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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 September 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(State or other jurisdiction
of incorporation or organization) |  | 51-0300558(I.R.S Employer
Identification No.)

|                                                                                     |  |                
|------------------------------------------------------------------------------------ |  | ---------------
|3535 Harbor Boulevard
Costa Mesa, California(Address of principal executive offices) |  | 92626(Zip Code)

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




Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [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 November 5, 2003, the registrant had 82,859,725 shares of common stock
outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Condensed Consolidated Balance Sheets               
|                              |                                                                                               | Condensed Consolidated Statements of Income         
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II: OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|Exhibit Index                
|EXHIBIT 31.A                 
|EXHIBIT 31.B                 
|EXHIBIT 32                   



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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES

INDEX

|                                                                                              |                                                                                                              |  |      |   | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  | ---- | - | 
|                                                                                              |                                                                                                              |  | PAGE
|                                                                                              |                                                                                                              |  |     
|Part I. FINANCIAL INFORMATION                                                                 |                                                                                                              |  |      |  
|Item 1. Financial Statements                                                                  |                                                                                                              |  |      |  
|                                                                                              | Condensed Consolidated Balance Sheets
September 28, 2003 and June 29, 2003                                   |  |      | 2 | 
|                                                                                              | Condensed Consolidated Statements of Income
Three months ended September 28, 2003,
and September 29, 2002    |  |      | 3 | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows
Three months ended September 28, 2003
and September 29, 2002 |  |      | 4 | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                         |  |      | 5 | 
|Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                                              |  | 13   |  
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                              |  | 35   |  
|Item 4. Controls and Procedures                                                               |                                                                                                              |  | 36   |  
|Part II. OTHER INFORMATION                                                                    |                                                                                                              |  |      |  
|Item 1. Legal Proceedings                                                                     |                                                                                                              |  | 37   |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                              |  | 37   |  
|Signatures                                                                                    |                                                                                                              |  | 39   |  

1



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




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

|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------- | --------- | ------------- | ------- | -------- | --------- | ------- | ------- | 
|                                                                                                                                                                        |                                     |                           |           | September 28, |         | June 29,
|                                                                                                                                                                        |                                     |                           |           | 2003          |         | 2003    
|                                                                                                                                                                        |                                     |                           |           |               |         |         
|Assets                                                                                                                                                                  |                                     |                           |           |               |         |          |           |        
|Current assets:                                                                                                                                                         |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        | Cash and cash equivalents           |                           | $         | 72,181        |         |          | $         | 136,971 |        
|                                                                                                                                                                        | Restricted cash                     |                           |           | 43,156        |         |          |           | 9,342   |        
|                                                                                                                                                                        | Investments                         |                           |           | 228,399       |         |          |           | 239,302 |        
|                                                                                                                                                                        | Accounts and other receivables, net |                           |           | 52,747        |         |          |           | 46,678  |        
|                                                                                                                                                                        | Litigation settlements receivable   |                           |           | 13,095        |         |          |           | 13,095  |        
|                                                                                                                                                                        | Inventories, net                    |                           |           | 12,479        |         |          |           | 10,998  |        
|                                                                                                                                                                        | Prepaid expenses                    |                           |           | 5,279         |         |          |           | 5,516   |        
|                                                                                                                                                                        | Deferred income taxes               |                           |           | 28,384        |         |          |           | 36,330  |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        |                                     | Total current assets      |           |               | 455,720 |          |           |         | 498,232 | 
|Property and equipment, net                                                                                                                                             |                                     |                           | 34,251    |               |         |          | 26,585    |        
|Investments                                                                                                                                                             |                                     |                           | 216,625   |               |         |          | 234,847   |        
|Goodwill                                                                                                                                                                |                                     |                           | 397,256   |               |         |          | 397,256   |        
|Other intangibles, net                                                                                                                                                  |                                     |                           | 25,617    |               |         |          | 27,067    |        
|Other assets                                                                                                                                                            |                                     |                           | 3,262     |               |         |          | 5,782     |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        |                                     | $                         | 1,132,731 |               |         | $        | 1,189,769 |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|Liabilities and Stockholders Equity                                                                                                                                    |                                     |                           |           |               |         |          |           |        
|Current liabilities:                                                                                                                                                    |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        | Accounts payable                    |                           |           | 20,645        |         |          |           | 11,298  |        
|                                                                                                                                                                        | Accrued liabilities                 |                           |           | 15,973        |         |          |           | 18,806  |        
|                                                                                                                                                                        | Accrued litigation settlements      |                           |           | 39,500        |         |          |           | 39,500  |        
|                                                                                                                                                                        | Income taxes payable                |                           |           | 11,368        |         |          |           | 5,457   |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        |                                     | Total current liabilities |           |               | 87,486  |          |           |         | 75,061  | 
|Convertible subordinated notes                                                                                                                                          |                                     |                           | 114,648   |               |         |          | 208,518   |        
|Deferred income taxes                                                                                                                                                   |                                     |                           | 3,486     |               |         |          | 4,260     |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|Total liabilities                                                                                                                                                       |                                     |                           | 205,620   |               |         |          | 287,839   |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|Commitments and contingencies (note 7)                                                                                                                                  |                                     |                           |           |               |         |          |           |        
|Subsequent events (note 9)                                                                                                                                              |                                     |                           |           |               |         |          |           |        
|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;
82,616,687 and 82,465,813 issued and outstanding at
September 28, 2003, and June 29, 2003, respectively   |                                     |                           | 8,262     |               |         |          | 8,247     |        
|Additional paid-in capital                                                                                                                                              |                                     |                           | 909,857   |               |         |          | 907,976   |        
|Deferred compensation                                                                                                                                                   |                                     |                           | (2,462    | )             |         |          | (3,159    | )      
|Retained earnings (accumulated deficit)                                                                                                                                 |                                     |                           | 11,454    |               |         |          | (11,134   | )      
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        | Total stockholders equity          |                           |           | 927,111       |         |          |           | 901,930 |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        
|                                                                                                                                                                        |                                     | $                         | 1,132,731 |               |         | $        | 1,189,769 |        
|                                                                                                                                                                        |                                     |                           |           |               |         |          |           |        

See accompanying notes to condensed consolidated financial statements.

