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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



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|           |  |                                                        
|---------- |  | -------------------------------------------------------
|(Mark One) |  |                                                        
|[X]        |  | Quarterly Report Pursuant to Section 13 or 15(d) of the
|           |  | Securities Exchange Act of 1934                        
|           |  | For the quarterly period ended December 28, 2003       

OR

| |     |                                                         
| | --- | --------------------------------------------------------
| | [ ] | Transition Report Pursuant to Section 13 or 15(d) of the
| |     | Securities Exchange Act of 1934                         

Commission File No. 001-31353

EMULEX CORPORATION

(Exact name of registrant as specified in its charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 51-0300558         
|(State or other jurisdiction             |  | (I.R.S Employer    
|of incorporation or organization)        |  | Identification No.)
|                                         |  |                    
|3333 Susan Street                        |  |                    
|Costa Mesa, California                   |  | 92626              
|(Address of principal executive offices) |  | (Zip Code)         

(714) 662-5600
(Registrants telephone number, including area code)



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

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

Yes [X] No [  ]


As of February 5, 2004, the registrant had 81,874,938 shares of common stock
outstanding.



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EMULEX CORPORATION AND SUBSIDIARIES

INDEX

|                                                                                              |                                                                                                                    |  |      |   | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ |  | ---- | - | 
|                                                                                              |                                                                                                                    |  | PAGE
|                                                                                              |                                                                                                                    |  |     
|Part I. FINANCIAL INFORMATION                                                                 |                                                                                                                    |  |      |  
|Item 1. Financial Statements                                                                  |                                                                                                                    |  |      |  
|                                                                                              | Condensed Consolidated Balance Sheets
December 28, 2003 and June 29, 2003                                          |  |      | 2 | 
|                                                                                              | Condensed Consolidated Statements of Income
Three and six months ended December 28, 2003
and December 29, 2002     |  |      | 3 | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows
Three and six months ended December 28, 2003
and December 29, 2002 |  |      | 4 | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                               |  |      | 5 | 
|Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                                                    |  | 17   |  
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                    |  | 48   |  
|Item 4. Controls and Procedures                                                               |                                                                                                                    |  | 48   |  
|Part II. OTHER INFORMATION                                                                    |                                                                                                                    |  |      |  
|Item 1. Legal Proceedings                                                                     |                                                                                                                    |  | 49   |  
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                    |  | 50   |  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                    |  | 51   |  
|Item 5. Other Information                                                                     |                                                                                                                    |  | 52   |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                    |  | 52   |  
|Signatures                                                                                    |                                                                                                                    |  | 55   |  

1



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##### 



Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)

|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------- | --------- | ------------ | ------- | -------- | --------- | ------- | ------- | 
|                                                                                                                                                                        |                                     |                           |           | December 28, |         | June 29,
|                                                                                                                                                                        |                                     |                           |           | 2003         |         | 2003    
|                                                                                                                                                                        |                                     |                           |           |              |         |         
|Assets                                                                                                                                                                  |                                     |                           |           |              |         |          |           |        
|Current assets:                                                                                                                                                         |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        | Cash and cash equivalents           |                           | $         | 191,640      |         |          | $         | 136,971 |        
|                                                                                                                                                                        | Restricted cash                     |                           |           | 1,380        |         |          |           | 9,342   |        
|                                                                                                                                                                        | Investments                         |                           |           | 190,700      |         |          |           | 239,302 |        
|                                                                                                                                                                        | Accounts and other receivables, net |                           |           | 59,033       |         |          |           | 46,678  |        
|                                                                                                                                                                        | Litigation settlements receivable   |                           |           | 13,095       |         |          |           | 13,095  |        
|                                                                                                                                                                        | Inventories, net                    |                           |           | 22,522       |         |          |           | 10,998  |        
|                                                                                                                                                                        | Prepaid expenses                    |                           |           | 5,122        |         |          |           | 5,516   |        
|                                                                                                                                                                        | Deferred income taxes               |                           |           | 25,695       |         |          |           | 36,330  |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        |                                     | Total current assets      |           |              | 509,187 |          |           |         | 498,232 | 
|Property and equipment, net                                                                                                                                             |                                     |                           | 44,919    |              |         |          | 26,585    |        
|Investments                                                                                                                                                             |                                     |                           | 182,677   |              |         |          | 234,847   |        
|Goodwill                                                                                                                                                                |                                     |                           | 584,150   |              |         |          | 397,256   |        
|Other intangibles, net                                                                                                                                                  |                                     |                           | 136,010   |              |         |          | 27,067    |        
|Deferred income taxes                                                                                                                                                   |                                     |                           | 6,280     |              |         |          |          |        
|Other assets                                                                                                                                                            |                                     |                           | 1,853     |              |         |          | 5,782     |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        |                                     | $                         | 1,465,076 |              |         | $        | 1,189,769 |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|Liabilities and Stockholders Equity                                                                                                                                    |                                     |                           |           |              |         |          |           |        
|Current liabilities:                                                                                                                                                    |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        | Accounts payable                    |                           |           | 33,431       |         |          |           | 11,298  |        
|                                                                                                                                                                        | Accrued liabilities                 |                           |           | 19,982       |         |          |           | 18,806  |        
|                                                                                                                                                                        | Accrued litigation settlements      |                           |           |             |         |          |           | 39,500  |        
|                                                                                                                                                                        | Income taxes payable                |                           |           | 8,118        |         |          |           | 5,457   |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        |                                     | Total current liabilities |           |              | 61,531  |          |           |         | 75,061  | 
|Convertible subordinated notes                                                                                                                                          |                                     |                           | 469,148   |              |         |          | 208,518   |        
|Contracts payable                                                                                                                                                       |                                     |                           | 11        |              |         |          |          |        
|Deferred income taxes                                                                                                                                                   |                                     |                           |          |              |         |          | 4,260     |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|Total liabilities                                                                                                                                                       |                                     |                           | 530,690   |              |         |          | 287,839   |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|Commitments and contingencies (note 8)                                                                                                                                  |                                     |                           |           |              |         |          |           |        
|Subsequent events (note 10)                                                                                                                                             |                                     |                           |           |              |         |          |           |        
|Stockholders equity:                                                                                                                                                   |                                     |                           |           |              |         |          |           |        
|Preferred stock, $0.01 par value; 1,000,000 shares authorized
(150,000 shares designated as Series A Junior Participating
Preferred Stock); none issued and outstanding |                                     |                           |          |              |         |          |          |        
|Common stock, $0.10 par value; 240,000,000 shares authorized;
81,632,412 and 82,465,813 issued and outstanding at
December 28, 2003, and June 29, 2003, respectively    |                                     |                           | 8,163     |              |         |          | 8,247     |        
|Additional paid-in capital                                                                                                                                              |                                     |                           | 923,909   |              |         |          | 907,976   |        
|Deferred compensation                                                                                                                                                   |                                     |                           | (12,755   | )            |         |          | (3,159    | )      
|Retained earnings (accumulated deficit)                                                                                                                                 |                                     |                           | 15,069    |              |         |          | (11,134   | )      
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        | Total stockholders equity          |                           |           | 934,386      |         |          |           | 901,930 |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        
|                                                                                                                                                                        |                                     | $                         | 1,465,076 |              |         | $        | 1,189,769 |        
|                                                                                                                                                                        |                                     |                           |           |              |         |          |           |        

See accompanying notes to condensed consolidated financial statements.

2



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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |        |        | 
|------------------------------------------------ | ----------------------------------------------------------- | -------------------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ------------ | ------ | ------------ | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                 |                                                             |                                  |        | Three Months Ended |        | Six Months Ended
|                                                 |                                                             |                                  |        |                    |        |                 
|                                                 |                                                             |                                  |        | December 28,       |        | December 29,     |        | December 28, |        | December 29,
|                                                 |                                                             |                                  |        | 2003               |        | 2002             |        | 2003         |        | 2002        
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |             
|Net revenues                                     |                                                             | $                                | 94,369 |                    |        | $                | 76,448 |              |        | $            | 178,946 |        |         | $ | 146,873 |       
|Cost of sales                                    |                                                             |                                  | 34,806 |                    |        |                  | 27,341 |              |        |              | 63,133  |        |         |   | 55,223  |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 |                                                             | Gross profit                     |        |                    | 59,563 |                  |        |              | 49,107 |              |         |        | 115,813 |   |         |        | 91,650 | 
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Operating expenses:                              |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Engineering and development                                 |                                  |        | 18,311             |        |                  |        | 15,922       |        |              |         | 34,655 |         |   |         | 29,595 |       
|                                                 | Selling and marketing                                       |                                  |        | 6,850              |        |                  |        | 4,359        |        |              |         | 11,452 |         |   |         | 9,023  |       
|                                                 | General and administrative                                  |                                  |        | 5,588              |        |                  |        | 3,322        |        |              |         | 9,245  |         |   |         | 6,068  |       
|                                                 | In-process research and development                         |                                  |        | 11,400             |        |                  |        |             |        |              |         | 11,400 |         |   |         |       |       
|                                                 | Amortization of other intangibles                           |                                  |        | 4,301              |        |                  |        | 1,452        |        |              |         | 5,751  |         |   |         | 2,905  |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 |                                                             | Total operating expenses         |        |                    | 46,450 |                  |        |              | 25,055 |              |         |        | 72,503  |   |         |        | 47,591 | 
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 |                                                             | Operating income                 |        |                    | 13,113 |                  |        |              | 24,052 |              |         |        | 43,310  |   |         |        | 44,059 | 
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Nonoperating income (loss):                      |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Interest income                                             |                                  |        | 1,978              |        |                  |        | 3,237        |        |              |         | 4,476  |         |   |         | 6,939  |       
|                                                 | Interest expense                                            |                                  |        | (727               | )      |                  |        | (1,227       | )      |              |         | (1,760 | )       |   |         | (3,031 | )     
|                                                 | Gain (loss) on repurchase of
convertible subordinated notes |                                  |        | (1,764             | )      |                  |        |             |        |              |         | 2,901  |         |   |         | 28,729 |       
|                                                 | Other income (expense), net                                 |                                  |        | 58                 |        |                  |        | (56          | )      |              |         | 164    |         |   |         | (86    | )     
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 |                                                             | Total nonoperating income (loss) |        |                    | (455   | )                |        |              | 1,954  |              |         |        | 5,781   |   |         |        | 32,551 | 
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Income before income taxes                       |                                                             |                                  | 12,658 |                    |        |                  | 26,006 |              |        |              | 49,091  |        |         |   | 76,610  |       
|Income tax provision                             |                                                             |                                  | 9,043  |                    |        |                  | 10,489 |              |        |              | 22,888  |        |         |   | 29,112  |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Net income                                       |                                                             | $                                | 3,615  |                    |        | $                | 15,517 |              |        | $            | 26,203  |        |         | $ | 47,498  |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Net income per share:                            |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Basic                                                       |                                  | $      | 0.04               |        |                  | $      | 0.19         |        |              | $       | 0.32   |         |   | $       | 0.58   |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Diluted                                                     |                                  | $      | 0.04               |        |                  | $      | 0.19         |        |              | $       | 0.31   |         |   | $       | 0.56   |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|Number of shares used in per share
computations: |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Basic                                                       |                                  |        | 82,558             |        |                  |        | 81,979       |        |              |         | 82,550 |         |   |         | 81,912 |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       
|                                                 | Diluted                                                     |                                  |        | 85,015             |        |                  |        | 87,486       |        |              |         | 84,577 |         |   |         | 88,329 |       
|                                                 |                                                             |                                  |        |                    |        |                  |        |              |        |              |         |        |         |   |         |       

See accompanying notes to condensed consolidated financial statements.

3



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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |          |         |        |  
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------- | -------- | ---------------- | ------- | ------------ | -------- | ------- | ------ | -
|                                                                                  |                                                                                   |                                                         |                                   |          | Six Months Ended
|                                                                                  |                                                                                   |                                                         |                                   |          |                 
|                                                                                  |                                                                                   |                                                         |                                   |          | December 28,     |         | December 29,
|                                                                                  |                                                                                   |                                                         |                                   |          | 2003             |         | 2002        
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |             
|Cash flows from operating activities:                                             |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Net income                                                                        |                                                                                   | $                                                       | 26,203                            |          |                  | $       | 47,498       |         
|                                                                                  | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                         |                                   |          |                  |         |              |          |        
|                                                                                  |                                                                                   | Depreciation and amortization of property and equipment |                                   |          | 5,849            |         |              |          | 5,254   |       
|                                                                                  |                                                                                   | Gain on repurchase of convertible subordinated notes    |                                   |          | (2,901           | )       |              |          | (28,729 | )     
|                                                                                  |                                                                                   | Payment of litigation settlements                       |                                   |          | (39,500          | )       |              |          |        |       
|                                                                                  |                                                                                   | Stock-based compensation                                |                                   |          | 3,040            |         |              |          | 1,947   |       
|                                                                                  |                                                                                   | Amortization of other intangibles                       |                                   |          | 5,751            |         |              |          | 2,905   |       
|                                                                                  |                                                                                   | In-process research and development                     |                                   |          | 11,400           |         |              |          |        |       
|                                                                                  |                                                                                   | Loss on disposal of property and equipment              |                                   |          | 50               |         |              |          | 141     |       
|                                                                                  |                                                                                   | Deferred income taxes                                   |                                   |          | 10,081           |         |              |          | 24,218  |       
|                                                                                  |                                                                                   | Tax benefit from exercise of stock options              |                                   |          | 3,397            |         |              |          | 1,287   |       
|                                                                                  |                                                                                   | Provision for doubtful accounts                         |                                   |          | 73               |         |              |          | 118     |       
|                                                                                  |                                                                                   | Changes in assets and liabilities:                      |                                   |          |                  |         |              |          |         |       
|                                                                                  |                                                                                   |                                                         | Accounts and other receivables    |          |                  | (6,274  | )            |          |         | (7,974 | )
|                                                                                  |                                                                                   |                                                         | Inventories                       |          |                  | (10,123 | )            |          |         | (1,400 | )
|                                                                                  |                                                                                   |                                                         | Prepaid expenses and other assets |          |                  | 2,216   |              |          |         | 1,085  |  
|                                                                                  |                                                                                   |                                                         | Accounts payable                  |          |                  | 20,354  |              |          |         | 1,039  |  
|                                                                                  |                                                                                   |                                                         | Accrued liabilities               |          |                  | (7,910  | )            |          |         | 652    |  
|                                                                                  |                                                                                   |                                                         | Income taxes payable              |          |                  | 2,618   |              |          |         | (427   | )
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|                                                                                  | Net cash provided by operating activities                                         |                                                         |                                   | 24,324   |                  |         |              | 47,614   |        
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Cash flows from investing activities:                                             |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Net proceeds from sale of property and equipment                                  |                                                                                   |                                                         | 36                                |          |                  |         |             |         
|Additions to property and equipment                                               |                                                                                   |                                                         | (22,124                           | )        |                  |         | (6,997       | )       
|Decrease (increase) in restricted cash related to the
construction escrow
account |                                                                                   |                                                         | 7,962                             |          |                  |         | (11,144      | )       
|Payments for Vixel Corporation, net of cash acquired                              |                                                                                   |                                                         | (294,755                          | )        |                  |         |             |         
|Payments for the technology assets of Trebia Networks, Inc.                       |                                                                                   |                                                         | (2,094                            | )        |                  |         |             |         
|Purchases of investments                                                          |                                                                                   |                                                         | (121,942                          | )        |                  |         | (371,326     | )       
|Maturities of investments                                                         |                                                                                   |                                                         | 232,390                           |          |                  |         | 275,821      |         
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|                                                                                  | Net cash used in investing activities                                             |                                                         |                                   | (200,527 | )                |         |              | (113,646 | )      
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Cash flows from financing activities:                                             |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Payments for notes payable and capital leases                                     |                                                                                   |                                                         | (1,279                            | )        |                  |         |             |         
|Proceeds from issuance of common stock under stock option plans                   |                                                                                   |                                                         | 5,505                             |          |                  |         | 877          |         
|Proceeds from issuance of common stock under employee
stock purchase plan         |                                                                                   |                                                         | 1,199                             |          |                  |         | 437          |         
|Repurchase of common stock                                                        |                                                                                   |                                                         | (40,500                           | )        |                  |         |             |         
|Net proceeds from issuance of convertible subordinated notes                      |                                                                                   |                                                         | 439,198                           |          |                  |         |             |         
|Repurchase of convertible subordinated notes                                      |                                                                                   |                                                         | (173,251                          | )        |                  |         | (104,169     | )       
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|                                                                                  | Net cash provided by (used in) financing activities                               |                                                         |                                   | 230,872  |                  |         |              | (102,855 | )      
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Net increase (decrease) in cash and cash equivalents                              |                                                                                   |                                                         | 54,669                            |          |                  |         | (168,887     | )       
|Cash and cash equivalents at beginning of period                                  |                                                                                   |                                                         | 136,971                           |          |                  |         | 282,561      |         
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Cash and cash equivalents at end of period                                        |                                                                                   | $                                                       | 191,640                           |          |                  | $       | 113,674      |         
|                                                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Supplemental disclosures:                                                         |                                                                                   |                                                         |                                   |          |                  |         |              |         
|Noncash investing and financing activities:                                       |                                                                                   |                                                         |                                   |          |                  |         |              |         
|                                                                                  | Fair value of assets acquired                                                     |                                                         | $                                 | 20,936   |                  |         | $            |         |        
|                                                                                  | Fair value of liabilities assumed                                                 |                                                         |                                   | 13,449   |                  |         |              |         |        
|                                                                                  | Stock options assumed for acquired business                                       |                                                         |                                   | 47,538   |                  |         |              |         |        
|Cash paid during the period for:                                                  |                                                                                   |                                                         |                                   |          |                  |         |              |         
|                                                                                  | Interest                                                                          |                                                         | $                                 | 1,982    |                  |         | $            | 3,053    |        
|                                                                                  | Income taxes                                                                      |                                                         |                                   | 6,788    |                  |         |              | 4,494    |        

See accompanying notes to condensed consolidated financial statements.

4



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|1. |  | Summary of Significant Accounting Policies and Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly its financial position as of
December 28, 2003, and June 29, 2003, and its condensed consolidated
statements of income for the three and six months ended December 28, 2003,
and December 29, 2002, and its condensed consolidated statements of cash
flows for the six month period then ended. Interim results for the three
and six months ended December 28, 2003, are not necessarily indicative of
the results that may be expected for the year ending June 27, 2004. The
interim financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the fiscal year ended June 29,
2003.                                                                           
|  
|   |  | Recently Adopted Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Emerging Issues Task Force (EITF) recently reached a consensus on its
tentative conclusions for EITF 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides accounting guidance for customer
solutions where delivery or performance of products, services and/or
performance may occur at different points in time or over different periods
of time. Companies are required to adopt this consensus for fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
material impact on the Companys financial position, results of operations
or liquidity.                                                                                                                                                                                                                                                                                      
|  
|   |  | In January 2003, the Financial Accounting Standards Board (FASB) issued

Interpretation 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. Interpretation 46 addresses consolidation by
business enterprises of variable interest entities. Interpretation 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first year or interim period
beginning after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003. The adoption of Interpretation 46 did not have a material impact on
the Companys financial position, results of operations or liquidity.                                                                        
|  
|   |  | In April 2003, the FASB issued Statement 149, an amendment of FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which requires prospective application for contracts entered into or
modified after June 30, 2003, except for contracts that exist in fiscal
quarters that began prior to June 15, 2003, and for hedging relationships
designated after June 30, 2003. For existing contracts in fiscal quarters
that began prior to June 15, 2003, the provisions of this Statement that
relate to Statement 133 implementation issues should continue to be applied
in accordance with their respective effective dates. Statement 149 requires
that contracts with comparable characteristics be accounted for similarly.
The adoption of this pronouncement did not have a material impact on the
Companys financial position, results of operations or liquidity.
|  
|   |  | In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity.
Statement 150 requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer.
Statement 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for public companies
during the first interim period beginning after June 15, 2003. The adoption
of this pronouncement did not have a material impact on the Companys
financial position, results of operations or liquidity.                   
|  
|   |  | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In December 2002, the FASB issued Statement 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Statement 148 amends the
disclosure requirements in Statement 123, Accounting for Stock-Based
Compensation for annual periods ending after December 15, 2002, and for
interim periods beginning after December 15, 2002. The Company adopted the
disclosure provisions of Statement 148 during the three months ended March
30, 2003. Effective for financial statements for fiscal years ending after
December 15, 2002, Statement 148 also provides three alternative transition
methods for companies that choose to adopt the fair value measurement
provisions of Statement 123. Should the Company be required to adopt the
fair value                                                                                                                                       

5



---



##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | measurement provisions of Statement 123 and Statement 148, it would have a
material non-cash impact on the Companys results of operations. However,
the Company has no plans to adopt the fair value measurement provisions of
Statement 123 unless required to under new accounting standards and, as
such, the adoption of Statement 148 did not have a material impact on the
Companys financial position, results of operations or liquidity.                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company accounts for its stock-based awards to employees using the
intrinsic value method under Accounting Principles Board (APB) Opinion No.
25 and related Interpretations. Stock-based awards to non-employees, if
any, are recorded using the fair value method. Had the Company determined
compensation cost based on the fair value at the grant date for all its
stock options under Statement 123, the Companys net income would have been
the pro forma amounts indicated below:

|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------------------ | ----- | ---------------- | - | ------------ | ---- | ------------ | - | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                                      |                       |   | Three Months Ended |       | Six Months Ended
|                                                                                                                                      |                       |   |                    |       |                 
|                                                                                                                                      |                       |   | December 28,       |       | December 29,     |   | December 28, |      | December 29,
|                                                                                                                                      |                       |   | 2003               |       | 2002             |   | 2003         |      | 2002        
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |             
|Net income as reported                                                                                                                |                       | $ | 3,615              |       |                  | $ | 15,517       |      |              | $ | 26,203  |      |  | $ | 47,498  |     
|Add: total employee
stock-based compensation
expense included in net
income as reported, net of
related tax effects                   |                       |   | 1,732              |       |                  |   | 1,101        |      |              |   | 2,328   |      |  |   | 1,947   |     
|Deduct: Total employee
stock-based compensation
expense determined
under fair value method
for all awards, net of
related tax effects |                       |   | (11,540            | )     |                  |   | (8,827       | )    |              |   | (19,514 | )    |  |   | (18,084 | )   
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|Pro forma net income (loss)                                                                                                           |                       | $ | (6,193             | )     |                  | $ | 7,791        |      |              | $ | 9,017   |      |  | $ | 31,361  |     
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|Pro forma net income
(loss) per share                                                                                                 |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|                                                                                                                                      | Basic  as reported   |   | $                  | 0.04  |                  |   | $            | 0.19 |              |   | $       | 0.32 |  |   | $       | 0.58 | 
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|                                                                                                                                      | Basic  pro forma     |   | $                  | (0.08 | )                |   | $            | 0.10 |              |   | $       | 0.11 |  |   | $       | 0.38 | 
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|                                                                                                                                      | Diluted  as reported |   | $                  | 0.04  |                  |   | $            | 0.19 |              |   | $       | 0.31 |  |   | $       | 0.56 | 
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     
|                                                                                                                                      | Diluted  pro forma   |   | $                  | (0.08 | )                |   | $            | 0.09 |              |   | $       | 0.11 |  |   | $       | 0.38 | 
|                                                                                                                                      |                       |   |                    |       |                  |   |              |      |              |   |         |      |  |   |         |     



| |  | The fair value of each option granted during the three months ended December
28, 2003, and December 29, 2002, was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               |  |                    |      |                  |              |                 |      |                  |  |              |      |  |  |  |      | 
|---------------------------------------------- |  | ------------------ | ---- | ---------------- | ------------ | --------------- | ---- | ---------------- |  | ------------ | ---- |  |  |  | ---- | 
|                                               |  | Three Months Ended |      | Six Months Ended
|                                               |  |                    |      |                 
|                                               |  | December 28,       |      | December 29,     |              | December 28,    |      | December 29,    
|                                               |  | 2003               |      | 2002             |              | 2003            |      | 2002            
|                                               |  |                    |      |                  |              |                 |      |                 
|Risk-free interest rate                        |  | 1.0% to 2.5%       |      |                  | 1.6% to 2.2% |                 |      | 1.0% to 2.5%     |  | 1.6% to 2.3%
|Stock volatility                               |  | 41% to 113.4%      |      | 98.4% to 99.1%   |              | 41% to 117.7%   |      | 98.4% to 99.1%  
|Dividend yield                                 |  |                    | 0.0% |                  |              |                 | 0.0% |                  |  |              | 0.0% |  |  |  | 0.0% | 
|Average expected lives (years)                 |  | 0.5 to 2.9         |      | 0.5 to 3.7       |              | 0.5 to 2.9      |      | 0.5 to 3.7      
|Weighted-average fair value
per option granted |  | $4.92 to $17.62    |      | $16.42           |              | $4.92 to $17.62 |      | $11.51 to $16.42



| |  | The Black-Scholes model, and other currently accepted option valuation
models, were developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Companys stock option plans. These models also require
highly subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated fair value
on the grant date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|2. |  | Business Combination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On November 13, 2003, the Company completed the cash tender offer by Aviary
Acquisition Corporation, its wholly owned subsidiary, to acquire all
outstanding shares of Vixel Corporation for $10.00 net per share, without
interest. Approximately 23.9 million shares of Vixels common stock
(including the associated preferred stock purchase and other rights),
representing approximately 91.6 percent of Vixels outstanding common stock,
and 2.9 million shares of Vixels Series B convertible preferred stock,
representing all of Vixels outstanding preferred stock, were tendered in
the offer. Through its wholly owned subsidiary, the Company accepted
payment for all validly tendered shares. On November 17, 2003, the Company
completed its acquisition of Vixel by means of a short-form merger of Aviary
Acquisition Corp., with and into Vixel.
|  
|   |  | The Company acquired Vixel to expand its Fibre Channel product line and paid
$298.4 million in cash for all outstanding common stock, preferred stock
and warrants of Vixel Corporation. The Company also incurred
acquisition-related expenses of $6.8 million in cash. In addition, the
Company issued 2.2 million stock options with a fair value of approximately
$47.5 million and kept the original vesting periods for the options in
exchange for the outstanding Vixel options for a total acquisition value of
$352.7 million. The Company calculated the fair value of the 2.2 million
stock options issued at the date of acquisition using the Black-Scholes
option-pricing model. Operations of Vixel will be included within the
Companys one operating segment, networking products.                                                                   
|  
|   |  | The Company accounted for the acquisition of Vixel under the purchase method
of accounting and recorded a one-time expense of $11.4 million for purchased
in-process research and development, or IPR&D, during the three months ended
December 28, 2003. The values assigned to these projects were determined by
identifying projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use. The
features of the related products had not been released to the market as of
the date of the acquisition, but the features and functionality of the
products had been defined.                                                                                                                                                                                                                       
|  
|   |  | The IPR&D related to two significant internal product development efforts.
The first project accounted for $7.4 million of the expenses. The second
project accounted for $4.0 million of the expenses. Both projects are for
embedded switching products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The first project was in development at the time of acquisition, but had not
yet completed the full design, development and testing phases.
Approximately 35 percent of the total expected time to be spent on the first
project was complete at the date of the acquisition with the remaining
activities of the design, development and testing phases as well as the
validation and readiness stages still to occur. The estimated costs to
complete the first project are $2.7 million.                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The second project had completed design and development, and testing had
begun as of the acquisition date. Approximately 70 percent of the total
expected time to be spent on the second project was complete at the date of
the acquisition with the remaining testing activities as well as the
validation and readiness stages still to occur. The estimated costs to
complete the second project are $1.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The risks and uncertainties associated with these two projects include, but
are not limited to, delays in product release to market if there are design
flaws or testing does not go as planned. In addition, if the projects are
delayed, such delay could potentially harm the Companys relationships with
its customers. Also, even if a product is successfully developed it may not
be accepted in the marketplace.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The values of these projects were determined using the Income Forecast
Method. In applying the Income Forecast Method the value of the acquired
technologies was estimated by discounting to present value the free cash
flows generated by the products to which the technologies are associated
over the remaining lives of the technologies. To distinguish between the
cash flows attributable to the underlying technology and cash flows
attributable to other assets available for generating product revenues,
adjustments were made to provide for a fair return to fixed assets, working
capital and other assets that contribute to value. The estimates were based
on the following assumptions:                                                                                                                                                            



| |  |  | The estimated revenues associated with the first project were
evaluated over seven years with peak revenues expected in fiscal
years 2008 and 2009 and declining revenues thereafter. The
estimated
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



