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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
  þ
    
    Quarterly Report Pursuant to Section 13 or
15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended October 2, 2005
 OR
 o
    
    Transition Report Pursuant to Section 13
or 15(d) of the
Securities Exchange Act of 1934
 Commission File No. 001-31353
 EMULEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    51-0300558(State or other jurisdiction
    
    (I.R.S Employerof incorporation or organization)
    
    Identification No.)3333 Susan StreetCosta Mesa, California
    
    92626(Address of principal executive offices)
    
    (Zip Code)
 (714) 662-5600  Registrants telephone number, including area code
 þ o
 þ o
 o þ




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PAGEPart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets October 2, 2005, and July 3, 2005
    
    
    2Condensed Consolidated Statements of Income Three months ended October 2, 2005, and September 26, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows Three months ended October 2, 2005, and September 26, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 6. Exhibits
    
    
    34Signatures
    
    
    36EXHIBIT 31AEXHIBIT 31BEXHIBIT 32
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
    October 2,
    
    July 3,2005
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    75,468
    
    
    $
    120,317Investments
    
    
    431,461
    
    
    
    346,675Accounts and other receivables, net
    
    
    61,950
    
    
    
    47,730Inventories, net
    
    
    22,790
    
    
    
    36,266Prepaid expenses
    
    
    4,878
    
    
    
    4,508Deferred income taxes
    
    
    28,470
    
    
    
    28,961Total current assets
    
    
    625,017
    
    
    
    584,457Property and equipment, net
    
    
    64,418
    
    
    
    65,976Investments
    
    
    42,056
    
    
    
    54,936Intangibles, net
    
    
    89,217
    
    
    
    95,806Other assets
    
    
    715
    
    
    
    606$
    821,423
    
    
    $
    801,781Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    20,657
    
    
    $
    29,778Accrued liabilities
    
    
    19,483
    
    
    
    21,505Income taxes payable
    
    
    19,825
    
    
    
    25,361Total current liabilities
    
    
    59,965
    
    
    
    76,644Convertible subordinated notes
    
    
    233,831
    
    
    
    233,382Deferred income taxes and other
    
    
    22,031
    
    
    
    14,164Total liabilities
    
    
    315,827
    
    
    
    324,190Commitments and contingencies (notes 7 and 8)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;
83,676,521 and 83,201,002 issued and outstanding at
October 2, 2005, and July 3, 2005, respectively
    
    
    8,368
    
    
    
    8,320Additional paid-in capital
    
    
    952,659
    
    
    
    944,545Deferred compensation
    
    
    
    
    
    
    (3,407
    )Accumulated deficit
    
    
    (455,431
    )
    
    
    (471,867
    )Total stockholders equity
    
    
    505,596
    
    
    
    477,591$
    821,423
    
    
    $
    801,781
 
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Three Months EndedOctober 2,
    
    September 26,2005
    
    2004Net revenues
    
    $
    104,379
    
    
    $
    73,225Cost of sales
    
    
    38,149
    
    
    
    29,246Gross profit
    
    
    66,230
    
    
    
    43,979Operating expenses:Engineering and development
    
    
    21,855
    
    
    
    20,197Selling and marketing
    
    
    7,957
    
    
    
    7,424General and administrative
    
    
    5,944
    
    
    
    (421
    )Amortization of intangibles
    
    
    6,384
    
    
    
    6,547Impairment of goodwill
    
    
    
    
    
    
    1,793Total operating expenses
    
    
    42,140
    
    
    
    35,540Operating income
    
    
    24,090
    
    
    
    8,439Nonoperating income:Interest income
    
    
    3,746
    
    
    
    3,034Interest expense
    
    
    (624
    )
    
    
    (1,347
    )Gain on repurchase of convertible subordinated notes
    
    
    
    
    
    
    13,090Other income (expense), net
    
    
    (2
    )
    
    
    (10
    )Total nonoperating income
    
    
    3,120
    
    
    
    14,767Income before income taxes
    
    
    27,210
    
    
    
    23,206Income tax provision
    
    
    10,774
    
    
    
    8,907Net income
    
    $
    16,436
    
    
    $
    14,299Net income per share:Basic
    
    $
    0.20
    
    
    $
    0.17Diluted
    
    $
    0.19
    
    
    $
    0.16Number of shares used in per share computations:Basic
    
    
    83,398
    
    
    
