cash generated by operations. 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 $40.0 million for the three months ended July 2, 2006 and $36.7 million for the three months ended July 3, 2005. Operating cash flow for the three months ended July 2, 2006 reflects our income from continuing operations of $21.1 million and net non-cash charges (depreciation and amortization, stock-based compensation, acquisition-related charges, deferred income taxes and other) of $18.8 million. Non-cash components of working capital in the aggregate were consistent with the amount at April 2, 2006 and included an increase of $15.3 million in income taxes payable due to the timing of estimated tax

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payments, partially offset by a decrease in accrued compensation of $9.2 million and accounts payable of $4.6 million due to the timing of payment obligations.

Cash used in investing activities of $109.5 million for the three months ended July 2, 2006 consists of cash outflows of $107.1 million for the acquisition of PathScale including the $15.0 million placed in escrow, net of cash acquired of $3.0 million, and additions to property and equipment of $9.7 million, partially offset by net sales and maturities of marketable securities of $7.2 million. During the three months ended July 3, 2005, cash used in investing activities of $122.6 million included net purchases of marketable securities of $117.2 million and additions to property and equipment of $5.4 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 $25.4 million for the three months ended July 2, 2006 resulted from our purchase of $27.3 million of common stock under our stock repurchase programs, partially offset by $1.7 million of proceeds from the issuance of common stock under our stock plans. During the three months ended July 3, 2005, the $50.1 million of cash used in financing activities resulted from the use of $55.0 million for the purchase of common stock under our stock repurchase programs, partially offset by $4.9 million of proceeds from the issuance of common stock under our stock plans.

Since fiscal 2003, our Board of Directors has approved various stock repurchase programs that authorized us to repurchase up to an aggregate of $750 million of our outstanding common stock. The most recent program was approved in November 2005 and authorized us to repurchase up to $200 million of our outstanding common stock. During the three months ended July 2, 2006, we purchased 1.7 million shares for an aggregate purchase price of $29.3 million under the November 2005 plan, of which $2.0 million related to transactions entered into near the end of the quarter and which settled subsequent to quarter end. In July 2006, subsequent to the end of the fiscal quarter, we purchased an additional 1.3 million shares for an aggregate purchase price of $21.3 million. Since fiscal 2003, we have purchased a total of $610.6 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 as of July 2, 2006, and their impact on our cash flows in future fiscal years, is as follows:

	2007
	(Remaining
	nine months)		2008		2009		2010		2011		Thereafter		Total
	(In millions)
Operating leases	$	4.1	$	2.9	$	2.0	$	1.2	$	0.7	$	0.3	$	11.2
Non-cancelable purchase obligations		45.1		—		—		—		—		—		45.1
Total	$	49.2	$	2.9	$	2.0	$	1.2	$	0.7	$	0.3	$	56.3

Critical Accounting Policies and Estimates

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

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Revenue Recognition

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) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.

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 transfer 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 delivery and are not dependent on the subsequent resale of our product. 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 (EITF) 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 and historical experience. Royalty and service revenue is recognized when earned and receipt is reasonably assured.

For those sales that include multiple deliverables, we allocate revenue based on the relative fair values of the individual components as determined in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” When more than one element, such as hardware and services, are contained in a single arrangement, we allocate revenue between the elements based on each element’s relative fair value, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. Fair value is generally determined based upon the price charged when the element is sold separately. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue recognition for the delivered elements until all undelivered elements have been fulfilled.

We sell certain software products and related post-contract customer support (PCS), and account for these transactions in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended. We recognize revenue from software products when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is probable. Revenue is allocated to each element based upon vendor-specific objective evidence (VSOE) of the fair value of the element. VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. If we are unable to support VSOE of fair value for PCS, the entire amount of revenue from the arrangement is deferred and recognized ratably over the period of the PCS. Amounts accounted for in accordance with SOP 97-2 have not yet been significant, but could be material in the future.

Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

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.

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Inventories

Inventories are valued at the lower of cost, on a first-in, first-out basis, or market. 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.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. We record liabilities for probable income tax assessments based on our estimate of potential tax related exposures. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known.

Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent management believes that recovery is more likely than not, we do not establish a valuation allowance. An adjustment to income would occur if we determine that we are able to realize a different amount of our deferred tax assets than currently expected.

Share-Based Payment

As of the beginning of the first quarter of fiscal 2007, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including stock options, restricted stock units and stock purchases under our Employee Stock Purchase Plan (ESPP) based on estimated fair values. SFAS 123R supersedes SFAS No. 123, “Accounting for Stock-Based Compensation,” and Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” and requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash inflow, rather than as an operating cash inflow as required under previous literature. This requirement may reduce future net operating cash flows and increase net financing cash flows. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107 relating to SFAS 123R. We have applied the provisions of SAB 107 in our adoption of SFAS 123R.

We adopted SFAS 123R using the modified prospective transition method and consequently have not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized beginning in fiscal 2007 includes: (1) amortization related to the remaining unvested portion of stock-based awards granted prior to the adoption of SFAS 123R based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (2) amortization related to stock-based awards granted subsequent to the adoption date based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In addition, we record expense over the offering period in connection with our ESPP and over the vesting term in connection with restricted stock unit awards. SFAS 123R requires forfeitures to be

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estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize stock-based compensation expense on a straight-line basis over the requisite service period.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated financial statements. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Our employee stock options have certain characteristics that are significantly different from traded options and changes in the subjective assumptions can materially affect the estimate of their fair value.

Goodwill and Purchased Intangible Assets

We account for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research and development is expensed immediately.

SFAS 142 requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the assets might be impaired, by comparing the carrying value to the fair value of the reporting unit to which they are assigned. A two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit with the carrying amount of goodwill. We perform the annual test for impairment as of the first day of our fiscal fourth quarter and utilize the two-step process.

Other intangible assets consist primarily of technology acquired or licensed from third parties, including technology acquired in business combinations. Other intangible assets that have definite lives are amortized on a straight-line basis over the estimated useful lives of the related assets ranging from one to five years.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of FIN 48 on our financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in the first quarter of fiscal 2007 did not have a significant impact on our financial statements.

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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 marketable 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 July 2, 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, asset and mortgage-backed securities, and other debt securities, which principally have remaining terms of three 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 July 2, 2006, unrealized losses of $4.9 million (net of related income taxes) on these securities are included in accumulated other comprehensive loss.

Item 4.   Controls and Procedures

As of the end of the quarter ended July 2, 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 July 2, 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 July 2, 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 1A.   Risk Factors

There have been no material changes in our risk factors from those disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 2, 2006, which was filed with the Securities and Exchange Commission on June 5, 2006. For convenience, our updated risk factors are included below in this Item 1A.

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 results 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;

•  our ability to timely produce products that comply with new environmental restrictions or related requirements of our OEM customers;

•  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;

•  changes in accounting rules, such as the change requiring the recording of compensation expense for employee stock options and other stock-based awards commencing in the first quarter of our 2007 fiscal year;

•  changes in our accounting policies;

•  increases in energy costs;

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•  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 margin may not be sustainable and may be adversely affected by numerous factors, including:

•  increased price competition;

•  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;

•  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 and server interconnect 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.