---



##### 

'

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |   |  | revenues associated with the second project were evaluated over nine
years with peak revenues expected in fiscal years 2008 and 2009 and
declining revenues thereafter. These projections are based on
managements estimates over the expected remaining lives of the
technologies.                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The discount rates used in the valuation reflect the relative
risk of the product lines, with a discount rate of 20% used for the
first project and a discount rate of 18% used for the second
project. These discount rates were based on the amount and risk of
effort remaining to complete the respective projects.



| |  | The Company believes that the foregoing assumptions used in determining the
income forecast associated with the IPR&D products were reasonable. No
assurance can be given, however, that the underlying assumptions used to
estimate the income forecast, the ultimate revenues and costs on such
projects or the events associated with such projects will transpire as
estimated.                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As a result of the acquisition, the Company will reduce the headcount
obtained from Vixel prior to the acquisition by a total of 23 employees,
three of whom left during the three months ended December 28, 2003, with the
remaining 20 employees, who are from the general and administrative, selling
and marketing, and manufacturing groups, scheduled to leave during the
Companys third fiscal quarter ending March 28, 2004. The Company accrued
$1.5 million at the date the Company gained effective control of Vixel,
November 13, 2003, for this reduction.
|
| |  | The total purchase and allocation among the fair values of tangible and
intangible assets and liabilities (including purchased IPR&D) are summarized
as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                         

|                               |                                     |   |         |        | 
|------------------------------ | ----------------------------------- | - | ------- | ------ | 
|Tangible assets                |                                     | $ | 31,376  |       
|Liabilities                    |                                     |   | 13,449  |       
|                               |                                     |   |         |       
|Net tangible assets            |                                     |   | 17,927  |       
|                               |                                     |   |         |       
|Identifiable
intangible assets |                                     |   |         |       
|                               | In-process research and development |   |         | 11,400 | 
|                               | Core technology                     |   |         | 43,300 | 
|                               | Developed technology                |   |         | 9,400  | 
|                               | Patents                             |   |         | 13,100 | 
|                               | Backlog                             |   |         | 500    | 
|                               | Customer relationships              |   |         | 38,200 | 
|                               | Tradename                           |   |         | 5,000  | 
|                               | Covenants not-to-compete            |   |         | 3,100  | 
|Deferred taxes                 |                                     |   | 9,986   |       
|Goodwill                       |                                     |   | 186,894 |       
|Deferred compensation          |                                     |   | 13,926  |       
|                               |                                     |   |         |       
|                               |                                     | $ | 352,733 |       
|                               |                                     |   |         |       



| |  | In accordance with Statement 141, Business Combinations, the allocation
period, which is the period that is required to identify and measure the
fair value of the assets acquired and liabilities assumed in a business
combination, should not exceed one year from the date that the Company
gained effective control of Vixel and made this initial allocation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Intangible assets with identifiable lives are being amortized on a
straight-line basis for their remaining lives as follows:                                                                                                                                                                                                                                         

|                         |  |  |  |  |              |  |  | 
|------------------------ |  |  |  |  | ------------ |  |  | 
|Core technology          |  |  |  |  | 7 years      | 
|Developed technology     |  |  |  |  | 4 years      | 
|Patents                  |  |  |  |  | 2 to 7 years | 
|Backlog                  |  |  |  |  | 3 months     | 
|Customer relationships   |  |  |  |  | 5 years      | 
|Tradename                |  |  |  |  | 7 years      | 
|Covenants not-to-compete |  |  |  |  | 3 years      | 

8



---



##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | The acquisition has been included in the condensed consolidated balance
sheets of the Company and the operating results of Vixel have been included
in the condensed consolidated statements of operations of the Company since the date
that the Company gained effective control of Vixel, November 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Following is the summarized unaudited pro forma combined results of
operations for the six months ended December 28, 2003, and the six months
ended December 29, 2002, assuming the acquisition had taken place at the
beginning of each fiscal year. The unaudited pro forma combined statement
of income for the six months ended December 28, 2003, was prepared based
upon the statement of income of Emulex for the six months ended December 28,
2003, and the statement of operations of Vixel for the period from June 30,
2003, to November 12, 2003. All operating results of Vixel were included in
the statement of income of Emulex since the date that the Company gained
effective control of Vixel, November 13, 2003. The unaudited pro forma
combined statement of income for the six months ended December 29, 2002, was
prepared based upon the statement of income of Emulex for the six months
ended December 29, 2002, and the statement of operations of Vixel for the
six months ended December 29, 2002. The unaudited pro forma results exclude
the effects of the IPR&D charge of $11.4 million but include the
amortization of other intangibles, the amortization of deferred compensation
and the increase and decrease to interest expense and interest income,
respectively, resulting from the acquisition. The unaudited pro forma
results are not necessarily indicative of the future operations or
operations that would have been reported had the acquisitions been completed
when assumed. The following unaudited information is presented in
thousands, except for the per share data.

|                             |  |                    |        |                  |  |                                       |        |              |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------------ | ------ | ---------------- |  | ------------------------------------- | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                             |  | Three Months Ended |        | Six Months Ended
|                             |  |                    |        |                 
|                             |  | December 28,       |        | December 29,     |  | December 28,                          |        | December 29,
|                             |  | 2003               |        | 2002             |  | 2003                                  |        | 2002        
|                             |  |                    |        |                  |  |                                       |        |             
|                             |  |                    |        |                  |  | (in thousands, except per share data) |        |              |  |  
|Net revenues                 |  | $                  | 99,216 |                  |  | $                                     | 82,423 |              |  | $ | 190,158 |  |  | $ | 157,989 | 
|                             |  |                    |        |                  |  |                                       |        |              |  |   |         |  |  |   |         | 
|Net income                   |  | $                  | 7,235  |                  |  | $                                     | 8,628  |              |  | $ | 23,703  |  |  | $ | 33,936  | 
|                             |  |                    |        |                  |  |                                       |        |              |  |   |         |  |  |   |         | 
|Net income per diluted share |  | $                  | 0.08   |                  |  | $                                     | 0.10   |              |  | $ | 0.27    |  |  | $ | 0.40    | 
|                             |  |                    |        |                  |  |                                       |        |              |  |   |         |  |  |   |         | 



|3. |  | Inventories                                 
|-- |  | --------------------------------------------
|  
|   |  | Inventories, net, are summarized as follows:

|               |  |                |        |          |  |   |        | 
|-------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|               |  | December 28,   |        | June 29,
|               |  | 2003           |        | 2003    
|               |  |                |        |         
|               |  | (in thousands)
|Raw materials  |  | $              | 12,095 |          |  | $ | 3,802  | 
|Finished goods |  | $              | 10,427 |          |  | $ | 7,196  | 
|               |  |                |        |          |  |   |        | 
|               |  | $              | 22,522 |          |  | $ | 10,998 | 
|               |  |                |        |          |  |   |        | 



| |  | Starting in late September 2001, some of the Companys major customers made
announcements that general economic conditions, exacerbated by the increase
in economic uncertainty in the aftermath of the terrorist events of
September 11, 2001, were having a negative impact on their financial
results. The announcements made, and forecasts received, indicated
deteriorating demand for the Companys one gigabit per second (Gbps)
products as these customers were expected to migrate to two Gbps products
for future purchases. As a result, the Company recorded an excess and
obsolete inventory charge totaling $13.6 million during the three months
ended September 30, 2001. After initially recording this one Gbps reserve
in September 2001, the Company has subsequently reduced this reserve by a
total of $8.8 million through December 28, 2003, as previously-reserved
inventory was sold. Overall, the Company has been able to recover a
significant portion of this reserved inventory that was not expected based
on the Companys forecasts and the forecasts received from its customers
when this excess and obsolete inventory charge was recorded. In addition to
the sale of some of this previously-reserved product, the Company has also
scrapped $3.4 million of this reserved inventory and negotiated and paid
cancellation charges of $0.2 million through December 28, 2003, related to
this excess and obsolete inventory charge since it was initially recorded.
As of December 28, 2003, the remaining reserve for one Gbps
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



---



##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|   |  | products was $1.2 million. However, as with all inventory, the Company
regularly compares forecasted demand for its one Gbps products against
inventory on hand and open purchase commitments and accordingly, the Company
may have to record reductions to the carrying value of excess and obsolete
inventory if forecasted demand decreases. As of December 28, 2003, the
Company had unreserved one Gbps inventory on hand of approximately $0.7
million.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | Goodwill and Other Intangibles                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Goodwill and other intangibles, net, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                         

|                                               |                                                       |                |                |         |          |   |        |         |  
|---------------------------------------------- | ----------------------------------------------------- | -------------- | -------------- | ------- | -------- | - | ------ | ------- | -
|                                               |                                                       |                | December 28,   |         | June 29,
|                                               |                                                       |                | 2003           |         | 2003    
|                                               |                                                       |                |                |         |         
|                                               |                                                       |                | (in thousands)
|Intangible assets not subject to amortization: |                                                       |                |                |         |          |   |        |        
|                                               | Goodwill                                              |                | $              | 584,150 |          |   | $      | 397,256 |  
|Intangible assets subject to amortization:     |                                                       |                |                |         |          |   |        |        
|                                               | Core technology and patents                           |                | $              | 99,007  |          |   | $      | 40,600  |  
|                                               | Accumulated amortization, core technology and patents |                |                | (17,461 | )        |   |        | (13,533 | )
|                                               | Developed technology                                  |                |                | 9,400   |          |   |        |        |  
|                                               | Accumulated amortization, developed technology        |                |                | (297    | )        |   |        |        |  
|                                               | Backlog                                               |                |                | 500     |          |   |        |        |  
|                                               | Accumulated amortization, backlog                     |                |                | (253    | )        |   |        |        |  
|                                               | Customer relationships                                |                |                | 38,200  |          |   |        |        |  
|                                               | Accumulated amortization, customer relationships      |                |                | (965    | )        |   |        |        |  
|                                               | Tradename                                             |                |                | 5,000   |          |   |        |        |  
|                                               | Accumulated amortization, tradename                   |                |                | (90     | )        |   |        |        |  
|                                               | Covenants not-to-compete                              |                |                | 3,100   |          |   |        |        |  
|                                               | Accumulated amortization, covenants not-to-compete    |                |                | (131    | )        |   |        |        |  
|                                               |                                                       |                |                |         |          |   |        |        
|Intangible assets subject to amortization      |                                                       | $              | 136,010        |         |          | $ | 27,067 |        
|                                               |                                                       |                |                |         |          |   |        |        
|                                               |                                                       | (in thousands) |                |         |          |  
|                                               | Goodwill balance as of June 29, 2003                  |                | $              | 397,256 |          |   |        |         |  
|                                               | Goodwill acquired during year                         |                |                | 186,894 |          |   |        |         |  
|                                               |                                                       |                |                |         |          |   |        |        
|                                               | Goodwill balance as of December 28, 2003              |                | $              | 584,150 |          |   |        |         |  
|                                               |                                                       |                |                |         |          |   |        |        



| |  | Goodwill relates to the purchase of Vixel during the three months ended
December 28, 2003, and the purchase of Giganet in fiscal 2001. Core
technology and patents relate to the purchase of Vixel and Giganet and to
the purchase of the technology assets of Trebia Corporation for $2.0 million
during the three months ended December 28, 2003. All other intangible
assets subject to amortization relate to the purchase of Vixel. The
technology assets purchased from Trebia are being amortized on a
straight-line basis over a four-year life.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Effective July 1, 2002, the Company adopted Statement 142, Goodwill and
Other Intangible Assets and, as a result, the Company ceased amortizing
goodwill of $397.3 million related to the purchase of Giganet. Goodwill
will be tested for impairment at least annually, but also on an interim
basis if an event or circumstance indicates that it is more likely than not
that an impairment loss has been incurred.                                                                                                                                
|
| |  | The intangible assets subject to amortization are being amortized on a
straight-line basis over lives ranging from three months to seven years.
Aggregated amortization expense for these intangibles for the three and six
months ended December 28, 2003, was $4.3 million and $5.8 million,
respectively, and for the three and six months ended December 29, 2002, was
$1.5 million and $2.9 million, respectively. For the next five full fiscal
years aggregated amortization expense is expected to be (in thousands):                           

10



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

|     |  |   |        | 
|---- |  | - | ------ | 
|2004 |  | $ | 19,071 | 
|2005 |  | $ | 26,166 | 
|2006 |  | $ | 26,104 | 
|2007 |  | $ | 25,419 | 
|2008 |  | $ | 21,294 | 



|5. |  | Other Assets                              
|-- |  | ------------------------------------------
|  
|   |  | Components of other assets are as follows:

|                                    |  |                 |       |          |  |   |       | 
|----------------------------------- |  | --------------- | ----- | -------- |  | - | ----- | 
|                                    |  | December 28,    |       | June 29,
|                                    |  | 2003            |       | 2003    
|                                    |  |                 |       |         
|                                    |  | ( in thousands)
|Deferred debt issuance costs-       |  |                 |       |          |  |   |       | 
|Convertible subordinated notes, net |  | $               | 1,223 |          |  | $ | 4,670 | 
|Longterm prepaid assets            |  |                 | 389   |          |  |   | 1,016 | 
|Refundable deposits                 |  |                 | 241   |          |  |   | 96    | 
|                                    |  |                 |       |          |  |   |       | 
|                                    |  | $               | 1,853 |          |  | $ | 5,782 | 
|                                    |  |                 |       |          |  |   |       | 

6. Accrued Liabilities

Components of accrued liabilities are as follows:

|                                   |  |                 |        |          |  |   |        | 
|---------------------------------- |  | --------------- | ------ | -------- |  | - | ------ | 
|                                   |  | December 28,    |        | June 29,
|                                   |  | 2003            |        | 2003    
|                                   |  |                 |        |         
|                                   |  | ( in thousands)
|Payroll and related costs          |  | $               | 7,527  |          |  | $ | 8,406  | 
|Accrued inventory purchases        |  |                 |       |          |  |   | 1,449  | 
|Accrued interest                   |  |                 | 252    |          |  |   | 1,502  | 
|Warranty reserves                  |  |                 | 4,204  |          |  |   | 2,349  | 
|Deferred revenue                   |  |                 | 1,122  |          |  |   | 2,054  | 
|Accrued advertising and promotions |  |                 | 1,088  |          |  |   | 719    | 
|Contracts payable                  |  |                 | 33     |          |  |   |       | 
|Other                              |  |                 | 5,756  |          |  |   | 2,327  | 
|                                   |  |                 |        |          |  |   |        | 
|                                   |  | $               | 19,982 |          |  | $ | 18,806 | 
|                                   |  |                 |        |          |  |   |        | 



| |  | Deferred revenue includes an accrual for estimated returns and allowances of
$1.1 million and $1.9 million at December 28, 2003 and June 29, 2003,
respectively. Deferred revenue also includes the revenue related to legacy
cLAN products with unspecified upgrade rights of $30 thousand and $0.2
million at December 28, 2003, and June 29, 2003, respectively.                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company provides a warranty of between one and three years on its
Input/Output Fibre Channel and Internet Protocol products and provides a
warranty of between one and five years on its Fibre Channel switching and
traditional networking products. The Company records a provision for
estimated warranty related costs at the time of sale based on historical
product returns and the Companys expected future cost of fulfilling its
warranty obligations.

11



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

Changes to the warranty reserve for the six months ended December 28, 2003, and
December 29, 2002, were:

|                                       |  |                 |        |              |  |   |       |  
|-------------------------------------- |  | --------------- | ------ | ------------ |  | - | ----- | -
|                                       |  | December 28,    |        | December 29,
|                                       |  | 2003            |        | 2002        
|                                       |  |                 |        |             
|                                       |  | ( in thousands)
|Balance at beginning of period         |  | $               | 2,349  |              |  | $ | 2,244 |  
|Additions to costs and expenses        |  |                 | 1,483  |              |  |   | 770   |  
|Amounts charged against reserve        |  |                 | (1,081 | )            |  |   | (419  | )
|Beginning balance of Vixel Corporation |  |                 | 1,453  |              |  |   |      |  
|                                       |  |                 |        |              |  |   |       |  
|Balance at end of period               |  | $               | 4,204  |              |  | $ | 2,595 |  
|                                       |  |                 |        |              |  |   |       |  

Changes to the warranty reserve for the three months ended December 28, 2003,
and December 29, 2002, were:

|                                       |  |                 |       |              |  |   |       |  
|-------------------------------------- |  | --------------- | ----- | ------------ |  | - | ----- | -
|                                       |  | December 28,    |       | December 29,
|                                       |  | 2003            |       | 2002        
|                                       |  |                 |       |             
|                                       |  | ( in thousands)
|Balance at beginning of period         |  | $               | 2,570 |              |  | $ | 2,200 |  
|Additions to costs and expenses        |  |                 | 835   |              |  |   | 590   |  
|Amounts charged against reserve        |  |                 | (654  | )            |  |   | (195  | )
|Beginning balance of Vixel Corporation |  |                 | 1,453 |              |  |   |      |  
|                                       |  |                 |       |              |  |   |       |  
|Balance at end of period               |  | $               | 4,204 |              |  | $ | 2,595 |  
|                                       |  |                 |       |              |  |   |       |  



|7. |  | Convertible Subordinated Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 29, 2002, the Company completed a $345.0 million private
placement of 1.75 percent convertible subordinated notes due February 1,
2007. Interest is payable in cash on February 1 and August 1 of each year
beginning August 1, 2002. These notes may be converted by the holder at any
time into shares of the Companys common stock at the conversion price of
$53.84 per share, subject to the potential adjustments described in the
terms of the notes issued. The Company may redeem the notes on or after
February 5, 2005, in whole or in part. The Company incurred associated
issuance costs of approximately $11.0 million.                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | During the three months ended September 29, 2002, the Companys Board of
Directors expanded the Companys stock repurchase program to include
repurchase of the Companys convertible subordinated notes as well as shares
of the Companys common stock. In August 2002, the Company bought back at
a discount to face value approximately $136.5 million in face value of its
convertible subordinated notes for $104.2 million. The resulting net
pre-tax gain of $28.7 million was recorded for the three months ended
September 29, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | During the three months ended September 28, 2003, the Companys Board of
Directors expanded the Companys stock repurchase program to include the
repurchase of all of the Companys convertible subordinated notes and
extended the entire program to June 2005. The combined program authorizes
the repurchase of up to 4.0 million shares of common stock and the
repurchase of all of the remaining outstanding convertible subordinated
notes. Also during the three months ended September 28, 2003, the Company
bought back approximately $93.9 million in face value of its convertible
subordinated notes at a discount to face value for approximately $87.3
million. The resulting net pre-tax gain of approximately $4.7 million was
recorded in the three months ended September 28, 2003. The repurchased
notes were cancelled, leaving convertible subordinated notes outstanding
with a face value of approximately $114.6 million that, if converted, would
result in the issuance of approximately 2.1 million shares
|  
|   |  | During the three months ended December 28, 2003, the Company bought back
approximately $85.4 million in face value of its convertible subordinated
notes for approximately $85.9 million. The resulting net pre-tax loss of
approximately $1.8 million was recorded in the three months ended December
28, 2003 and was due to the expensing of the remaining deferred debt
issuance costs. The repurchased notes were cancelled, leaving convertible
subordinated notes outstanding with a face value of approximately $29.3
million that, if converted, would result in the issuance of approximately
0.5 million shares. At December 28, 2003, 1.5 million shares of common
stock remained authorized for repurchase, reflecting the repurchase of 1.5
million common shares                                                                                                                                                                                                                                                        

12



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|   |  | during the three months ended December 28, 2003. In addition, the entire
$29.3 million face amount of the outstanding 1.75 percent convertible
subordinated notes remained authorized for repurchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On December 12, 2003, the Company completed a $450.0 million private
placement of 0.25 percent convertible subordinated notes due 2023. Interest
is payable in cash on June 15th and December 15th of each year beginning
June 15, 2004. Under the terms of the offering, the notes will be
convertible, at the option of the holder and subject to the satisfaction of
certain conditions, into shares of Emulex common stock at a price of $43.20
per share.The notes will mature in twenty years and will not be callable
for the first five years. Holders of the notes may require the Company to purchase
the notes for cash by giving written notice within the 20 business days
prior to each of December 15, 2006, December 15, 2008, December 15, 2013 and
December 15, 2018. The Company incurred associated bankers fees of
approximately $10.1 million, which were recorded as a reduction to the
proceeds from the issuance of the notes and will be accreted over the life
of the notes as well as $0.7 million of other associated acquisition costs,
which have been recorded as an asset and will be amortized over the life of
the notes. See Subsequent Events at note 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|8. |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | On February 28, 2003, Vixel Corporation, prior to the Companys acquisition
of it, filed a patent infringement action against QLogic Corporation in the
United States District Court for the District of Delaware. The complaint
states that QLogic is infringing U.S. Patent No. 6,118,776, entitled
Methods and Apparatus for Fibre Channel Interconnection of Private Loop
Devices, through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products, including but not
limited to, QLogics SANBox2 series of products. On March 28, 2003, Vixel
filed a first amended complaint stating that QLogic is also infringing U.S.
Patent No. 6,185,203, entitled Fibre Channel Switching Fabric and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, QLogics SANBox2 series of
products. On May 23, 2003, Vixel filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District Court for
the Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching
products, including but not limited to, Brocades Silkworm switch products.
QLogic and Brocade denied infringement and challenged the validity of the
patents referenced. Brocade also challenged the enforceability of those
patents. In both of these suits, Vixel was seeking unspecified past
damages, potential future royalties, or, alternatively, injunctive relief.
|  
|   |  | On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that
one of Vixels products, the 7200 Fibre Channel Switch, infringes U.S.
Patent No. 4,821,034, entitled Digital Exchange Switch Element and
Network. The suit seeks unspecified monetary damages as well as injunctive
relief.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | On December 15, 2003, the Company and QLogic tentatively agreed to settle
the claims and mutually release each other from any liability associated
with the claims (and the related counterclaims filed by Qlogic) in exchange
for payments by QLogic. In connection with the settlement, QLogic will be
required to make an upfront payment and pay quarterly royalties
associated with the future sales of certain products. The settlements are
subject to execution of final written agreements with normal and customary
terms and court approval of the dismissal of the lawsuits. The Company
expects the terms of the final settlement agreements to be consistent with
the terms agreed upon by the parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | On November 15, 2001, prior to the Companys acquisition of Vixel
Corporation, a securities class action was filed in the United States
District Court in the Southern District of New York against Vixel and two of
its officers and directors and certain underwriters who participated in the
Vixel initial public offering in late 1999. The amended complaint alleges
violations under Section 10(b) of the Exchange Act and Section 11 of the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