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

|                                                 |                                                      |                           |        |                    |        |               |        |        |        | 
|------------------------------------------------ | ---------------------------------------------------- | ------------------------- | ------ | ------------------ | ------ | ------------- | ------ | ------ | ------ | 
|                                                 |                                                      |                           |        | Three Months Ended
|                                                 |                                                      |                           |        | September 28,      |        | September 29,
|                                                 |                                                      |                           |        | 2003               |        | 2002         
|                                                 |                                                      |                           |        |                    |        |              
|Net revenues                                     |                                                      | $                         | 84,577 |                    |        | $             | 70,425 |       
|Cost of sales                                    |                                                      |                           | 28,327 |                    |        |               | 27,882 |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 |                                                      | Gross profit              |        |                    | 56,250 |               |        |        | 42,543 | 
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Operating expenses:                              |                                                      |                           |        |                    |        |               |        |       
|                                                 | Engineering and development                          |                           |        | 16,344             |        |               |        | 13,673 |       
|                                                 | Selling and marketing                                |                           |        | 4,602              |        |               |        | 4,664  |       
|                                                 | General and administrative                           |                           |        | 3,657              |        |               |        | 2,746  |       
|                                                 | Amortization of other intangibles                    |                           |        | 1,450              |        |               |        | 1,453  |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 |                                                      | Total operating expenses  |        |                    | 26,053 |               |        |        | 22,536 | 
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 |                                                      | Operating income          |        |                    | 30,197 |               |        |        | 20,007 | 
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Nonoperating income:                             |                                                      |                           |        |                    |        |               |        |       
|                                                 | Interest income                                      |                           |        | 2,498              |        |               |        | 3,702  |       
|                                                 | Interest expense                                     |                           |        | (1,033             | )      |               |        | (1,804 | )     
|                                                 | Gain on repurchase of convertible subordinated notes |                           |        | 4,665              |        |               |        | 28,729 |       
|                                                 | Other income (expense), net                          |                           |        | 106                |        |               |        | (30    | )     
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 |                                                      | Total nonoperating income |        |                    | 6,236  |               |        |        | 30,597 | 
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Income before income taxes                       |                                                      |                           | 36,433 |                    |        |               | 50,604 |       
|Income tax provision                             |                                                      |                           | 13,845 |                    |        |               | 18,623 |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Net income                                       |                                                      | $                         | 22,588 |                    |        | $             | 31,981 |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Net income per share:                            |                                                      |                           |        |                    |        |               |        |       
|                                                 | Basic                                                |                           | $      | 0.27               |        |               | $      | 0.39   |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 | Diluted                                              |                           | $      | 0.27               |        |               | $      | 0.37   |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|Number of shares used in per share computations: |                                                      |                           |        |                    |        |               |        |       
|                                                 | Basic                                                |                           |        | 82,541             |        |               |        | 81,844 |       
|                                                 |                                                      |                           |        |                    |        |               |        |       
|                                                 | Diluted                                              |                           |        | 87,472             |        |               |        | 89,166 |       
|                                                 |                                                      |                           |        |                    |        |               |        |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |          |         |        |  
|---------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------- | ------- | ------------------ | ------ | ------------- | -------- | ------- | ------ | -
|                                                                       |                                                                                   |                                                               |                                   |         | Three Months Ended
|                                                                       |                                                                                   |                                                               |                                   |         | September 28,      |        | September 29,
|                                                                       |                                                                                   |                                                               |                                   |         | 2003               |        | 2002         
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |              
|Cash flows from operating activities:                                  |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Net income                                                             |                                                                                   | $                                                             | 22,588                            |         |                    | $      | 31,981        |         
|                                                                       | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                               |                                   |         |                    |        |               |          |        
|                                                                       |                                                                                   | Depreciation and amortization of property and equipment       |                                   |         | 2,874              |        |               |          | 2,532   |       
|                                                                       |                                                                                   | Gain on repurchase of convertible subordinated notes          |                                   |         | (4,665             | )      |               |          | (28,729 | )     
|                                                                       |                                                                                   | Increase in restricted cash related to litigation
settlements |                                   |         | (39,500            | )      |               |          |        |       
|                                                                       |                                                                                   | Stock-based compensation                                      |                                   |         | 597                |        |               |          | 846     |       
|                                                                       |                                                                                   | Amortization of other intangibles                             |                                   |         | 1,450              |        |               |          | 1,453   |       
|                                                                       |                                                                                   | Loss (gain) on disposal of property and equipment             |                                   |         | (1                 | )      |               |          | 24      |       
|                                                                       |                                                                                   | Deferred income taxes                                         |                                   |         | 7,172              |        |               |          | 16,918  |       
|                                                                       |                                                                                   | Tax benefit from exercise of stock options                    |                                   |         | 751                |        |               |          | 287     |       
|                                                                       |                                                                                   | Provision for doubtful accounts                               |                                   |         | 34                 |        |               |          | 56      |       
|                                                                       |                                                                                   | Changes in assets and liabilities:                            |                                   |         |                    |        |               |          |         |       
|                                                                       |                                                                                   |                                                               | Accounts and other receivables    |         |                    | (6,103 | )             |          |         | (4,318 | )
|                                                                       |                                                                                   |                                                               | Inventories                       |         |                    | (1,481 | )             |          |         | (3,543 | )
|                                                                       |                                                                                   |                                                               | Prepaid expenses and other assets |         |                    | 755    |               |          |         | 749    |  
|                                                                       |                                                                                   |                                                               | Accounts payable                  |         |                    | 9,347  |               |          |         | 3,938  |  
|                                                                       |                                                                                   |                                                               | Accrued liabilities               |         |                    | (2,724 | )             |          |         | (1,026 | )
|                                                                       |                                                                                   |                                                               | Income taxes payable              |         |                    | 5,911  |               |          |         | 1,371  |  
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|                                                                       | Net
cash provided by (used in) operating activities                               |                                                               |                                   | (2,995  | )                  |        |               | 22,539   |        
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Cash flows from investing activities:                                  |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Net proceeds from sale of property and equipment                       |                                                                                   |                                                               | 6                                 |         |                    |        |              |         
|Additions to property and equipment                                    |                                                                                   |                                                               | (10,545                           | )       |                    |        | (2,358        | )       
|Decrease in restricted cash related to the construction escrow
account |                                                                                   |                                                               | 5,686                             |         |                    |        | 284           |         
|Purchases of investments                                               |                                                                                   |                                                               | (114,918                          | )       |                    |        | (228,771      | )       
|Maturities of investments                                              |                                                                                   |                                                               | 144,043                           |         |                    |        | 159,139       |         
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|                                                                       | Net
cash provided by (used in) investing activities                               |                                                               |                                   | 24,272  |                    |        |               | (71,706  | )      
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Cash flows from financing activities:                                  |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Proceeds from issuance of common stock under stock option plans        |                                                                                   |                                                               | 1,245                             |         |                    |        | 181           |         
|Repurchase of convertible subordinated notes                           |                                                                                   |                                                               | (87,312                           | )       |                    |        | (104,169      | )       
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|                                                                       | Net cash used in financing activities                                             |                                                               |                                   | (86,067 | )                  |        |               | (103,988 | )      
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Net decrease in cash and cash equivalents                              |                                                                                   |                                                               | (64,790                           | )       |                    |        | (153,155      | )       
|Cash and cash equivalents at beginning of period                       |                                                                                   |                                                               | 136,971                           |         |                    |        | 282,561       |         
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Cash and cash equivalents at end of period                             |                                                                                   | $                                                             | 72,181                            |         |                    | $      | 129,406       |         
|                                                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Supplemental disclosures:                                              |                                                                                   |                                                               |                                   |         |                    |        |               |         
|Cash paid during the period for:                                       |                                                                                   |                                                               |                                   |         |                    |        |               |         
|                                                                       | Interest                                                                          |                                                               | $                                 | 1,826   |                    |        | $             | 3,052    |        
|                                                                       | Income taxes                                                                      |                                                               |                                   | 11      |                    |        |               | 502      |        

See accompanying notes to condensed consolidated financial statements.

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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
September 28, 2003, and June 29, 2003, and its condensed consolidated
statements of income for the three months ended September 28, 2003, and
September 29, 2002, and its condensed consolidated statements of cash flows
for the three month periods then ended. Interim results for the three
months ended September 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 April 2003, the Financial Accounting Standards Board, (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 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.

5



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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | 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                   
|                                                                                                                                      |                       |   |                                      
|                                                                                                                                      |                       |   | September 28,                         |      | September 29,
|                                                                                                                                      |                       |   | 2003                                  |      | 2002         
|                                                                                                                                      |                       |   |                                       |      |              
|                                                                                                                                      |                       |   | (In thousands, except per share data)
|Net income as reported                                                                                                                |                       | $ | 22,588                                |      |               | $ | 31,981 |     
|Add: Total employee stock-based compensation expense included
in net income as reported, net of related tax effects                   |                       |   | 596                                   |      |               |   | 845    |     
|Deduct: Total employee stock-based compensation expense
determined under fair value method for all awards, net of related
tax effects |                       |   | (7,976                                | )    |               |   | (9,263 | )   
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     
|Pro forma net income                                                                                                                  |                       | $ | 15,208                                |      |               | $ | 23,563 |     
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     
|Pro forma net income per share                                                                                                        |                       |   |                                       |      |               |   |        |     
|                                                                                                                                      | Basic  as reported   |   | $                                     | 0.27 |               |   | $      | 0.39 | 
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     
|                                                                                                                                      | Basic  pro forma     |   | $                                     | 0.18 |               |   | $      | 0.29 | 
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     
|                                                                                                                                      | Diluted  as reported |   | $                                     | 0.27 |               |   | $      | 0.37 | 
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     
|                                                                                                                                      | Diluted  pro forma   |   | $                                     | 0.18 |               |   | $      | 0.28 | 
|                                                                                                                                      |                       |   |                                       |      |               |   |        |     