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;

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•  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

•  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, SATA and Serial Attached SCSI, or SAS, that may compete with the market acceptance of our products. Although we continue to explore and develop products based on new technologies, a substantial portion of our revenues is generated today 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 or in sufficient volumes.

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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 79% and 77% of net revenues for the three months ended July 2, 2006 and the fiscal year ended April 2, 2006, 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.

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 effects of this seasonality and these uneven sales patterns on our business in the past.

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

The markets for our products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. In the Fibre Channel HBA market, we compete primarily with Emulex Corporation. In the iSCSI HBA market, we compete primarily with Broadcom Corporation. In the switch products sector, we compete primarily with Brocade Communications Systems, Inc. and McDATA Corporation. In the InfiniBand HCA market, we compete primarily with Mellanox Technologies Ltd. We may also 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 and server interconnect 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.

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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 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 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.

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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 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 and have a material adverse effect on our results of operations.

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, including the transition from 2Gb to 4Gb Fibre Channel products, 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. Any such adverse events 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 does 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

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internal controls as of the end of each fiscal year. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control 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 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 July 2, 2006 and that there was no change in our internal control over financial reporting during our quarter ended July 2, 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 registered public accounting firm 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 registered public accounting firm 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 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, or RoHS) and similar legislation currently proposed in China. In addition, recycling, labeling and related requirements have already begun to apply to products we sell in Europe. Where necessary, we are redesigning our products to ensure that they comply with these requirements as well as related requirements imposed by our OEM customers. We are also working with our suppliers to provide us with compliant materials, parts and components. If our products do not comply with the European substance restrictions, we could become subject to fines, civil or criminal sanctions, and contract damage claims. In addition, we could be prohibited from shipping non-compliant products into the European Union, and required to recall and replace any products already shipped, if such products were found to be non-compliant, which would disrupt our ability to ship products and result in reduced revenue, increased obsolete or excess inventories and harm to our business and customer relationships. We also must successfully manage the transition to RoHS-compliant products in order to minimize the effects of product inventories that may become excess or obsolete, as well as ensure that sufficient supplies of RoHS-compliant products can be delivered to meet customer demand. Failure to manage this transition may adversely impact our revenues and operating results. Various other countries and states in the United States have issued, or are in the process of issuing, other environmental regulations that may impose additional restrictions or obligations and require further changes to our products. These regulations could impose a significant cost of doing business in those countries and states.

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We could also face significant costs and liabilities in connection with product take-back legislation. The European Union has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the European Union to enact the directive in their respective countries was August 13, 2004 (such legislation, together with the directive, the “WEEE Legislation”). Producers participating in the market became financially responsible for implementing these responsibilities beginning in August 2005. Implementation in certain European Union member states has been delayed into 2006. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant.

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 43% and 45% of our net revenues for the three months ended July 2, 2006 and the fiscal year ended April 2, 2006. We expect that international revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. In addition, a 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.

Moreover, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may

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take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.

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 existence of unknown defects in acquired companies’ products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition;

•  the diversion of management’s attention from other business concerns;

•  the failure of markets for the products of acquired companies to develop as expected;

•  risks associated with entering markets or conducting operations with which we have no or limited direct prior experience;

•  risks associated with assuming the legal obligations of acquired companies;

•  risks related to the effect that acquired companies’ internal control processes might have on our financial reporting and management’s report on our internal control over financial reporting;

•  the potential loss of current customers or failure to retain acquired companies’ customers;

•  the potential loss of key employees of acquired companies; and

•  the incurrence of significant exit charges if products acquired in business combinations are unsuccessful.

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.

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.

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Beginning with fiscal 2007, we are required to recognize compensation expense related to employee stock options, restricted stock units and our employee stock purchase plan. There is no assurance that the expense that we are required to recognize measures accurately the value of our share-based payment awards, and the recognition of this expense could cause the trading price of our common stock to decline.

Effective as of the beginning of the first quarter of fiscal 2007, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values. As a result, starting with fiscal 2007, our operating results contain a charge for stock-based compensation expense related to employee stock options, restricted stock units and our employee stock purchase plan. This charge is in addition to stock-based compensation expense we have recognized in prior periods related to acquisitions and investments. The application of SFAS 123R generally requires the use of an option-pricing model to determine the fair value of share-based payment awards. This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123R and Staff Accounting Bulletin No. 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

As a result of the adoption of SFAS 123R, beginning with fiscal 2007, our earnings will be lower than they would have been had we not been required to adopt SFAS 123R. This will continue to be the case for future periods. We cannot predict the effect that this adverse impact on our reported operating results will have on the trading price of our common stock.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees,

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. As a result of our adoption of SFAS No. 123R in the first quarter of fiscal 2007, the use of stock options and other stock-based awards to attract and retain employees may be limited. 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 stock-based awards 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.

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 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 develop certain new products with 90 nanometer (.09 micron) 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

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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. In addition, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as us. 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.

Unavailability of third-party licenses could adversely affect our business.

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.

If we fail to carefully manage the use of “open source” software in our products, we may be required to license key portions of our products on a royalty free basis or expose key parts of source code.

Certain of our software (as well as that of our customers) may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, or GPL, which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.

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Unanticipated changes in our tax provisions 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, by discovery of new information in the course of our tax return preparation process, or by changes in the valuation of our deferred tax assets and liabilities. Our effective tax rates are also affected by intercompany transactions for licenses, services, funding and other items. Additionally, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities which may result in the assessment of additional taxes. 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.

In June 2006, the Financial Accounting Standards Board issued Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of FIN 48 on our financial statements. There is a risk that the adoption of FIN 48 could result in a cumulative effect charge to earnings, increases in future effective tax rates or increases in future interperiod effective tax rate volatility.

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.

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 2.   Unregistered Sales of Equity Securities and Use of Proceeds

On November 7, 2005, we announced a 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 first quarter of fiscal year 2007 under our stock purchase 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
April 3, 2006 — April 30, 2006		—	$	—		—	$	190,000,000
May 1, 2006 — May 28, 2006		956,747	$	17.97		956,747	$	172,810,000
May 29, 2006 — July 2, 2006		701,948	$	17.20		701,948	$	160,739,000
Total		1,658,695	$	17.64		1,658,695	$	160,739,000

We previously purchased 602,862 shares under this program.

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Item 6.   Exhibits

Exhibits

Exhibit No.
	10	.1	Terms and Conditions of Nonqualified Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.*
	10	.2	Terms and Conditions of Incentive Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.*
	10	.3	Terms and Conditions of Stock Unit Award under the QLogic Corporation 2005 Performance Incentive Plan.*
	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.

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

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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: August 1, 2006

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EXHIBIT INDEX

Exhibit No.
	10	.1	Terms and Conditions of Nonqualified Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.*
	10	.2	Terms and Conditions of Incentive Stock Option under the QLogic Corporation 2005 Performance Incentive Plan.*
	10	.3	Terms and Conditions of Stock Unit Award under the QLogic Corporation 2005 Performance Incentive Plan.*
	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.