13



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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | Securities Act and seeks unspecified damages on behalf of persons who
purchased Vixel stock during the period October 1, 1999 through December 6,
2000. In October 2002, the parties agreed to toll the statute of limitations
with respect to Vixels officers and directors until September 30, 2003, and
on the basis of this agreement, Vixels officers and directors were
dismissed from the lawsuit without prejudice. During June 2003, Vixel and
the other issuer defendants in the action reached a tentative settlement
with the plaintiffs that would, among other things, result in the dismissal
with prejudice of all claims against the defendants and their officers and
directors. In connection with the possible settlement, those officers and
directors who had entered tolling agreements with the plaintiffs agreed to
extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement
proposal in principle, it remains subject to a number of procedural
conditions, as well as formal approval by the court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On October 9, 2003, before the Companys acquisition of Vixel, a purported
class action lawsuit was filed in King County Superior Court of the State of
Washington against Vixel and each of Vixels directors and certain unnamed
individuals (the Vixel Parties), entitled Russell Fink v. Vixel
Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made general
allegations that, among other things, Vixels directors breached their
fiduciary duties to Vixel stockholders in connection with the approval of
the merger with Emulex and sought to enjoin the tender offer and have the
merger agreement declared unlawful, among other forms of relief. On November
7, 2003, the Vixel Parties entered into a memorandum of understanding for a
$0.7 million settlement with the plaintiff in the class action suit pursuant
to which the parties have agreed to settle the action, subject to court
approval. The $0.7 million was recorded as general and administrative
expense for the three months ended December 28, 2003. The consummation of
the settlement is subject to: (a) the drafting and execution of formal
settlement documents; (b) the completion by plaintiff of reasonable
discovery as agreed to by the parties; and (c) final court approval (as
defined by law) of the settlement and dismissal of the action with
prejudice.                                                                                                                                                                                                       
|
| |  | Beginning on or about February 20, 2001, the Company and certain of its
officers and directors were named as defendants in a number of securities
class action lawsuits filed in the United States District Court, Central
District of California. The plaintiffs in the actions represent purchasers
of the Companys common stock during various periods ranging from January
18, 2001, through February 9, 2001. The complaints alleged that the Company
and certain of its officers and directors made misrepresentations and
omissions in violation of sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended. The complaints generally seek compensatory
damages, costs and attorneys fees in an unspecified amount. In addition,
the Company has received inquiries about events giving rise to the lawsuits
from the SEC and the Nasdaq Stock Market. On April 22, 2003, the Company
entered into two Memoranda of Understanding agreeing to terms of settlement
for both the class action and derivative litigation. During the three months
ended December 28, 2003, the settlement was approved and $39.5 million held
in escrow was paid to the plaintiffs. The Company is currently seeking to
recover a portion of this amount from the Companys insurance carriers. The
final amount collected for the Companys receivable from its insurance
carriers related to the tentative settlements of securities class action and
derivative lawsuits may be materially different from the receivable amount.
See Subsequent Events at note 10.
|
| |  | Each of the foregoing lawsuits or arbitrations is pending, and presents
risks inherent in disputes of this type, any of which could have a material
adverse effect on the Companys business, financial condition or results of
operations. Such potential risks include the continuing expenses of
litigation, the risk of loss of patent rights, the risk of injunction
against the sale of products incorporating the technology in question,
counterclaims and attorneys fee liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Additionally, the Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Companys consolidated financial position, results of
operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Other Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Company recorded an estimated excess and obsolete inventory charge of
$13.6 million associated with older-generation one Gbps products during the
three months ended September 30, 2001. After initially recording this one
Gbps reserve in September 2001, the Company has subsequently reduced this
reserve by a total of $8.8 million through December 28, 2003, as
previously-reserved inventory has been sold. Overall, the Company has been
able to recover a significant portion of this reserved inventory that was

not expected based                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

14



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|   |  | on the Companys forecast and the forecasts received from its customers when
this excess and obsolete inventory charge was recorded. In addition to the
sale of some of this previously-reserved product, the Company has also
scrapped $3.4 million of this reserved inventory and negotiated and paid
cancellation charges of $0.2 million through December 28, 2003, related to
this excess and obsolete inventory charge since it was initially recorded.
As of December 28, 2003, the remaining reserve for one Gbps products was
$1.2 million. However, as with all inventory, the Company regularly
compares forecasted demand for its one Gbps products against inventory on
hand and open purchase commitments and accordingly, the Company may have to
record reductions to the carrying value of excess and obsolete inventory if
forecasted demand decreases. As of December 28, 2003, the Company had
unreserved one Gbps inventory on hand of approximately $0.7 million.                                                                                                                                                                                                                                                                                      
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company was previously required to enter into end-of-life purchase
agreements for two key inventory components as the sole-source manufacturers
of these components announced their discontinued manufacturing of the
components. As of December 28, 2003, the Companys remaining purchase
obligation for the two components was $11.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | During the third quarter of fiscal 2002, the Company entered into an
agreement to relocate its headquarters locally in Costa Mesa, California.
The Company financed the build-to-suit construction phase of the new
facility with its own capital, and will begin a 10-year lease term with an
option to buy the land and buildings during the first six months of the
lease term. If the Company does not exercise its option to purchase the
facility, the landlord will obtain permanent financing and reimburse the
Company for the construction costs. Construction on the Companys new
corporate headquarters was completed subsequent to December 28, 2003. If
purchased, the Company believes the total cost, including the land, building
and other related capital expenditures, would be approximately $47.0
million. The Companys total gross undiscounted financial commitment for
the 10-year lease term would be approximately $45.9 million. At December
28, 2003, the Company had restricted cash of $1.4 million held in escrow
associated with the construction of the headquarters. In addition, the
Company has a $1.0 million letter of credit in place in lieu of a rental
deposit on one of its other facilities. See Subsequent Events at note 10.
|  
|9. |  | Earnings per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing adjusted net income by
the weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common shares
that would be outstanding if the dilutive potential common shares from stock
option plans and convertible subordinated notes had been issued. The
dilutive effect of outstanding stock options is reflected in diluted net
income per share by application of the treasury stock method. The following
table sets forth the computation of basic and diluted net income per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

15



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##### 



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |        |       | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----- | ------------------ | ----- | ---------------- | ----- | ------------ | ----- | ------------ | ----- | ------ | ----- | - | ----- | ------ | ----- | 
|                                               |                                                                                             |                                                                      |       | Three Months Ended |       | Six Months Ended
|                                               |                                                                                             |                                                                      |       |                    |       |                 
|                                               |                                                                                             |                                                                      |       | December 28,       |       | December 29,     |       | December 28, |       | December 29,
|                                               |                                                                                             |                                                                      |       | 2003               |       | 2002             |       | 2003         |       | 2002        
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |             
|Numerator:                                     |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|                                               | Net income                                                                                  |                                                                      | $     | 3,615              |       |                  | $     | 15,517       |       |              | $     | 26,203 |       |   | $     | 47,498 |      
|                                               | Adjustment for interest expense on
convertible subordinated notes, net of tax               |                                                                      |       |                   |       |                  |       | 731          |       |              |       |       |       |   |       | 1,878  |      
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|                                               | Numerator for diluted net income per share                                                  |                                                                      | $     | 3,615              |       |                  | $     | 16,248       |       |              | $     | 26,203 |       |   | $     | 49,376 |      
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|Denominator:                                   |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|                                               | Denominator for basic net income per share
 weighted average shares outstanding            |                                                                      |       | 82,558             |       |                  |       | 81,979       |       |              |       | 82,550 |       |   |       | 81,912 |      
|                                               | Effect of dilutive securities:                                                              |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |        |      
|                                               |                                                                                             | Dilutive options outstanding                                         |       |                    | 2,457 |                  |       |              | 1,634 |              |       |        | 2,027 |   |       |        | 1,722 | 
|                                               |                                                                                             | Dilutive common shares from assumed
conversion of subordinated notes |       |                    |      |                  |       |              | 3,873 |              |       |        |      |   |       |        | 4,695 | 
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|                                               | Denominator for diluted net income per
share  adjusted weighted average shares
outstanding |                                                                      |       | 85,015             |       |                  |       | 87,486       |       |              |       | 84,577 |       |   |       | 88,329 |      
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|Basic net income per share                     |                                                                                             | $                                                                    | 0.04  |                    |       | $                | 0.19  |              |       | $            | 0.32  |        |       | $ | 0.58  |       
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|Diluted net income per share                   |                                                                                             | $                                                                    | 0.04  |                    |       | $                | 0.19  |              |       | $            | 0.31  |        |       | $ | 0.56  |       
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|Antidilutive options excluded from computation |                                                                                             |                                                                      | 3,774 |                    |       |                  | 6,765 |              |       |              | 4,670 |        |       |   | 6,765 |       
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       
|Average market price of common stock           |                                                                                             | $                                                                    | 27.64 |                    |       | $                | 17.73 |              |       | $            | 25.66 |        |       | $ | 18.30 |       
|                                               |                                                                                             |                                                                      |       |                    |       |                  |       |              |       |              |       |        |       |   |       |       



|    |  | The antidilutive options were excluded from the computation of diluted net
income per share because the options exercise price was greater than the
average market price of the common shares during the three and six months
ended December 28, 2003, and December 29, 2002. The impact of the Companys
1.75 percent convertible subordinated notes is excluded as the effect would
be antidilutive for the three and six months ended December 28, 2003. The
impact of the 0.25 percent convertible subordinated notes issued in December
2003 is excluded as these are contingent convertible subordinated notes and
did not meet the criteria for conversion into common stock during the three
and six months ended December 28, 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | The Company completed a $450.0 million private placement of 0.25 percent
convertible subordinated notes due 2023 during the three months ended
December 28, 2003, and granted the initial purchasers of the notes an
option, which they exercised subsequent to December 28, 2003, to purchase an
additional $67.5 million principal amount of the notes. The Company
incurred associated bankers fees of $1.5 million, which were recorded as a
reduction of the proceeds and will be accreted over the life of the notes.                                                                                                                                                                                                                 
|   
|    |  | Also subsequent to December 28, 2003, the Company bought back approximately
$11.6 million face value of its 1.75 percent convertible subordinated notes
for approximately $11.7 million. The resulting net pre-tax loss of
approximately $0.2 million due to the expensing of the remaining deferred
debt issuance costs will be recorded during the third fiscal quarter of
2004.                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Also subsequent to December 28, 2003, the Company signed a Letter Agreement
with one of its three insurers under which the Company is to receive $10.0
million less amounts previously paid by the insurer for the defense of the
securities class action lawsuits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Also subsequent to December 28, 2003, the Company exercised its option to
purchase its headquarters property. The Company believes the total cost,
including the land, building and other related capital expenditures would be
approximately $47.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

16



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##### 



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

Forward-Looking Statements

Certain statements contained in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. We may also make forward-looking statements in other reports filed
with the Securities and Exchange Commission, in materials delivered to
stockholders and in press releases. In addition, our representatives may from
time to time make oral forward-looking statements. Forward-looking statements
provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or
current fact. Words such as anticipates, in the opinion, believes,
intends, expects, may, will, should, could, plans, forecasts,
estimates, predicts, projects, potential, continue and similar
expressions may be intended to identify forward-looking statements.

Actual future results could differ materially from those described in the
forward-looking statements as a result of a variety of factors, including those
discussed in Managements Discussion and Analysis of Financial Condition and
Results of Operations set forth below, and, in particular, the subsection
entitled Risk Factors set forth therein, and in our most recently filed
Annual Report on Form 10-K. These factors include risks related to the recent
acquisition of Vixel and the fact that the economy generally, and the
technology and storage segments specifically, have recently been in a state of
uncertainty making it difficult to determine if past experience is a good guide
to the future and making it impossible to determine if markets will grow or
shrink in the short term. Recently, our results have been significantly
impacted by a widespread slowdown in information technology investment that has
also pressured the storage networking market that is the mainstay of our
business. A continued downturn in information technology spending could
adversely affect our revenues and results of operations. As a result of this
uncertainty, we are unable to predict with any accuracy what future results
might be. Other factors affecting these forward-looking statements include,
but are not limited to, the following: slower than expected growth of the
storage networking market or the failure of our Original Equipment
Manufacturer, or OEM, customers to successfully incorporate our products into
their systems; our dependence on a limited number of customers and the effects
of the loss of, or decrease or delays in orders by, any such customers, or the
failure of such customers to make payments; the emergence of new or stronger
competitors as a result of consolidation movements in the market; the timing
and market acceptance of our or our OEM customers new or enhanced products;
the variability in the level of our backlog and the variable booking patterns
of our customers; the effects of terrorist activities and resulting political
or economic instability; the highly competitive nature of the markets for our
products as well as pricing pressures that may result from such competitive
conditions; our ability and the ability of our OEM customers to keep pace with
the rapid technological changes in our industry and gain market acceptance for
new products and technologies; the effect of rapid migration of customers
towards newer product platforms; possible transitions from board level to
application specific integrated circuit, or ASIC, solutions for selected
applications; a shift in unit product mix from high-end to midrange products; a
decrease in the average unit selling prices or an increase in the manufactured
cost of our products; delays in product development; our reliance on
third-party suppliers and subcontractors for components and assembly; any
inadequacy of our intellectual property protection or the potential for
third-party claims of infringement; our ability to attract and retain key
technical personnel; our dependence on foreign sales; the effect of
acquisitions; changes in tax rates or changes in accounting standards.

Readers should carefully review these cautionary statements since they identify
certain important factors that could cause actual results to differ materially
from those in the forward-looking statements and from historical trends and are
in addition to other factors discussed elsewhere in this Form 10-Q, in our
filings with the Securities and Exchange Commission or in materials
incorporated therein by reference. We caution the reader, however, that these
lists of risk factors may not be exhaustive. We expressly disclaim any
obligation or undertaking to release publicly any updates or changes to these
forward-looking statements that may be made to reflect any future events or
circumstances.

Company Overview

Emulex Corporation is the world leader in Fibre Channel host bus adapters, or
HBAs, and delivers a broad range of intelligent building blocks, including
embedded storage switches and Input/Output, or I/0, controllers for next
generation storage networking systems. HBAs are the data communication
products that enable servers to connect to storage networks by offloading
communication-processing tasks as information is delivered and sent to the
storage network. Embedded storage switches and I/0 controllers are deployed
inside storage arrays, tape libraries and other storage appliances, delivering
improved performance and reliability and storage connections. Emulexs
architecture offers customers a stable applications program interface, or API,
that has been preserved across multiple generations

17



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##### 



of storage networking solutions and to which many of the worlds leading OEMs
have customized software for mission-critical server and storage system
applications.

Substantially all of our revenues during the second quarter of fiscal 2004
ended December 28, 2003, were comprised of products based on Fibre Channel
technology. Our Fibre Channel development efforts began in 1992, and we shipped
our first Fibre Channel product in volume in 1996. According to IDC and Gartner
Dataquest, in calendar 2002 we were the worlds largest provider of Fibre
Channel host bus adapters, in terms of revenue, ports and units shipped. Many
of the worlds leading server and storage providers rely on Emulex HBAs,
embedded storage switching and I/O controller products to build reliable,
scalable and high performance storage solutions. The Emulex award winning
product families, including our LightPulseTM HBAs and
InSpeedTM embedded
storage switching products, are based on internally developed ASIC, firmware
and software technologies, and offer customers high performance, scalability,
flexibility and reduced total cost of ownership. Emulexs products have been
selected by many of the worlds leading server and storage providers, including
Dell, EMC, Fujitsu Ltd., Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi
Data Systems, IBM, NEC, Network Appliance, StorageTek, Sun Microsystems and
Unisys. In addition, we include industry leaders Brocade, Computer Associates,
Intel, McDATA, Microsoft and VERITAS among our strategic partners. We market
to OEMs and end users through our own worldwide selling organization as well as
our two tier distribution partners, including ACAL, Avnet, Bell Microproducts,
Info-X, Netmarks, Tech Data, Tidalwire and Tokyo Electron. Corporate
headquarters are located in Costa Mesa, California. Our periodic and current
reports filed with or furnished to the Securities and Exchange Commission
pursuant to the requirements of the Securities and Exchange Act of 1934 are
available free of charge through our website (www.emulex.com) as soon as
reasonably practicable after such reports are electronically filed with, or
furnished to, the Securities and Exchange Commission. As of December 28, 2003,
we had a total of 520 employees. References contained herein to Emulex, the
Company, the Registrant, we, our, and us, refer to Emulex Corporation
and its subsidiaries.

Business Combination

On November 13, 2003, we completed the cash tender offer by Aviary Acquisition
Corporation, our wholly owned subsidiary, to acquire all outstanding shares of
Vixel Corporation for $10.00 net per share, without interest. Approximately
23.9 million shares (including approximately 2.0 million shares subject to
guaranteed delivery) of Vixels common stock representing approximately 91.6
percent of Vixels outstanding common stock, and 2.9 million shares of Vixels
Series B convertible preferred stock, representing all of Vixels outstanding
preferred stock, were tendered in the offer. Through our wholly owned
subsidiary, we accepted payment for all validly tendered shares. On November
17, 2003, we completed our acquisition of Vixel by means of a short-form merger
of Aviary Acquisition Corp., with and into Vixel.

We acquired Vixel to expand our Fibre Channel product line and paid $298.4
million in cash for all outstanding common stock, preferred stock and warrants
of Vixel Corporation. We also incurred acquisition-related expenses of $6.8
million in cash. In addition, we issued 2.2 million stock options with a fair
value of approximately $47.5 million and kept the original vesting periods for
the options in exchange for the outstanding Vixel options for a total
acquisition value of $352.7 million. We calculated the fair value of the 2.2
million stock options issued at the date of acquisition using the Black-Scholes
option-pricing model. The operations of Vixel will be included within the
Companys one operating segment, networking products.

We accounted for the acquisition of Vixel under the purchase method of
accounting and recorded a one-time expense of $11.4 million for purchased
in-process research and development, or IPR&D, during the three months ended
December 28, 2003. The values assigned to these projects were determined by
identifying projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use. The
features of the related products had not been released to the market as of the
date of the acquisition, but the features and functionality of the products had
been defined.

The IPR&D related to two significant internal product development efforts. The
first project accounted for $7.4 million of the expenses. The second project
accounted for $4.0 million of the expenses. Both projects are for embedded
switching products.

The first project was in development at the time of acquisition, but had not
yet completed the full design, development and testing phases. Approximately
35 percent of the total expected time to be spent on the first project was
complete at the date of the acquisition with the remaining activities of the
design, development and testing phases as well as the validation and readiness
stages still to occur. The estimated costs to complete the first project are
$2.7 million.

18



---



##### 



The second project had completed design and development, and testing had begun
as of the acquisition date. Approximately 70 percent of the total expected
time to be spent on the second project was complete at the date of the
acquisition with the remaining testing activities as well as the validation and
readiness stages still to occur. The estimated costs to complete the second
project are $1.2 million.

The risks and uncertainties associated with these two projects include, but are
not limited to, delays in product release to market if there are design flaws
or testing does not go as planned. In addition, if the projects are delayed,
such delay could potentially harm our relationships with our customers. Also,
even if a product is successfully developed it may not be accepted in the
marketplace.

The values of these projects were determined using the Income Forecast Method.
In applying the Income Forecast Method the value of the acquired technologies
was estimated by discounting to present value the free cash flows forecasted to
be generated by the products to which the technologies are associated over the
remaining lives of the technologies. To distinguish between the cash flows
attributable to the underlying technology and cash flows attributable to other
assets available for generating product revenues, adjustments were made to
provide for a fair return to fixed assets, working capital and other assets
that contribute to value. The estimates were based on the following
assumptions:



| |  |  | The estimated revenues associated with the first project were
evaluated over seven years with peak revenues expected in fiscal
years 2008 and 2009 and declining revenues thereafter. The
estimated revenues associated with the second project were evaluated
over nine years with peak revenues expected in fiscal years 2008 and
2009 and declining revenues thereafter. These projections are based
on managements estimates over the expected remaining lives of the
technologies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The discount rates used in the valuation reflect the relative
risk of the product lines, with a discount rate of 20% used for the
first project and a discount rate of 18% used for the second
project. These discount rates were based on the amount and risk of
effort remaining to complete the respective projects.                                                                                                                                                                 

We believe that the foregoing assumptions used in determining the income
forecast associated with the IPR&D products were reasonable. No assurance can
be given, however, that the underlying assumptions used to estimate the income
forecast, the ultimate revenues and costs on such projects or the events
associated with such projects will transpire as estimated.

As a result of the acquisition, we will reduce the headcount obtained from
Vixel prior to the acquisition by a total of 23 employees, three of whom left
during the three months ended December 28, 2003, with the remaining 20
employees, who are from the general and administrative, selling and marketing,
and manufacturing groups, scheduled to leave during our third fiscal quarter
ended March 28, 2004. We accrued $1.5 million at the date we gained effective
control of Vixel, November 13, 2003, for this reduction.

The total purchase and allocation among the fair values of tangible and
intangible assets and liabilities (including purchased IPR&D) are summarized as
follows (in thousands):

|                               |                                     |   |         |        | 
|------------------------------ | ----------------------------------- | - | ------- | ------ | 
|Tangible assets                |                                     | $ | 31,376  |       
|Liabilities                    |                                     |   | 13,449  |       
|                               |                                     |   |         |       
|Net
tangible assets            |                                     |   | 17,927  |       
|                               |                                     |   |         |       
|Identifiable
intangible assets |                                     |   |         |       
|                               | In-process research and development |   |         | 11,400 | 
|                               | Core technology                     |   |         | 43,300 | 
|                               | Developed technology                |   |         | 9,400  | 
|                               | Patents                             |   |         | 13,100 | 
|                               | Backlog                             |   |         | 500    | 
|                               | Customer relationships              |   |         | 38,200 | 
|                               | Tradename                           |   |         | 5,000  | 
|                               | Covenants not-to-compete            |   |         | 3,100  | 
|Deferred taxes                 |                                     |   | 9,986   |       
|Goodwill                       |                                     |   | 186,894 |       
|Deferred compensation          |                                     |   | 13,926  |       
|                               |                                     |   |         |       
|                               |                                     | $ | 352,733 |       
|                               |                                     |   |         |       

19



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##### 





| |  | In accordance with Statement 141, Business Combinations, the allocation
period, which is the period that is required to identify and measure the
fair value of the assets acquired and liabilities assumed in a business
combination, should not exceed one year from the date that we gained
effective control of Vixel and made this initial allocation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Intangible assets with identifiable lives are being amortized on a
straight-line basis for their remaining lives as follows:                                                                                                                                                                                                                                

|                         |  |  |  |  |              |  |  | 
|------------------------ |  |  |  |  | ------------ |  |  | 
|Core technology          |  |  |  |  | 7 years      | 
|Developed technology     |  |  |  |  | 4 years      | 
|Patents                  |  |  |  |  | 2 to 7 years | 
|Backlog                  |  |  |  |  | 3 months     | 
|Customer relationships   |  |  |  |  | 5 years      | 
|Tradename                |  |  |  |  | 7 years      | 
|Covenants not-to-compete |  |  |  |  | 3 years      | 

The acquisition has been included in
the condensed consolidated balance sheets of the
Company and the operating results of Vixel have been included in the
condensed consolidated statements of operations of the Company since the date that we
gained effective control of Vixel, November 13, 2003.