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

|                                               |  |                    |       |               |  |   |       |  
|---------------------------------------------- |  | ------------------ | ----- | ------------- |  | - | ----- | -
|                                               |  | Three Months Ended
|                                               |  |                   
|                                               |  | September 28,      |       | September 29,
|                                               |  | 2003               |       | 2002         
|                                               |  |                    |       |              
|Risk-free interest rate                        |  |                    | 2.3   | %             |  |   | 2.3   | %
|Stock volatility                               |  |                    | 117.7 | %             |  |   | 98.5  | %
|Dividend yield                                 |  |                    | 0.0   | %             |  |   | 0.0   | %
|Average expected lives (years)                 |  |                    | 2.6   |               |  |   | 3.7   |  
|Weighted-average fair value per option granted |  | $                  | 15.64 |               |  | $ | 11.51 |  



| |  | The Black-Scholes model, as well as other currently accepted option
valuation models, was 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|2. |  | Inventories                                 
|-- |  | --------------------------------------------
|  
|   |  | Inventories, net, are summarized as follows:

|               |  |                |        |          |  |   |        | 
|-------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|               |  | September 28,  |        | June 29,
|               |  | 2003           |        | 2003    
|               |  |                |        |         
|               |  | (in thousands)
|Raw materials  |  | $              | 6,004  |          |  | $ | 3,802  | 
|Finished goods |  |                | 6,475  |          |  |   | 7,196  | 
|               |  |                |        |          |  |   |        | 
|               |  | $              | 12,479 |          |  | $ | 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 its one Gbps reserve in
September 2001, the Company has subsequently reduced this reserve by a total
of $8.7 million through September 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 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 September 28, 2003, related to this excess
and obsolete inventory charge since it was initially recorded. As of
September 28, 2003, the remaining reserve for one Gbps products was $1.3
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 September 28, 2003, the Company had
unreserved one Gbps inventory on hand of approximately $0.9 million.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Goodwill and Other Intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Goodwill and other intangibles, net, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                               |                                                       |   |                |         |          |   |        |         |  
|---------------------------------------------- | ----------------------------------------------------- | - | -------------- | ------- | -------- | - | ------ | ------- | -
|                                               |                                                       |   | September 28,  |         | June 29,
|                                               |                                                       |   | 2003           |         | 2003    
|                                               |                                                       |   |                |         |         
|                                               |                                                       |   | (in thousands)
|Intangible assets not subject to amortization: |                                                       |   |                |         |          |   |        |        
|                                               | Goodwill                                              |   | $              | 397,256 |          |   | $      | 397,256 |  
|                                               |                                                       |   |                |         |          |   |        |        
|Intangible assets subject to amortization:     |                                                       |   |                |         |          |   |        |        
|                                               | Core technology and patents                           |   | $              | 40,600  |          |   | $      | 40,600  |  
|                                               | Accumulated amortization, core technology and patents |   |                | (14,983 | )        |   |        | (13,533 | )
|                                               |                                                       |   |                |         |          |   |        |        
|Intangible assets subject to amortization      |                                                       | $ | 25,617         |         |          | $ | 27,067 |        
|                                               |                                                       |   |                |         |          |   |        |        



| |  | 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 beginning July 1, 2002. 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 remaining intangible assets subject to amortization are being amortized
on a straight-line basis over seven years. Aggregated amortization expense
for these intangibles for the three months ended September 28, 2003, and
September 29, 2002, was $1.5 million in each period and for the next five
full fiscal years is expected to be (in thousands):                                               

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

|     |  |   |      
|---- |  | - | -----
|2004 |  | $ | 5,800
|2005 |  | $ | 5,800
|2006 |  | $ | 5,800
|2007 |  | $ | 5,800
|2008 |  | $ | 3,867



|4. |  | Other Assets                              
|-- |  | ------------------------------------------
|  
|   |  | Components of other assets are as follows:

|                                                                   |  |                |       |          |  |   |       | 
|------------------------------------------------------------------ |  | -------------- | ----- | -------- |  | - | ----- | 
|                                                                   |  | September 28,  |       | June 29,
|                                                                   |  | 2003           |       | 2003    
|                                                                   |  |                |       |         
|                                                                   |  | (in thousands)
|Deferred debt issuance costs 
convertible subordinated notes, net |  | $              | 2,513 |          |  | $ | 4,670 | 
|Long-term prepaid assets                                           |  |                | 652   |          |  |   | 1,016 | 
|Refundable deposits                                                |  |                | 97    |          |  |   | 96    | 
|                                                                   |  |                |       |          |  |   |       | 
|                                                                   |  | $              | 3,262 |          |  | $ | 5,782 | 
|                                                                   |  |                |       |          |  |   |       | 



|5. |  | Accrued Liabilities                              
|-- |  | -------------------------------------------------
|  
|   |  | Components of accrued liabilities are as follows:

|                                   |  |                |        |          |  |   |        | 
|---------------------------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|                                   |  | September 28,  |        | June 29,
|                                   |  | 2003           |        | 2003    
|                                   |  |                |        |         
|                                   |  | (in thousands)
|Payroll and related costs          |  | $              | 8,067  |          |  | $ | 8,406  | 
|Accrued inventory purchases        |  |                | 21     |          |  |   | 1,449  | 
|Accrued interest                   |  |                | 322    |          |  |   | 1,502  | 
|Warranty reserves                  |  |                | 2,570  |          |  |   | 2,349  | 
|Deferred revenue                   |  |                | 1,603  |          |  |   | 2,054  | 
|Accrued advertising and promotions |  |                | 873    |          |  |   | 719    | 
|Other                              |  |                | 2,517  |          |  |   | 2,327  | 
|                                   |  |                |        |          |  |   |        | 
|                                   |  | $              | 15,973 |          |  | $ | 18,806 | 
|                                   |  |                |        |          |  |   |        | 



| |  | Deferred revenue includes an accrual for estimated returns and allowances of
$1.5 million and $1.9 million at September 28, 2003 and June 29, 2003,
respectively. Deferred revenue also includes the revenue related to legacy
cLAN products with unspecified upgrade rights of $0.1 and $0.2 million at
September 28, 2003, and June 29, 2003, respectively.                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company provides a warranty of between one and three years on its Fibre
Channel and Internet Protocol products and provides a warranty of between
one and five years on its 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.
|
| |  | Changes to the warranty reserve for the three months ended September 28,
2003, and September 29, 2002, were:                                                                                                                                                                                                                                                                                                                

|                                |  |                    |       |               |  |   |       |  
|------------------------------- |  | ------------------ | ----- | ------------- |  | - | ----- | -
|                                |  | Three Months Ended
|                                |  |                   
|                                |  | September 28,      |       | September 29,
|                                |  | 2003               |       | 2002         
|                                |  |                    |       |              
|                                |  | (in thousands)    
|Balance at beginning of period  |  | $                  | 2,349 |               |  | $ | 2,244 |  
|Additions to costs and expenses |  |                    | 648   |               |  |   | 180   |  
|Amounts charged against reserve |  |                    | (427  | )             |  |   | (224  | )
|                                |  |                    |       |               |  |   |       |  
|Balance at end of period        |  | $                  | 2,570 |               |  | $ | 2,200 |  
|                                |  |                    |       |               |  |   |       |  

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|6. |  | 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 (see note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | 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.
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 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. At September
28, 2003, 3.0 million shares of common stock and all of the $114.6 million
face amount of the outstanding convertible subordinated notes remained
authorized for repurchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|7. |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | 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 allege 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. Pursuant to a
Stipulation and Court Order, the actions were consolidated. On August 24,
2001, an Amended and Consolidated Complaint was filed. Defendants motion
to dismiss was denied by way of an order dated March 7, 2002. Defendants
motion for reconsideration of that order was denied by an order dated May 3,
2002. Plaintiffs commenced discovery. The court certified the class action
by an order dated September 30, 2002. Following these class action
lawsuits, a number of derivative cases were filed in state courts in
California and Delaware, and in federal court in California, alleging that
certain officers and directors breached their fiduciary duties to the
Company in connection with the events alleged in the class action lawsuits.
The derivative cases filed in California state courts were consolidated in
Orange County Superior Court and plaintiffs filed a consolidated and amended
complaint on January 31, 2002. On May 10, 2002, the Orange County Superior
Court ordered that the consolidated actions be stayed pending resolution of
the federal class action described above. The derivative suit in Delaware
was dismissed on August 28, 2001. On March 15, 2002, the United States
District Court for the Central District of California ordered that the
federal derivative action be stayed pending resolution of the class action
lawsuit described above. The Company has received inquiries about events
giving rise to the lawsuits from the Securities and Exchange Commission and
the Nasdaq Stock Market. On