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

EX-10.1

Exhibit 10.1

QLOGIC CORPORATION
2005 PERFORMANCE INCENTIVE PLAN
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTION

1. General.

     These Terms and Conditions of Nonqualified Stock Option (these “Terms”) apply to a particular stock option (“Option”) to purchase shares of Common Stock of QLogic Corporation (the “Corporation”) if incorporated by reference in the Notice of Grant Agreement (“Grant Notice”) corresponding to that particular grant. The recipient of the Option identified in the Grant Notice is referred to as the “Grantee.” The per share exercise price of the Option as set forth on the Grants tab on the CEFS website (www.ubs.com/cefs/qlgc) is referred to as the “Exercise Price.” The effective date of grant of the Option as set forth on the Grants tab on the CEFS website is referred to as the “Award Date.” The Option was granted under and subject to the QLogic Corporation 2005 Performance Incentive Plan (the “Plan”) and these Terms. Capitalized terms are defined in the Plan if not defined herein. The Option has been granted to the Grantee in addition to, and not in lieu of, any other form of compensation otherwise payable or to be paid to the Grantee. The Grant Notice and these Terms are collectively referred to as the “Option Agreement” applicable to the Option, or this “Option Agreement.”

2. Vesting; Limits on Exercise; Incentive Stock Option Status.

     Subject to adjustment under Section 7.1 of the Plan and further subject to early termination under Section 5 of these Terms and Section 7.4 of the Plan, the Option shall become vested as follows: (1) 25% of the total number of shares of Common Stock subject to the Option shall vest on the first anniversary of the Award Date; and (2) an additional 6.25% of the total number of shares of Common Stock subject to the Option shall vest on the last day of each calendar quarter following the calendar quarter in which the first vesting date occurs until the Option is vested as to all of the shares of Common Stock subject thereto. The Option may be exercised only to the extent the Option is vested and exercisable.

• Cumulative Exercisability. To the extent that the Option is vested and exercisable, the Grantee has the right to exercise the Option (to the extent not previously exercised), and such right shall continue, until the expiration or earlier termination of the Option.

• No Fractional Shares. Fractional share interests shall be disregarded, but may be cumulated.

• Minimum Exercise. No fewer than 100 shares of Common Stock (subject to adjustment under Section 7.1 of the Plan) may be purchased at any one time, unless the number purchased is the total number at the time exercisable under the Option.

• Nonqualified Stock Option. The Option is a nonqualified stock option and is not, and shall not be, an incentive stock option within the meaning of Section 422 of the Code.

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3. Continuance of Employment/Service Required; No Employment/Service Commitment.

     The vesting schedule requires continued employment or service through each applicable vesting date as a condition to the vesting of the applicable installment of the Option and the rights and benefits under this Option Agreement. Employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a termination of employment or services as provided in Section 5 below or under the Plan.

     Nothing contained in this Option Agreement or the Plan constitutes a continued employment or service commitment by the Corporation or any of its Subsidiaries, affects the Grantee’s status, if he or she is an employee, as an employee at will who is subject to termination without cause, confers upon the Grantee any right to remain employed by or in service to the Corporation or any Subsidiary, interferes in any way with the right of the Corporation or any Subsidiary at any time to terminate such employment or service, or affects the right of the Corporation or any Subsidiary to increase or decrease the Grantee’s other compensation.

4. Manner of Exercise.

     4.1 Method of Exercise of Option.

     The Corporation has established a web – based system for managing and exercising Options. Currently, UBS Financial Services, Inc. manages Option exercises. In order to exercise an Option, the Grantee must contact UBS either by logging on to the UBS OneSource website (http://www.ubs.com/onesource/qlgc) or by calling the UBS Call Center at 1-866-756-4421. UBS will request from the Grantee information regarding the Option to be exercised, the method of payment of the exercise price and the order type. In addition, the Grantee may elect to have income taxes withheld at higher than the statutory rate. In order to comply with the terms of the Plan, the Grantee also must deliver:

• payment in full for the Exercise Price of the shares to be purchased in cash, check or by electronic funds transfer, or utilizing the UBS same day sale procedures;

• any written statements or agreements required pursuant to Section 8.1 of the Plan; and

• satisfaction of the tax withholding provisions of Section 8.5 of the Plan.

The Administrator also may, but is not required to, authorize a non-cash payment alternative by notice and third party payment in such manner as may be authorized by the Administrator. For other methods of payment for exercise, contact the Administrator.

     4.2 Responsibility for Taxes. The ultimate liability for any and all tax, social insurance and payroll tax withholding legally payable by an employee under applicable law (including without limitation laws of foreign jurisdictions)(“Tax-Related Items”) is and remains Grantee’s responsibility and liability and the Corporation (a) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Option and the subsequent sale of the

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shares of Common Stock subject to the Option; and (b) does not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate Grantee’s liability for Tax-Related Items.

          Prior to exercise of the Option, Grantee shall pay or make adequate arrangements satisfactory to the Administrator to satisfy all withholding obligations of the Corporation. In this regard, Grantee authorizes the Corporation to withhold all applicable Tax-Related Items legally payable by Grantee from his or her wages or other cash compensation paid to Grantee by the Corporation or from proceeds of sale. Alternatively, or in addition, if permissible under local law, the Corporation may sell or arrange for the sale of shares of Common Stock that Grantee is due to acquire to meet the minimum withholding obligations for Tax-Related Items. Finally, Grantee shall pay to the Corporation any amount of any Tax-Related Items that the Corporation may be required to withhold as a result of Grantee’s participation in the Plan or Grantee’s purchase of shares of Common Stock that cannot be satisfied by the means previously described.

5. Early Termination of Option.

     5.1 Expiration Date. Subject to earlier termination as provided below in this Section 5, the Option will terminate on the tenth (10^th) anniversary of the Award Date (the “Expiration Date”).

     5.2 Possible Termination of Option upon Change in Control. The Option is subject to termination in connection with a Change in Control Event or certain similar reorganization events as provided in Section 7.4 of the Plan.

     5.3 Termination of Option upon a Termination of Grantee’s Employment or Services. Subject to earlier termination on the Expiration Date of the Option or pursuant to Section 5.2 above, if the Grantee ceases to be employed by or ceases to provide services to the Corporation or a Subsidiary, the following rules shall apply (the last day that the Grantee is employed by or provides services to the Corporation or a Subsidiary is referred to as the Grantee’s “Severance Date”):

• other than as expressly provided below in this Section 5.3, (a) the Grantee will have until the date that is 3 months after his or her Severance Date to exercise the Option (or portion thereof) to the extent that it was vested on the Severance Date, (b) the Option, to the extent not vested on the Severance Date, shall terminate on the Severance Date, and (c) the Option, to the extent exercisable for the 3-month period following the Severance Date and not exercised during such period, shall terminate at the close of business on the last day of the 3-month period;

• if the termination of the Grantee’s employment or services is the result of the Grantee’s death or Total Disability (as defined below), (a) the Grantee (or his or her beneficiary or personal representative, as the case may be) will have until the date that is 12 months after the Grantee’s Severance Date to exercise the Option, (b) the Option, to the extent not vested on the Severance Date, shall terminate on the Severance Date, and (c) the Option, to the extent exercisable for the 12-month period

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	following the Severance Date and not exercised during such period, shall terminate at the close of business on the last day of the 12-month period;
•	if the Grantee’s employment or services are terminated by the Corporation or a Subsidiary for Cause (as defined below), the Option (whether vested or not) shall terminate on the Severance Date.