Following is the summarized unaudited pro forma combined results of operations
for the six months ended December 28, 2003, and the six months ended December
29, 2002, assuming the acquisition had taken place at the beginning of each
fiscal year. The unaudited pro forma combined statement of income for the six
months ended December 28, 2003, was prepared based upon the statement of income
of Emulex for the six months ended December 28, 2003, and the statement of
operations of Vixel for the period from June 30, 2003, to November 12, 2003.
All operating results of Vixel were included in the statement of income of
Emulex since the date Emulex gained effective control of Vixel, November 13,
2003. The unaudited pro forma combined statement of income for the six months
ended December 29, 2002, was prepared based upon the statement of income of
Emulex for the six months ended December 29, 2002, and the statement of
operations of Vixel for the six months ended December 29, 2002. The unaudited
pro forma results exclude the effects of the IPR&D charge of $11.4 million but
include the amortization of other intangibles, the amortization of deferred
compensation and the increase and decrease to interest expense and interest
income, respectively, resulting from the acquisition. The unaudited pro forma
results are not necessarily indicative of the future operations or operations
that would have been reported had the acquisitions been completed when assumed.
The following unaudited information is presented in thousands, except for the
per share data.

|                             |  |                                       |        |                  |  |              |        |              |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------------------------------- | ------ | ---------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                             |  | Three Months Ended                    |        | Six Months Ended
|                             |  |                                       |        |                 
|                             |  | December 28,                          |        | December 29,     |  | December 28, |        | December 29,
|                             |  | 2003                                  |        | 2002             |  | 2003         |        | 2002        
|                             |  |                                       |        |                  |  |              |        |             
|                             |  | (in thousands, except per share data)
|Net revenues                 |  | $                                     | 99,216 |                  |  | $            | 82,423 |              |  | $ | 190,158 |  |  | $ | 157,989 | 
|                             |  |                                       |        |                  |  |              |        |              |  |   |         |  |  |   |         | 
|Net income                   |  | $                                     | 7,235  |                  |  | $            | 8,628  |              |  | $ | 23,703  |  |  | $ | 33,936  | 
|                             |  |                                       |        |                  |  |              |        |              |  |   |         |  |  |   |         | 
|Net income per diluted share |  | $                                     | 0.08   |                  |  | $            | 0.10   |              |  | $ | 0.27    |  |  | $ | 0.40    | 
|                             |  |                                       |        |                  |  |              |        |              |  |   |         |  |  |   |         | 

Convertible Subordinated Notes Offering

On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004. Under the
terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.We incurred associated
bankers fees of $10.1 million, which were recorded as a reduction to the
proceeds from the issuance of the notes and will be accreted over the life of
the notes as well as approximately $0.7 million of other associated acquisition
costs, which have been recorded as an asset and will be amortized over the life
of the notes. In addition, we granted the initial purchasers of the notes an
option, which they exercised subsequent to December 28, 2003, to purchase an
additional $67.5 million principal amount of the notes. We incurred associated
bankers fees of $1.5 million, which were recorded as a reduction of the
proceeds and will be accreted over the life of the notes. See Part II, Item 2
Changes in Securities and Use of Proceeds for a more detailed discussion of the
convertible subordinated notes offering.

20



---



##### 



Results of Operations

The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere herein.

|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |      |      | 
|--------------------------- | ----------------------------------------------------------- | --------------------------------- | ----- | ------------------ | ---- | ---------------- | ----- | -------------------------- | ---- | -------- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                            |                                                             |                                   |       |                    |      |                  |       | Percentage of Net Revenues |      |          |       |     
|                            |                                                             |                                   |       | Three months ended |      | Six months ended
|                            |                                                             |                                   |       |                    |      |                 
|                            |                                                             |                                   |       | December           |      | December         |       | December                   |      | December
|                            |                                                             |                                   |       | 28, 2003           |      | 29, 2002         |       | 28, 2003                   |      | 29, 2002
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |         
|Net revenues                |                                                             |                                   | 100.0 | %                  |      |                  | 100.0 | %                          |      |          | 100.0 | %    |      |  | 100.0 | %   
|Cost of sales               |                                                             |                                   | 36.9  |                    |      |                  | 35.8  |                            |      |          | 35.3  |      |      |  | 37.6  |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|                            | Gross profit                                                |                                   |       | 63.1               |      |                  |       | 64.2                       |      |          |       | 64.7 |      |  |       | 62.4 |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Operating expenses:         |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|                            | Engineering and development                                 |                                   |       | 19.4               |      |                  |       | 20.8                       |      |          |       | 19.4 |      |  |       | 20.2 |     
|                            | Selling and marketing                                       |                                   |       | 7.3                |      |                  |       | 5.7                        |      |          |       | 6.4  |      |  |       | 6.1  |     
|                            | General and administrative                                  |                                   |       | 5.9                |      |                  |       | 4.3                        |      |          |       | 5.1  |      |  |       | 4.1  |     
|                            | Amortization of other intangibles                           |                                   |       | 4.5                |      |                  |       | 1.9                        |      |          |       | 3.2  |      |  |       | 2.0  |     
|                            | In-process research and development                         |                                   |       | 12.1               |      |                  |       |                           |      |          |       | 6.4  |      |  |       |     |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|                            |                                                             | Total operating expenses          |       |                    | 49.2 |                  |       |                            | 32.7 |          |       |      | 40.5 |  |       |      | 32.4 | 
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Operating income            |                                                             |                                   | 13.9  |                    |      |                  | 31.5  |                            |      |          | 24.2  |      |      |  | 30.0  |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Nonoperating income (loss): |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|                            | Interest income                                             |                                   |       | 2.1                |      |                  |       | 4.2                        |      |          |       | 2.5  |      |  |       | 4.7  |     
|                            | Interest expense                                            |                                   |       | (0.8               | )    |                  |       | (1.6                       | )    |          |       | (1.0 | )    |  |       | (2.1 | )   
|                            | Gain
(loss) on repurchase of convertible
subordinated notes |                                   |       | (1.9               | )    |                  |       |                           |      |          |       | 1.6  |      |  |       | 19.6 |     
|                            | Other income (expense) net                                  |                                   |       | 0.1                |      |                  |       | (0.1                       | )    |          |       | 0.1  |      |  |       |     |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|                            |                                                             | Total non-operating income (loss) |       |                    | (0.5 | )                |       |                            | 2.5  |          |       |      | 3.2  |  |       |      | 22.2 | 
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Income before income taxes  |                                                             |                                   | 13.4  |                    |      |                  | 34.0  |                            |      |          | 27.4  |      |      |  | 52.2  |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Income tax provision        |                                                             |                                   | 9.6   |                    |      |                  | 13.7  |                            |      |          | 12.8  |      |      |  | 19.9  |     
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     
|Net income                  |                                                             |                                   | 3.8   | %                  |      |                  | 20.3  | %                          |      |          | 14.6  | %    |      |  | 32.3  | %   
|                            |                                                             |                                   |       |                    |      |                  |       |                            |      |          |       |      |      |  |       |     

Three months ended December 28, 2003, compared to three months ended December
29, 2002

Net Revenues.Net revenues for the second quarter of fiscal 2004 ended
December 28, 2003, increased $17.9 million, or 23 percent, to $94.4 million,
compared to the same quarter of fiscal 2003 ended December 29, 2002.

From a product line perspective, net revenues generated from our Fibre Channel
products for the three months ended December 28, 2003, were $94.3 million, an
increase of $18.1 million, or 24 percent, compared to the three months ended
December 29, 2002, and represented substantially all of our net revenues. We
believe that our net revenues from our broad range of Input/Output, or I/O, and
Fibre Channel switching products are being generated primarily as a result of
our product certifications and qualifications with OEM customers, which take
product both directly and through distribution channels.

21



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##### 



Net Revenues by Product Line

|                       |                    |          |                |          |            |      |              |          |            |            |              |        |            |  |     |     |   |   |        |        |  |  |     |    |  
|---------------------- | ------------------ | -------- | -------------- | -------- | ---------- | ---- | ------------ | -------- | ---------- | ---------- | ------------ | ------ | ---------- |  | --- | --- | - | - | ------ | ------ |  |  | --- | -- | -
|                       |                    |          |                |          |            |      |              |          |            |            | Three Months |        |            |  |     |     |   |   |        |        |  |  |    
|                       |                    |          | Three Months   |          | Percentage |      | Ended        |          | Percentage |            |              |        |            |  |     |     |  
|                       |                    |          | Ended December |          | of Net     |      | December 29, |          | of Net     |            | Increase/    |        | Percentage
|(in thousands)         |                    | 28, 2003 |                | Revenues |            | 2002 |              | Revenues |            | (Decrease) | Change      
|                       |                    |          |                |          |            |      |              |          |            |            |             
|Fibre Channel          |                    | $        | 94,335         |          |            |      | 100          | %        |            | $          | 76,243       |        |            |  | 100 | %   |   | $ | 18,092 |        |  |  | 24  | % 
|IP networking          |                    |          | 31             |          |            |      |             |          |            |            | 171          |        |            |  |    |     |   |   | (140   | )      |  |  | (82 | %)
|Traditional networking |                    |          | 3              |          |            |      |             |          |            |            | 34           |        |            |  |    |     |   |   | (31    | )      |  |  | (91 | %)
|                       |                    |          |                |          |            |      |              |          |            |            |              |        |            |  |     |     |   |   |        |        |  |  |     |   
|                       | Total net revenues |          | $              | 94,369   |            |      |              | 100      | %          |            | $            | 76,448 |            |  |     | 100 | % |   | $      | 17,921 |  |  |     | 23 | %
|                       |                    |          |                |          |            |      |              |          |            |            |              |        |            |  |     |     |   |   |        |        |  |  |     |   

Our IP networking products consist of both our iSCSI products, which have not
completed development, as well as legacy VI and cLAN products. We expect that
our VI, cLAN and traditional networking products, which have all entered
end-of-life status, will contribute negligible revenues to succeeding quarters.
We do not expect material revenue from iSCSI products for the foreseeable
future.

In addition to direct sales, some of our larger OEM customers purchased or
marketed products indirectly through distributors, resellers or other third
parties. Customers whose direct net revenues, or total direct and indirect net
revenues (including customer-specific models purchased or marketed indirectly
through distributors, resellers and other third parties) exceeded 10 percent of
our net revenues, were as follows:

Net Revenues by Major Customers

|                             |                 |  |                   |    |                                        |  |                   |    |                   |  |  |    |   |  |  |    |  
|---------------------------- | --------------- |  | ----------------- | -- | -------------------------------------- |  | ----------------- | -- | ----------------- |  |  | -- | - |  |  | -- | -
|                             |                 |  | Direct Revenues   |    | Total Direct and Indirect Revenues (2)
|                             |                 |  |                   |    |                                       
|                             |                 |  | Three Months      |    | Three Months                           |  | Three Months      |    | Three Months     
|                             |                 |  | Ended             |    | Ended                                  |  | Ended             |    | Ended            
|                             |                 |  | December 28, 2003 |    | December 29, 2002                      |  | December 28, 2003 |    | December 29, 2002
|                             |                 |  |                   |    |                                        |  |                   |    |                  
|Net revenue percentage (1) : |                 |  |                   |    |                                        |  |                   |    |                   |  |  |    |   |  |  |   
|                             | IBM             |  |                   | 27 | %                                      |  |                   | 18 | %                 |  |  | 27 | % |  |  | 24 | %
|                             | Hewlett-Packard |  |                   | 23 | %                                      |  |                   | 24 | %                 |  |  | 25 | % |  |  | 24 | %
|                             | EMC             |  |                   |   |                                        |  |                   |   |                   |  |  | 17 | % |  |  | 22 | %



|(1) |  | Amounts less than 10 percent are not presented                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Customer-specific models sold indirectly are included with the OEMs revenues in these columns rather than as
revenue for the distributors, resellers or other third parties.

Direct sales to our top five customers accounted for 69 percent of total net
revenues for the three months ended December 28, 2003, compared to 64 percent
for the three months ended December 29, 2002, and we expect to be similarly
concentrated in the future. Our EMC OEM products are sold both directly to EMC
and indirectly through distributors. As a result, for the three months ended
December 28, 2003, and December 29, 2002, direct revenues attributable to EMC
were below 10 percent but direct and indirect revenues attributable to EMC were
greater than 10 percent of total net revenues.

From a sales channel perspective, net revenues generated from OEM customers
were 70 percent of total net revenues and sales through distribution were 30
percent in the three months ended December 28, 2003. Our OEM customers may
take products both directly and through distribution channels.

22



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##### 



Net Revenues by Sales Channel

|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |    |  
|-------------- | ------------------ | ---- | ------------ | -------- | ---------- | ---- | ------------ | -------- | ------------ | ---------- | --------- | ------ | ---------- |  | -- | --- | - | - | ------ | ------ |  |  | --- | -- | -
|               |                    |      | Three Months |          |            |      |              |          | Three Months |            |           |        |            |  |    |     |   |   |        |        | 
|               |                    |      | Ended        |          | Percentage |      | Ended        |          | Percentage   |            |           |        |            |  |    |     |  
|               |                    |      | December 28, |          | of Net     |      | December 29, |          | of Net       |            | Increase/ |        | Percentage
|(in thousands) |                    | 2003 |              | Revenues |            | 2002 |              | Revenues |              | (Decrease) |           | Change
|               |                    |      |              |          |            |      |              |          |              |            |           |       
|OEM            |                    | $    | 66,307       |          |            |      | 70           | %        |              | $          | 49,962    |        |            |  | 65 | %   |   | $ | 16,345 |        |  |  | 33  | % 
|Distribution   |                    |      | 28,005       |          |            |      | 30           | %        |              |            | 26,469    |        |            |  | 35 | %   |   |   | 1,536  |        |  |  | 6   | % 
|Other          |                    |      | 57           |          |            |      |             |          |              |            | 17        |        |            |  |   |     |   |   | 40     |        |  |  | 235 | % 
|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |    |  
|               | Total net revenues |      | $            | 94,369   |            |      |              | 100      | %            |            | $         | 76,448 |            |  |    | 100 | % |   | $      | 17,921 |  |  |     | 23 | %
|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |   

In the three months ended December 28, 2003, domestic net revenues increased by
$8.8 million, or 21 percent, and international net revenues increased by $9.1
million, or 27 percent, compared to the three months ended December 29, 2002.

Net Domestic and International Revenues

|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |    |  
|-------------- | ------------------ | ---- | ------------ | -------- | ---------- | ---- | ------------ | -------- | ------------ | ---------- | --------- | ------ | ---------- |  | -- | --- | - | - | ----- | ------ |  |  | -- | -- | -
|               |                    |      | Three Months |          |            |      |              |          | Three Months |            |           |        |            |  |    |     |   |   |       |        | 
|               |                    |      | Ended        |          | Percentage |      | Ended        |          | Percentage   |            |           |        |            |  |    |     |  
|               |                    |      | December 28, |          | of Net     |      | December 29, |          | of Net       |            | Increase/ |        | Percentage
|(in thousands) |                    | 2003 |              | Revenues |            | 2002 |              | Revenues |              | (Decrease) |           | Change
|               |                    |      |              |          |            |      |              |          |              |            |           |       
|Domestic       |                    | $    | 51,587       |          |            |      | 55           | %        |              | $          | 42,772    |        |            |  | 56 | %   |   | $ | 8,815 |        |  |  | 21 | % 
|Europe         |                    |      | 33,203       |          |            |      | 35           | %        |              |            | 28,210    |        |            |  | 37 | %   |   |   | 4,993 |        |  |  | 18 | % 
|Pacific Rim    |                    |      | 9,579        |          |            |      | 10           | %        |              |            | 5,466     |        |            |  | 7  | %   |   |   | 4,113 |        |  |  | 75 | % 
|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |   
|               | Total net revenues |      | $            | 94,369   |            |      |              | 100      | %            |            | $         | 76,448 |            |  |    | 100 | % |   | $     | 17,921 |  |  |    | 23 | %
|               |                    |      |              |          |            |      |              |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |   

We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products.
However, because we sell to OEMs and distributors who ultimately resell our
products to their customers, the geographic mix of our net revenues may not be
reflective of the geographic mix of end-user demand or installations.

Gross Profit.Cost of sales included the cost of production of finished
products as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. Also, cost of sales included $0.2 million and $30 thousand of amortized
deferred stock-based compensation expense for the three months ended December
28, 2003, and December 29, 2002, respectively. In the three months
ended December 28, 2003, gross profit increased $10.5 million, or 21 percent,
to $59.6 million, from $49.1 million in the three months ended December 29,
2002. Gross margin decreased slightly
to 63 percent in the three months ended December 28, 2003, compared to 64
percent in the three months ended December 29, 2002. In the three months
ended December 28, 2003, and December 29, 2002, we also recorded a reduction
related to our one Gbps reserve, as previously-reserved inventory was sold, of
$0.1 million and $1.1 million, respectively. The reserve was initially
recorded during the first quarter of fiscal 2002. Excluding the reductions of
the excess and obsolete inventory reserve of $0.1 million in the three months
ended December 28, 2003, and $1.1 million in the three months ended December
29, 2002, gross profit would have been $59.5 million and $48.0 million,
respectively, and gross margin would have been 63 percent in both periods. The
remaining increase in gross profit in the three months ended December 28, 2003,
compared to the three months ended December 29, 2002, was primarily due to
higher total Fibre Channel net revenues and volumes.

Engineering and Development.Engineering and development expenses consisted
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of our products. These expenses included
third-party fees paid to consultants, prototype development expenses and
computer services costs related to supporting computer tools used in the
engineering and design process. Engineering and development expenses were
$18.3 million and $15.9 million in the three months ended December 28, 2003,
and December 29, 2002, representing 19 percent and 21 percent of net revenues
in each period, respectively. Engineering and development expenses increased
by $2.4 million, or 15 percent, in the three months ended December 28, 2003,
compared to the three months ended December 29, 2002. This increase was
primarily due to the inclusion of the engineering and development expenses
associated with our acquisition of Vixel that accounted for $1.9 million, or
approximately 80 percent of the overall $2.4 million increase, driven in part
by the addition of 60 employees and their associated expenses. The remaining
increase was due to our continued investment in Fibre Channel and IP
engineering and development, which represented substantially all of our
engineering and development efforts and expenses prior to the acquisition of

23



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##### 



Vixel. Engineering and development expenses above included $0.6 million of
amortized deferred stock-based compensation for both the three months ended
December 28, 2003, and December 29, 2002. Due to the technical nature of our
products, engineering support is a critical part of our strategy during both
the development of our products and the support of our customers from product
design through deployment into the market. We intend to continue to make
significant investments in the technical support and enhancement of our current
products as well as the continued development of new products. While our
engineering expenses in the three months ended December 28, 2003, increased at
a similar rate as net revenues in comparison to the three months ended December
29, 2002, engineering expenses can fluctuate from quarter to quarter depending
on several factors, including, but not limited to, non-recurring engineering
charges associated with new product introduction schedules, hiring patterns and
depreciation of capital equipment.

Selling and Marketing.Selling and marketing expenses consisted primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of our products, as well as trade shows, product
literature, promotional support costs and other advertising-related costs.
Selling and marketing expenses were $6.9 million and $4.4 million in the three
months ended December 28, 2003, and December 29, 2002, representing seven and
six percent of net revenues, respectively. Selling and marketing expenses
increased by $2.5 million, or 57 percent, in the three months ended December
28, 2003, compared to the three months ended December 29, 2002. This increase
was primarily due to the inclusion of the selling and marketing expenses
associated with our acquisition of Vixel that accounted for $1.7 million, or
approximately 67 percent of the overall $2.5 million increase, driven in part
by the addition of 22 employees and their associated expenses. In addition,
selling and marketing expenses include increases for travel and related
expenses of $0.4 million, and an increase in advertising expenses of $0.2
million. Selling and marketing expenses above included $1.3 million and $0.3
million of amortized deferred stock-based compensation expenses in the three
months ended December 28, 2003, and December 29, 2002, respectively. The
principal reason for the $1.0 million increase in amortized deferred stock
compensation was due to the acquisition of Vixel and is included within the
$1.7 million of Vixel-related expenses described above. As a portion of
selling and marketing expenses, such as selling and marketing employees base
compensation and amortized deferred stock-based compensation expense, is not
driven directly by net revenue increases, the expenses have not expanded at the
same rate as our net revenues.

General and Administrative.Ongoing general and administrative expenses
consisted primarily of salaries and related expenses for executives, financial
accounting support, human resources, administrative services, professional fees
and other associated corporate expenses. General and administrative expenses
were $5.6 million and $3.3 million in the three months ended December 28, 2003,
and December 29, 2002, representing six percent and four percent of net
revenues in each period, respectively. General and administrative expenses
increased by $2.3 million, or 68 percent, in the three months ended December
28, 2003, compared to the three months ended December 29, 2002. This increase
was primarily due to the inclusion of the general and administrative expenses
associated with our acquisition of Vixel that accounted for $1.3 million, or
approximately 58 percent of the overall $2.3 million increase, driven in part
by the addition of 15 employees and their associated expenses. The increase in
general and administrative expenses was also primarily due to a $0.5 million
increase in insurance expenses and a $0.4 million increase in accounting and
tax services. General and administrative expenses included $0.4 million and
$0.1 million of amortized deferred stock-based compensation expenses in the
three months ended December 28, 2003, and December 29, 2002, respectively.
Additionally, a $0.7 million expense for the tentative settlement of
shareholder litigation related to the Vixel acquisition based on a memo of
understanding with the plaintiff in the case is included in the above $1.3
million of Vixel-related expenses.

In-Process Research and Development Expense.The in-process research and
development expense of $11.4 million was related to our acquisition of Vixel
during the three months ended December 28, 2003, and represented 12 percent of
our net revenues. There was no in-process research and development expenses
for the three months ended December 29, 2002.

Amortization of Other Intangibles.Amortization of other intangibles included
the amortization of intangible assets with estimable lives. For the three
months ended December 28, 2003, amortization of other intangibles is for
intangible assets related to the purchase of Vixel and the purchase of the
technology assets of Trebia Corporation, which were both completed during the
three months ended December 28, 2003, and the purchase Giganet, completed
during fiscal 2001. For the three months ended December 29, 2002, amortization
is for intangible assets related to the purchase of Giganet. The $2.8 million
increase in amortization of other intangibles to $4.3 million for the three
months ended December 28, 2003, was due to the addition of amortization related
to the Vixel acquisition and the acquisition of the technology assets of Trebia
Corporation. Amortization of other intangibles represented five and two

24



---



##### 



percent
of net revenues for the three months ended December 28, 2003, and for the three
months ended December 29, 2002, respectively.

Nonoperating Loss.Nonoperating loss consisted primarily of interest income,
interest expense and other non-operating income and expense items such as the
loss on the repurchase of convertible subordinated notes. Our nonoperating
income decreased by $2.4 million to a nonoperating loss of $0.5 million in the
three months ended December 28, 2003, from nonoperating income of $2.0 million
in the three months ended December 29, 2002. The decrease was due primarily to
a loss on the repurchase of convertible subordinated notes of $1.8 million in
the three months ended December 28, 2003, due to the expensing of the remaining
deferred debt issuance costs. Additionally, interest income decreased by $1.3
million to $2.0 million in the three months ended December 28, 2003, from $3.2
million in the three months ended December 29, 2002, primarily due to lower
interest yields and a lower level of invested funds. The lower amount of 1.75
percent convertible subordinated notes outstanding during the three months
ended December 28, 2003, compared to the three months ended December 29, 2002,
as well as the issuance of 0.25 percent convertible subordinated notes during
the three months ended December 28, 2003, partially offset the other decreases
to nonoperating income by causing interest expense to decrease by $0.5 million
to $0.7 million in the three months ended December 28, 2003, from $1.2 million
in the three months ended December 29, 2002.

Income Taxes. In the three months ended December 28, 2003, we recorded a tax
provision in the amount of $9.0 million, or approximately 71 percent of our
income before income taxes. In the three months ended December 29, 2002, we
recorded a tax provision in the amount of $10.5 million, or approximately 40
percent of our income before income taxes. The increase in the effective tax
rate for the three months ended December 28, 2003, was primarily due to the
IPR&D charge associated with the Vixel acquisition being non-deductible for tax
purposes.

Six months ended December 28, 2003, compared to six months ended December 29,
2002

Net Revenues.Net revenues for the six months of fiscal 2004 ended December
28, 2003, increased $32.1 million, or 22 percent, to $178.9 million, compared
to the six month period of fiscal 2003 ended December 29, 2002.

From a product line perspective, net revenues generated from our Fibre Channel
products for the six months ended December 28, 2003, were $178.4 million, an
increase of $33.4 million, or 23 percent, compared to the six months ended
December 29, 2002, and represented substantially all of our net revenues. The
increase was due to our Fibre Channel products and we believe that our net
revenues from our Fibre Channel products are being generated primarily as a
result of our product certifications and qualifications with OEM customers,
which take product both directly and through distribution channels.