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | April 22, 2003, the Company entered into two
Memoranda of Understanding (MOUs) agreeing to terms of settlement of both
the class action and derivative litigation. The MOUs call for settlement
payments totaling $39.0 million, plus up to $0.5 million of the cost of
providing notice to the class members. A Final Order and Judgment was
approved by the court in the derivative cases on May 30, 2003, based on a
Stipulation of Settlement of Derivative Claims dated as of May 13, 2003. An
Order Preliminarily Approving Settlement and Providing for Notice was
approved by the court in the federal class action on July 11, 2003, based on
a Stipulation of Settlement dated as of July 3, 2003. A Settlement Hearing
was held on October 15, 2003, in the federal class action, and the
settlement was approved. As a result, the $39.5 million of restricted cash
held in escrow was paid subsequent to September 28, 2003. Insurance
proceeds are expected to reimburse the Company for a minimum of
approximately $12.5 million of the settlement payments, in addition to $2.5
million for legal expenses, some of which has already been received by the
Company. The probable net effect of the settlements to the Company, based
on the Companys current minimum estimate of reimbursement from the
insurance carriers, is expected to be approximately $27.0 million, or $16.7
million after tax, recorded during 2003. The Company commenced an
arbitration proceeding against three of its insurance carriers in June 2003
seeking reimbursement of $30.0 million for the defense and settlement costs.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 its one
Gbps reserve in September 2001, the Company has subsequently reduced this
reserve by a total of $8.7 million through September 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 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 September
28, 2003, related to this excess and obsolete inventory charge since it was
initially recorded. As of September 28, 2003, the remaining reserve for one
Gbps products was $1.3 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
September 28, 2003, the Company had unreserved one Gbps inventory on hand of
approximately $0.9 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 September 28, 2003, the Companys remaining purchase
obligation for the two components was $17.5 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 is financing the build-to-suit construction phase of the new
facility with its own capital, before beginning 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 is progressing. 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 September 28, 2003, the Company had
restricted cash of $3.7 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.                                                                                                                                                                                                                                                                                                                                                                                                                

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



|8. |  | 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:

|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |        |       | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----- | ------------------------------------- | ----- | ------------- | ----- | ------ | ----- | 
|                                               |                                                                                             |                                                                      |       | Three Months Ended                   
|                                               |                                                                                             |                                                                      |       |                                      
|                                               |                                                                                             |                                                                      |       | September 28,                         |       | September 29,
|                                               |                                                                                             |                                                                      |       | 2003                                  |       | 2002         
|                                               |                                                                                             |                                                                      |       |                                       |       |              
|                                               |                                                                                             |                                                                      |       | (in thousands, except per share data)
|Numerator:                                     |                                                                                             |                                                                      |       |                                       |       |               |       |       
|                                               | Net income                                                                                  |                                                                      | $     | 22,588                                |       |               | $     | 31,981 |      
|                                               | Adjustment for interest expense on convertible
subordinated notes, net of tax               |                                                                      |       | 640                                   |       |               |       | 1,141  |      
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|                                               | Numerator for diluted net income per share                                                  |                                                                      | $     | 23,228                                |       |               | $     | 33,122 |      
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|Denominator:                                   |                                                                                             |                                                                      |       |                                       |       |               |       |       
|                                               | Denominator for basic net income per
share - weighted average shares outstanding            |                                                                      |       | 82,541                                |       |               |       | 81,844 |      
|                                               | Effect of dilutive securities:                                                              |                                                                      |       |                                       |       |               |       |        |      
|                                               |                                                                                             | Dilutive options outstanding                                         |       |                                       | 1,700 |               |       |        | 1,806 | 
|                                               |                                                                                             | Dilutive common shares from assumed conversion of
subordinated notes |       |                                       | 3,231 |               |       |        | 5,516 | 
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|                                               | Denominator for diluted net income per
share - adjusted weighted average shares outstanding |                                                                      |       | 87,472                                |       |               |       | 89,166 |      
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|Basic net income per share                     |                                                                                             | $                                                                    | 0.27  |                                       |       | $             | 0.39  |       
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|Diluted net income per share                   |                                                                                             | $                                                                    | 0.27  |                                       |       | $             | 0.37  |       
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|Antidilutive options excluded from computation |                                                                                             |                                                                      | 7,077 |                                       |       |               | 5,673 |       
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       
|Average market price of common stock           |                                                                                             | $                                                                    | 23.68 |                                       |       | $             | 18.85 |       
|                                               |                                                                                             |                                                                      |       |                                       |       |               |       |       



|   |  | 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 months ended
September 28, 2003, and September 29, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | On October 8, 2003, the Company and Vixel Corporation, a Delaware
corporation (Vixel), announced that the two companies have signed a
definitive agreement for the Company to acquire Vixel, a leading supplier of
embedded switch ASICs and subsystems for the storage networking market.
Under the terms of the agreement, the Company will acquire Vixel for $10 per
share in cash, for an estimated transaction value of approximately $310.0
million. The acquisition is structured as a cash tender offer for all of
the shares of Vixel. Any Vixel shares not acquired by Emulex in the tender
offer will be acquired in a second step merger in which remaining Vixel
shareholders will receive the same cash price per share as that paid in the
tender offer. In addition, the Company will assume all existing vested and
unvested Vixel stock options. The tender offer is expected to be completed
in November 2003, subject to regulatory approvals and certain closing
conditions, including the tender of a majority of shares of capital stock of
Vixel on a fully-diluted basis.
|  
|   |  | On October 17, 2003, the Company acquired the technology assets of Trebia
Networks, Inc. and Trebia Networks Securities, Inc. The acquired technology
includes multiprotocol storage networking processor                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements



| |  | architectures and
high-performance offload engines. The purchase price was $2.0 million in
cash, with $0.5 million of that amount placed in an escrow account for at
least 90 days.                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The purchase price allocations have not been finalized for the pending Vixel
acquisition and the completed Trebia technology asset acquisition. However,
significant amounts may be allocated to in-process research and development
(IPR&D) and to intangible assets, resulting in IPR&D expense and/or
intangible asset amortization expense that would have a significant impact on
the Companys results of operations.

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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
proposed 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 consolidating 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 our stock
price on stock compensation charges; 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 a leading designer, developer and supplier of a broad
line of storage networking host bus adapters, or HBAs, and ASICs that provide
connectivity solutions for storage area networks, or SANs, network attached
storage, or NAS, and redundant array of independent disks, or RAID, storage.
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 network. Our products are based on internally
developed ASIC and
embedded firmware and software technology, and offer support for a wide variety
of SAN protocols, configurations, system interfaces and operating systems.
Emulexs architecture offers customers a stable applications program

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interface,
or API, that has been preserved across multiple generations of adapters 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 first quarter of fiscal 2004 ended
September 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.
Emulex has secured significant customer relationships with the worlds leading
storage and server suppliers, including Dell, EMC, Fujitsu-Siemens, Groupe
Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance 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. As of September 28, 2003,
we had a total of 403 employees. References contained herein to Emulex, the
Company, the Registrant, we, our, and us, refer to Emulex Corporation
and its subsidiaries.

Subsequent Events

On October 8, 2003, Emulex and Vixel Corporation, a Delaware corporation, or
Vixel, announced that the two companies have signed a definitive agreement for
us to acquire Vixel, a leading supplier of embedded switch ASICs and subsystems
for the storage networking market. Under the terms of the agreement, we will
acquire Vixel for $10 per share in cash, for an estimated transaction value of
approximately $310.0 million. The acquisition is structured as a cash tender
offer for all of the shares of Vixel. Any Vixel shares not acquired by us in
the tender offer will be acquired in a second step merger in which remaining
Vixel shareholders will receive the same cash price per share as that paid in
the tender offer. In addition, we will assume all existing vested and unvested
Vixel stock options. The tender offer is expected to be completed in November
2003, subject to regulatory approvals and certain closing conditions, including
the tender of a majority of shares of capital stock of Vixel on a fully-diluted
basis.

On October 17, 2003, we acquired the technology assets of Trebia Networks, Inc.
and Trebia Networks Securities, Inc., or Trebia. The acquired technology
includes multiprotocol storage networking processor architectures and
high-performance offload engines. The purchase price was $2.0 million in cash,
with $0.5 million of that amount placed in an escrow account for at least 90
days.