     For purposes of the Option, “Total Disability” means a “permanent and total disability” (within the meaning of Section 22(e)(3) of the Code or as otherwise determined by the Administrator).

     For purposes of the Option, “Cause” means that the Grantee:

(1)	has been negligent in the discharge of his or her duties to the Corporation or any of its Subsidiaries, has refused to perform stated or assigned duties or is incompetent in or (other than by reason of a disability or analogous condition) incapable of performing those duties;
(2)	has been dishonest or committed or engaged in an act of theft, embezzlement or fraud, a breach of confidentiality, an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information; has breached a fiduciary duty, or willfully and materially violated any other duty, law, rule, regulation or policy of the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or has been convicted of a felony or misdemeanor (other than minor traffic violations or similar offenses);
(3)	has materially breached any of the provisions of any agreement with the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or
(4)	has engaged in unfair competition with, or otherwise acted intentionally in a manner injurious to the reputation, business or assets of, the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; has improperly induced a vendor or customer to break or terminate any contract with the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or has induced a principal for whom the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries acts as agent to terminate such agency relationship.

     In all events the Option is subject to earlier termination on the Expiration Date of the Option or as contemplated by Section 5.2. The Administrator shall be the sole judge of whether the Grantee continues to render employment or services for purposes of this Option Agreement.

6. Non-Transferability.

     The Option and any other rights of the Grantee under this Option Agreement or the Plan are nontransferable and exercisable only by the Grantee, except as set forth in Section 5.7 of the Plan.

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7. Adjustment.

     The total number of shares of Common Stock subject to the Option, as well as the Exercise Price of the Option, are subject to adjustment pursuant to Section 7.1 of the Plan.

8. Data Privacy Consent.

     Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data as described in this document by and among, as applicable, the Corporation, its Subsidiaries, or affiliates for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan.

     Grantee further understands that the Corporation, its Subsidiaries or affiliates hold certain personal information about Grantee, including, but not limited to, Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock held in the Corporation and details of all Options or other entitlements to shares of Common Stock awarded, canceled, exercised, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than Grantee’s country. Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom Grantee may elect to deposit any shares of Common Stock acquired upon exercise of the Option. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage Grantee’s participation in the Plan. Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or withdraw the consents herein by contacting the Corporation’s human resources department. Grantee understands that withdrawal of consent may affect Grantee’s ability to exercise or realize benefits from the Option.

9. Nature of Grant.

     In accepting the grant of the Option, Grantee acknowledges that: (i) the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified, suspended or terminated by the Corporation at any time, as provided in the Plan and these Terms; (ii) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of stock options, or benefits in lieu of stock options even if stock options have been granted repeatedly in the past; (iii) all decisions with respect to future grants will be at the sole discretion of the Corporation; (iv) Grantee’s participation in the Plan shall not create a right to further employment and shall not interfere with the ability of the Corporation or its subsidiaries to terminate Grantee’s employment relationship at any time with or without cause; (v) Grantee’s participation in the Plan is voluntary; (vi) in the event that Grantee is not an employee of the Corporation, the Option grant will not be interpreted to form an employment contract or relationship with the Corporation, and furthermore, the

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Option grant will not be interpreted to form an employment contract with the Corporation and any of its Subsidiaries or affiliates; (vii) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty; (viii) if the underlying shares of Common Stock do not increase in value, the Option will have no value; (ix) if Grantee exercises his or her Option and obtains shares of Common Stock, the value of those shares of Common Stock acquired upon exercise may increase or decrease in value, even below the Exercise Price; and (x) no claim or entitlement to compensation or damages arises from termination of the Option or diminution in value of the Option or shares of Common Stock acquired pursuant to the Option and Grantee irrevocably releases the Corporation and its Subsidiaries and affiliates from any such claim that may arise.

10. Notices.

     Any notice to be given under the terms of this Option Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of the Secretary, and to the Grantee at the address last reflected on the Corporation’s payroll records, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be delivered in person or shall be enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. Any such notice shall be given only when received, but if the Grantee is no longer employed by the Corporation or a Subsidiary, shall be deemed to have been duly given five business days after the date mailed in accordance with the foregoing provisions of this Section 10.

11. Plan.

     The Option and all rights of the Grantee under this Option Agreement are subject to the terms and conditions of the Plan, incorporated herein by this reference. The Grantee agrees to be bound by the terms of the Plan and this Option Agreement. The Grantee acknowledges having read and understanding the Plan and this Option Agreement. Unless otherwise expressly provided in other sections of this Option Agreement, provisions of the Plan that confer discretionary authority on the Board or the Administrator do not and shall not be deemed to create any rights in the Grantee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Board or the Administrator so conferred by appropriate action of the Board or the Administrator under the Plan after the date hereof.

12. Entire Agreement.

     This Option Agreement and the Plan together constitute the entire agreement and supersede all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Option Agreement may be amended pursuant to Section 8.6 of the Plan. Such amendment must be in writing and signed by the Corporation. The Corporation may, however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Grantee hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.

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13. Governing Law.

     This Option Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to conflict of law principles thereunder.

14. Effect of this Agreement.

     Subject to the Corporation’s right to terminate the Option pursuant to Section 7.4 of the Plan, this Option Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors to the Corporation.

15. Section Headings.

     The section headings of this Option Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof.

16. Acceptance.

     In accepting the grant of the Option, Grantee acknowledges receipt of a copy of the Plan, the Grant Notice and these Terms. Grantee has read and understands the terms and provisions thereof, and has accepted the Option subject to all terms and conditions of the Plan, the Grant Notice and these Terms. Grantee acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the shares of Common Stock acquired upon exercise and that Grantee should consult a tax adviser prior to such exercise or disposition.

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EX-10.2

Exhibit 10.2

QLOGIC CORPORATION
2005 PERFORMANCE INCENTIVE PLAN
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTION

1. General.

     These Terms and Conditions of Incentive Stock Option (these “Terms”) apply to a particular stock option (“Option”) to purchase shares of Common Stock of QLogic Corporation (the “Corporation”) if incorporated by reference in the Notice of Grant Agreement (“Grant Notice”) corresponding to that particular grant. The recipient of the Option identified in the Grant Notice is referred to as the “Grantee.” The per share exercise price of the Option as set forth on the Grants tab on the CEFS website (www.ubs.com/cefs/qlgc) is referred to as the “Exercise Price.” The effective date of grant of the Option as set forth on the Grants tab on the CEFS website is referred to as the “Award Date.” The Option was granted under and subject to the QLogic Corporation 2005 Performance Incentive Plan (the “Plan”) and these Terms. Capitalized terms are defined in the Plan if not defined herein. The Option has been granted to the Grantee in addition to, and not in lieu of, any other form of compensation otherwise payable or to be paid to the Grantee. The Grant Notice and these Terms are collectively referred to as the “Option Agreement” applicable to the Option, or this “Option Agreement.”