    82,561Diluted
    
    
    90,825
    
    
    
    94,716
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Three Months EndedOctober 2,
    
    September 26,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    16,436
    
    
    $
    14,299Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    4,130
    
    
    
    3,297Amortization of discount on 0.25% convertible
subordinated notes
    
    
    449
    
    
    
    895Gain on repurchase of convertible subordinated notes
    
    
    
    
    
    
    (13,090
    )Insurance recovery on shareholder litigation settlements
    
    
    
    
    
    
    (4,399
    )Stock-based compensation
    
    
    4,833
    
    
    
    1,285Amortization of intangibles
    
    
    6,384
    
    
    
    6,547Impairment of goodwill
    
    
    
    
    
    
    1,793Loss on disposal of property and equipment
    
    
    15
    
    
    
    4Deferred income taxes
    
    
    8,372
    
    
    
    8,187Changes in assets and liabilities:Accounts and other receivables
    
    
    (14,220
    )
    
    
    23,404Inventories
    
    
    13,630
    
    
    
    6,814Prepaid expenses and other assets
    
    
    (479
    )
    
    
    (390
    )Accounts payable and accrued liabilities
    
    
    (11,157
    )
    
    
    (7,911
    )Income taxes payable
    
    
    (5,536
    )
    
    
    (88
    )Net cash provided by operating activities
    
    
    22,857
    
    
    
    40,647Cash flows from investing activities:Additions to property and equipment
    
    
    (2,587
    )
    
    
    (3,212
    )Net decrease in restricted cash related to the construction
escrow account
    
    
    
    
    
    
    23Purchases of investments
    
    
    (529,887
    )
    
    
    (102,363
    )Maturities of investments
    
    
    457,981
    
    
    
    118,321Net cash (used in) provided by investing activities
    
    
    (74,493
    )
    
    
    12,769Cash flows from financing activities:Proceeds from issuance of common stock under stock option plans
    
    
    5,433
    
    
    
    1,526Repurchase of convertible subordinated notes
    
    
    
    
    
    
    (137,206
    )Excess tax benefits from stock-based payment arrangements
    
    
    1,354
    
    
    
    145Net cash provided by (used in) financing activities
    
    
    6,787
    
    
    
    (135,535
    )Net decrease in cash and cash equivalents
    
    
    (44,849
    )
    
    
    (82,119
    )Cash and cash equivalents at beginning of period
    
    
    120,317
    
    
    
    192,137Cash and cash equivalents at end of period
    
    $
    75,468
    
    
    $
    110,018Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    1
    
    
    $
    151Income taxes
    
    
    6,845
    
    
    
    664
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1.
    
    Summary of Significant Accounting Policies and Basis of PresentationIn 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 October 2, 2005 and July 3, 2005, and its condensed
consolidated statements of income and cash flows for the three months ended October 2, 2005 and
September 26, 2004. Interim results for the three months ended October 2, 2005, are not
necessarily indicative of the results that may be expected for the year ending July 2, 2006.
The interim financial statements should be read in conjunction with the Companys Annual Report
on Form 10-K for the fiscal year ended July 3, 2005. Certain reclassifications have been made
to prior period amounts to conform to the current period presentation.New and Recently Adopted Accounting StandardsIn November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs. SFAS No. 151 requires that
items such as idle facility expense, excessive spoilage, double freight and rehandling costs be
recognized as current-period charges regardless of whether they meet the criteria of so
abnormal as provided in Accounting Research Bulletin
No. 43, Chapter 4, Inventory Pricing.
In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company has applied the
provisions of SFAS No. 151 to the inventory costs prospectively from July 4, 2005. The adoption
of SFAS No. 151 did not have a significant impact on the Companys consolidated results of
operations for the three months ended October 2, 2005 or financial position at October 2, 2005.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It requires
retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific effect or the
cumulative effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.In September 2005, the FASB reached a final consensus on Emerging Issues Task Force (EITF)
Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty.
(EITF 04-13 concludes that two or more legally separated exchange transactions with the same
counterparty should be combined and considered as a single arrangement for purposes of applying
APB Opinion No. 29, Accounting for Nonmonetary Transactions, when the transactions were
entered into in contemplation of one another. The consensus contains several indicators to be
considered in assessing whether two transactions are entered into in contemplation of one
another. If, based on consideration of the indicators and the substance of the arrangement, two
transactions are combined and considered a single arrangement, an exchange of finished goods
inventory for either raw material or work-in-process should be accounted for at fair value. The
provisions of EITF 04-13 are applied to transactions completed in reporting periods beginning
after March 15, 2006.In November 2003, the EITF reached an interim consensus on EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments, to require
additional disclosure requirements for securities classified as available-for-sale or
held-to-maturity for fiscal years ending after December 15, 2003. In March 2004, the EITF
reached a final consensus on this Issue, to provide additional guidance, which companies must
follow in determining whether investment securities have an impairment which should be
considered other-than-temporary. In November 2005, the FASB issued FASB Staff Position (FSP)
SFAS No. 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The FSP provides further guidance on the determination as
to when an investment is considered impaired, whether the impairment is other than temporary and
the measurement of an impairment loss. The FSP is effective for reporting periods beginning
after December 15, 2005. EITF 03-01 and FSP No. 115-1 and No. 124-1 are not expected to have a
significant impact on the carrying value of the Companys investments.In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
Share-Based Payment, or SFAS No. 123(R). Effective
July 4, 2005, the Company adopted SFAS No. 123(R), using the modified prospective
application transition method which provides for only current
and future period stock-based awards to be measured and
recognized at fair value. See note 9 for additional information.
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2.
    