Net Revenues by Product Line

|                       |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |     |    |  
|---------------------- | ------------------ | -------- | -------------- | -------- | ---------- | ---- | ------------ | -------- | ---------- | ---------- | ---------- | ------- | ---------- |  | -- | --- | - | - | ------ | ------ |  |  | --- | -- | -
|                       |                    |          |                |          |            |      |              |          |            |            | Six Months |         |            |  |    |     |   |   |        |        |  |  |    
|                       |                    |          | Six Months     |          | Percentage |      | Ended        |          | Percentage |            |            |         |            |  |    |     |  
|                       |                    |          | Ended December |          | of Net     |      | December 29, |          | of Net     |            | Increase/  |         | Percentage
|(in thousands)         |                    | 28, 2003 |                | Revenues |            | 2002 |              | Revenues |            | (Decrease) |            | Change 
|                       |                    |          |                |          |            |      |              |          |            |            |            |        
|Fibre Channel          |                    | $        | 178,435        |          |            |      | 100          | %        |            | $          | 144,997    |         |            |  | 99 | %   |   | $ | 33,438 |        |  |  | 23  | % 
|IP networking          |                    |          | 503            |          |            |      |             |          |            |            | 1,817      |         |            |  | 1  |     |   |   | (1,314 | )      |  |  | (72 | %)
|Traditional networking |                    |          | 8              |          |            |      |             |          |            |            | 59         |         |            |  |   |     |   |   | (51    | )      |  |  | (86 | %)
|                       |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |     |   
|                       | Total net revenues |          | $              | 178,946  |            |      |              | 100      | %          |            | $          | 146,873 |            |  |    | 100 | % |   | $      | 32,073 |  |  |     | 22 | %
|                       |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |     |   

25



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##### 



Customers whose direct net revenues, or total direct and indirect net revenues
(including customer-specific models purchased or marketed indirectly through
distributors, resellers and other third parties) exceeded 10 percent of our net
revenues, were as follows:

Net Revenues by Major Customers

|                           |                 |  |                 |    |                                        |  |                |    |                |  |  |    |   |  |  |    |  
|-------------------------- | --------------- |  | --------------- | -- | -------------------------------------- |  | -------------- | -- | -------------- |  |  | -- | - |  |  | -- | -
|                           |                 |  | Direct Revenues |    | Total Direct and Indirect Revenues (2)
|                           |                 |  |                 |    |                                       
|                           |                 |  | Six Months      |    | Six Months                             |  |                |    |                |  |  |    |  
|                           |                 |  | Ended           |    | Ended                                  |  | Six Months     |    | Six Months    
|                           |                 |  | December 28,    |    | December 29,                           |  | Ended December |    | Ended December
|                           |                 |  | 2003            |    | 2002                                   |  | 28, 2003       |    | 29, 2002      
|                           |                 |  |                 |    |                                        |  |                |    |               
|Net revenue percentage (1) |                 |  |                 |    |                                        |  |                |    |                |  |  |    |   |  |  |   
|                           | IBM             |  |                 | 24 | %                                      |  |                | 21 | %              |  |  | 24 | % |  |  | 25 | %
|                           | Hewlett-Packard |  |                 | 21 | %                                      |  |                | 24 | %              |  |  | 23 | % |  |  | 24 | %
|                           | Info-X          |  |                 | 10 | %                                      |  |                |   |                |  |  |   |   |  |  |   |  
|                           | Tidalwire       |  |                 | 10 | %                                      |  |                |   |                |  |  |   |   |  |  |   |  
|                           | EMC             |  |                 |   |                                        |  |                |   |                |  |  | 24 | % |  |  | 20 | %



|(1) |  | Amounts less than 10 percent are not presented                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Customer-specific models sold indirectly are included with the OEMs revenues in these columns rather than as revenue for the
distributors, resellers or other third parties.

Direct sales to our top five customers accounted for 71 percent of total net
revenues for the six months ended December 28, 2003, compared to 65 percent for
the six months ended December 29, 2002, and we expect to be similarly
concentrated in the future. Our net revenues from our customers can be
significantly impacted by changes in the business models of our customers.
Beginning in late 2002, EMC began sourcing more product through distributors
rather than purchasing it directly. Consequently, direct sales to EMC have
been impacted, while indirect EMC revenues through distribution have risen.

From a sales channel perspective, net revenues generated from OEM customers
were 64 percent of net revenues and sales through distribution were 36 percent
in the six months ended December 28, 2003.

Net Revenues by Sales Channel

|                   |  |          |                |          |            |      |              |          |            |            |            |        |            |  |     |    |   |   |        |        |   |  |    |     |   
|------------------ |  | -------- | -------------- | -------- | ---------- | ---- | ------------ | -------- | ---------- | ---------- | ---------- | ------ | ---------- |  | --- | -- | - | - | ------ | ------ | - |  | -- | --- | --
|                   |  |          |                |          |            |      |              |          |            |            | Six Months |        |            |  |     |    |   |   |        |        |   |  |   
|                   |  |          | Six Months     |          | Percentage |      | Ended        |          | Percentage |            |            |        |            |  |     |    |  
|                   |  |          | Ended December |          | of Net     |      | December 29, |          | of Net     |            | Increase/  |        | Percentage
|(in thousands)     |  | 28, 2003 |                | Revenues |            | 2002 |              | Revenues |            | (Decrease) |            | Change
|                   |  |          |                |          |            |      |              |          |            |            |            |       
|OEM                |  |          | $              | 114,317  |            |      |              | 64       | %          |            | $          | 98,594 |            |  |     | 67 | % |   | $      | 15,723 |   |  |    | 16  | % 
|Distribution       |  |          |                | 64,532   |            |      |              | 36       | %          |            |            | 48,171 |            |  |     | 33 | % |   |        | 16,361 |   |  |    | 34  | % 
|Other              |  |          |                | 97       |            |      |              |         |            |            |            | 108    |            |  |     |   |   |   |        | (11    | ) |  |    | (10 | %)
|                   |  |          |                |          |            |      |              |          |            |            |            |        |            |  |     |    |   |   |        |        |   |  |    |     |   
|Total net revenues |  | $        | 178,946        |          |            |      | 100          | %        |            | $          | 146,873    |        |            |  | 100 | %  |   | $ | 32,073 |        |   |  | 22 | %  
|                   |  |          |                |          |            |      |              |          |            |            |            |        |            |  |     |    |   |   |        |        |   |  |    |     |   

The increase in OEM revenues is due to increased demand for Fibre Channel
products by OEM customers that take product directly. A major factor in the
increased distribution net revenues is that beginning in 2002, one of our
larger OEM customers, EMC, began sourcing more product through distribution
rather than purchasing it directly.

In the six months ended December 28, 2003, domestic net revenues increased by
$13.5 million, or 15 percent, and international net revenues increased by $18.6
million, or 33 percent, compared to the six months ended December 29, 2002.

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Net Domestic and International Revenues

|               |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |    |    |  
|-------------- | ------------------ | -------- | -------------- | -------- | ---------- | ---- | ------------ | -------- | ---------- | ---------- | ---------- | ------- | ---------- |  | -- | --- | - | - | ------ | ------ |  |  | -- | -- | -
|               |                    |          |                |          |            |      |              |          |            |            | Six Months |         |            |  |    |     |   |   |        |        |  |  |   
|               |                    |          | Six Months     |          | Percentage |      | Ended        |          | Percentage |            |            |         |            |  |    |     |  
|               |                    |          | Ended December |          | of Net     |      | December 29, |          | of Net     |            | Increase/  |         | Percentage
|(in thousands) |                    | 28, 2003 |                | Revenues |            | 2002 |              | Revenues |            | (Decrease) |            | Change 
|               |                    |          |                |          |            |      |              |          |            |            |            |        
|Domestic       |                    | $        | 104,562        |          |            |      | 59           | %        |            | $          | 91,059     |         |            |  | 62 | %   |   | $ | 13,503 |        |  |  | 15 | % 
|Europe         |                    |          | 56,229         |          |            |      | 31           | %        |            |            | 45,214     |         |            |  | 31 | %   |   |   | 11,015 |        |  |  | 24 | % 
|Pacific Rim    |                    |          | 18,155         |          |            |      | 10           | %        |            |            | 10,600     |         |            |  | 7  | %   |   |   | 7,555  |        |  |  | 71 | % 
|               |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |    |   
|               | Total net revenues |          | $              | 178,946  |            |      |              | 100      | %          |            | $          | 146,873 |            |  |    | 100 | % |   | $      | 32,073 |  |  |    | 22 | %
|               |                    |          |                |          |            |      |              |          |            |            |            |         |            |  |    |     |   |   |        |        |  |  |    |   

We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products. We
believe the increase in international net revenues at a higher rate than
domestic net revenues is due to the continued increase in market acceptance of
Fibre Channel products outside of the United States. However, because we sell
to OEMs and distributors who ultimately resell our products to their customers, the
geographic mix of our net revenues may not be reflective of the geographic mix
of end-user demand or installations.

Gross Profit.In the six months ended December 28, 2003, gross profit
increased $24.2 million, or 26 percent, to $115.8 million, from $91.7 million
in the six months ended December 29, 2002. Gross margin increased to 65
percent in the six months ended December 28, 2003, compared to 62 percent in
the six months ended December 29, 2002. Starting in late September 2001, some
of our major customers made announcements that general economic conditions,
exacerbated by the increase in economic uncertainty in the aftermath of the
terrorist events of September 11, 2001, were having a negative impact on their
financial results. The announcements made, and forecasts received, indicated
deteriorating demand for our one Gbps products as these customers were expected
to migrate to two Gbps products for future purchases. As a result, we recorded
an estimated excess and obsolete inventory charge totaling $13.6 million during
the first quarter of fiscal 2002. After initially recording this one Gbps
reserve during the first quarter of fiscal 2002, we have subsequently reduced
this reserve by a total of $8.8 million through December 28, 2003, as
previously-reserved inventory has been sold. Overall, we have been able to
recover a significant portion of this reserved inventory that was not expected
based on our forecasts and the forecasts received from our customers when this
excess and obsolete charge was recorded. In addition to the sale of this
previously-reserved product, we have also scrapped $3.4 million of this
reserved inventory and negotiated and paid cancellation charges of $0.2 million
through December 28, 2003, related to this excess and obsolete inventory charge
since it was initially recorded. In the six months ended December 28, 2003,
and December 29, 2002, the reduction related to our one Gbps reserve, as
previously-reserved inventory was sold, was $1.9 million and $1.3 million,
respectively. Excluding the reductions of the excess and obsolete inventory
reserve of $1.9 million in the six months ended December 28, 2003, and $1.3
million in the six months ended December 29, 2002, gross profit would have been
$113.9 million and $90.3 million, respectively, and gross margin would have
been 64 percent in the six months ended December 28, 2003, and 62 percent in
the six months ended December 29, 2002. The remaining increase in gross profit
and gross margin in the six months ended December 28, 2003, compared to the six
months ended December 29, 2002, was due to cost reductions for Fibre Channel
products, higher total Fibre Channel net revenues and volumes, and changes in
product mix. Also, cost of sales included $0.2 million and $34 thousand of
amortized deferred stock-based compensation expense for the six months ended
December 28, 2003, and December 29, 2002, respectively.

Engineering and Development.Engineering and development expenses were $34.7
million and $29.6 million in the six months ended December 28, 2003, and
December 29, 2002, representing 19 percent and 20 percent of net revenues in
each period, respectively. Engineering and development expenses increased by
$5.1 million, or 17 percent, in the six months ended December 28, 2003,
compared to the six months ended December 29, 2002. This increase was due in
part to the inclusion of the engineering and development expenses associated
with our acquisition of Vixel that accounted for $1.9 million, or approximately
38 percent of the overall $5.1 million increase, driven in part by the addition
of 60 employees and their associated expenses. The remaining increase was due
to our continued investment in Fibre Channel and IP engineering and
development, which represented substantially all of our engineering and
development efforts and expenses prior to the acquisition of Vixel.
Engineering and development expenses above included $1.0 million and $1.1
million of amortized deferred stock-based compensation for the six months ended
December 28, 2003, and December 29, 2002, respectively. Due to the technical
nature of our products, engineering support is a critical part of our strategy
during both the development of our products and the support of our customers
from product design through deployment into the market. We intend to continue
to make significant investments in the technical support and enhancement of our
current products as well as the continued development of

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new products. While
our engineering expenses in the six months ended December 28, 2003, increased
at a similar rate as net revenues in comparison to the six months ended
December 29, 2002, engineering expenses can fluctuate from quarter to quarter
depending on several factors, including, but not limited to, non-recurring
engineering charges associated with new product introduction schedules, hiring
patterns and depreciation of capital equipment.

Selling and Marketing.Selling and marketing expenses were $11.5 million and
$9.0 million in the six months ended December 28, 2003, and December 29, 2002,
representing six percent of net revenues in each period. Selling and marketing
expenses increased by $2.4 million, or 27 percent, in the six months ended
December 28, 2003, compared to the six months ended December 29, 2002. This
increase was primarily due to the inclusion of the selling and marketing
expenses associated with our acquisition of Vixel that accounted for $1.7
million, or approximately 69 percent of the overall $2.4 million increase,
driven in part by the addition of 22 employees and their associated expenses.
In addition, selling and marketing expenses include increases for travel and
related expenses of approximately $0.4 million and an increase in advertising
expenses of approximately $0.1 million. Selling and marketing expenses above
included $1.4 million and $0.6 million of amortized deferred stock-based
compensation expenses in the six months ended December 28, 2003, and December
29, 2002, respectively. The $0.8 million increase in amortized deferred
stock-based compensation is due primarily to the acquisition of Vixel, and is
included within the $1.7 million of Vixel-related expenses described above. As
a portion of selling and marketing expenses, such as selling and marketing
employees base compensation and amortized deferred stock-based compensation
expense, is not driven directly by net revenue increases, the expenses have not
expanded at the same rate as our net revenues.

General and Administrative.General and administrative expenses were $9.2
million and $6.1 million in the six months ended December 28, 2003, and
December 29, 2002, representing five percent and four percent of net revenues
in each period, respectively. General and administrative expenses increased by
$3.2 million, or 52 percent, in the six months ended December 28, 2003,
compared to the six months ended December 29, 2002. This increase was
primarily due to the inclusion of the general and administrative expenses
associated with our acquisition of Vixel that accounted for $1.3 million, or
approximately 41 percent of the overall $3.2 million increase, driven in part
by the addition of 15 employees and their associated expenses. The increase in
general and administrative expenses was also due primarily to a $1.0 million
increase in insurance expenses, a $0.6 million increase in accounting and tax
services and a $0.5 million increase in legal expenses. General and
administrative expenses included $0.4 million and $0.1 million of amortized
deferred stock-based compensation expenses in the three months ended December
28, 2003, and December 29, 2002, respectively, and $0.7 million for the
tentative settlement of shareholder litigation related to the Vixel acquisition
based on a memo of understanding with the plaintiff in the case in the three
months ended December 28, 2003. The amortized deferred stock-based
compensation related to the Vixel acquisition of $0.3 million and the $0.7
million for the tentative settlement of shareholder litigation are included
within the $1.3 million of Vixel-related expenses described above.

In-Process Research and Development Expense.The in-process research and
development expense of $11.4 million was related to our acquisition of Vixel
during the six months ended December 28, 2003, and represented six percent of
our net revenues. There was no in-process research and development expenses
for the six months ended December 29, 2002.

Amortization of Other Intangibles.For the six months ended December 28, 2003,
amortization is for intangible assets related to the purchase of Vixel and the
purchase of the technology assets of Trebia Corporation, which were both
completed during the six months ended December 28, 2003, and the purchase
Giganet, completed during fiscal 2001. For the six months ended December 29,
2002, amortization is for intangible assets related to the purchase of Giganet.
The $2.8 million increase in amortization of other intangibles to $5.8 million
for the six months ended December 28, 2003, was due to the addition of
amortization related to the Vixel acquisition and the acquisition of the
technology assets of Trebia Corporation. Amortization of other intangibles
represented three and two percent of net revenues for the six months ended
December 28, 2003, and for the six months ended December 29, 2002,
respectively.

Nonoperating Loss.Our nonoperating income decreased by $26.8 million to $5.8
million in the six months ended December 28, 2003, from nonoperating income of
$32.6 million in the six months ended December 29, 2002. The decrease was due
primarily to a decrease in the net overall gain on the repurchase of
convertible subordinated notes by $25.8 million to $2.9 million in the six
months ended December 28, 2003, from $28.7 million in the six months ended
December 28, 2003. Additionally, interest income decreased by $2.5 million to
$4.5 million in the six months ended December 28, 2003, from $6.9 million in
the six months ended December 29, 2002, primarily due to lower interest yields
and a lower level of invested funds. The lower amount of 1.75 percent
convertible subordinated notes outstanding during the six months ended December
28, 2003, compared to the six months ended December 29, 2002,

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as well as the issuance of 0.25 percent convertible subordinated notes during the six months
ended December 28, 2003, partially offset the other decreases to nonoperating
income by causing interest expense to decrease by $1.3 million to $1.8 million
in the six months ended December 28, 2003, from $3.0 million in the six months
ended December 29, 2002.

Income Taxes. In the six months ended December 28, 2003, we recorded a tax
provision in the amount of $22.9 million, or approximately 47 percent of our
income before income taxes. In the six months ended December 29, 2002, we
recorded a tax provision in the amount of $29.1 million, or approximately 38
percent of our income before income taxes. The increase in the effective tax
rate for the six months ended December 28, 2003, was primarily due to the IPR&D
charge associated with the Vixel acquisition being non-deductible for tax
purposes.

Critical Accounting Policies

The preparation of the financial statements requires estimation and judgment
that affect the reported amounts of net revenues, expenses, assets and
liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could potentially
result in materially different results under different assumptions and
conditions. If these estimates differ significantly from actual results, the
impact to the financial statements may be material.

We have identified the following as critical accounting policies: revenue
recognition; allowance for doubtful accounts; goodwill, other intangibles and
long-lived assets; inventories; income taxes and stock-based compensation.

Revenue Recognition. Our revenue recognition policies are in accordance with
the Securities and Exchange Commissions Staff Accounting Bulletin No. 101. We
recognize revenue at the time of shipment when title and risk of loss have
passed, evidence of an arrangement has been obtained and collectibility has
been reasonably assured. We make certain sales through two-tier distribution
channels and have various distribution agreements with selected distributors
and Master Value Added Resellers, or collectively the Distributors. These
distribution agreements may be terminated upon written notice by either party.
Additionally, these Distributors are generally given privileges to return a
portion of inventory and to participate in price protection and cooperative
marketing programs. Therefore, we recognize revenues on our standard products
sold to our Distributors based on data received from the Distributors and
managements estimates to approximate the point that these products have been
resold by the Distributors. As OEM-specific models sold to our Distributors
are governed under the related OEM agreements rather than under these
distribution agreements, we recognize revenue at the time of shipment to the
Distributors when title and risk of loss have passed, evidence of an
arrangement has been obtained and collectibility has been reasonably assured.
Additionally, we maintain accruals and allowances for price protection and
cooperative marketing programs.

For products with unspecified software upgrade rights, which are our legacy
cLAN products that contribute negligible revenues, we apply the American
Institute of Certified Public Accountants Statement of Position, or SOP, 97-2,
Software Revenue Recognition as amended by SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition With Respect to Certain Transactions.
Under SOP 97-2, as amended by SOP 98-9, revenue is recognized from software
licenses, provided the software has been delivered to the customer, persuasive
evidence of an arrangement exists, the price charged to the customer is fixed
or determinable at fair value, there are no significant Company obligations
related to the sale and the resulting receivable is deemed collectible, net of
an allowance for doubtful accounts. In accordance with SOP 97-2, as amended by
SOP 98-9, we have deferred the revenue over the upgrade period for certain
legacy cLAN products with unspecified software upgrade rights.

Furthermore, we provide a warranty of between one and three years on our I/O
Fibre Channel and Internet Protocol products and provide a warranty of between
one and five years on our Fibre Channel switching and traditional networking
products. We record a provision for estimated warranty-related costs at the
time of sale based on historical product return rates and our expected future
costs of fulfilling our warranty obligations.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts based upon historical write-offs as a percentage of net revenues.
Although we have not experienced significant losses on accounts receivable
historically, our accounts receivable are concentrated with a small number of
customers. Consequently, any write-off associated with one of these customers
could have a significant impact on our allowance for doubtful accounts.

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Goodwill, Other Intangibles and Long-Lived Assets.Goodwill and other
intangibles resulting from the acquisition of Vixel and Giganet and the
purchase of the technology assets of Trebia Corporation are carried at cost
less accumulated amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the estimated
economic lives of the respective intangible assets, ranging from two to seven
years. We adopted Statement 142 effective July 1, 2002, and no longer amortize
goodwill and other intangibles that have indeterminate useful lives. The
adoption of Statement 142 had a significant effect on our results of
operations. Prior to the adoption for Statement 142 we applied Statement 121
for goodwill, other intangibles and long-lived assets. We completed our
transitional impairment analysis under Statement 142 and found no impairment
upon the adoption of Statement 142 as of July 1, 2002. Our annual impairment
test occurred in the fourth quarter of fiscal 2003 with no impairment charges
resulting. In accordance with Statement 142, goodwill and other intangibles
that have indeterminate lives will be tested for impairment at least annually,
but also on an interim basis if an event or circumstance indicates that it is
more likely than not that an impairment loss has been incurred. Any future
impairment loss could materially and adversely affect our financial position
and results of operations.

Additionally, Statement 144, under which the recoverability of long-lived
assets is assessed by determining whether the carrying value of an asset can be
recovered through projected undiscounted future operating cash flows over its
remaining life whenever events or changes in circumstances indicate that we may
not be able to recover the assets carrying value. The amount of impairment,
if any, is measured based on fair value, which is determined using projected
discounted future operating cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.

Inventories.Inventories are stated at the lower of cost or net realizable
value on a first-in, first-out basis. We use a standard cost system for
purposes of determining cost. The standards are adjusted periodically to
ensure they represent actual cost. We regularly compare forecasted demand and the
composition of the forecast against inventory on hand and open purchase
commitments in an effort to ensure the carrying value of inventory does not
exceed net realizable value. Accordingly, we may have to record reductions to
the carrying value of excess and obsolete inventory if forecasted demand
decreases. We have previously recorded reductions to the carrying value of
excess and obsolete inventory, as described in the Gross Profit section of the
Results of Operations for the six months ended December 28, 2003, compared to
the six months ended December 29, 2002.

Income Taxes. We account for income taxes using the asset and liability
method, which recognizes deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. We
regularly review historical and anticipated future pre-tax results of
operations to determine whether we will be able to realize the benefit of our
deferred tax assets. A valuation allowance is required to reduce the potential
deferred tax asset when it is more likely than not that all or some portion of
the potential deferred tax asset will not be realized due to the lack of
sufficient taxable income.

Stock-Based Compensation. We account for our stock-based awards to employees
using the intrinsic value method. Stock-based awards to non-employees, if any,
are recorded using the fair value method. See note 1 of the Condensed
Consolidated Financial Statements for more information. Although we have no
plans to adopt the fair value provisions of Statement 123 unless required to
under new accounting standards for all stock awards, if we were required to
account for all stock-based awards based on the fair value method, it would
have a material non-cash impact on our results of operations.

Liquidity and Capital Resources

At December 28, 2003, we had $447.7 million in working capital and $566.4
million in cash and cash equivalents, restricted cash, current investments and
long-term investments. At June 29, 2003, we had $423.2 million in working
capital and $620.5 million in cash and cash equivalents, restricted cash,
current investments and long-term investments. Our cash and cash equivalents
increased by $54.7 million to $191.6 million as of December 28, 2003, from
$137.0 million as of June 29, 2003. The increase in cash and cash equivalents
was due to our financing and operating activities, which provided $230.9
million and $24.3 million of cash and cash equivalents, respectively. The cash
and cash equivalents provided by financing and operating activities were
partially offset by our investing activities, which used $200.5 million of cash
and cash equivalents.

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In the six months ended December 28, 2003, operating activities provided $24.3
million of cash and cash equivalents, primarily from net income before
non-cash activities. Such non-cash activities consisted primarily of
in-process research and development, deferred income taxes, the depreciation
and amortization of property and equipment, the amortization of other
intangibles, the tax benefit from the exercise of stock options, stock-based
compensation and the gain on repurchase of convertible subordinated notes. In
addition, cash and cash equivalents from operating activities increased due to
an increase in accounts payable, an increase in income taxes payable, and a
decrease in prepaid expenses and other assets. These increases to net cash
provided by operating activities were partially offset by the litigation
settlement payment, a decrease in accrued liabilities, an increase in accounts
and other receivables and an increase in inventories. The cash provided by
operating activities in the six months ended December 29, 2002, was primarily
from net income before non-cash items such as the gain on repurchase of
convertible subordinated notes, deferred income taxes, depreciation and
amortization of property and equipment, stock-based compensation, amortization
of other intangibles and the tax benefit from the exercise of stock options,
as well as changes in other working capital balances.

In the six months ended December 28, 2003, cash used in investing activities
was $200.5 million. The primary use of cash was payments for the purchase of
Vixel of $294.8 million, net of cash acquired. Additional uses of cash were
for purchases of investments of $121.9 million, additions to property and
equipment of $22.1 million, and payments for the technology assets of Trebia
Networks of $2.1 million, offset by maturities of investments of $232.4 million
and a decrease in restricted cash related to the construction escrow account of
$8.0 million. In the six months ended December 29, 2002 investing activities,
which consisted of purchases of investments of $371.3 million, maturities of
investments of $275.8 million, an increase in restricted cash related to the
construction escrow account of $11.1 million and additions to property and
equipment of $7.0 million, used $113.6 million of cash and cash equivalents.

Financing activities provided $230.9 million of cash and cash equivalents in
the six months ended December 28, 2003. This increase in cash and cash
equivalents was primarily due to our net proceeds from the issuance of 0.25
percent convertible subordinated notes of $439.2 million offset by the
repurchase of $179.3 million in face value of convertible subordinated notes
at a net discount to face value, spending $173.3 million, the repurchase of 1.5
million shares for $40.5 million and payments for notes payable and capital
leases of $1.3 million. Additionally, proceeds from the issuance of common
stock under stock option plans provided $5.5 million and proceeds from the
issuance of common stock under the employee stock purchase plan provided $1.2
million. For the six months ended December 29, 2002, financing activities,
which consisted primarily of our repurchase of approximately $136.5 million in
face value of convertible subordinated notes at a discount to face value,
spending $104.2 million, as well as the proceeds of $0.8 million from the
issuance of common stock under stock option plans and $0.4 million from the
issuance of common stock under the employee stock purchase plan, used $102.9
million of cash and cash equivalents.