2. Vesting; Limits on Exercise.

     Subject to adjustment under Section 7.1 of the Plan and further subject to early termination under Section 5 of these Terms and Section 7.4 of the Plan, the Option shall become vested as follows: (1) 25% of the total number of shares of Common Stock subject to the Option shall vest on the first anniversary of the Award Date; and (2) an additional 6.25% of the total number of shares of Common Stock subject to the Option shall vest on the last day of each calendar quarter following the calendar quarter in which the first vesting date occurs until the Option is vested as to all of the shares of Common Stock subject thereto. The Option may be exercised only to the extent the Option is vested and exercisable.

• Cumulative Exercisability. To the extent that the Option is vested and exercisable, the Grantee has the right to exercise the Option (to the extent not previously exercised), and such right shall continue, until the expiration or earlier termination of the Option.

• No Fractional Shares. Fractional share interests shall be disregarded, but may be cumulated.

• Minimum Exercise. No fewer than 100 shares of Common Stock (subject to adjustment under Section 7.1 of the Plan) may be purchased at any one time, unless the number purchased is the total number at the time exercisable under the Option.

• ISO Value Limit. If the aggregate fair market value of the shares with respect to which ISOs (whether granted under the Option or otherwise) first become exercisable

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by the Grantee in any calendar year exceeds $100,000, as measured on the applicable Award Dates, the limitations of Section 5.1.2 of the Plan shall apply and to such extent the Option will be rendered a nonqualified stock option.

3. Continuance of Employment/Service Required; No Employment/Service Commitment.

     The vesting schedule requires continued employment or service through each applicable vesting date as a condition to the vesting of the applicable installment of the Option and the rights and benefits under this Option Agreement. Employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a termination of employment or services as provided in Section 5 below or under the Plan.

     Nothing contained in this Option Agreement or the Plan constitutes a continued employment or service commitment by the Corporation or any of its Subsidiaries, affects the Grantee’s status, if he or she is an employee, as an employee at will who is subject to termination without cause, confers upon the Grantee any right to remain employed by or in service to the Corporation or any Subsidiary, interferes in any way with the right of the Corporation or any Subsidiary at any time to terminate such employment or service, or affects the right of the Corporation or any Subsidiary to increase or decrease the Grantee’s other compensation.

4. Manner of Exercise.

     4.1 Method of Exercise of Option.

     The Corporation has established a web – based system for managing and exercising Options. Currently, UBS Financial Services, Inc. manages Option exercises. In order to exercise an Option, the Grantee must contact UBS either by logging on to the UBS OneSource website (http://www.ubs.com/onesource/qlgc) or by calling the UBS Call Center at 1-866-756-4421. UBS will request from the Grantee information regarding the Option to be exercised, the method of payment of the exercise price and the order type. In addition, the Grantee may elect to have income taxes withheld at higher than the statutory rate. In order to comply with the terms of the Plan, the Grantee also must deliver:

• payment in full for the Exercise Price of the shares to be purchased in cash, check or by electronic funds transfer, or utilizing the UBS same day sale procedures;

• any written statements or agreements required pursuant to Section 8.1 of the Plan; and

• satisfaction of the tax withholding provisions of Section 8.5 of the Plan.

The Administrator also may, but is not required to, authorize a non-cash payment alternative by notice and third party payment in such manner as may be authorized by the Administrator. For other methods of payment for exercise, contact the Administrator.

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     The Option will qualify as an ISO only if it meets all of the applicable requirements of the Code. The Option may be rendered a nonqualified stock option if the Administrator permits the use of one or more of the non-cash payment alternatives referenced above.

     4.2 Responsibility for Taxes. The ultimate liability for any and all tax, social insurance and payroll tax withholding legally payable by an employee under applicable law (including without limitation laws of foreign jurisdictions)(“Tax-Related Items”) is and remains Grantee’s responsibility and liability and the Corporation (a) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Option and the subsequent sale of the shares of Common Stock subject to the Option; and (b) does not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate Grantee’s liability for Tax-Related Items.

          Prior to exercise of the Option, Grantee shall pay or make adequate arrangements satisfactory to the Administrator to satisfy all withholding obligations of the Corporation. In this regard, Grantee authorizes the Corporation to withhold all applicable Tax-Related Items legally payable by Grantee from his or her wages or other cash compensation paid to Grantee by the Corporation or from proceeds of sale. Alternatively, or in addition, if permissible under local law, the Corporation may sell or arrange for the sale of shares of Common Stock that Grantee is due to acquire to meet the minimum withholding obligations for Tax-Related Items. Finally, Grantee shall pay to the Corporation any amount of any Tax-Related Items that the Corporation may be required to withhold as a result of Grantee’s participation in the Plan or Grantee’s purchase of shares of Common Stock that cannot be satisfied by the means previously described.

5. Early Termination of Option.

     5.1 Expiration Date. Subject to earlier termination as provided below in this Section 5, the Option will terminate on the tenth (10^th) anniversary of the Award Date (the “Expiration Date”).

     5.2 Possible Termination of Option upon Change in Control. The Option is subject to termination in connection with a Change in Control Event or certain similar reorganization events as provided in Section 7.4 of the Plan.

     5.3 Termination of Option upon a Termination of Grantee’s Employment or Services. Subject to earlier termination on the Expiration Date of the Option or pursuant to Section 5.2 above, if the Grantee ceases to be employed by or ceases to provide services to the Corporation or a Subsidiary, the following rules shall apply (the last day that the Grantee is employed by or provides services to the Corporation or a Subsidiary is referred to as the Grantee’s “Severance Date”):

• other than as expressly provided below in this Section 5.3, (a) the Grantee will have until the date that is 3 months after his or her Severance Date to exercise the Option (or portion thereof) to the extent that it was vested on the Severance Date, (b) the Option, to the extent not vested on the Severance Date, shall terminate on the Severance Date, and (c) the Option, to the extent exercisable for the 3-month period

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	following the Severance Date and not exercised during such period, shall terminate at the close of business on the last day of the 3-month period;
•	if the termination of the Grantee’s employment or services is the result of the Grantee’s death or Total Disability (as defined below), (a) the Grantee (or his or her beneficiary or personal representative, as the case may be) will have until the date that is 12 months after the Grantee’s Severance Date to exercise the Option, (b) the Option, to the extent not vested on the Severance Date, shall terminate on the Severance Date, and (c) the Option, to the extent exercisable for the 12-month period following the Severance Date and not exercised during such period, shall terminate at the close of business on the last day of the 12-month period;
•	if the Grantee’s employment or services are terminated by the Corporation or a Subsidiary for Cause (as defined below), the Option (whether vested or not) shall terminate on the Severance Date.