    Business CombinationOn November 13, 2003, the Company completed the cash tender offer to acquire all outstanding
 shares of Vixel Corporation for $10.00 net per share, without interest. On November 17, 2003,
the Company completed its acquisition of Vixel. The Company acquired Vixel to expand its Fibre
Channel product line and paid $298.4 million in cash for all outstanding common stock,
preferred stock and warrants of Vixel Corporation. The Company also incurred
acquisition-related expenses of $6.7 million in cash. In addition, the Company issued 2.2
million stock options with a fair value of approximately $47.5 million and kept the original
vesting periods for the options in exchange for the outstanding Vixel options for a total
acquisition value of $352.7 million. The Company calculated the fair value of the 2.2 million
stock options issued at the date of acquisition using the Black-Scholes option-pricing model.In connection with the preparation of Vixel Corporations tax return in the first quarter of
fiscal 2005, the Company revised estimates and discovered errors related to the deferred tax
assets of Vixel Corporation (acquired in November 2003). As a result, the Company recorded a
$1.8 million impairment of goodwill in the three months ended September 26, 2004. The Company
does not believe that this $1.8 million impairment of goodwill was material to fiscal 2005
operations or financial results. Excluding this adjustment, net income for the three months
ended September 26, 2004, would have been $16.1 million.3.
    
    InventoriesInventories, net, are summarized as follows:
 October 2,
    
    July 3,2005
    
    2005(in thousands)Raw materials
    
    $
    6,728
    
    
    $
    20,269Finished goods
    
    
    16,062
    
    
    
    15,997$
    22,790
    
    
    $
    36,266
 4.
    
    Intangibles, netIntangibles, net, are as follows:
 October 2,
    
    July 3,2005
    
    2005(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    98,639
    
    
    $
    98,742Accumulated amortization, core technology and patents
    
    
    (42,777
    )
    
    
    (39,216
    )Developed technology
    
    
    9,324
    
    
    
    9,341Accumulated amortization, developed technology
    
    
    (4,380
    )
    
    
    (3,818
    )Customer relationships
    
    
    37,892
    
    
    
    37,962Accumulated amortization, customer relationships
    
    
    (14,262
    )
    
    
    (12,415
    )Tradename
    
    
    4,960
    
    
    
    4,969Accumulated amortization, tradename
    
    
    (1,335
    )
    
    
    (1,161
    )Covenants not-to-compete
    
    
    3,075
    
    
    
    3,081Accumulated amortization, covenants not-to-compete
    
    
    (1,919
    )
    
    
    (1,679
    )Intangible assets subject to amortization
    
    $
    89,217
    
    
    $
    95,806
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The intangible assets subject to amortization are being amortized on a straight-line basis over
lives ranging from two to seven years. Aggregated amortization expense for these intangibles
for the three months ended October 2, 2005, and September 26, 2004 was $6.4 million and $6.5
million, respectively. For the following five full fiscal years aggregated amortization
expense is expected to be (in thousands):
 2006
    
    $
    25,4522007
    
    $
    24,8842008
    
    $
    20,9492009
    
    $
    11,8942010
    
    $
    8,518
 5.
    