On January 29, 2002, we completed a $345.0 million private placement of 1.75
percent convertible subordinated notes due February 1, 2007. During the three
months ended September 29, 2002, our Board of Directors expanded our
repurchase program to include the repurchase of our convertible subordinated
notes up to a purchase price of $125.0 million. Also during the three months
ended September 29, 2002, we bought back at a discount to face value
approximately $136.5 million in face value of our convertible subordinated
notes for $104.2 million. The resulting net pre-tax gain of approximately
$28.7 million was recorded for the three months ended September 29, 2002. The
repurchased notes were cancelled, leaving convertible subordinated notes
outstanding with a face value of $208.5 million, which, if converted, would
have resulted in the issuance of approximately 3.9 million shares.

During the six month months ended December 28, 2003, our Board of Directors
expanded our stock repurchase program to include the repurchase of all of our
convertible subordinated notes and extended the entire program to June 2005.
The combined program authorizes the repurchase of up to 4.0 million shares of
common stock and the repurchase of all of the remaining outstanding
convertible subordinated notes. Also during the six months ended December 28,
2003, we bought back approximately $179.3 million in face value of our
convertible subordinated notes at a discount to face value for approximately
$173.3 million. The resulting net pre-tax gain of approximately $2.9 million
was recorded for the six months ended December 28, 2003. The repurchased
notes were cancelled, leaving convertible subordinated notes outstanding with
a face value of approximately $29.3 million that, if converted, would result
in the issuance of approximately 0.5 million shares. At December 28, 2003,
1.5 million shares of common stock remained authorized for repurchase,
reflecting the repurchase of 1.5 million common shares for $40.5 million
during the six months ended December 28, 2003. In addition, the entire $29.3
million face amount of the 1.75 percent outstanding convertible subordinated
notes remained authorized for repurchase.

On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004.

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Under the terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.We incurred associated
bankers fees of approximately $10.1 million, which were recorded as a
reduction to the proceeds from the issuance of the notes and will be accreted
over the life of the notes as well as $0.7 million of other associated
acquisition costs, which have been recorded as an asset and will be amortized
over the life of the notes. In addition, we granted the initial purchasers of
the notes an option, which they exercised subsequent to December 28, 2003, to
purchase an additional $67.5 million principal amount of the notes. We
incurred associated bankers fees of $1.5 million, which were recorded as a
reduction of the proceeds and will be accreted over the life of the notes.

Also subsequent to December 28, 2003, we bought back approximately $11.6
million face value of our 1.75 percent convertible subordinated notes for
approximately $11.7 million. The resulting net pre-tax loss of approximately
$0.2 million due to the expensing of the remaining deferred debt issuance costs
will be recorded during the third fiscal quarter of 2004.

We were previously required to enter into end-of-life purchase agreements for
two key inventory components as the sole-source manufacturers of these
components announced their discontinued manufacturing of the components. As of
December 28, 2003, our remaining purchase obligation for the two components was
$11.8 million.

On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding with the plaintiff in the class action suit
pursuant to which the parties have agreed to settle the action, subject to
court approval. The consummation of the settlement is subject to: (a) the
drafting and execution of formal settlement documents; (b) the completion by
plaintiff of reasonable discovery as agreed to by the parties; and (c) final court approval (as defined by law) of
the settlement and dismissal of the action with prejudice. We expect to pay
the settlement amount of $0.7 million during fiscal 2004.

Subsequent to December 28, 2003, we signed a Letter Agreement with one of our
three insurers under which we are to receive $10.0 million less amounts
previously paid by the insurer for the defense of previous securities class
action lawsuits for which we paid $39.5 million to the plaintiffs during the
three months ended December 28, 2003. The $39.5 million was previously held
in escrow.

During the third quarter of fiscal 2002, we entered into an agreement to
relocate our headquarters locally in Costa Mesa, California. We financed the
build-to-suit construction phase of the new facility with our own capital, and
will begin a 10-year lease term with an option to buy the land and buildings
during the first six months of the lease term. If we do not exercise our
option to purchase the facility, the landlord will obtain permanent financing
and reimburse us for the construction costs. Construction on our new
corporate headquarters was completed subsequent to December 28, 2003. If
purchased, we believe the total cost, including the land, building and other
related capital expenditures, would be approximately $47.0 million. Our total
gross undiscounted financial commitment for the 10-year lease term would be
approximately $45.9 million. At December 28, 2003, we had restricted cash of
$1.4 million held in escrow associated with the construction of the
headquarters. In addition, we have a $1.0 million letter of credit in place
in lieu of a rental deposit on one of our other facilities. Subsequent to
December 28, 2003, we exercised our option to purchase the headquarters
property.

As part of our commitment to storage networking product development, including
Fibre Channel, which includes our recent acquisition of Vixel Corporation, and
IP Networking, we expect to continue our investments in property and
equipment, most notably for additional engineering equipment, continued
enhancement of our global IT infrastructure, and the local relocation of our
Costa Mesa, California facility.

We believe that our existing cash and cash equivalents balances, facilities
and equipment leases, investments and anticipated cash flows from operating
activities will be sufficient to support our working capital needs and capital
expenditure requirements for at least the next 12 months.

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As described above, the following summarizes our contractual obligations at
December 28, 2003, and the effect such obligations are expected to have on our
liquidity and cash flow in future periods:

|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |        |        |  |   |         |         | 
|-------------------------------------------------------------- | ----- | - | ---------------------- | ------- | ------ | - | --------- | ------ | ----- | - | ----- | ------ | ------- | - | ------ | ------ |  | - | ------- | ------- | 
|                                                               |       |   | Payments Due by Period
|                                                               |       |   |                       
|                                                               |       |   | (in thousands)        
|                                                               |       |   |                        |         |        |   | Less than |        | 1-3   |   | 4-5   |        | After 5
|                                                               |       |   | Total                  |         | 1 year |   | Years     |        | Years |   | Years
|                                                               |       |   |                        |         |        |   |           |        |       |   |      
|Convertible subordinated notes and
interest (1)                |       | $ | 503,822                |         |        | $ | 1,075     |        |       | $ | 3,275 |        |         | $ | 32,035 |        |  | $ | 467,437 |        
|Leases                                                         |       |   | 5,091                  |         |        |   | 1,323     |        |       |   | 3,579 |        |         |   | 189    |        |  |   |        |        
|Non-cancelable purchase obligations for end
of life components |       |   | 11,824                 |         |        |   | 11,824    |        |       |   |      |        |         |   |       |        |  |   |        |        
|Litigation settlements                                         |       |   | 698                    |         |        |   | 698       |        |       |   |      |        |         |   |       |        |  |   |        |        
|Letter of credit                                               |       |   | 1,000                  |         |        |   | 1,000     |        |       |   |      |        |         |   |       |        |  |   |        |        
|New corporate headquarters  lease option
(2)                  |       |   | 45,899                 |         |        |   | 2,220     |        |       |   | 8,972 |        |         |   | 9,104  |        |  |   | 25,603  |        
|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |        |        |  |   |         |        
|                                                               | Total |   | $                      | 568,334 |        |   | $         | 18,140 |       |   | $     | 15,826 |         |   | $      | 41,328 |  |   | $       | 493,040 | 
|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |        |        |  |   |         |        

(1). As described above, subsequent to December 28, 2003, the initial
purchasers of the notes exercised their option to purchase an additional $67.5
million principal amount of the notes. The principal payment related to the
0.25 percent private placement of $450.0 million is shown as maturing after 5
years in this schedule, but holders of the notes may require us to purchase the
notes for cash by giving us written notice as early as 20 business days prior
to each of December 15, 2006, December 15, 2008, December 15, 2013 and December
15, 2018.

(2). As described above, subsequent to December 28, 2003, we exercised our
option to purchase our headquarters property. We believe the total cost,
including the land, building and other related capital expenditures, would be
approximately $47.0 million.

Risk Factors

A downturn in information technology spending in general or spending on
high-performance computer and storage systems in particular could adversely
affect our revenues and results of operations.

The demand for our Fibre Channel products, which represented 100 percent of our
net revenues for the six months ended December 28, 2003, has been driven by the
demand for high-performance storage networking products and solutions that
support enterprise computing applications, including on-line transaction
processing, data mining, data warehousing, multimedia and Internet
applications. Any significant downturn in demand for such products, solutions
and applications, such as the slowdown experienced beginning in early 2001 and
exacerbated by the September 11, 2001 terrorist attacks and resulting political
and economic uncertainty, could adversely affect our business, results of
operations and financial condition. The adverse effects of any sustained
downturn in information technology spending on our operating results may be
exacerbated by our research and development investments, strategic investments
and merger and acquisition activity, as well as customer service and support,
which are expected to continue despite any such downturn.

Our business depends upon the continued growth of the Fibre Channel storage
networking market, and our business will be adversely affected if such growth
does not occur or occurs more slowly than we anticipate.

The size of our potential market is largely dependent upon the broadening
acceptance of our Fibre Channel storage networking technologies as alternatives
to other technologies traditionally utilized for network and storage
communications, as well as the overall demand for storage. We believe that our
investment in the Fibre Channel storage networking market represents our
greatest opportunity for revenue growth and profitability for the foreseeable
future. However, the market for Fibre Channel storage networking products may
not gain broader acceptance and customers may choose alternative technologies
and products supplied by other companies. Recently, interest has re-emerged
for iSCSI storage networking solutions, which may satisfy some I/0 connectivity
requirements through standard Ethernet adapters and software at little to no
incremental cost. Such iSCSI solutions are likely to compete with Fibre
Channel I/0 solutions, particularly in the low end of the market. Additionally,
since our products are sold as parts of integrated systems, demand for our
products is driven by the demand for these integrated systems, including other
companies complementary products. A lack of demand for the integrated systems
or a lack of complementary products required for these integrated systems could
have a material adverse effect on our business, results of

33



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operations and financial condition. If the Fibre Channel storage networking market does not
grow, or grows more slowly than we anticipate, attracts more competitors than
we expect, as discussed below, or if our products do not achieve market
acceptance, our business, results of operations and financial condition could
be materially adversely affected.

Because a significant portion of our revenues are generated from sales to a
limited number of customers, none of which are the subject of exclusive or
long-term contracts, the loss of one or more of these customers could adversely
affect our business.

We rely almost exclusively on original equipment manufacturers, or OEMs, and
sales through distribution channels for our revenue. For the six months ended
December 28, 2003, we derived approximately 64 percent of our net revenues from
OEMs and 36 percent from sales through distribution. Furthermore, because the
majority of our sales through distribution channels consist of OEM-certified
products, OEM customers effectively controlled more than 87 percent of our
revenue for the six months ended December 28, 2003. We may be unable to retain
our current OEM and distributor customers or to recruit additional or
replacement customers.

For the six months ended December 28, 2003, direct sales amounted to 24 percent
for IBM, 21 percent for Hewlett-Packard, 10 percent for Info-X and 10 percent
for Tidalwire. Direct sales to our top five customers accounted for 71 percent
of total net revenues for the six months ended December 28, 2003. Additionally,
some of our larger OEM customers purchased or marketed products indirectly
through distributors, resellers or other third parties. Total net revenues,
including direct sales to our OEM customers and their OEM-specific models
purchased or marketed indirectly through other distribution channels, amounted
to 24 percent of our total net revenues for IBM, 24 percent for EMC and 23
percent for Hewlett Packard for the six months ended December 28, 2003.
Although we have attempted to expand our base of customers including customers
for embedded switching products, we believe our revenues in the future will
continue to be similarly derived from a limited number of customers, especially
in light of the continuing consolidation the industry has experienced. As a
result, to the extent that sales to any of our significant customers do not
increase in accordance with our expectations or are reduced, our business,
results of operations and financial condition could be materially adversely
affected.

As is common in the technology industry, our agreements with OEMs and
distributors are typically non-exclusive, have no volume commitments, and often
may be terminated by either party without cause. Indeed, it is increasingly
commonplace for our OEM and distributor customers to carry or utilize competing
product lines. If we were to lose business from one or more significant OEM or
distributor customers to a competitor, our business, results of operations and
financial condition could be materially adversely affected.

Our markets are highly competitive and our business and results of operations
may be adversely affected by entry of new competitors into the markets,
aggressive pricing and the introduction or expansion of competitive products
and technologies.

The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. We expect that our markets will continue to
attract new competition. Our current and potential competition consists of
major domestic and international companies, some of which have substantially
greater financial, technical, marketing and distribution resources than we
have. Additional companies may enter the markets for our storage networking
products and new or stronger competitors may emerge as a result of
consolidation movements in the marketplace. Furthermore, larger companies in
other related industries may develop or acquire technologies and apply their
significant resources, such as distribution channels and brand recognition, to
acquire market share. Emerging companies attempting to obtain a share of the
existing markets act as potential competition as well. Additionally, our
existing competitors continue to introduce products with improved
price/performance characteristics, and we will have to do the same to remain
competitive. As the market grows and matures, we expect more customers to
qualify multiple sources for OEM or standard products where we have prevailed
previously as a single source, thus introducing competition into our existing
customer accounts. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share,
any of which could have a material adverse effect on our business, results of
operations and financial condition.

Alternative legacy technologies such as SCSI compete with our Fibre Channel
storage networking technologies for customers. Legacy technologies such as port
bypass circuits compete with our embedded switch products. Our success depends
in part on our own ability and on the ability of our OEM customers to develop
storage networking solutions that are competitive with these alternative legacy
technologies. Some of our competitors already have well-established

34



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relationships with our current and potential customers, have extensive
knowledge of the markets we serve and may have better name recognition and more
extensive development, sales and marketing resources than us. Additionally, in
the future other technologies that we are not currently developing may evolve
to address the storage networking applications currently served by our Fibre
Channel product line today, reducing our market opportunity.

We may not realize the anticipated benefits and may encounter unforeseen
difficulties related to our acquisition of Vixel Corporation.

On November 17, 2003, we completed our acquisition of Vixel Corporation.
Achieving the benefits of the acquisition of Vixel will depend in part on our
ability to integrate the technology, operations and personnel of Vixel into our
company in a timely and efficient manner. Future revenue from Vixel may decline
from prior periods or may not meet our expectations, and current and ongoing
expenses also may exceed our expectations. In addition, Vixel may be unable to
obtain design wins in accordance with past practice or our expectations, and
the design wins obtained to date may not translate into revenue in the amounts
and during the periods we expect. Moreover, integrating Emulex and Vixel will
be a complex, time consuming and expensive process and may disrupt our business
if not completed in a timely and efficient manner. The acquisition and
integration of Vixels business with Emulex will involve a number of risks and
challenges, including:



| |  |  | diversion of managements attention from ongoing operations;                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties and expenses in combining the operations, technology and systems of the two companies;                                                                       
|
| |  |  | difficulties and expenses in assimilating and retaining employees,
including integrating teams that have not previously worked together;                                  
|
| |  |  | difficulties in creating and maintaining uniform standards, controls, procedures and policies;                                                                            
|
| |  |  | different geographic locations of the principal operations of Emulex and Vixel; and/or                                                                                    
|
| |  |  | potential adverse short-term effects on operating results,
primarily as a result of increased costs resulting from the integration
of the operations of the two companies.

As a result of these and other difficulties, we may not realize the anticipated
benefits of the acquisition and may encounter difficulties that could have a
material adverse effect on our business and operating results or cause
expectations with respect to Vixel and the combined companies to be inaccurate.

Our reported financial results will be impacted by the accounting for the Vixel
Corporation acquisition.

In November 2003, we completed the acquisition of Vixel Corporation for a total
purchase price of $298.4 million in cash for the outstanding common stock,
preferred stock and warrants of Vixel Corporation. We also incurred
acquisition-related expenses of $6.8 million in cash. In addition, we issued
2.2 million stock options with a fair value of approximately $47.5 million in
exchange for the Vixel options we assumed for a total acquisition value of
$352.7 million. We calculated the fair value of the 2.2 million stock options
issued at the date of acquisition using the Black-Scholes option-pricing model.
In accordance with generally accepted accounting principles, or GAAP, we
accounted for the acquisition using the purchase method of accounting. Under
the purchase method, the purchase price is allocated among identifiable assets
and liabilities of Vixel based upon their fair market value, and the excess of
the purchase price over the fair market value of the assets and liabilities
will be allocated to goodwill. The amount allocated to identifiable intangible
assets is being amortized over the estimated life of the identifiable
intangible assets. Also, we are amortizing deferred stock-based compensation
related to the options issued over the remaining vesting periods of each
option. The amortization expenses will reduce our earnings. Additionally,
$11.4 million of the purchase price has been allocated to in-process research
and development acquired as part of the transaction, which was expensed during
the three months ended December 28, 2003, that also reduced earnings. In
accordance with Statement 141, Business Combinations, the allocation period,
which is the period that is required to identify and measure the fair value of
the assets acquired and liabilities assumed in a business combination, should
not exceed one year from the date that we gained effective control of Vixel and
made the initial purchase price allocation.

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Some of our suppliers, our strategic partners or our OEM customers could become
competitors.

Some of our suppliers, our strategic partners and our OEM customers currently
have or could develop products internally or could purchase another company
with products or technology that would replace or compete with our products and
technology. To the extent that our customers or suppliers are successful in
developing and marketing competitive solutions, the resulting reductions in
sales of our products could have a material adverse effect on our business,
results of operations and financial condition.

Our operating results are difficult to forecast and could be adversely affected
by many factors, and our stock price may decline if our results fail to meet
expectations.

Our revenues and results of operations have varied on a quarterly basis in the
past and may vary significantly in the future. Accordingly, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful, and you should not rely on such comparisons as indications of our
future performance. We may be unable to maintain our current levels of growth
or profitability in the future. Our revenues and results of operations are
difficult to forecast and could be adversely affected by many factors,
including, among others:



| |  |  | the gain or loss of significant OEMs, OEM design wins or other customers;                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the size, timing and terms of OEM and other customer orders;                                                                                                                                               
|
| |  |  | changes in the sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;                                                                                                  
|
| |  |  | changes in our significant customers desired inventory levels;                                                                                                                                                       
|
| |  |  | our acquisition of Vixel;                                                                                                                                                                                             
|
| |  |  | the timing and market acceptance of new or enhanced product
introductions by us, our OEM customers and our competitors;                                                                                               
|
| |  |  | changes in the selling price of our products;                                                                                                                                                                         
|
| |  |  | changes in the mix of product sales or the mix of sales channels;                                                                                                                                                     
|
| |  |  | difficulties in obtaining incremental market share growth;                                                                                                                                                            
|
| |  |  | fluctuations in product development and other operating expenses;                                                                                                                                                     
|
| |  |  | fluctuations in manufacturing costs, including the cost of components we use to produce our products;                                                                                                                 
|
| |  |  | component shortages experienced by us, or reduced demand from our
customers if our customers are unable to acquire the components used in
conjunction with our products in their deployments;                         
|
| |  |  | the ability of our electronics manufacturing service providers to
produce and distribute our products in a timely fashion;                                                                                            
|
| |  |  | difficulties, disruptions or delays caused by the move of our corporate headquarters in fiscal 2004;                                                                                                                  
|
| |  |  | difficulties with updates, changes or additions to our Enterprise Resource Planning (ERP) System;                                                                                                                     
|
| |  |  | changes in general social and economic conditions, including but
not limited to terrorism, public health and slower than expected market
growth, with resulting changes in customer technology budgeting and
spending;
|
| |  |  | changes in technology, industry standards or consumer preferences;                                                                                                                                                    
|
| |  |  | seasonality;                                                                                                                                                                                                          

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| |  |  | changes in our accounting or other policies resulting from the
adoption of new laws, regulations or pronouncements; and/or
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuations in foreign currency exchange rates.                                                                          

As a result of these and other unexpected factors or developments, we expect
that in the future operating results will from time to time be below the
expectations of investors or market analysts, which would have a material
adverse effect on our stock price.

Our relatively small backlog of unfilled orders, possible customer delays or
deferrals and our tendency to generate a large percentage of our quarterly
sales near the end of the quarter contribute to possible fluctuations in our
operating results that could have an adverse impact on our results of
operations and stock price.

Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially
on orders booked during that quarter. Alternatively, orders already in backlog
may be deferred or cancelled, as was experienced and disclosed by us in early
February of calendar 2001. Also, we have typically generated a large percentage
of our quarterly revenues in the last month of the quarter. Our customers may
change their accounting practices and purchasing patterns, thus reducing our
ability to predict our quarterly sales. Additionally, we use blanket purchase
orders with some customers, with customer-provided forecasts and customer
controlled just-in-time pulls of products from hub warehouses, thus reducing
our ability to predict our quarterly sales. As a result of these and other
factors, we may not be able to accurately predict our quarterly sales. Because
our expense levels are partially based on our expectations of future sales, in
the event we experience unexpected decreases in quarterly sales, our expenses
may be disproportionately large relative to our revenues and we may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. A material shortfall in sales in relation to our quarterly
expectations or any delay, deferral or cancellation of customer orders would
likely have an immediate and adverse impact on our results of operations and
may adversely affect our stock price.

The failure of one or more of our significant customers to make payments could
adversely affect our business.

We are subject to credit risk associated with the concentration of our accounts
receivable from our customers. Our days sales outstanding, or DSOs, were 42
days at December 28, 2003, and 37 days at June 29, 2003. There can be no assurance they will remain at this level or improve. If one of our current
significant customers were to declare bankruptcy, if we were to lose one of our
current significant customers and did not receive their payments due to us, or
if one of our current significant customers were to dispute a significant
amount owed to us, we could experience a material adverse effect on our
business, results of operations and financial condition.

The market price of our common stock may decline as a result of our acquisition
of Vixel Corporation.

The market price of our common stock may decline as a result of our acquisition
of Vixel if:



| |  |  | the integration of Emulex and Vixel is unsuccessful;                                                                                                                                                                                                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we do not achieve the perceived benefits of the merger as rapidly
or to the extent anticipated by financial analysts or investors; and/or                                                                                                                                                                        
|
| |  |  | the effect of the merger on our financial results, including but
not limited to, increased in-process research and development expense,
intangible asset amortization expense, integration expenses and ongoing
operational expenses, is not consistent with the expectations of
financial analysts or investors.

Our industry is subject to rapid technological change, and we must keep pace
with the changes to successfully compete.

The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in large part on our ability to
enhance our existing products and to introduce new products on a timely basis
to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as 4, 8 and 10 gigabit per
second, or Gbps, Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI Express;
iSCSI; Serial ATA, or SATA; Serial Attached SCSI, or SAS; Virtual Interface, or
VI; and Remote Direct Memory Access, or RDMA; are in

37



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development by many companies and their ultimate acceptance and deployment in
the market is uncertain. We are developing some, but not all of these
technologies, and we cannot be sure that the technologies we chose to develop
will achieve market acceptance, or that technologies that we chose not to
develop will be available to purchase or license from third parties or will be
immaterial to our business. Our embedded switch products are associated with
emerging next-generation storage architectures, and their success is dependent
on developing market acceptance and facilitating transitions from legacy
architectures. We cannot be certain that we will be successful in developing,
manufacturing and marketing new products or product enhancements that respond
to technological changes in a timely manner and achieve market acceptance. In
addition, a key element of our current business strategy is to develop ASICs in
order to increase system performance, enhance integration and reduce
manufacturing costs, thereby enhancing the price/performance of our storage
networking products. We cannot be certain that we will be successful at
developing and incorporating ASICs effectively and in a timely manner.
Additionally, the cost and time required for developing ASICs has been
increasing and we cannot be certain of the impact on our business of such
increases. If we are unable, for technological or other reasons, to develop new
products, enhance or sell existing products, or consume existing products in a
timely and cost-effective manner in response to technological and market
changes, our business, results of operations and financial condition may be
materially adversely affected.

We have experienced losses in our history and may experience losses in our
future that may adversely affect our stock price and financial condition.

We have experienced losses in our history, most recently a net loss of $96.2
million in fiscal 2002, and $23.6 million in fiscal 2001. The net loss in
fiscal 2002 included $156.2 million of amortization of goodwill and other
intangibles related to the acquisition of Giganet, Inc. and a net excess and
obsolete inventory charge of $10.1 million. The net loss in fiscal 2001
included $22.3 million of in-process research and development expenses and
$52.1 million of amortization of goodwill and other intangibles related to the
acquisition of Giganet. Beginning in the first quarter of fiscal 2003, when we
adopted Statement 142, Goodwill and Other Intangible Assets, we no longer
amortize goodwill and other intangibles that have indeterminate useful lives.
As of December 28, 2003, we had net goodwill related to the Vixel and Giganet
acquisitions in the amount of $584.2 million that will be reviewed at least
annually for impairment. Any losses, including losses caused by impairment of
goodwill, may adversely affect the perception of our business by analysts and
investors, which could adversely affect our stock price. While our recent
losses were not accompanied by negative cash flow from operations, to the
extent that we are unable to generate positive operating profits and positive
cash flow from operations, our financial condition may be materially adversely
affected.

The migration of our customers toward newer product platforms may have a
significant adverse effect on our results of operations, including lower
average selling prices or charges for obsolete inventory.