     For purposes of the Option, “Total Disability” means a “permanent and total disability” (within the meaning of Section 22(e)(3) of the Code or as otherwise determined by the Administrator).

     For purposes of the Option, “Cause” means that the Grantee:

(1)	has been negligent in the discharge of his or her duties to the Corporation or any of its Subsidiaries, has refused to perform stated or assigned duties or is incompetent in or (other than by reason of a disability or analogous condition) incapable of performing those duties;
(2)	has been dishonest or committed or engaged in an act of theft, embezzlement or fraud, a breach of confidentiality, an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information; has breached a fiduciary duty, or willfully and materially violated any other duty, law, rule, regulation or policy of the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or has been convicted of a felony or misdemeanor (other than minor traffic violations or similar offenses);
(3)	has materially breached any of the provisions of any agreement with the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or
(4)	has engaged in unfair competition with, or otherwise acted intentionally in a manner injurious to the reputation, business or assets of, the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; has improperly induced a vendor or customer to break or terminate any contract with the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries; or has induced a principal for whom the Corporation, any of its Subsidiaries or any affiliate of the Corporation or any of its Subsidiaries acts as agent to terminate such agency relationship.

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     In all events the Option is subject to earlier termination on the Expiration Date of the Option or as contemplated by Section 5.2. The Administrator shall be the sole judge of whether the Grantee continues to render employment or services for purposes of this Option Agreement.

     Notwithstanding any post-termination exercise period provided for herein or in the Plan, the Option will qualify as an ISO only if it is exercised within the applicable exercise periods for ISOs under, and meets all of the other requirements of, the Code. If the Option is not exercised within the applicable exercise periods for ISOs or does not meet such other requirements, the Option will be rendered a nonqualified stock option.

6. Non-Transferability.

     The Option and any other rights of the Grantee under this Option Agreement or the Plan are nontransferable and exercisable only by the Grantee, except as set forth in Section 5.7 of the Plan.

7. Adjustment.

     The total number of shares of Common Stock subject to the Option, as well as the Exercise Price of the Option, are subject to adjustment pursuant to Section 7.1 of the Plan.

8. Data Privacy Consent.

     Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data as described in this document by and among, as applicable, the Corporation, its Subsidiaries, or affiliates for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan.

     Grantee further understands that the Corporation, its Subsidiaries or affiliates hold certain personal information about Grantee, including, but not limited to, Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock held in the Corporation and details of all Options or other entitlements to shares of Common Stock awarded, canceled, exercised, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than Grantee’s country. Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom Grantee may elect to deposit any shares of Common Stock acquired upon exercise of the Option. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage Grantee’s participation in the Plan. Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or withdraw the consents herein by contacting the Corporation’s human resources department. Grantee understands that withdrawal of consent may affect Grantee’s ability to exercise or realize benefits from the Option.

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9. Nature of Grant.

     In accepting the grant of the Option, Grantee acknowledges that: (i) the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified, suspended or terminated by the Corporation at any time, as provided in the Plan and these Terms; (ii) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of stock options, or benefits in lieu of stock options even if stock options have been granted repeatedly in the past; (iii) all decisions with respect to future grants will be at the sole discretion of the Corporation; (iv) Grantee’s participation in the Plan shall not create a right to further employment and shall not interfere with the ability of the Corporation or its subsidiaries to terminate Grantee’s employment relationship at any time with or without cause; (v) Grantee’s participation in the Plan is voluntary; (vi) in the event that Grantee is not an employee of the Corporation, the Option grant will not be interpreted to form an employment contract or relationship with the Corporation, and furthermore, the Option grant will not be interpreted to form an employment contract with the Corporation and any of its Subsidiaries or affiliates; (vii) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty; (viii) if the underlying shares of Common Stock do not increase in value, the Option will have no value; (ix) if Grantee exercises his or her Option and obtains shares of Common Stock, the value of those shares of Common Stock acquired upon exercise may increase or decrease in value, even below the Exercise Price; and (x) no claim or entitlement to compensation or damages arises from termination of the Option or diminution in value of the Option or shares of Common Stock acquired pursuant to the Option and Grantee irrevocably releases the Corporation and its Subsidiaries and affiliates from any such claim that may arise.

10. Notices.

     Any notice to be given under the terms of this Option Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of the Secretary, and to the Grantee at the address last reflected on the Corporation’s payroll records, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be delivered in person or shall be enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. Any such notice shall be given only when received, but if the Grantee is no longer employed by the Corporation or a Subsidiary, shall be deemed to have been duly given five business days after the date mailed in accordance with the foregoing provisions of this Section 10.

11. Plan.

     The Option and all rights of the Grantee under this Option Agreement are subject to the terms and conditions of the Plan, incorporated herein by this reference. The Grantee agrees to be bound by the terms of the Plan and this Option Agreement. The Grantee acknowledges having read and understanding the Plan and this Option Agreement. Unless otherwise expressly provided in other sections of this Option Agreement, provisions of the Plan that confer discretionary authority on the Board or the Administrator do not and shall not be deemed to create any rights in the Grantee unless such rights are expressly set forth herein or are otherwise

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in the sole discretion of the Board or the Administrator so conferred by appropriate action of the Board or the Administrator under the Plan after the date hereof.

12. Entire Agreement.

     This Option Agreement and the Plan together constitute the entire agreement and supersede all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Option Agreement may be amended pursuant to Section 8.6 of the Plan. Such amendment must be in writing and signed by the Corporation. The Corporation may, however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Grantee hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.

13. Governing Law.

     This Option Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to conflict of law principles thereunder.

14. Effect of this Agreement.

     Subject to the Corporation’s right to terminate the Option pursuant to Section 7.4 of the Plan, this Option Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors to the Corporation.

15. Section Headings.

     The section headings of this Option Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof.

16. Acceptance.

     In accepting the grant of the Option, Grantee acknowledges receipt of a copy of the Plan, the Grant Notice and these Terms. Grantee has read and understands the terms and provisions thereof, and has accepted the Option subject to all terms and conditions of the Plan, the Grant Notice and these Terms. Grantee acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the shares of Common Stock acquired upon exercise and that Grantee should consult a tax adviser prior to such exercise or disposition.

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EX-10.3

Exhibit 10.3

QLOGIC CORPORATION
2005 PERFORMANCE INCENTIVE PLAN
TERMS AND CONDITIONS OF STOCK UNIT AWARD

1. General.

     Subject to these Terms and Conditions of Stock Unit Award (these “Terms”) and the QLogic Corporation 2005 Performance Incentive Plan (the “Plan”), QLogic Corporation (the “Corporation”) has granted to the Grantee (as defined below) a credit of stock units under the Plan (the “Stock Unit Award” or “Award”) with respect to the number of stock units provided in the Notice of Grant Agreement (“Grant Notice”) corresponding to that particular Award grant (subject to adjustment as provided in Section 7.1 of the Plan) (the “Stock Units”). As used herein, the term “stock unit” means a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding share of the Corporation’s Common Stock (subject to adjustment as provided in Section 7.1 of the Plan) solely for purposes of the Plan and these Terms. The recipient of the Award identified in the Grant Notice is referred to as the “Grantee.” The effective date of grant of the Award as set forth on the Grants tab on the CEFS website (www.ubs.com/cefs/qlgc) is referred to as the “Award Date.” Capitalized terms are defined in the Plan if not defined herein. The Award has been granted to the Grantee in addition to, and not in lieu of, any other form of compensation otherwise payable or to be paid to the Grantee. The Stock Units shall be used solely as a device for the determination of the payment to eventually be made to the Participant if such Stock Units vest pursuant to Section 2. The Stock Units shall not be treated as property or as a trust fund of any kind.