    Other AssetsComponents of other assets are as follows:
 October 2,
    
    July 3,2005
    
    2005(in thousands)Deferred debt issuance costs-convertible subordinated notes, net
    
    $
    126
    
    
    $
    151Long-term prepaid assets
    
    
    516
    
    
    
    354Refundable deposits
    
    
    73
    
    
    
    101$
    715
    
    
    $
    606
 6.
    
    Accrued Liabilities
  October 2,
    
    July 3,2005
    
    2005(in thousands)Payroll and related costs
    
    $
    8,321
    
    
    $
    8,204Warranty reserves
    
    
    3,606
    
    
    
    4,085Deferred revenue, sales returns and allowances
    
    
    2,755
    
    
    
    3,442Accrued advertising and promotions
    
    
    1,776
    
    
    
    1,674Accrued property, sales, franchise and related taxes
    
    
    1,538
    
    
    
    1,280Other
    
    
    1,487
    
    
    
    2,820$
    19,483
    
    
    $
    21,505
 The Company provides a warranty of between one and five years on its Fibre Channel, Internet
Protocol and other networking products. The Company records a provision for estimated
warranty-related costs based on historical product returns and the Companys expected future
cost of fulfilling its warranty obligations.Changes to the warranty reserve were:
 Three Months EndedOctober 2,
    
    September 26,2005
    
    2004(in thousands)Balance at beginning of period
    
    $
    4,085
    
    
    $
    4,046Additions to costs and expenses
    
    
    699
    
    
    
    486Amounts charged against reserve
    
    
    (1,178
    )
    
    
    (583
    )Balance at end of period
    
    $
    3,606
    
    
    $
    3,949
 7.
    
    Convertible Subordinated NotesIn 2002, the Company completed a $345.0 million private placement of 1.75 percent convertible
subordinated notes due February 1, 2007. These notes were convertible 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
incurred associated issuance costs of approximately $11.0 million. Beginning in the three
months ended September 29, 2002 through July 3, 2005, the Company
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repurchased all of the outstanding $345.0 million face value of its 1.75 percent convertible
subordinated notes for approximately $315.9 million, resulting in a net pre-tax gain of
approximately $31.1 million recorded in prior periods. The repurchased notes were cancelled
leaving no 1.75 percent convertible notes outstanding at October 2, 2005 and July 3, 2005.In 2004, the Company completed a $517.5 million private placement of 0.25 percent contingently
convertible subordinated notes due December 15, 2023. Interest is payable in cash on June 15
and December 15 of each year beginning June 15, 2004. Under the terms of the offering, the
notes will be convertible into shares of the Companys common stock at a price of $43.20 per
share at the option of the holder upon the occurrence of any of the following:
 
    
    prior to December 15, 2021, on any date during any fiscal quarter (and only
during such fiscal quarter) after the fiscal quarter ending December 31, 2003, if
the closing sale price of the Companys common stock was more than 120 percent of
the then current conversion price for at least 20 trading days in the period of
the 30 consecutive trading days ending on the last day of the previous fiscal
quarter;
    
    on or after December 15, 2021, at all times on or after any date on which the
closing sale price of the Companys common stock is more than 120 percent of the
then current conversion price of the notes;
    
    if the Company elects to redeem the notes on or after December 20, 2008;
    
    upon the occurrence of specified corporate transactions or significant
distributions to holders of the Companys common stock; or
    