As our customers migrate from one platform to the enhanced price/performance of
the next platform, we may experience reduced revenue, gross profit or gross
margin levels associated with lower average selling prices or higher relative
product costs associated with improved performance. Also, economic conditions
during platform migration periods can have a significant impact on results.
While we regularly compare forecasted demand for our products against inventory
on hand and open purchase commitments, to the extent that customers migrate to
newer product platforms more quickly than anticipated, the corresponding
reduction in demand for older product platforms may result in obsolete
inventory and related charges which could have an adverse effect on our
financial condition and results of operations.

Any failure of our OEM customers to keep up with rapid technological change and
successfully market and sell systems that incorporate new technologies could
adversely affect our business.

Our revenues depend significantly upon the ability and willingness of our OEM
customers to develop, promote and deliver, on a timely basis, products that
incorporate our technology. OEMs must commit significant resources to develop
products that incorporate our technology or solutions. The ability and
willingness of OEM customers to develop, promote and deliver such products are
significantly influenced by a variety of factors, many of which are outside of
our control. We cannot be certain of the ability or willingness of our OEM
customers to continue developing, marketing and selling products that
incorporate our technology or solutions. In addition, while we have secured
numerous design wins for our storage networking products from OEM customers, we
cannot be certain that our customers will be able to or will choose to ship
systems that incorporate our products, or that their shipped systems will be
commercially successful. Our business is dependent on our relationships with
our OEM and distributor customers, so the inability or unwillingness of any of
our significant customers to develop or promote products that use our
technology or solutions would have a material adverse effect on our business,
results of operations and financial condition.

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Rapid changes in the evolution of technology, including the unexpected extent
or timing of the transition from HBA solutions or embedded switch box solutions
to lower-priced ASIC solutions, could adversely affect our business.

Historically, the electronics industry has developed higher performance ASICs
that 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 certain customers for certain applications that have
effectively resulted in a lower-priced solution when compared to an HBA
solution. This transition may occur for our products in other applications as
well. This transition may also occur from embedded switch box products to lower
priced embedded switch ASIC products. The result of this transition may be an
adverse effect on our revenues and profit margin. If this transition is more
abrupt or is more widespread than anticipated, there can be no assurance that
we will be able to modify our business model in a timely manner, if at all, in
order to mitigate the effects of this transition on our business, results of
operations and financial position. 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.

Rapid shifts in customer purchases from our high-end server and storage
solutions to midrange server and storage solutions could adversely affect our
business.

Historically, the majority of our Fibre Channel revenue has come from our
high-end server and storage solutions. In recent quarters, an increasing
percentage of revenue has come from midrange server and storage solutions,
which typically have lower average selling prices than our high-end server and
storage solutions. If this trend were to be more abrupt or more widespread than
anticipated, there can be no assurance that we would be able to modify our
business model in a timely manner, if at all, in order to mitigate the effect
of this trend on our business, results of operations and financial position.

A decrease in the average unit selling prices and/or an increase in the
manufactured cost of our Fibre Channel products could adversely affect our
revenue, gross margins and financial performance.

Since we introduced our first Fibre Channel products, we have experienced
downward pressure on their average unit selling prices. We may provide pricing
discounts to customers based upon volume purchase criteria, and achievement of
such discounts may reduce our average unit selling prices. To the extent that
growth in unit demand fails to offset decreases in average unit selling prices,
our revenues and financial performance could be materially adversely affected.
Although historically we have achieved offsetting cost reductions, to the
extent that average unit selling prices of our Fibre Channel products decrease
without a corresponding decrease in the costs of such products, our gross margins and financial performance could be materially adversely affected.
Furthermore, if the manufactured cost of our products were to increase due to
inflation or other factors, our gross margins and financial performance could
be materially adversely affected.

Delays in product development could adversely affect our business.

We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our products and the relatively long product development
cycles, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could have a material adverse effect on
our business, results of operations and financial condition. Prior delays have
resulted from numerous factors, such as:



| |  |  | difficulties in hiring and retaining necessary personnel;                         
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | difficulties in reallocating engineering resources and other resource limitations;
|
| |  |  | difficulties with independent contractors;                                        
|
| |  |  | unanticipated engineering or manufacturing complexity;                            
|
| |  |  | undetected errors or failures in software and hardware;                           
|
| |  |  | changing OEM product specifications;                                              

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| |  |  | delays in the acceptance or shipment of products by OEM customers; and/or
| | - |  | -------------------------------------------------------------------------
|
| |  |  | changing market or competitive product requirements.                     

In addition, while we have secured numerous design wins for our storage
networking products from OEM customers, if our customers are unable to or
otherwise do not ship systems that incorporate our products, or if their
shipped systems are not commercially successful, our business, results of
operations and financial condition would be materially adversely affected.

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 errors, especially when
first introduced or as new versions are released. The occurrence of hardware or
software errors could adversely affect sales of our products, cause us to incur
significant repair costs, divert the attention of our engineering personnel
from product development efforts and cause us to lose credibility with current
or prospective customers.

Our joint development activities may result in products that are not
commercially successful or that are not available in a timely fashion.

We have engaged in joint development projects with third parties in the past
and we expect to continue doing so in the future. Joint development can magnify
several risks for us, including the loss of control over development of aspects
of the jointly developed products and over the timing of product availability.
Accordingly, we face increased risk that joint development activities will
result in products that are not commercially successful or that are not
available in a timely fashion.

During April 2003 we announced a joint development activity with Intel
Corporation relating to storage processors that integrate SATA, SAS and Fibre
Channel interfaces within a single architecture. Under the agreement, we will
develop the protocol controller hardware, firmware and drivers. Intel will
integrate its Intel(R) Xscale(TM) microarchitecture as the core technology for
the new processors and will manufacture the processors on its 90-nanometer
process technology. We will market the resulting Fibre Channel products and
Intel will market the SATA and SAS product. This activity has risks resulting
from unproven new-generation manufacturing technology, from the licensing of
SATA and SAS technology to Intel, from increased development costs, from
reduced flexibility in making design changes in response to market changes and
in reduced control over product completion schedules.

A change in our business relationships with our third-party suppliers or our
electronics manufacturing service providers could adversely affect our
business.

We rely on third-party suppliers for components and the manufacture of our
products, and we have experienced delays or difficulty in securing components
and finished goods in the past. Delays or difficulty in securing components or
finished goods may be caused by numerous factors including, but not limited to:



| |  |  | discontinued production by a supplier;                                                             
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | undetected errors, failures or production quality issues;                                          
|
| |  |  | timeliness of product delivery;                                                                    
|
| |  |  | financial stability and viability of our suppliers and electronics manufacturing service providers;
|
| |  |  | changes in business strategies of our suppliers and electronics manufacturing service providers;   
|
| |  |  | disruption in shipping channels;                                                                   
|
| |  |  | natural disasters;                                                                                 
|
| |  |  | environmental, tax or legislative changes in the location where our products are produced;         

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| |  |  | difficulties associated with foreign operations; and/or
| | - |  | -------------------------------------------------------
|
| |  |  | market shortages.                                      

There is a risk that we will not be able to retain our current suppliers or
change to alternative suppliers. An interruption in supply or the cost of
shifting to a new supplier or electronics manufacturing service providers could
have a material adverse effect on our business, results of operations and
financial condition.

Additionally, key components that we use in our products may only be available
from single sources with which we do not have contracts. We may obtain sole
source components manufactured by companies such as Cypress, E20, Finisar, ICS,
Intel, IBM, Lattice, Micrel, Micron, Motorola, NEC, Quicklogic, Samsung, Seiko
Epson, Siliconix, Tundra Semiconductor and Vitesse. In addition, we design our
own ASICs that are embedded in our products. These ASICs are also sole sourced
and manufactured by third- party semiconductor foundries including IBM, Marvell
and LSI Logic. In addition to hardware, we design software to provide
functionality to our hardware products. The loss of one or more of our sole
suppliers or third party foundries could have a material adverse effect on our
business, results of operations and financial condition. In addition, an
announcement made by one of our sole suppliers or third party foundries that
they intend to stop producing a component in the future could cause us, based
on forecasted demand that may or may not materialize, to enter into a long-term
purchase commitment or make a last-time purchase that could have a material
adverse effect on our business, results of operations and financial condition.

Because we outsource the production of our products to electronics
manufacturing service providers, or EMS providers, we only manage the supply of
a small number of our product components. Currently, we rely upon our EMS
providers to complete numerous component purchases for our products.
Consequently, we cannot be certain that the necessary components will be
available to meet our future requirements at favorable prices, if at all.

In October 2003, Celestica Inc., a leading EMS provider, announced that it had
entered into an agreement to acquire Manufacturers Services Limited (MSL), one
of our primary EMS providers. While we are unable to predict the effects that
such acquisition will have on our relationship with MSL, it is possible that
the integration of MSL with Celestica could result in disruptions that would
adversely affect our ability to timely and efficiently produce and ship our
products. Moreover, consolidation among EMS providers could result in decreased
competition among EMS providers, which could adversely affect our ability to
negotiate favorable arrangements with EMS providers. In June 2003, we selected
Benchmark Electronics, Inc., or Benchmark, as an additional EMS provider and
have begun shipping product from Benchmarks facility in Guadalajara, Mexico.
At this time, the majority of our customers have qualified the Benchmark
facility in Mexico. Embedded switch products are obtained from an EMS facility,
Suntron, in Texas. Although we do not expect these changes to our EMS providers
to have a significant impact on us, if we were to experience significant delays
in product qualifications, completing production runs or shipping product as a
result of these changes, and we were unable to compensate for this disruption
elsewhere, it could have a material adverse effect on our business, results of operations and financial condition.
Moreover, because we rely upon our EMS providers to manufacture, store and ship
our products, the manufacturing and sale of our products would be temporarily
suspended if one or all of our EMS providers are unable or unwilling to
complete production runs for us in the future, or experience any significant
delays in completing production runs or shipping product. We conduct business
with our EMS providers through contracts with fairly short terms (usually 1
year), sometimes with termination for convenience rights of the EMS upon as
little as 6 months notice. If an EMS provider decides to terminate the
agreement, allows the agreement to expire, or materially changes the terms of
our purchases, or if our supply from an EMS provider is otherwise interrupted,
we will not be able to easily replace the manufacturing capability. Securing a
new EMS relationship, production ramp-up and customer qualification of new
facilities can take many months or longer. An interruption in supply of our
products and the cost of qualifying and shifting production to an alternative
manufacturing and distribution facility could have a material adverse effect on
our business, results of operations and financial condition. Furthermore, we
rely upon the financial stability of our EMS providers and their ability and
willingness to continue as our EMS providers.

If our intellectual property protections are inadequate, it could adversely
affect our business.

We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of
product support and customer relations. At the same time, our success is
partially dependent on the proprietary technology contained in our products. We
currently rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual provisions to establish and protect our
intellectual property rights in our

41



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products. For a more complete
description of our intellectual property, you should read the Business 
Intellectual Property section of our most recently filed Annual Report on Form
10-K.

We cannot be certain that the steps we take to protect our intellectual
property will adequately 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. In addition, the laws
of some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all.
Furthermore, we enter into various development projects and arrangements with
other companies. In some cases, these arrangements allow for the sharing or use
of our intellectual property. Our failure to protect our intellectual property
rights could have a material adverse effect on our business, results of
operations and financial condition.

On February 28, 2003, Vixel Corporation, prior to our acquisition of it, filed
a patent infringement action against QLogic Corporation in the United States
District Court for the District of Delaware. The complaint states that QLogic
is infringing U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, through the
unauthorized manufacture, use, sale and offering for sale of various storage
area network switching products, including but not limited to, QLogics SANBox2
series of products. On March 28, 2003, Vixel filed a first amended complaint
stating that QLogic is also infringing U.S. Patent No. 6,185,203, entitled
Fibre Channel Switching Fabric and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop
Devices through the unauthorized manufacture, use, sale and offering for sale
of various storage area network switching products, including but not limited
to, QLogics SANBox2 series of products. On May 23, 2003, Vixel filed a patent
infringement action against Brocade Communications Systems, Inc. in the United
States District Court for the Northern District of California. The complaint
states that Brocade is infringing U.S. Patent No. 6,185,203, entitled Fibre
Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled Methods and
Apparatus for Fibre Channel Interconnection of Private Loop Devices, and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices, through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, Brocades Silkworm switch
products. QLogic and Brocade denied infringement and challenged the validity of
the patents referenced. Brocade also challenged the enforceability of those
patents. In both of these suits, Vixel was seeking unspecified past damages,
potential future royalties, or, alternatively, injunctive relief.

On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that one
of Vixels products, the 7200 Fibre Channel Switch, infringes U.S. Patent No.
4,821,034, entitled Digital Exchange Switch Element and Network. The suit
seeks unspecified monetary damages as well as injunctive relief.

On December 15, 2003, we and QLogic tentatively agreed to settle the claims and
mutually release each other from any liability associated with the claims (and
the related counterclaims filed by QLogic) in exchange for payments by QLogic.
In connection with the settlement, QLogic will be required to make an upfront
payment and pay quarterly royalties associated with the future sales of
certain products. The settlements are subject to execution of final written
agreements with normal and customary terms and court approval of the dismissal
of the lawsuits. As of February 10, 2004, the final settlement agreements have
not been signed. We expect the terms of the final settlement agreements to be
consistent with the terms agreed upon by the parties. However, if final
agreement is not reached or the terms are materially different from those
terms tentatively agreed upon at December 15, 2003, it could have a material adverse
effect on our results of operations.

Each of the foregoing lawsuits is pending, and presents risks inherent in
disputes of this type, any of which could have a material adverse effect on our
business, financial condition or results of operations. Such potential risks
include the continuing expenses of litigation, the risk of loss of patent
rights, the risk of injunction against the sale of products incorporating the
technology in question, counterclaims and attorneys fee liability.

Third-party claims of intellectual property infringement could adversely affect
our business.

We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements, which may or may not be available. However, we have in the past
obtained, and may be required in the future to obtain, licenses of technology

42



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owned by other parties. We cannot be certain that the necessary licenses will
be available or that they can be obtained on commercially reasonable terms. If
we were to fail to obtain such royalty or licensing agreements in a timely
manner and on reasonable terms, our business, results of operations and financial
condition would be materially adversely affected.

The inability to attract or the loss of key managerial and technical personnel
could adversely affect our business.

Our success depends to a significant degree upon the performance and continued
service of key managers as well as engineers involved in the development of our
storage networking technologies and technical support of our storage networking
products and customers. Our future success depends upon our ability to attract,
train and retain such personnel. We may need to increase the number of key
managers as well as technical staff members with experience in high-speed
networking applications as we further develop our storage networking product
lines. Competition for such highly skilled employees the communities in which
we operate as well as our industry is intense, and we cannot be certain that we
will be successful in recruiting and retaining such personnel. In addition,
employees may leave our company and subsequently compete against us. Also, many
of these key managerial and technical personnel receive stock options. New
regulations, volatility in the stock market and other factors could diminish
the value of our stock options, putting us at a competitive disadvantage and
forcing us to use more cash compensation. If we are unable to attract new
managerial and technical employees, or are unable to retain our current key
managerial and technical employees, our business, results of operations and
financial condition could be materially adversely affected.

Our international business activities subject us to risks that could adversely
affect our business.

For the six months ended December 28, 2003, sales in the United States
accounted for 59 percent of our total net revenues, sales in Europe accounted
for 31 percent of our total net revenues, and sales in the Pacific Rim
countries accounted for 10 percent of our total net revenues. We expect that
sales in the United States and Europe will continue to account for the
substantial majority of our net revenues for the foreseeable future. All of our
sales are currently denominated in U.S. dollars. As a result, if the value of
the U.S. dollar increases relative to foreign currencies, our products could
become less competitive in international markets. Additionally, a significant
portion of our products is produced at a manufacturing subcontractors
production facility in Valencia, Spain and in the future products will be
produced in Guadalajara, Mexico. As a result, we are subject to the risks
inherent in international operations. Our international business activities
could be affected, limited or disrupted by a variety of factors, including:



| |  |  | the imposition of governmental controls and regulatory requirements;         
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | the costs and risks of localizing products for foreign countries;            
|
| |  |  | longer accounts receivable payment cycles;                                   
|
| |  |  | changes in the value of local currencies relative to our functional currency;
|
| |  |  | trade restrictions;                                                          
|
| |  |  | changes in tariffs;                                                          
|
| |  |  | loss of tax benefits due to international production;                        
|
| |  |  | general economic and social conditions within foreign countries; and/or      
|
| |  |  | political instability, war or terrorism.                                     

In addition, the revenues we earn in various countries in which we do business
may be subject to taxation by more than one jurisdiction, thereby adversely
affecting our earnings. All of these factors could harm future sales of our
products to international customers or future production outside of the United
States of our products, and have a material adverse effect on our business,
results of operations and financial condition.

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Export restrictions may adversely affect our business.

Our products are subject to U.S. Department of Commerce export control
restrictions. Neither our customers nor we may export such products without
obtaining an export license, where applicable. These U.S. export laws also
prohibit
the export of our products to a number of countries deemed by the United States
to be hostile. These restrictions may make foreign competitors facing less
stringent controls on their products more competitive in the global market than
our customers or us. The U.S. government may not approve any pending or future
export license requests. In addition, the list of products and countries for
which export approval is required, and the regulatory policies with respect
thereto, could be revised. The sale of our products could be harmed by our
inability or the inability of our customers to obtain the required licenses or
by the costs of compliance.

Potential acquisitions or strategic investments may be more costly or less
profitable than anticipated and may adversely affect the price of our company
stock.

We may pursue acquisitions or strategic investments, such as the acquisition of
Vixel Corporation, that could provide new technologies, products or service
offerings. Future acquisitions or strategic investments may negatively impact
our results of operations as a result of operating losses incurred by the
acquired entity, the use of significant amounts of cash, potentially dilutive
issuances of equity or equity-linked securities, incurrence of debt or
amortization of intangible assets with determinable lives. Furthermore, we may
incur significant expenses pursuing acquisitions or strategic investments that
ultimately may not be completed. Moreover, to the extent that any proposed
acquisition or strategic investment is not favorably received by stockholders,
analysts and others in the investment community, the price of our common stock
could be adversely affected. In addition, acquisitions or strategic investments
involve numerous risks, including:



| |  |  | difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the diversion of managements attention from other business concerns;                                                                                                                                     
|
| |  |  | risks of entering markets in which we have no or limited prior experience;                                                                                                                                
|
| |  |  | risks related to the effect that the acquired companys internal
control processes might have on our financial reporting and
managements report on our internal controls over financial reporting;
and/or
|
| |  |  | the potential loss of key employees of the acquired company.                                                                                                                                              

In the event that an acquisition or strategic investment does occur and we are
unable to obtain anticipated profits or successfully integrate operations,
technologies, products or personnel that we acquire, our business, results of
operations and financial condition could be materially adversely affected.

Our stock price is volatile, which has and may result in lawsuits against us
and our officers and directors.

The stock market in general and the stock prices in technology-based companies
in particular have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in
the future as well. For example, during calendar year 2003 the reported high
and low closing sales prices of our common stock ranged from a low of $17.20
per share to a high of $29.59 per share. Factors that could have a significant
impact on the market price of our common stock include, but are not limited to,
the following:



| |  |  | quarterly variations in operating results;               
| | - |  | ---------------------------------------------------------
|
| |  |  | announcements of new products by us or our competitors;  
|
| |  |  | the gain or loss of significant customers or design wins;
|
| |  |  | changes in analysts earnings estimates;                 

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| |  |  | changes in analyst recommendations, price targets or other
parameters that may not be related to earnings estimates;
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | rumors or dissemination of false information;                                                                       
|
| |  |  | pricing pressures;                                                                                                  
|
| |  |  | short selling of our common stock;                                                                                  
|
| |  |  | dilution resulting from conversion of outstanding convertible
subordinated notes into shares of our common stock;   
|
| |  |  | general conditions in the computer, storage or communications markets; and/or                                       
|
| |  |  | events affecting other companies that investors deem to be comparable to us.                                        

In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. In this
regard, we and certain of our officers and directors were named as defendants
in a number of securities class action lawsuits filed in the United States
District Court, Central District of California. The plaintiffs in the actions
represent purchasers of our common stock during various periods ranging from
January 18, 2001, through February 9, 2001. The complaints allege that we and
certain of our officers and directors made misrepresentations and omissions in
violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended. The complaints generally seek compensatory damages, costs and
attorneys fees in an unspecified amount. In addition, we have received
inquiries about events giving rise to the lawsuits from the SEC and the Nasdaq
Stock Market. On April 22, 2003, we entered into two Memoranda of Understanding
agreeing to terms of settlement for both the class action and derivative
litigation. Subsequent to September 28, 2003, the settlement was approved and
$39.5 million held in escrow was paid to the plaintiffs. We are currently
seeking to recover a portion of this amount from our insurance carriers and
have recorded a receivable for the amount we estimate will be recovered. For a
more detailed description, see the next Risk Factor listed below. The final
amount collected for our receivable from our insurance carriers related to the
tentative settlements of securities class action and derivative lawsuits may be
materially different from the receivable amount. If we were to be the subject
of similar litigation in the future it could have a material adverse effect on
our results of operations and financial condition.

On November 15, 2001, prior to our acquisition of Vixel Corporation, a
securities class action was filed in the United States District Court in the
Southern District of New York against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleges violations under Section
10(b) of the Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock during the
period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and
directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice.
During June 2003, Vixel and the other issuer defendants in the action reached a
tentative settlement with the plaintiffs that would, among other things, result
in the dismissal with prejudice of all claims against the defendants and their
officers and directors. In connection with the possible settlement, those
officers and directors who had entered tolling agreements with the plaintiffs
agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal in
principle, it remains subject to a number of procedural conditions, as well as
formal approval by the court. This lawsuit is pending, and presents risks
inherent in litigation including continuing expenses, risks of loss, additional
claims, and attorney fee liability.

On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding for a $0.7 million settlement with the plaintiff in
the class action suit pursuant to which the parties have agreed to settle the
action, subject to court approval. The consummation of the settlement is
subject to: (a) the drafting and execution of formal settlement documents; (b)
the completion by plaintiff

45



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of reasonable discovery as agreed to by the
parties; and (c) final court approval (as defined by law) of the settlement and
dismissal of the action with prejudice. This lawsuit is pending, and presents
risks inherent in litigation including continuing expenses, risks of loss,
additional claims, and attorney fee liability.

The final amount collected for our receivable from our insurance carriers
related to the tentative settlements of securities class action and derivative
lawsuits may be materially different from the receivable amount.

As of December 28, 2003, we had recorded a $13.1 million receivable from our
insurance carriers relating to the tentative $39.5 million settlement of
securities class action and derivative lawsuits relating to Emulex
specifically. We had directors and officers insurance with a primary limit of
$10 million and a possible $10 million reinstatement for
the period of February 2000 through February 2002; and excess insurance of $10
million for the period of February 2000 through February 2001; and excess
insurance of $20 million for the period of February 2001 through February 2002.
Our insurance carriers have refused to pay the amount we believe they are
obligated to pay, asserting various defenses including coverage exclusions and
late notice. Our actual insurance recovery may be materially different from the
receivable amount we had recorded for various reasons, including the strength
of the defenses asserted by our insurance carriers. If one or all of our
insurance carriers were unable or refused to make some or all of the payments
due to us, or if an arbitrator or court determines that the recovery should be
an amount other than the receivable amount, or if ultimately the amount
received by us is more or less than the receivable amount, we would be required
to record a corresponding gain or loss. Subsequent to December 28, 2003, we
signed a Letter Agreement with one of our insurers under which we are to
receive $10.0 million less amounts previously paid by the insurer for the
defense of the securities class action lawsuits.

Terrorist activities and resulting military and other actions could adversely
affect our business.

The terrorist attacks in New York and Washington, D.C. in September 2001
disrupted commerce throughout the United States and Europe. The continued
threat of terrorism within the United States and Europe 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, 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, financial condition, 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, results of operations or financial condition.

Our corporate offices and principal product development facilities are located
in a region that is subject to earthquakes and other natural disasters.

Our California and Washington facilities, including our corporate offices and
principal product development facilities, are located near major earthquake
faults. Any disruption in our business activities, personal injury or damage to
the facilities in excess of our currently insured amounts as a result of
earthquakes or other such natural disasters, could have a material adverse
effect on our business, results of operations and financial condition.

Our shareholder rights plan, certificate of incorporation and Delaware law
could adversely affect the performance of our stock.

Our shareholder rights plan and provisions of our certificate of incorporation
and of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. The shareholder rights plan and these provisions of our
certificate of incorporation and Delaware law are intended to encourage
potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. For more information, please read note 12 to the Consolidated Financial
Statements of our most recently filed Annual Report on Form 10-K, our
certificate of incorporation and Delaware law for more information on the
anti-takeover effects of provisions of our shareholder rights plan.

Changes in laws, regulations and financial accounting standards may affect our
reported results of operations.

The recently enacted Sarbanes-Oxley Act of 2002 and related regulations may
result in changes in accounting standards or accepted practices within our
industry. New pronouncements and varying interpretations of

46



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##### 



pronouncements have
occurred in the past and are likely to occur in the future as a result of
recent Congressional and regulatory actions. New laws, regulations and
accounting standards, as well as changes to currently accepted accounting
practices in the technology industry might adversely affect our reported
financial results, which could have an adverse effect on our stock price.
Proposals have been made concerning the expensing of stock options that could
result in rules or laws that may adversely affect our reported financial
results, which could have an adverse effect on our stock price.