The purchase price allocations have not been finalized for the pending Vixel
acquisition and the completed Trebia technology asset acquisition. However,
significant amounts may be allocated to in-process research and development, or
IPR&D, and to intangible assets, resulting in IPR&D expense and/or intangible
asset amortization expense that would have a significant impact on our results
of operations.

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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
|                           |                                                      |                            |       | for the Three Months Ended
|                           |                                                      |                            |       |                           
|                           |                                                      |                            |       | September 28,              |      | September 29,
|                           |                                                      |                            |       | 2003                       |      | 2002         
|                           |                                                      |                            |       |                            |      |              
|Net revenues               |                                                      |                            | 100.0 | %                          |      |               | 100.0 | %   
|Cost of sales              |                                                      |                            | 33.5  |                            |      |               | 39.6  |     
|                           |                                                      |                            |       |                            |      |               |       |     
|                           | Gross profit                                         |                            |       | 66.5                       |      |               |       | 60.4 |     
|                           |                                                      |                            |       |                            |      |               |       |     
|Operating expenses:        |                                                      |                            |       |                            |      |               |       |     
|                           | Engineering and development                          |                            |       | 19.3                       |      |               |       | 19.4 |     
|                           | Selling and marketing                                |                            |       | 5.5                        |      |               |       | 6.6  |     
|                           | General and administrative                           |                            |       | 4.3                        |      |               |       | 3.9  |     
|                           | Amortization of other intangibles                    |                            |       | 1.7                        |      |               |       | 2.1  |     
|                           |                                                      |                            |       |                            |      |               |       |     
|                           |                                                      | Total operating expenses   |       |                            | 30.8 |               |       |      | 32.0 | 
|                           |                                                      |                            |       |                            |      |               |       |     
|Operating income           |                                                      |                            | 35.7  |                            |      |               | 28.4  |     
|                           |                                                      |                            |       |                            |      |               |       |     
|Nonoperating income:       |                                                      |                            |       |                            |      |               |       |     
|                           | Interest income                                      |                            |       | 3.0                        |      |               |       | 5.3  |     
|                           | Interest expense                                     |                            |       | (1.2                       | )    |               |       | (2.6 | )   
|                           | Gain on repurchase of convertible subordinated notes |                            |       | 5.5                        |      |               |       | 40.8 |     
|                           | Other income (expense), net                          |                            |       | 0.1                        |      |               |       | (-   | )   
|                           |                                                      |                            |       |                            |      |               |       |     
|                           |                                                      | Total non-operating income |       |                            | 7.4  |               |       |      | 43.5 | 
|                           |                                                      |                            |       |                            |      |               |       |     
|Income before income taxes |                                                      |                            | 43.1  |                            |      |               | 71.9  |     
|Income tax provision       |                                                      |                            | 16.4  |                            |      |               | 26.5  |     
|                           |                                                      |                            |       |                            |      |               |       |     
|Net income                 |                                                      |                            | 26.7  | %                          |      |               | 45.4  | %   
|                           |                                                      |                            |       |                            |      |               |       |     

Net Revenues

Net revenues for the first three months of fiscal 2004 ended September 28,
2003, increased $14.2 million, or 20 percent, to $84.6 million, compared to the
same three months of fiscal 2003 ended September 29, 2002.

From a product line perspective, net revenues generated from our Fibre Channel
products for the three months ended September 28, 2003, were $84.1 million, an
increase of $15.3 million, or 22 percent, compared to the three months ended
September 29, 2002, and represented 99 percent of total net revenues. We
continue to 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

|                       |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |    |  
|---------------------- | ------------------ | ---- | ------------- | -------- | ---------- | ---- | ------------- | -------- | ------------ | ---------- | --------- | ------ | ---------- |  | -- | --- | - | - | ------ | ------ |  |  | --- | -- | -
|                       |                    |      | Three Months  |          |            |      |               |          | Three Months |            |           |        |            |  |    |     |   |   |        |        | 
|                       |                    |      | Ended         |          | Percentage |      | Ended         |          | Percentage   |            |           |        |            |  |    |     |  
|                       |                    |      | September 28, |          | of Net     |      | September 29, |          | of Net       |            | Increase/ |        | Percentage
|(in thousands)         |                    | 2003 |               | Revenues |            | 2002 |               | Revenues |              | (Decrease) |           | Change
|                       |                    |      |               |          |            |      |               |          |              |            |           |       
|Fibre Channel          |                    | $    | 84,100        |          |            |      | 99            | %        |              | $          | 68,754    |        |            |  | 98 | %   |   | $ | 15,346 |        |  |  | 22  | % 
|IP networking          |                    |      | 472           |          |            |      | 1             | %        |              |            | 1,646     |        |            |  | 2  | %   |   |   | (1,174 | )      |  |  | (71 | %)
|Traditional networking |                    |      | 5             |          |            |      |              |          |              |            | 25        |        |            |  |   |     |   |   | (20    | )      |  |  | (80 | %)
|                       |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |   
|                       | Total net revenues |      | $             | 84,577   |            |      |               | 100      | %            |            | $         | 70,425 |            |  |    | 100 | % |   | $      | 14,152 |  |  |     | 20 | %
|                       |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |   

Our IP networking products consist of both our iSCSI products, which are
currently in development, and VI products; as well as legacy 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. Although we
continue to devote resources to iSCSI product development, the market remains
in an early stage of development and we do not expect material revenue from
these products for the foreseeable future.

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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                           |  |                 |    |                 |  |  |    |  
|                           |                 |  | Ended           |    | Ended                                  |  | Three Months    |    | Three Months   
|                           |                 |  | September 28,   |    | September 29,                          |  | Ended September |    | Ended September
|                           |                 |  | 2003            |    | 2002                                   |  | 28, 2003        |    | 29, 2002       
|                           |                 |  |                 |    |                                        |  |                 |    |                
|Net revenue percentage (1) |                 |  |                 |    |                                        |  |                 |    |                 |  |  |    |   |  |  |   
|                           | IBM             |  |                 | 21 | %                                      |  |                 | 23 | %               |  |  | 21 | % |  |  | 25 | %
|                           | Hewlett-Packard |  |                 | 19 | %                                      |  |                 | 23 | %               |  |  | 21 | % |  |  | 23 | %
|                           | Tidalwire       |  |                 | 16 | %                                      |  |                 |   |                 |  |  |   |   |  |  |   |  
|                           | Info-X          |  |                 | 11 | %                                      |  |                 |   |                 |  |  |   |   |  |  |   |  
|                           | EMC             |  |                 |   |                                        |  |                 |   |                 |  |  | 31 | % |  |  | 18 | %



| | (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 74 percent of total net
revenues for the three months ended September 28, 2003, compared to 67 percent
in September 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 distribution 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 57 percent of net revenues and sales through distribution were 43 percent
in the three months ended September 28, 2003. Our OEM customers may take
products both directly and through distribution channels.

Net Revenues by Sales Channel

|               |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |    |  
|-------------- | ------------------ | ---- | ------------- | -------- | ---------- | ---- | ------------- | -------- | ------------ | ---------- | --------- | ------ | ---------- |  | -- | --- | - | - | ------ | ------ |  |  | --- | -- | -
|               |                    |      | Three Months  |          |            |      |               |          | Three Months |            |           |        |            |  |    |     |   |   |        |        | 
|               |                    |      | Ended         |          | Percentage |      | Ended         |          | Percentage   |            |           |        |            |  |    |     |  
|               |                    |      | September 28, |          | of Net     |      | September 29, |          | of Net       |            | Increase/ |        | Percentage
|(in thousands) |                    | 2003 |               | Revenues |            | 2002 |               | Revenues |              | (Decrease) |           | Change
|               |                    |      |               |          |            |      |               |          |              |            |           |       
|OEM            |                    | $    | 48,010        |          |            |      | 57            | %        |              | $          | 48,632    |        |            |  | 69 | %   |   | $ | (622   | )      |  |  | (1  | %)
|Distribution   |                    |      | 36,527        |          |            |      | 43            | %        |              |            | 21,702    |        |            |  | 31 | %   |   |   | 14,825 |        |  |  | 68  | % 
|End-User       |                    |      | 40            |          |            |      |              |          |              |            | 91        |        |            |  |   |     |   |   | (51    | )      |  |  | (56 | %)
|               |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |   
|               | Total net revenues |      | $             | 84,577   |            |      |               | 100      | %            |            | $         | 70,425 |            |  |    | 100 | % |   | $      | 14,152 |  |  |     | 20 | %
|               |                    |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |        |        |  |  |     |   

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 three months ended September 28, 2003, domestic net revenues increased
by $4.7 million, or 10 percent, and international net revenues increased by
$9.5 million, or 43 percent, compared to the three months ended September 29,
2002.