     The Grant Notice and these Terms are collectively referred to as the “Stock Unit Award Agreement” applicable to the Stock Units, or this “Stock Unit Award Agreement.”

2. Vesting.

     Subject to adjustment under Section 7.1 of the Plan and further subject to early termination under Section 6 of these Terms and Section 7.4 of the Plan, the Award shall vest and become non-forfeitable with respect to twenty-five (25%) of the total number of Stock Units on each of the first, second, third and fourth anniversaries of the Award Date.

3. Continuance of Employment/Service Required; No Employment/Service Commitment.

     The vesting schedule requires continued employment or service through each applicable vesting date as a condition to the vesting of the applicable installment of the Award and the rights and benefits under this Stock Unit Award Agreement. Employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a termination of employment or services as provided in Section 6 below or under the Plan.

     Nothing contained in this Stock Unit Award Agreement or the Plan constitutes a continued employment or service commitment by the Corporation or any of its Subsidiaries,

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affects the Grantee’s status, if he or she is an employee, as an employee at will who is subject to termination without cause, confers upon the Grantee any right to remain employed by or in service to the Corporation or any Subsidiary, interferes in any way with the right of the Corporation or any Subsidiary at any time to terminate such employment or service, or affects the right of the Corporation or any Subsidiary to increase or decrease the Grantee’s other compensation.

4. Dividend and Voting Rights.

     4.1 Limitations on Rights Associated with Stock Units. The Grantee shall have no rights as a stockholder of the Corporation, no dividend rights and no voting rights with respect to the Stock Units and any shares of Common Stock underlying or issuable in respect of such Stock Units until such shares of Common Stock are actually issued to and held of record by the Grantee. No adjustments will be made for dividends or other rights of a holder for which the record date is prior to the date of issuance of the stock certificate.

5. Crediting of Vested Stock Unit Awards; Tax Withholding.

     5.1 Crediting of Vested Stock Unit Awards.

     On or as soon as administratively practical following each vesting of the applicable portion of the total Award pursuant to Section 2 or Section 8, the Corporation shall deliver to the Grantee a number of shares of Common Stock (either by delivering one or more certificates for such shares or by entering such shares in book entry form, as determined by the Corporation in its discretion) equal to the number of Stock Units subject to this Award that vest on the applicable vesting date, unless such Stock Units terminate prior to the given vesting date pursuant to Section 6. The Corporation’s obligation to deliver or credit shares of Common Stock with respect to vested Stock Units is subject to the condition precedent that the Grantee or other person entitled under the Plan to receive any shares with respect to the vested Stock Units (a) deliver to the Corporation any representations or other documents or assurances required pursuant to Section 8.1 of the Plan and (b) make arrangements satisfactory to the Corporation to pay or otherwise satisfy the tax withholding requirements with respect to the vested Stock Units. The Grantee shall have no further rights with respect to any Stock Units that are paid or that terminate pursuant to Section 6.

     The Corporation has established a web – based system for managing Stock Unit Awards. Currently, UBS Financial Services, Inc. manages Stock Unit Awards. In the event that the Grantee wishes to sell shares of Common Stock granted pursuant to a vested Stock Unit Award, the Grantee must contact UBS either by logging on to the UBS OneSource website (http://www.ubs.com/onesource/qlgc) or by calling the UBS Call Center at 1-866-756-4421. UBS will request from the Grantee information regarding the Common Stock to be sold and the order type. In addition, the Grantee may elect to have income taxes withheld at higher than the statutory rate.

     5.2 Responsibility for Taxes. The ultimate liability for any and all tax, social insurance and payroll tax withholding legally payable by an employee under applicable law (including without limitation laws of foreign jurisdictions)(“Tax-Related Items”) is and remains

2

Grantee’s responsibility and liability and the Corporation (a) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant or vesting of the Award and the subsequent sale of the shares of Common Stock subject to the Award; and (b) does not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate Grantee’s liability for Tax-Related Items.

     Upon the granting of a Stock Unit Awards or the vesting of shares of the Common Stock in respect of the Stock Unit Awards, the Corporation (or the Subsidiary last employing the Grantee) shall have the right at its option to (a) require the Grantee to pay or provide for payment in cash of the amount of any taxes that the Corporation or the Subsidiary may be required to withhold with respect to such payment and/or distribution, or (b) deduct from any amount payable to the Grantee the amount of any taxes which the Corporation or the Subsidiary may be required to withhold with respect to such payment and/or distribution. In any case where a tax is required to be withheld in connection with Stock Unit Awards or the delivery of shares of Common Stock under this Stock Unit Award Agreement, the Administrator may, in its sole discretion, direct the Corporation or the Subsidiary to reduce the number of Stock Unit Awards or shares to be delivered by (or otherwise reacquire) the appropriate number of whole shares, valued at their then fair market value (with the “fair market value” of such shares determined in accordance with the applicable provisions of the Plan), to satisfy such withholding obligation at the minimum applicable withholding rates. Alternatively, or in addition, if permissible under local law, the Corporation may sell or arrange for the sale of shares of Common Stock that Grantee is due to acquire to meet the minimum withholding obligations for Tax-Related Items. Finally, Grantee shall pay to the Corporation any amount of any Tax-Related Items that the Corporation may be required to withhold as a result of Grantee’s participation in the Plan or Grantee’s purchase of shares of Common Stock that cannot be satisfied by the means previously described.

6. Early Termination of Award.

     The Grantee’s Stock Units shall terminate to the extent such units have not become vested prior to the first date the Grantee is no longer employed by the Corporation or one of its Subsidiaries, regardless of the reason for the termination of the Grantee’s employment with the Corporation or a Subsidiary, whether with or without cause, voluntarily or involuntarily. If the Grantee is employed by a Subsidiary and that entity ceases to be a Subsidiary, such event shall be deemed to be a termination of employment of the Grantee for purposes of this Agreement, unless the Grantee otherwise continues to be employed by the Corporation or another of its Subsidiaries following such event. If any unvested Stock Units are terminated hereunder, such Stock Units shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Corporation and without any other action by the Grantee, or the Grantee’s beneficiary or personal representative, as the case may be. The Administrator shall be the sole judge of whether the Grantee continues to render employment or services for purposes of this Stock Unit Award Agreement.