    subject to specified exceptions, for the ten business day period after any five
consecutive trading day period in which the average trading prices for the notes
for such five trading day period was less than 98 percent of the average
conversion value of the notes during that period.
 The notes will mature in December 2023 and may not be called by the Company prior to December
20, 2008. Holders of the notes may require the Company to purchase the notes for cash by
giving written notice within the 20 business days prior to each of December 15, 2006, December
15, 2008, December 15, 2013 or December 15, 2018 or upon a change in control. The Company
incurred total associated bankers fees of approximately $11.6 million, which were recorded as
a reduction to the proceeds from the issuance of the notes and will be accreted over the
effective life of the notes, as well as $0.7 million of other associated debt issuance costs,
which have been included in other assets and will also be amortized over the effective life of
the notes. The effective life of the Companys 0.25 percent contingent convertible
subordinated notes due 2023 is three years, which is the period up to the first date that the
holders can require us to repurchase the notes.As previously authorized by the Board of Directors, during the three months ended September
26, 2004, the Company repurchased approximately $153.0 million of its 0.25 percent convertible
subordinated notes at a discount to face value, spending approximately $137.2 million. The
resulting net pre-tax gain of $13.1 million from the repurchase of these 0.25 percent
convertible subordinated notes was recorded in the three months ended September 26, 2004.
The repurchased notes were cancelled.Throughout the remainder of fiscal 2005, the Company repurchased approximately $128.5 million
of its 0.25 percent convertible subordinated notes at a discount to face value, spending
approximately $119.3 million. The resulting net pre-tax gain of $7.7 million from the
repurchase of these 0.25 percent convertible subordinated notes was recorded in subsequent
periods throughout fiscal 2005. The repurchased notes were cancelled, leaving 0.25 percent
convertible subordinated notes outstanding at October 2, 2005 with a face value of
approximately $236.0 million that, if converted, would result in the issuance of approximately
5.5 million shares.
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8.
    
    Commitments and ContingenciesLitigationOn November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities
class action was filed in the United States District Court in the Southern District of New
York as Case No. 01 CIV. 10053(SAS), Master File No. 21 MC 92 (SAS) against Vixel and two of
its officers and directors and certain underwriters who participated in the Vixel initial
public offering in late 1999. The amended complaint alleges violations under Section 10(b) of
the Exchange Act and Section 11 of the Securities Act and seeks unspecified damages on behalf
of persons who purchased Vixel stock during the period October 1, 1999 through December 6,
2000. In October 2002, the parties agreed to toll the statute of limitations with respect to
Vixels officers and directors until September 30, 2003, and on the basis of this agreement,
Vixels officers and directors were dismissed from the lawsuit without prejudice. During June
2003, Vixel and the other issuer defendants in the action reached a tentative settlement with
the plaintiffs that would, among other things, result in the dismissal with prejudice of all
claims against the defendants and their officers and directors. In connection with the
possible settlement, those officers and directors who had entered tolling agreements with the
plaintiffs agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal in principle, it
remains subject to a number of procedural conditions, as well as formal approval by the court.
On August 31, 2005, a Preliminary Order In Connection With Settlement Proceedings was issued
which among other items, sets a date for a Settlement Fairness Hearing, and the form of notice
to the Settlement Classes of the Issuers Settlement
Stipulation. The Company believes the final resolution of this litigation
will not have a material adverse effect on the Companys
consolidated financial position, results of operations or liquidity.Ongoing lawsuits present inherent risks, any of which could have a material adverse effect on
the Companys business, financial condition or results of operations. Such potential risks
include the continuing expenses of litigation, counterclaims and attorneys fee liability.Additionally, the Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Companys consolidated financial
position, results of operations or liquidity.Other Commitments and ContingenciesThe Company has entered into purchase agreements for key inventory components, and as of
October 2, 2005, the Companys remaining purchase obligation for these key components was $2.5
million. Other inventory purchase obligations of the Company as of October 2, 2005 were
$26.5 million.9.
    
    Stock-Based CompensationIn December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, or SFAS
No. 123(R). SFAS No. 123(R) requires that the compensation cost related to share-based payment
transactions, measured based on the fair value of the equity or liability instruments issued, be
recognized in the financial statements. The adoption of SFAS No. 123(R) is required in fiscal
years beginning after June 15, 2005. Determining the fair value of options using the
Black-Scholes model requires subjective
assumptions, including future stock price volatility and expected time until exercise, which
greatly affect the calculated fair value on the grant date.For the three months ended September 26, 2004, the Company accounted 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, were 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 SFAS No. 123, Accounting for Stock
Based Compensation, the Companys net income would have been the pro forma amounts indicated
below (in thousands, except per share data):
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Three Months EndedSeptember 26,2004Net income as reported
    
    $
    14,299Add: total employee stock-based compensation expense included
in net income as reported, net of related tax effects
    
    
    931Deduct: Total employee stock-based compensation expense determined
under fair value method for all awards, net of related tax effects
    
    
    (6,900
    )Pro forma net income
    
    $
    8,330Pro forma net income per share:Basic  as reported
    
    $
    0.17Basic  pro forma
    
    $
    0.10Diluted  as reported
    
    $
    0.16Diluted  pro forma
    
    $
    0.10
 The fair value of each option granted during the three months ended September 26, 2004, was
estimated on the date of grant using the Black-Scholes option-pricing model with the following
assumptions:
 Three Months EndedSeptember 26,2004Risk-free interest rate
    