The final determination of our income tax liability may be materially different
from our income tax provisions and accruals.

We are subject to income taxes in both the United States and international
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are
many transactions where the ultimate tax determination is uncertain.
Additionally, our calculations of income taxes are based on our interpretations
of applicable tax laws in the jurisdictions in which we file. Although we
believe our tax estimates are reasonable, there is no assurance that the final
determination of our income tax liability will not be materially different than
what is reflected in our income tax provisions and accruals. Should additional
taxes be assessed as a result of new legislation, an audit or litigation, if
our effective tax rate should change as a result of changes in federal,
international or state and local tax laws, or if we were to change the
locations where we operate, there could be a material effect on our income tax
provision and net income in the period or periods in which that determination
is made.

We may need additional capital in the future and such additional financing may
not be available on favorable terms.

While we believe we have adequate working capital to meet our expected cash
requirements for the immediate future, we may need to raise additional funds
through public or private debt or equity financings in order to:



| |  |  | take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop new products or services;                                                                                                                       
|
| |  |  | repay outstanding indebtedness; and/or                                                                                                                  
|
| |  |  | respond to unanticipated competitive pressures.                                                                                                         

Any additional financing we may need may not be available on terms favorable to
us, or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of business
opportunities, develop new products or services or otherwise respond to
unanticipated competitive pressures. In any such case, our business, results of
operations and financial condition could be materially adversely affected.

In January 2002, we completed a $345 million private placement of 1.75 percent
convertible subordinated notes, which are due February 1, 2007. Subsequently,
we repurchased and cancelled at a discount to face value approximately an
aggregate of $315.7 million in face value of such notes, leaving approximately
$29.3 million still outstanding as of December 28, 2003.

On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004. Under the
terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.We incurred associated
bankers fees of $10.1 million, which were recorded as a reduction to the
proceeds from the issuance of the notes and will be accreted over the life of
the notes as well as approximately $0.7 million of other associated acquisition
costs, which have been recorded as an asset and will be amortized over the life
of the notes. In addition, the Company granted the initial purchasers of the
notes an option, which they exercised subsequent to December 28, 2003, to
purchase an additional $67.5 million principal amount of the notes.

If we have insufficient liquidity and capital resources to repay the principal
amounts of our outstanding convertible notes and the notes offered hereby when
due, we may be forced to raise additional funds through public or private

47



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##### 



debt
or equity financings, which may not be available on favorable terms, if at all.
If such financings were not available on favorable terms, our results of
operations and financial condition could be materially adversely affected.

Conversion of our outstanding notes would dilute the ownership interest of
existing stockholders.

The conversion of our notes into shares of our common stock would dilute the
ownership interests of existing stockholders. Any sales in the public market
of the common stock issuable upon conversion of the notes could adversely
affect prevailing market prices of our common stock. In addition, the
existence of the notes may encourage short selling by market participants due
to this dilution or to facilitate trading strategies involving notes and common
stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

At December 28, 2003, our investment portfolio consisted primarily of fixed
income securities, excluding those classified as cash, cash equivalents and
restricted cash, of $373.4 million. We have the positive intent and ability to
hold these securities to maturity. Currently, the carrying amount of these
securities approximates fair market value. However, the fair market value of
these securities is subject to interest rate risk and would decline in value if
market interest rates increased. If market interest rates were to increase
immediately and uniformly by 10 percent from the levels existing as of December
28, 2003, the decline in the fair value of the portfolio would not be material
to our financial position, results of operations and cash flows. However, if
interest rates decreased and securities within our portfolio matured and were
re-invested in securities with lower interest rates, interest income would
decrease in the future. Our 0.25 percent convertible subordinated notes are
due in 2023 and our 1.75 percent convertible subordinated notes are due
February 1, 2007.

Foreign Currency

We have executed and will continue to execute transactions in foreign
currencies. As a result, we may be exposed to financial market risk resulting
from fluctuations in foreign currency rates, particularly the British Pound and
the Euro. Given the relatively small number of foreign currency transactions,
we do not believe that our potential exposure to fluctuations in foreign
currency rates is significant.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are
able to collect the information we are required to disclose in the reports we
file with the Securities and Exchange Commission, or SEC, and to process,
summarize and disclose this information within the time periods specified in
the rules of the SEC. Based on their evaluation of our disclosure controls and
procedures, our management, with the participation of the Chief Executive and
Chief Financial Officers, has concluded that, as of the end of the period
covered by this Quarterly Report on Form 10-Q, these disclosure controls and
procedures were effective to ensure that we are able to record, process,
summarize and report the information we are required to disclose in the reports
we file with the SEC within the required time periods.

There were no changes in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

48



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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On February 28, 2003, Vixel Corporation, prior to our acquisition of it, filed
a patent infringement action against QLogic Corporation in the United States
District Court for the District of Delaware. The complaint states that QLogic
is infringing U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, through the
unauthorized manufacture, use, sale and offering for sale of various storage
area network switching products, including but not limited to, QLogics SANBox2
series of products. On March 28, 2003, Vixel filed a first amended complaint
stating that QLogic is also infringing U.S. Patent No. 6,185,203, entitled
Fibre Channel Switching Fabric and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop
Devices through the unauthorized manufacture, use, sale and offering for sale
of various storage area network switching products, including but not limited
to, QLogics SANBox2 series of products. On May 23, 2003, Vixel filed a patent
infringement action against Brocade Communications Systems, Inc. in the United
States District Court for the Northern District of California. The complaint
states that Brocade is infringing U.S. Patent No. 6,185,203, entitled Fibre
Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled Methods
and Apparatus for Fibre Channel Interconnection of Private Loop Devices, and
U.S. Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices, through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, Brocades Silkworm switch
products. QLogic and Brocade denied infringement and challenged the validity of
the patents referenced. Brocade also challenged the enforceability of those
patents. In both of these suits, Vixel was seeking unspecified past damages,
potential future royalties, or, alternatively, injunctive relief.

On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that one
of Vixels products, the 7200 Fibre Channel Switch, infringes U.S. Patent No.
4,821,034, entitled Digital Exchange Switch Element and Network. The suit
seeks unspecified monetary damages as well as injunctive relief.

On December 15, 2003, we and QLogic tentatively agreed to settle the claims and
mutually release each other from any liability associated with the claims (and
the related counterclaims filed by QLogic) in exchange for payments by QLogic.
In connection with the settlement, QLogic will be required to make an upfront
payment and pay quarterly royalties associated with the future sales of
certain products. The settlements are subject to execution of final written
agreements with normal and customary terms and court approval of the dismissal
of the lawsuits. We expect the terms of the final settlement agreements to be
consistent with the terms agreed upon by the parties.

On November 15, 2001, prior to our acquisition of Vixel Corporation, a
securities class action was filed in the United States District Court in the
Southern District of New York against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleges violations under Section
10(b) of the Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock during the
period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and
directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice.
During June 2003, Vixel and the other issuer defendants in the action reached a
tentative settlement with the plaintiffs that would, among other things, result
in the dismissal with prejudice of all claims against the defendants and their
officers and directors. In connection with the possible settlement, those
officers and directors who had entered tolling agreements with the plaintiffs
agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal
in principle, it remains subject to a number of procedural conditions, as well
as formal approval by the court.

On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding for a $0.7 million settlement with the plaintiff in
the class action suit pursuant to which the parties have agreed to settle the
action, subject to court approval. The consummation of the settlement is
subject to: (a) the drafting and execution of formal settlement documents; (b)
the completion by plaintiff

49



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of reasonable discovery as agreed to by the
parties; and (c) final court approval (as defined by law) of the settlement and
dismissal of the action with prejudice.

Beginning on or about February 20, 2001, we and certain of our officers and
directors were named as defendants in a number of securities class action
lawsuits filed in the United States District Court, Central District of
California. The plaintiffs in the actions represent purchasers of our common
stock during various periods ranging from January 18, 2001, through February 9,
2001. The complaints alleged that we and certain of our officers and directors
made misrepresentations and omissions in violation of sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended. The complaints generally
seek compensatory damages, costs and attorneys fees in an unspecified amount.
In addition, we have received inquiries about events giving rise to the
lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003, we
entered into two Memoranda of Understanding agreeing to terms of settlement for
both the class action and derivative litigation. During the three months ended
December 28, 2003, the settlement was approved and $39.5 million held in escrow
was paid to the plaintiffs. We are currently seeking to recover a portion of
this amount from our insurance carriers and have recorded a receivable for the
amount we estimate will be recovered. The final amount collected for our
receivable from our insurance carriers related to the tentative settlements of
securities class action and derivative lawsuits may be materially different
from the receivable amount. Subsequent to December 28, 2003, we signed a
Letter Agreement with one of our insurers, , under which we are to receive
$10.0 million less amounts previously paid by the insurer for the defense of
the securities class action lawsuits.

Each of the foregoing lawsuits or arbitrations is pending, and presents risks
inherent in disputes of this type, any of which could have a material adverse
effect on our business, financial condition or results of operations. Such
potential risks include the continuing expenses of litigation, the risk of loss
of patent rights, the risk of injunction against the sale of products
incorporating the technology in question, counterclaims and attorneys fee
liability.

Additionally, we are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.

Item 2. Changes in Securities and Use of Proceeds

On December 12, 2003, we sold $450 million in aggregate principal amount of
0.25% Convertible Subordinated Notes due 2023 to Credit Suisse First Boston LLC
and Deutsche Bank Securities, as initial purchasers, Subsequent to December
28, 2003, we sold an additional $67.5 million of such notes to the initial
purchasers upon exercise in full of their option to purchase up additional
notes. The issuance and sale of the notes and the subsequent offering and
resale of the notes by the initial purchaser were exempt from the registration
provisions of the Securities Act of 1933 pursuant to Section 4(2) of such act
and Rule 144A promulgated thereunder.

The aggregate principal amount of the notes sold was $517.5 million. The
aggregate discount to the initial purchasers was $11.6 million.

The notes accrue interest at an annual rate of 0.25 percent and are
convertible, at the option of the holder and subject to the satisfaction of
certain conditions, into our common stock at an initial conversion price of
$43.20 per share, subject to customary antidilution adjustments. This
represents a 60 percent conversion premium based on the closing bid price of
$27.00 of our common stock on December 8, 2003. At the initial conversion rate,
each $1,000 principal amount of notes will be convertible into 23.148 shares of
our common stock. The notes will mature in twenty years and will not be
callable for the first five years.

We are obligated to file with the Securities and Exchange Commission a
registration statement registering the notes and the shares underlying the
notes within 90 days after December 12, 2003 or that registration statement
declared effective within 180 days after December 12, 2003.

We may not redeem the notes prior to December 20, 2008. Thereafter, we may
redeem the notes at 100% of their principal amount, plus accrued and unpaid
interest, if the closing price of its common stock for 20 trading days within a
period of 30 consecutive trading days ending on the trading day before the date
of mailing of the redemption notice exceeds 120% of the conversion price in
effect on such trading day. At any time on or after December 20, 2010, we may
redeem all or a portion of the notes at 100% of their principal amount plus
accrued and unpaid interest.

Holders of the notes may require us to purchase the notes for cash by giving
written notice within the 20 business days prior to each of December 15, 2006,
December 15, 2008, December 15, 2013 and December 15, 2018.

50



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In connection with our sale of the notes, we repurchased an aggregate of 1.5
million shares of common stock at an average price of $27.00 per share. In
addition, we repurchased an aggregate of $85.4 million of our previously
outstanding 1.75% convertible notes due 2007 at an aggregate purchase price of
$85.9 million.

ISSUER PURCHASES OF EQUITY SECURITIES

|                                            |  |           |             |            |  |                     |       |                      |  |                       |             |                    |  |                    |  | 
|------------------------------------------- |  | --------- | ----------- | ---------- |  | ------------------- | ----- | -------------------- |  | --------------------- | ----------- | ------------------ |  | ------------------ |  | 
|                                            |  |           |             |            |  |                     |       |                      |  |                       |             |                    |  | Maximum Number (or
|                                            |  |           |             |            |  |                     |       |                      |  | Total Number of       |             | Approximate Dollar
|                                            |  | Total     |             |            |  |                     |       | Shares Purchased     |  | Value) of Shares that
|                                            |  | Number of |             | Average    |  | as Part of Publicly |       | May Yet Be Purchased
|                                            |  | Shares    |             | Price Paid |  | Announced Plans     |       | Under the Plans or  
|Period                                      |  | Purchased |             | per Share  |  | or Programs         |       | Programs            
|                                            |  |           |             |            |  |                     |       |                     
|September 29, 2003
through October 26,
2003 |  |           |            |            |  |                     |      |                      |  |                       |            |                    |  | 3.0 million       
|October 27, 2003
through November
23, 2003  |  |           |            |            |  |                     |      |                      |  |                       |            |                    |  | 3.0 million       
|November 24, 2003
through December
28, 2003 |  |           | 1.5 million |            |  | $                   | 27.00 |                      |  |                       | 1.5 million |                    |  | 1.5 million       
|Total                                       |  |           | 1.5 million |            |  | $                   | 27.00 |                      |  |                       | 1.5 million |                    |  | 1.5 million       

Our Board of Directors authorized the repurchase of up to four million shares
over the two years beginning in September 2001. The repurchase plan authorized
us to make purchases in the open market or through privately negotiated
transactions with the timing and terms of any purchase to be determined by
management based on market conditions. During the first quarter of fiscal
2002, we repurchased 1.0 million common shares and did not subsequently
repurchase any shares during fiscal 2002 and 2003. During the three months
ended September 28, 2003, our Board of Directors extended the repurchase
program to June 2005.

Aside from the repurchases of shares and notes described above, we used
approximately $174 million of the proceeds to repay short term indebtedness
incurred in connection with our acquisition of Vixel and intend to use the
balance of the net proceeds of the note offering for general corporate
purposes, including working capital and potential acquisitions. We currently
have no understandings or agreements with respect to any acquisitions.

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

The annual meeting of stockholders of the Company was held on November 22,
2003. All share amounts related to the stockholders meeting are the actual
shares as of that date. There were 82,688,675 shares of the Companys common
stock issued, outstanding and entitled to vote at the meeting as of October 1,
2003, the record date. Proxies representing 74,597,697 common shares were
received and tabulated. Three proposals were voted on at this meeting. First,
the following members were elected to the Companys Board of Directors to hold
office for the ensuing year:

|                  |  |          |            |          |  |  |            | 
|----------------- |  | -------- | ---------- | -------- |  |  | ---------- | 
|Nominee           |  | In Favor |            | Withheld
|                  |  |          |            |         
|Fred. B. Cox      |  |          | 53,149,944 |          |  |  | 21,447,753 | 
|Michael P. Downey |  |          | 71,286,002 |          |  |  | 3,311,695  | 
|Bruce C. Edwards  |  |          | 71,313,040 |          |  |  | 3,284,657  | 
|Paul F. Folino    |  |          | 71,554,423 |          |  |  | 3,043,274  | 
|Robert H. Goon    |  |          | 70,221,940 |          |  |  | 4,375,757  | 
|Don M. Lyle       |  |          | 70,246,210 |          |  |  | 4,351,487  | 

51



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The second proposal submitted to the stockholders of the Company was to ratify
and approve the authorization of certain outstanding employee stock options for
a smaller number of stock options with a new exercise price. The proposal was
approved with the following votes:

|                |  |  |           
|--------------- |  |  | ----------
|For             |  |  | 46,640,112
|Against         |  |  | 10,031,796
|Abstain         |  |  | 584,696   
|Broker Non-Vote |  |  | 17,341,093

The third proposal submitted to the stockholders of the Company was to ratify
the selection of KPMG LLP as the Companys independent public accountants for
fiscal year 2004. This proposal was approved with the following votes:

|        |  |  |           
|------- |  |  | ----------
|For     |  |  | 73,178,144
|Against |  |  | 1,360,691 
|Abstain |  |  | 58,862    

Item 5. Other Information

On November 20, 2003, we announced the appointment of James M. McCluney to the
position of President and Chief Operating Officer. Mr. McCluney was the
President and Chief Executive Officer of Vixel Corporation.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

| |             |  |                                                                                                                                                                                                                                                                                                                                              
| | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 3.1 |  | Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K
for 1997).                                                                                                                                                                                                    
| |             | 
| | Exhibit 3.2 |  | Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2000).                                                                                                                          
| |             | 
| | Exhibit 3.3 |  | Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.3 to the Companys quarterly report on form 10-Q for
the quarterly period ended September 29, 2002).                                                                                                                                                               
| |             | 
| | Exhibit 3.4 |  | Amendment to Bylaws of the Company adopted by the Board of
Directors on March 2, 2001 (incorporated by reference to Exhibit 3.4
to the Companys 2002 Annual Report on Form 10-K).                                                                                                                                                           
| |             | 
| | Exhibit 3.5 |  | Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4 to the
Companys Current Report on Form 8-K filed February 2, 1989).                                                                                                                                                    
| |             | 
| | Exhibit 4.1 |  | Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Companys Current
Report on Form 8-K filed February 2, 1989).                                                                                                                                                                            
| |             | 
| | Exhibit 4.2 |  | Certificate regarding extension of Final Expiration Date of
Rights Agreement dated January 18, 1999 (incorporated by reference
to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on
Form S-3, filed on May 17, 1999).                                                                                                          
| |             | 
| | Exhibit 4.3 |  | Form of 1.75% Convertible Subordinated Note due February 1,
2007 (incorporated by reference to Exhibit 4.8 to the Registration
Statement on Form S-3, amended on June 28, 2002).                                                                                                                                                             
| |             | 
| | Exhibit 4.4 |  | Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
January 29, 2002, related to the Companys 1.75% Convertible
Subordinated Notes due February 1, 2007 (incorporated by reference
to Exhibit 4.9 to the Registration Statement on Form S-3, amended on
June 28, 2002).
| |             | 
| | Exhibit 4.5 |  | Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated January 29, 2002, related to
the Companys 1.75% Convertible Subordinated                                                                                                                                                                 

52



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| |               |  |                                                                                                                                                                                                                    
| | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |  | Notes due February 1,
2007 (incorporated by reference to Exhibit 4.10 to the Registration
Statement on Form S-3, amended on June 28, 2002).                                                                        
| |               | 
| | Exhibit 4.6   |  | Form of 0.25% Convertible Subordinated Note due 2023.                                                                                                                                                              
| |               | 
| | Exhibit 4.7   |  | Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023.
| |               | 
| | Exhibit 4.8   |  | Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated December 12, 2003, related to
the Companys 0.25% Convertible Subordinated Notes due 2023.                      
| |               |  |                                                                                                                                                                                                                    
| | Exhibit 10.1  |  | Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).                                                         
| |               | 
| | Exhibit 10.2  |  | Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the 2002 Proxy Statement
filed on October 21, 2002).                                                         
| |               | 
| | Exhibit 10.3  |  | Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys 2002 Proxy Statement filed on October 21, 2002).                        
| |               | 
| | Exhibit 10.4  |  | Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys 2002 proxy
statement filed on October 21, 2002).                                             
| |               | 
| | Exhibit 10.5  |  | Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                            
| |               | 
| | Exhibit 10.6  |  | Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                                
| |               | 
| | Exhibit 10.7  |  | Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                                 
| |               | 
| | Exhibit 10.27 |  | Lease Agreement between Vixel Corporation and Sun Life
Assurance Company of Canada (U.S.) dated December 6, 1996, as
amended January 22, 1997, and November 28, 2001.                                              
| |               | 
| | Exhibit 10.28 |  | Sublease Agreement between Vixel Corporation and Inter-Tel
Technologies, Inc., dated October 7, 2002.                                                                                                              
| |               | 
| | Exhibit 31A   |  | Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.                                                                 
| |               | 
| | Exhibit 31B   |  | Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.                                                                 
| |               | 
| | Exhibit 32    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.                                                                                                  

(b) Reports on Form 8-K



| | 1. |  | The Registrant filed Form 8-K on October 8, 2003, with
respect to its announcement of a definitive agreement to acquire
Vixel Corporation reported under Item 5.          
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The Registrant filed Form 8-K on October 23, 2003, containing
a press release announcing the Registrants financial results for
the three months ended September 28, 2003.

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| | 3. |  | The Registrant filed Form 8-K on November 28, 2003, with
respect to the completion of its cash tender offer to acquire all
outstanding shares of Vixel Corporation reported under Item 2 
Acquisition or Disposition of Assets                                                                                                                                                                                                     
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 4. |  | The Registrant filed Form 8-K on December 8, 2003, as amended
on Form 8-K/A on January 27, 2004, with respect to the acquisition
of Vixel Corporation reported under Item 2  Acquisition or
Disposition or Assets.                                                                                                                                                                                                                 
|
| | 5. |  | The Registrant filed Form 8-K on December 9, 2003, with
respect to the Registrants press release issued on December 8,
2003, announcing its intention to raise capital through a private
offering of convertible subordinated notes and the Registrants
press release on December 9, 2003, announcing that it had priced a
private offering of $450.0 million of convertible subordinated notes
to qualified institutional buyers.
|
| | 6. |  | The Registrant filed Form 8-K on December 10, 2003, with
respect to QLogic Corporation filing a complaint against the
Registrant alleging that one of Vixels products infringes on one of
Qlogics patents.                                                                                                                                                                                                                        

54



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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.

Date: February 10, 2004

| |  |                    |  |                                                                                                                              
| |  | ------------------ |  | -----------------------------------------------------------------------------------------------------------------------------
| |  | EMULEX CORPORATION
| |  |                    |  |                                                                                                                              
| |  | By:                |  | /s/ Paul F. Folino                                                                                                           
| |  |                    |  |                                                                                                                              
| |  |                    |  | Paul F. Folino
Chairman of the Board and Chief Executive Officer                                                             
| |  |                    |  |                                                                                                                              
| |  | By:                |  | /s/ Michael J. Rockenbach                                                                                                    
| |  |                    |  |                                                                                                                              
| |  |                    |  | Michael J. Rockenbach
Executive Vice President and
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)

55



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##### 



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3.1 |  | Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K
for 1997).                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 3.2 |  | Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2000).                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 3.3 |  | Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.3 to the Companys quarterly report on form 10-Q for
the quarterly period ended September 29, 2002).                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 3.4 |  | Amendment to Bylaws of the Company adopted by the Board of
Directors on March 2, 2001 (incorporated by reference to Exhibit 3.4
to the Companys 2002 Annual Report on Form 10-K).                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 3.5 |  | Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4 to the
Companys Current Report on Form 8-K filed February 2, 1989).                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 4.1 |  | Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Companys Current
Report on Form 8-K filed February 2, 1989).                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 4.2 |  | Certificate regarding extension of Final Expiration Date of
Rights Agreement dated January 18, 1999 (incorporated by reference
to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on
Form S-3, filed on May 17, 1999).                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 4.3 |  | Form of 1.75% Convertible Subordinated Note due February 1,
2007 (incorporated by reference to Exhibit 4.8 to the Registration
Statement on Form S-3, amended on June 28, 2002).                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 4.4 |  | Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
January 29, 2002, related to the Companys 1.75% Convertible
Subordinated Notes due February 1, 2007 (incorporated by reference
to Exhibit 4.9 to the Registration Statement on Form S-3, amended on
June 28, 2002).
|            |  |                                                                                                                                                                                                                                                                                                                                              
|Exhibit 4.5 |  | Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated January 29, 2002, related to
the Companys 1.75% Convertible Subordinated                                                                                                                                                                 

56



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##### 



|              |  |                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  | Notes due February 1,
2007 (incorporated by reference to Exhibit 4.10 to the Registration
Statement on Form S-3, amended on June 28, 2002).                                                                        
|              |  |                                                                                                                                                                                                                    
|Exhibit 4.6   |  | Form of 0.25% Convertible Subordinated Note due 2023.                                                                                                                                                              
|              |  |                                                                                                                                                                                                                    
|Exhibit 4.7   |  | Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023.
|              |  |                                                                                                                                                                                                                    
|Exhibit 4.8   |  | Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated December 12, 2003, related to
the Companys 0.25% Convertible Subordinated Notes due 2023.                      
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.1  |  | Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).                                                         
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.2  |  | Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the 2002 Proxy Statement
filed on October 21, 2002).                                                         
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.3  |  | Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys 2002 Proxy Statement filed on October 21, 2002).                        
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.4  |  | Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys 2002 proxy
statement filed on October 21, 2002).                                             
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.5  |  | Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                            
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.6  |  | Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                                
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.7  |  | Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).                                 
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.27 |  | Lease Agreement between Vixel Corporation and Sun Life
Assurance Company of Canada (U.S.) dated December 6, 1996, as
amended January 22, 1997, and November 28, 2001.                                              
|              |  |                                                                                                                                                                                                                    
|Exhibit 10.28 |  | Sublease Agreement between Vixel Corporation and Inter-Tel
Technologies, Inc., dated October 7, 2002.                                                                                                              
|              |  |                                                                                                                                                                                                                    
|Exhibit 31A   |  | Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.                                                                 
|              |  |                                                                                                                                                                                                                    
|Exhibit 31B   |  | Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.                                                                 
|              |  |                                                                                                                                                                                                                    
|Exhibit 32    |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.                                                                                                  

57