7. Restrictions on Transfer.

     Neither the Stock Unit Award, nor any interest therein or amount or shares payable in respect thereof may be sold, assigned, transferred, pledged or otherwise disposed of, alienated or

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encumbered, either voluntarily or involuntarily. The transfer restrictions in the preceding sentence shall not apply to (a) transfers to the Corporation, or (b) transfers by will or the laws of descent and distribution.

8. Adjustment.

     The Administrator may accelerate payment and vesting of the Stock Units in such circumstances as it, in its sole discretion, may determine. In addition, upon the occurrence of certain events relating to the Corporation’s stock contemplated by Section 7.1 of the Plan (including, without limitation, an extraordinary cash dividend on such stock), the Administrator shall make adjustments if appropriate in the number of Stock Units then outstanding and the number and kind of securities that may be issued in respect of the Stock Unit Award. No such adjustment shall be made with respect to any ordinary cash dividend for which dividend equivalents are paid pursuant to Section 4.2.

9. Data Privacy Consent.

     Grantee explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of Grantee’s personal data as described in this document by and among, as applicable, the Corporation, its Subsidiaries, or affiliates for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan.

     Grantee further understands that the Corporation, its Subsidiaries or affiliates hold certain personal information about Grantee, including, but not limited to, Grantee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock held in the Corporation and details of all Awards or other entitlements to shares of Common Stock awarded, canceled, exercised, vested, unvested or outstanding in Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than Grantee’s country. Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom Grantee may elect to deposit any shares of Common Stock acquired upon vesting of the Award. Grantee understands that Data will be held only as long as is necessary to implement, administer and manage Grantee’s participation in the Plan. Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or withdraw the consents herein by contacting the Corporation’s human resources department. Grantee understands that withdrawal of consent may affect Grantee’s ability to exercise or realize benefits from the Award.

10. Nature of Grant.

     In accepting the grant of the Award, Grantee acknowledges that: (i) the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified,

4

suspended or terminated by the Corporation at any time, as provided in the Plan and these Terms; (ii) the grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future grants of stock units, or benefits in lieu of stock units even if stock units have been granted repeatedly in the past; (iii) all decisions with respect to future grants will be at the sole discretion of the Corporation; (iv) Grantee’s participation in the Plan shall not create a right to further employment and shall not interfere with the ability of the Corporation or its subsidiaries to terminate Grantee’s employment relationship at any time with or without cause; (v) Grantee’s participation in the Plan is voluntary; (vi) in the event that Grantee is not an employee of the Corporation, the Award grant will not be interpreted to form an employment contract or relationship with the Corporation, and furthermore, the Award grant will not be interpreted to form an employment contract with the Corporation and any of its Subsidiaries or affiliates; (vii) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty; (viii) if Grantee vests in his or her Award and shares of Common Stock are no longer restricted, the value of those shares of Common Stock acquired upon vesting may increase or decrease in value, even below the price at which such Award was originally granted; and (x) no claim or entitlement to compensation or damages arises from termination of the Award or diminution in value of the Award or shares of Common Stock acquired pursuant to the Award and Grantee irrevocably releases the Corporation and its Subsidiaries and affiliates from any such claim that may arise.

11. Notices.

     Any notice to be given under the terms of this Stock Unit Award Agreement shall be in writing and addressed to the Corporation at its principal office to the attention of the Secretary, and to the Grantee at the address last reflected on the Corporation’s payroll records, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be delivered in person or shall be enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. Any such notice shall be given only when received, but if the Grantee is no longer employed by the Corporation or a Subsidiary, shall be deemed to have been duly given five business days after the date mailed in accordance with the foregoing provisions of this Section 11.

12. Plan.

     The Award and all rights of the Grantee under this Stock Unit Award Agreement are subject to the terms and conditions of the Plan, incorporated herein by this reference. The Grantee agrees to be bound by the terms of the Plan and this Stock Unit Award Agreement. The Grantee acknowledges having read and understanding the Plan and this Stock Unit Award Agreement. Unless otherwise expressly provided in other sections of this Stock Unit Award Agreement, provisions of the Plan that confer discretionary authority on the Board or the Administrator do not and shall not be deemed to create any rights in the Grantee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Board or the Administrator so conferred by appropriate action of the Board or the Administrator under the Plan after the date hereof.

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13. Entire Agreement.

     This Stock Unit Award Agreement and the Plan together constitute the entire agreement and supersede all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Stock Unit Award Agreement may be amended pursuant to Section 8.6 of the Plan. Such amendment must be in writing and signed by the Corporation. The Corporation may, however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Grantee hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.

14. Governing Law.

     This Stock Unit Award Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to conflict of law principles thereunder.

15. Effect of this Agreement.

     Subject to the Corporation’s right to terminate the Award pursuant to Section 7.4 of the Plan, this Stock Unit Award Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors to the Corporation.

16. Limitation on Participant’s Rights.

     Participation in the Plan confers no rights or interests other than as herein provided. This Stock Unit Award Agreement creates only a contractual obligation on the part of the Corporation as to amounts payable and shall not be construed as creating a trust. Neither the Plan nor any underlying program, in and of itself, has any assets. The Grantee shall have only the rights of a general unsecured creditor of the Corporation with respect to amounts credited and benefits payable, if any, with respect to the Stock Units, and rights no greater than the right to receive the Common Stock as a general unsecured creditor with respect to Stock Units, as and when payable hereunder.

17. Section Headings.

     The section headings of this Stock Unit Award Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof.

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18. Construction.

     It is intended that the terms of the Award will not result in the imposition of any tax liability pursuant to Section 409A of the Code. The Stock Unit Award Agreement shall be construed and interpreted consistent with that intent.

19. Acceptance.

     In accepting the grant of the Award, Grantee acknowledges receipt of a copy of the Plan, the Grant Notice and these Terms. Grantee has read and understands the terms and provisions thereof, and has accepted the Award subject to all terms and conditions of the Plan, the Grant Notice and these Terms. Grantee acknowledges that there may be adverse tax consequences upon vesting of the Award or disposition of the shares of Common Stock acquired upon vesting of the Award and that Grantee should consult a tax adviser prior to such exercise or disposition.

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EX-31.1

EXHIBIT 31.1

Certification 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

I, H.K. Desai, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of QLogic Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ H.K. DESAI
	H.K. Desai
	Chief Executive Officer

Date: August 1, 2006

EX-31.2

EXHIBIT 31.2

Certification 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

I, Anthony J. Massetti, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of QLogic Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:	/s/ ANTHONY J. MASSETTI
	Anthony J. Massetti
	Chief Financial Officer

Date: August 1, 2006

EX-32

EXHIBIT 32

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

     Each of the undersigned, the Chief Executive Officer and Chief Financial Officer of QLogic Corporation (the “Company”), hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

     (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended July 2, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ H.K. DESAI

H.K. Desai
Chief Executive Officer

/s/ ANTHONY J. MASSETTI

Anthony J. Massetti
Chief Financial Officer

Dated: August 1, 2006

     The foregoing certification is being furnished to the Securities and Exchange Commission pursuant to 18 U.S.C Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, except to the extent that the Company specifically incorporates it by reference and regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.