    
    2.9
    %Stock volatility
    
    
    84.0
    %Dividend yield
    
    
    0.0
    %Average expected lives (years)
    
    
    2.8Weighted-average fair value per option granted
    
    $
    5.34
 Effective July 4, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment, using the
modified prospective application transition method which provides for only the current and
future period stock-based awards to be measured and recognized at fair value. Previously, benefits of tax
deductions in excess of recognized compensation costs were reported as operating cash flows.
As a result of the adoption of SFAS No. 123(R) such tax benefits
are reported as a
financing cash inflow rather than as a reduction of taxes paid. Prior period amounts have
been retrospectively adjusted to conform to this presentation.At October 2, 2005, the Company had four stock-based payment plans for employees and
Directors, which are described below. Amounts recognized in the financial statements with
respect to these plans are as follows:
 Three Months EndedOctober 2,2005(in thousands)Total cost of stock-based payment plans during the period
    
    $
    4,987Amounts capitalized in inventory and fixed assets during the period
    
    
    (154
    )Amounts recognized in income for amounts previously capitalized in
inventory and fixed assets
    
    
    Amounts charged against income, before income tax benefit
    
    $
    4,833Amount of related income tax benefit recognized in income
    
    $
    1,001
 10




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##### Table of Contents



Employee Stock Option PlansThe Companys Employee Stock Option Plan (the Plan), which is shareholder approved, permits
the grant of stock options and nonvested shares to its domestic and international employees
for up to 33.7 million shares of common stock. Stock option awards are granted with an exercise price not less than the fair
market value of the Companys stock at the date of grant; these stock option awards generally
vest based on either three or four years of continuous service and have either a six or
10-year contractual term. Certain stock option awards provide for accelerated vesting if
there is a change in control (as defined in the Plan). As of October 2, 2005, there are 944,997 options available for future award grants. The Companys 2004 Employee Stock Incentive Plan (the 2004 Plan), which is shareholder
approved, permits the grant of stock options and restricted (nonvested) or unrestricted shares
to its employees for up to 2,000,000 shares of common stock. The purchase price for the shares
subject to any option granted under the 2004 Plan shall not be less than 100 percent of the
fair market value of the shares of common stock of the Company on the date the option is
granted. These stock option awards generally vest based on either three or four years of
continuous service and have either a six or 10-year contractual term. As of October 2, 2005, there are 534,195 options available for future award grants.Options granted under the Plan and options granted under the 2004 Plan prior to August 2005
have a 10-year contractual term and become exercisable on a cumulative basis as to 25 percent
of the total number of shares covered by the option one year from the date the option is
granted with an additional 6.25 percent after the end of each consecutive calendar quarter
thereafter, except when otherwise provided by the Board of Directors or the Compensation
Committee. Beginning with awards granted in August 2005, each option granted generally has a
six-year contractual term and becomes exercisable on a cumulative basis as to 30 percent of
the total number of shares covered by the option one year from the date the option is granted
with an additional 7.5 percent after the end of each of the next four consecutive calendar
quarters and an additional 10 percent after the end of each of the next four consecutive
quarters thereafter, except when otherwise provided by the Board of Directors or the
Compensation Committee.The Companys 1997 Stock Option Plan for Non-Employee Directors (the Director Plan), which
as amended, allows for a maximum of 1,730,000 shares of common stock to be issued. The
Director Plan currently provides that an option to purchase 60,000 shares of common stock of
the Company will be granted to each non-employee director of the Company upon the first date
that such director becomes eligible to participate. These options shall be exercisable as to
one-third of the shares on each anniversary of the grant if the director is still a director
of the Company. In addition, on each yearly anniversary of the date of the initial grant,
each eligible director shall automatically be granted an additional option to purchase 20,000
shares of common stock. These options shall be exercisable as to one-half of the shares on
the six month anniversary, one quarter on the nine month anniversary and one quarter on the
year anniversary of the grant date. Options granted under the Director Plan are non-qualified
stock options. The exercise price per option granted will not be less than the fair market
value at the date of grant. No option granted under the Director Plan shall be exercisable
after the expiration of the earlier of (i) ten years following the date the option is granted
or (ii) one year following the date the optionee ceases to be a director of the Company for
any reason. As of October 2, 2005, there are 295,000 options available for future award grants.The Companys Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of
Directors and approved by the stockholders in 2000 and became effective on January 1, 2001.
Under the Purchase Plan, employees of the Company who elect to participate have the right to
purchase common stock at a 15 percent discount from the lower of the market value of the
common stock at the beginning or the end of each six month offering period. The Purchase Plan
permits an enrolled employee to make contributions to purchase shares of common stock by
having withheld from their salary an amount up to 10 percent of their compensation (which
amount may be increased from time to time by the Company but may not exceed 15% of
compensation). No employee may purchase more than $25,000 worth of common stock (calculated
at the time the purchase right is granted) or 1,000 shares in any calendar year. The
Compensation Committee of the Board of Directors administers the Purchase Plan. The Company
has reserved a total of 1,950,000 shares of common stock for issuance
under the Purchase Plan. As of October 2, 2005, there are 1,131,844 shares available for future purchases under the Purchase Plan.The fair value of each stock option award and purchases under the Plan, the 2004 Plan, the
Director Plan and the Purchase Plan are estimated on the date of grant using the Black-Scholes
option-pricing model based on the market price of the underlying common stock as of the date
of grant, the expected term and expected risk-free interest rates. This model requires
subjective assumptions, including expected stock price volatility and expected time until
exercise, which greatly affect the calculated fair value on the grant date, as well as the
market price of the underlying common stock as of the date of grant
and expected risk-free
interest rates. Expected volatilities are based on methodologies
utilizing equal weighting involving both historical
periods equal to the expected term and implied volatilities based on
traded options to buy the Companys shares.
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##### Table of Contents