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Net Domestic and International Revenues

|               |                   |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |    |  
|-------------- | ----------------- | ---- | ------------- | -------- | ---------- | ---- | ------------- | -------- | ------------ | ---------- | --------- | ------ | ---------- |  | -- | --- | - | - | ----- | ------ |  |  | -- | -- | -
|               |                   |      | Three Months  |          |            |      |               |          | Three Months |            |           |        |            |  |    |     |   |   |       |        | 
|               |                   |      | Ended         |          | Percentage |      | Ended         |          | Percentage   |            |           |        |            |  |    |     |  
|               |                   |      | September 28, |          | of Net     |      | September 29, |          | of Net       |            | Increase/ |        | Percentage
|(in thousands) |                   | 2003 |               | Revenues |            | 2002 |               | Revenues |              | (Decrease) |           | Change
|               |                   |      |               |          |            |      |               |          |              |            |           |       
|Domestic       |                   | $    | 52,975        |          |            |      | 63            | %        |              | $          | 48,287    |        |            |  | 69 | %   |   | $ | 4,688 |        |  |  | 10 | % 
|Europe         |                   |      | 23,026        |          |            |      | 27            | %        |              |            | 17,004    |        |            |  | 24 | %   |   |   | 6,022 |        |  |  | 35 | % 
|Pacific Rim    |                   |      | 8,576         |          |            |      | 10            | %        |              |            | 5,134     |        |            |  | 7  | %   |   |   | 3,442 |        |  |  | 67 | % 
|               |                   |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |   
|               | Total net revenue |      | $             | 84,577   |            |      |               | 100      | %            |            | $         | 70,425 |            |  |    | 100 | % |   | $     | 14,152 |  |  |    | 20 | %
|               |                   |      |               |          |            |      |               |          |              |            |           |        |            |  |    |     |   |   |       |        |  |  |    |   

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

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. In the three months ended September 28, 2003,
gross profit increased $13.7 million, or 32 percent, to $56.3 million, from
$42.5 million in the three months ended September 29, 2002. Gross margin
increased to 67 percent in the three months ended September 28, 2003, compared
to 60 percent in the three months ended September 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 the one Gbps reserve during the first quarter of fiscal
2002, we have subsequently reduced this reserve by a total of $8.7 million
through September 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 September 28, 2003, related to
this excess and obsolete inventory charge since it was initially recorded. In
the three months ended September 28, 2003, and September 29, 2002, the
reduction related to our one Gbps reserve, as previously-reserved inventory has
been sold, was $1.8 million and $0.2 million, respectively. Excluding the
reductions of the excess and obsolete inventory reserve of $1.8 million in the
three months ended September 28, 2003, and $0.2 million in the three months
ended September 29, 2002, gross profit would have been $54.4 million and $42.4
million, respectively, and gross margin would have been 64 percent and 60
percent, respectively. The increase in gross profit and gross margin in the
three months ended September 28, 2003, compared to the three months ended
September 29, 2002, was also due to cost reductions for Fibre Channel products,
higher Fibre Channel net revenues and volumes, and changes in product mix.
Also, cost of sales included $4 thousand of amortized deferred stock-based
compensation expense in each of the three months ended September 28, 2003, and
September 29, 2002.

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 $16.3 million and $13.7 million in
the three months ended September 28, 2003, and September 29, 2002, representing
19 percent of net revenues in each period, respectively. Engineering and
development expenses increased by $2.7 million, or 20 percent, in the three
months ended September 28, 2003, compared to the three months ended September
29, 2002. This increase was due to our continued investment in Fibre Channel
and IP engineering and development, which represented
substantially all

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of our engineering and development efforts and expenses.
Engineering expenses included $0.4 million and $0.5 million of amortized
deferred stock-based compensation for the three months ended September 28,
2003, and September 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 new products. While our
engineering expenses in the three months ended September 28, 2003, increased at
the same rate as net revenues in comparison to the three months ended September
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 $4.6
million and $4.7 million in the three months ended September 28, 2003, and
September 29, 2002, representing five and seven percent of net revenues,
respectively. Selling and marketing expenses decreased by $0.1 million, or one
percent, in the three months ended September 28, 2003, compared to the three
months ended September 29, 2002. Selling and marketing expenses included $0.1
million and $0.3 million of amortized deferred stock-based compensation
expenses in the three months ended September 28, 2003, and September 29, 2002,
respectively. The decrease in selling and marketing expenses is due primarily
to this decrease of $0.2 million in deferred compensation expense, partially
offset by an increase of $0.1 million in other salary-related expenses. As a
portion of selling and marketing expenses, such as selling and marketing
employees base compensation, 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 $3.7 million and $2.7
million in the three months ended September 28, 2003, and September 29, 2002,
representing four percent of net revenues in each period, respectively.
General and administrative expenses increased by $0.9 million, or 33 percent,
in the three months ended September 28, 2003, compared to the three months
ended September 29, 2002. The increase in general and administrative expenses
was primarily due to a $0.5 million increase in insurance expenses, a $0.2
million increase in legal expenses and a $0.2 million increase in accounting
and tax services. General and administrative expenses included $37 thousand
and $0.1 million of amortized deferred stock-based compensation expenses in the
three months ended September 28, 2003, and September 29, 2002, respectively.

Amortization of Other Intangibles

Amortization of other intangibles included the amortization of intangible
assets with estimable lives in 2003 and 2002. All intangible assets relate to
the purchase of Giganet, completed during fiscal 2001. The amortization of
other intangibles was $1.5 million in each of the three months ended September
28, 2003, and the three months ended September 29, 2002, representing two
percent of net revenues in both periods. If our acquisition of Vixel is
completed, it could result in a significant increase in amortization of other
intangibles.

Nonoperating Income

Nonoperating income consisted primarily of interest income, interest expense
and other non-operating income and expense items such as the gain on the
repurchase of convertible subordinated notes. Our nonoperating income
decreased by $24.4 million to $6.2 million in the three months ended September
28, 2003, from $30.6 million in the three months ended September 29, 2002. The
decrease was due primarily to a decrease in gains on the repurchase of
convertible subordinated notes of $24.0 million to $4.7 million in the three
months ended September 28, 2003, compared to $28.7 million in the three months
ended September 29, 2002. Additionally, the lower amount of convertible notes
outstanding for the three months ended September 28, 2003, compared to the
three months ended September 29, 2002, caused interest expense to decrease by
$0.8 million to $1.0 million in the three months ended September 28, 2003, from
$1.8 million in the three months ended September 29, 2002. Interest income
decreased by

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$1.2 million to $2.5 million in the three months ended September 28, 2003, from
$3.7 million in the three months ended September 29, 2002, primarily due to
lower interest yields and a lower level of invested funds.

Income Taxes

In the three months ended September 28, 2003, we recorded a tax provision in
the amount of $13.8 million, or approximately 38 percent of our income before
income taxes. In the three months ended September 29, 2002, we recorded a tax
provision in the amount of $18.6 million, or approximately 37 percent of our
income before income taxes. We recorded a tax rate other than the statutory
federal tax rate in 2003 and 2002 principally due to state taxes in the United
States. State taxes in the United States and the continued shift in our
production to an electronics manufacturing service provider outside of the
United States, which reduces deductions for products previously sourced from
the United States, were the primary reasons for the increase in the tax rate to
38 percent in the three months ended September 28, 2003, from 37 percent in the
three months ended September 29, 2002.

New Accounting Standards

In January 2003, the Financial Accounting Standards Board, or 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. We do not believe
that we have any variable interest entities to which Interpretation 46 will
apply.

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.

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.

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Furthermore, we provide a warranty of between one and three years on our Fibre
Channel and Internet Protocol products and provide a warranty of between one
and five years on our 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.

Goodwill, Other Intangibles and Long-Lived Assets. Goodwill and other
intangibles resulting from the acquisition of Giganet 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.

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.

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Liquidity and Capital Resources

At September 28, 2003, we had $368.2 million in working capital and $560.4
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
decreased by $64.8 million to $72.2 million as of September 28, 2003, from
$137.0 million as of June 29, 2003. The decrease in cash and cash equivalents
was due to our financing and operating activities, which used $86.1 million and
$3.0 million of cash and cash equivalents, respectively. The cash and cash
equivalents used by financing and operating activities were partially offset by
our investing activities, which provided $24.3 million of cash and cash
equivalents.

In the three months ended September 28, 2003, operating activities used $3.0
million of cash and cash equivalents, primarily from net income before
non-cash activities. Such non-cash activities consisted primarily of the
increase in restricted cash related to the litigation settlements, deferred
income taxes, the gain on repurchase of convertible subordinated notes, the
depreciation and amortization of property and equipment, the amortization of
other intangibles, the tax benefit from the exercise of stock options and
stock-based compensation. 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 an increase in accounts and other receivables, a decrease
in accrued liabilities and an increase in inventories. The cash provided by
operating activities in the three months ended September 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, amortization of other intangibles,
stock-based compensation and the tax benefit from the exercise of stock
options, as well as changes in other working capital balances.

In the three months ended September 28, 2003, investing activities, which
primarily consisted of maturities of investments of $144.0 million, offset by
purchases of investments of $114.9 million, additions to property and equipment
of $10.5 million, and an increase in restricted cash related to the
construction escrow account of $5.7 million, provided $24.3 million of cash and
cash equivalents. In the three months ended September 29, 2002 investing
activities, which primarily consisted of purchases of investments of $228.8
million, maturities of investments of $159.1 million and additions to property
and equipment of $2.4 million, used $71.7 million of cash and cash equivalents.

Financing activities used $86.1 million of cash and cash equivalents in the
three months ended September 28, 2003. This decrease in cash and cash
equivalents was primarily due to our repurchase of approximately $93.9 million
in face value of convertible subordinated notes at a discount to face value,
spending $87.3 million. The decrease in cash and cash equivalents was
partially offset by proceeds of $1.2 million from the issuance of common stock
under stock option plans. For the three months ended September 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
$0.2 million from the issuance of common stock under stock option plans, used
$104.0 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 three months ended September 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 three months ended September
28, 2003, we bought back approximately $93.9 million in face value of our
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 for 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

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approximately 2.1 million shares. At September 28, 2003, 3.0 million shares
of common stock and all of the $114.6 million face amount of the outstanding
convertible subordinated notes remained authorized for repurchase.

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
September 28, 2003, our remaining purchase obligation for the two components
was $17.5 million.

For the three months ended March 30, 2003, we recorded a net $27.0 million
before-tax charge associated with the tentative settlements of securities class
action and derivative lawsuits. The net $27.0 million charge included $39.5
million expected to be paid to plaintiffs during fiscal 2004, less an estimated
$12.5 million probable minimum recovery from our insurance carriers expected in
fiscal 2004. In addition to the $12.5 million, our litigation settlements
receivable based upon our probable minimum recovery at September 28, 2003, also
includes $0.6 million designated for related legal fees. We
commenced an arbitration proceeding against three of our insurance
carriers in June 2003 seeking reimbursement of $30.0 million for
the defense and settlement costs. At September 28,
2003, all related unpaid legal fees have been accrued as a liability and we had
restricted cash of $39.5 million in escrow associated with these settlements.
A Settlement Hearing was held on October 15, 2003, in the federal class action,
and the settlement was approved. As a result, the $39.5 million held in escrow
was paid subsequent to September 28, 2003.

In 2002, we entered into an agreement to relocate our headquarters locally in
Costa Mesa, California. We are financing the build-to-suit construction phase
of the approximately 180 thousand square feet facility with our own capital,
before beginning 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 is progressing. 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
September 28, 2003, we had restricted cash of $3.7 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.

As part of our commitment to storage networking product development, including
Fibre Channel 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. In addition, subsequent to September
28, 2003, we announced that we will acquire Vixel Corporation for an estimated
transaction value of $310.0 million, subject to customary closing conditions,
as well as spend $2.0 million to acquire the technology assets of Trebia
Networks, Inc. and Trebia Networks Securities, Inc. during fiscal 2004. We
will acquire Vixel for $10 per share in cash, and the Vixel acquisition is
structured as a cash tender offer for all the shares of Vixel. To fund a
portion of the Vixel acquisition, we may elect, among other things,
to obtain short-term financing to avoid selling certain of our
investments prior to maturity.

In addition, the plaintiffs in the tentative settlements of securities class
action and derivative lawsuits were paid $39.5 million subsequent to September
28, 2003. 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.

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

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|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |         |         |  |   |        |        | 
|-------------------------------------------------------------- | ----- | - | ---------------------- | ------- | ------ | - | --------- | ------ | ----- | - | ----- | ------ | ------- | - | ------- | ------- |  | - | ------ | ------ | 
|                                                               |       |   | 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                    |       | $ | 121,670                |         |        | $ | 1,003     |        |       | $ | 4,013 |        |         | $ | 116,654 |         |  | $ |       |       
|Operating leases                                               |       |   | 4,456                  |         |        |   | 1,518     |        |       |   | 2,789 |        |         |   | 149     |         |  |   |       |       
|Non-cancelable purchase obligations for end
of life components |       |   | 17,469                 |         |        |   | 17,469    |        |       |   |      |        |         |   |        |         |  |   |       |       
|Litigation settlements                                         |       |   | 39,500                 |         |        |   | 39,500    |        |       |   |      |        |         |   |        |         |  |   |       |       
|Letter of credit                                               |       |   | 1,000                  |         |        |   | 1,000     |        |       |   |      |        |         |   |        |         |  |   |       |       
|New corporate headquarters  lease option                      |       |   | 45,899                 |         |        |   | 2,220     |        |       |   | 8,972 |        |         |   | 9,104   |         |  |   | 25,603 |       
|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |         |         |  |   |        |       
|                                                               | Total |   | $                      | 229,994 |        |   | $         | 62,710 |       |   | $     | 15,774 |         |   | $       | 125,907 |  |   | $      | 25,603 | 
|                                                               |       |   |                        |         |        |   |           |        |       |   |       |        |         |   |         |         |  |   |        |       

Risk Factors

A prolonged 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 99 percent of our
net revenues for the three months ended September 28, 2003, has been supported
by the demand for high-performance networking and data storage products and
solutions that support enterprise computing requirements, including on-line
transaction processing, data mining, data warehousing, multimedia and Internet
applications. Any significant downturn in demand for such products and
solutions, 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 may be adversely affected. 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 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 dependent upon the broadening acceptance of
our 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 storage
networking market represents our greatest opportunity for revenue growth and
profitability for the foreseeable future. However, the market for storage
networking products may not gain broader acceptance and customers may not
continue to choose our technology and products. Additionally, since our
products are sold as parts of integrated systems, our products demand 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 operations and financial
condition. If the 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 OEMs and sales through distribution channels for
our revenue. For the three months ended September 28, 2003, we derived
approximately 57 percent of our net revenues from OEMs and 43 percent from
sales through distribution. Furthermore, because the majority of our sales
through distribution channels consist of OEM-certified products, we believe
that OEM customers effectively controlled more than 88 percent of our revenue
for the three months ended September 28, 2003. We may be unable to retain our
current OEM and distributor customers or to recruit additional or replacement
customers.

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For the three months ended September 28, 2003, direct sales amounted to 21
percent for IBM, 19 percent for Hewlett-Packard, 16 percent for Tidalwire and
11 percent for Info-X. Direct sales to our top five customers accounted for 74
percent of total net revenues for the three months ended September 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 31 percent of our total net revenues for EMC, 21 percent for IBM
and 21 percent for Hewlett Packard for the three months ended September 28,
2003. Although we have attempted to expand our base of customers, 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 and 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 and
IP storage networking technologies for customers. 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
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 we have.
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.

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

On October 8, 2003, we announced a proposed acquisition of Vixel Corporation.
The acquisition is subject to a number of conditions, including successful
completion of a cash tender offer for the outstanding shares of Vixel. While
the tender offer is expected to close on November 13, 2003, it may not close in
accordance with our expectations or at all. To the extent that we are able to
successfully complete the acquisition of Vixel, achieving the benefits of such
acquisition will depend in part on our ability to integrate the technology,
operations and personnel of the two companies in a timely and efficient manner.
Future revenue from Vixel may decline from prior periods or may not meet our
expectations or those of Vixel management, and current and ongoing expenses
also may exceed our expectations or those of Vixel management. 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

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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 render our
financial projections or other expectations of Vixel or the combined companies
to be inaccurate.

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 pending 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;                                                      

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| |  |  | Difficulties in obtaining incremental market share growth;                                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fluctuations in product development and other operating expenses;                                                                                                                                                     
|
| |  |  | Fluctuations in manufacturing cost, 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;                                                                                                                                                                                                          
|
| |  |  | 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 in 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 or deferral 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 38
days at September 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,

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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 proposed
acquisition of Vixel Corporation.

In the event we are able to successfully complete the acquisition of Vixel, the
market price of our common stock may decline as a result of such acquisition
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.

In addition, the significant reduction in Emulexs available cash as a result
of the completion of the proposed Vixel acquisition could adversely affect the
attractiveness of Emulex to financial analysts and investors, and could impair
our ability to make additional acquisitions and our financial condition in the
event of a prolonged economic downturn, any of which could adversely affect the
market price of our common stock.

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 a 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 gigabit per second, or Gbps,
Fibre Channel solutions; 10 Gbps Fibre Channel solutions; Infiniband; PCI-X
2.0; PCI Express; iSCSI; Serial ATA, or SATA; Serial Attached SCSI, or SAS; VI;
and Remote Direct Memory Access, or RDMA; are in development by many companies
and their ultimate acceptance and deployment in the market is uncertain.
Emulex is 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. 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, Inc. 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. We currently have net goodwill related to the Giganet acquisition in
the amount of $397.3 million that will be reviewed at least annually for
impairment. In addition, to the extent we are able to complete the proposed
acquisition of Vixel Corporation, we may experience goodwill impairment
charges. 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

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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 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 and gross
margin levels associated with lower average selling prices and 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
a product that incorporates 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.

Rapid changes in the evolution of technology, including the unexpected extent
or timing of the transition from HBA 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 solutions at
a significantly lower average selling price. We have previously offered ASICs
to certain customers for certain applications that has 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. 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.

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 revenues has come from our
high-end server and storage solutions. In recent quarters, an increasing
percentage of revenues 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

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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;                                              
|
| |  |  | 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 were 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, Emulex
will develop the protocol controller hardware, firmware and drivers. Intel
will integrate its Intel® Xscale microarchitecture as the core technology for
the new processors and will manufacture the processors on its

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90-nanometer
process technology. Emulex 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;         
|
| |  |  | 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 and LSI
Logic. In addition to hardware, we design software to provide functionality to
our hardware products. In the past, we have also licensed software from third
party providers for use with our traditional networking products, and most of
these providers are the sole source for the software. However, both our
software and the third party software are provided as embedded programs within
the 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

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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 expect to begin shipping product to customers from Benchmarks
facility in Guadalajara, Mexico by the end of the second quarter of fiscal
2004. At this time, our customers have yet to qualify the Benchmark facility
in Mexico. 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. 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 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.

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 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 in our local
community 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.

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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 fiscal 2003, sales in the United States accounted for 60 percent of our
total net revenues, sales in Europe accounted for 33 percent of our total net
revenues, and sales in the Pacific Rim countries accounted for seven 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 overseas production of our
products, and have a material adverse effect on our business, results of
operations and financial condition.

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 we are. 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 proposed
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

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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. 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;                                                                            
|
| |  |  | 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

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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 Securities and
Exchange Commission 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 the $39.5 million held in escrow was paid. If
we were to be the subject of similar litigation in the future it could have a
material adverse effect on or results of operations and financial condition.

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 September 28, 2003, we have a $13.1 million receivable from our insurance
carriers related to the tentative settlements of securities class action and
derivative lawsuits. We had directors and officers insurance with a primary
limit of $10.0 million and a possible $10.0 million reinstatement for the
period of February 2000 through February 2002; and excess insurance of $10.0
million for the period February 2000 through February 2001; and excess
insurance of $20.0 million for the period February 2001 to February 2002. Our
insurance carriers have asserted various defenses including coverage exclusions
and late notice. Our actual insurance recovery may be materially different
from the recorded amount 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 payments due to us, or if
an arbitrator or court determines that the recovery should be an amount other
than the recorded amount, or if ultimately the amount received by us is more or
less than the recorded amount, we would be required to record a corresponding
gain or loss.

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 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. You should 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.

34



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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 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;                                                                                                                       
|
| |  |  | Replace funds used for the acquisition of Vixel;                                                                                                        
|
| |  |  | 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.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

At September 28, 2003, our investment portfolio consisted primarily of fixed
income securities, excluding those classified as cash, cash equivalents and
restricted cash, of $445.0 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
September 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

35



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portfolio matured and were re-invested in securities with lower interest rates,
interest income would decrease in the future. 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 controls and procedures
were effective to ensure that we are able to collect, process and disclose the
information we are required to disclose in the reports we file with the SEC
within the required time periods.

There were no significant 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.

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PART II: OTHER INFORMATION




Item 1. Legal Proceedings

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 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.
Pursuant to a Stipulation and Court Order, the actions were consolidated. On
August 24, 2001, an Amended and Consolidated Complaint was filed. Defendants
motion to dismiss was denied by way of an order dated March 7, 2002.
Defendants motion for reconsideration of that order was denied by an order
dated May 3, 2002. Plaintiffs commenced discovery. The court certified the
class action by an order dated September 30, 2002. Following these class
action lawsuits, a number of derivative cases were filed in state courts in
California and Delaware, and in federal court in California, alleging that
certain officers and directors breached their fiduciary duties to us in
connection with the events alleged in the class action lawsuits. The
derivative cases filed in California state courts were consolidated in Orange
County Superior Court and plaintiffs filed a consolidated and amended complaint
on January 31, 2002. On May 10, 2002, the Orange County Superior Court ordered
that the consolidated actions be stayed pending resolution of the federal class
action described above. The derivative suit in Delaware was dismissed on
August 28, 2001. On March 15, 2002, the United States District Court for the
Central District of California ordered that the federal derivative action be
stayed pending resolution of the class action lawsuit described above. We
received inquiries about events giving rise to the lawsuits from the Securities
and Exchange Commission and Nasdaq Stock Market. On April 22, 2003, we entered
into two Memoranda of Understanding, or MOUs, agreeing to terms of settlement
for both the class action and derivative litigation. The MOUs call for
settlement payments totaling $39.0 million, plus up to $0.5 million of the cost
of providing notice to the class members. A Final Order and Judgment was
approved by the court in the derivative cases on May 30, 2003, based on a
Stipulation of Settlement of Derivative Claims dated as of May 13, 2003. An
Order Preliminarily Approving Settlement and Providing for Notice was approved
by the court in the federal class action on July 11, 2003, based on a
Stipulation of Settlement dated as of July 3, 2003. A Settlement Hearing was
held on October 15, 2003, in the federal class action, and the settlement was
approved. As a result, the $39.5 million of restricted cash held in escrow was
paid subsequent to September 28, 2003. Insurance proceeds are expected to
reimburse us for a portion of the payments and the probable net after tax
effect of the settlements to us, based on our current minimum estimate of
reimbursement from the insurance carriers, is expected to be approximately
$16.7 million after tax, recorded during 2003 We commenced an arbitration
proceeding against three of our insurance carriers in June 2003 seeking
reimbursement of $30.0 million for the defense and settlement costs.

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 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).                                 

37



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|             |  |                                                                                                                                                                                                                                                                                                                                              
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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 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 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 August 7, 2003, containing a
press release announcing the Registrants financial results for the
three months ended June 29, 2003.                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The Registrant filed Form 8-K on September 24, 2003, with
respect to the extension of the Registrants repurchase program
through June 2005 and to the expansion of the Registrants
repurchase program to include all of the Registrants convertible
subordinated notes. The Registrant also announced the repurchase of
$93.9 million face value of its convertible subordinated notes.

38



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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: November 10, 2003

| |  |                    |  |                                                                           
| |  | ------------------ |  | --------------------------------------------------------------------------
| |  | 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)                        

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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 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 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 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.                                                                                                                                                                                                                            

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