For the three months ended October 2, 2005, the assumptions utilized to complete the fair
value of stock option grants under the Plan, the 2004 Plan and the Director Plan (All Other
Plans), and the Purchase Plan were:
 All Other Plans
    
    Purchase PlanExpected volatility
    
    
    42% - 57
    %
    
    
    37
    %Weighted
average expected volatility
    
    
    50
    %
    
    
    37
    %Expected dividends
    
    
    
    
    
    
    Expected
term (in years)
    
    
    2.0 - 5.0
    
    
    
    0.5Weighted
average expected term (in years)
    
    
    3.25
    
    
    
    0.5Risk-free rate
    
    
    4.11% - 4.13
    %
    
    
    3.9
    %
 A summary of option activity under the plans for the three months ended October 2, 2005 is as
follows:
 WeightedAverage
    
    AggregateWeighted
    
    Remaining
    
    IntrinsicAverage
    
    Contractual
    
    ValueOptions
    
    Exercise Price
    
    Term (years)
    
    (in millions)Balance, July 3, 2005
    
    
    14,110,464
    
    
    $
    22.15Granted
    
    
    1,070,039
    
    
    
    20.63Exercised
    
    
    (378,028
    )
    
    
    10.20Canceled
    
    
    (420,002
    )
    
    
    39.75Forfeited
    
    
    (10,813
    )
    
    
    18.32Balance, October 2, 2005
    
    
    14,371,660
    
    
    $
    21.83
    
    
    
    6.5
    
    
    $
    53.9Exercisable October 2,
2005
    
    
    9,454,816
    
    
    $
    23.92
    
    
    
    5.7
    
    
    $
    34.9
 As of October 2, 2005, there was $24.7 million of total unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted-average period of
1.3 years. The weighted average fair value of option awards
granted during the three months ended October 2, 2005
was $8.19.The total intrinsic value of stock options exercised was $3.8 million during the three months ended October 2, 2005.As of October 2, 2005, the amount of shares authorized under the Plan, the 2004 Plan, the
Directors Plan and the Purchase Plan are sufficient to cover future stock option exercises and
the Company issues new shares to satisfy such future exercises. As of October 2, 2005, there
are no stock repurchase programs authorized by the Board of Directors.10.
    
    Earnings per ShareBasic net income per share for the three months ended October 2, 2005 and September 26, 2004
was computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net income per share was 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
dilutive effect of convertible subordinated notes is reflected in diluted net income per share
by application of the if-converted method. The following table sets forth the computation of
basic and diluted net income per share:
 12




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##### Table of Contents



Three Months EndedOctober 2,
    
    September 26,2005
    
    2004(in thousands except per share data)Numerator:Net income
    
    $
    16,436
    
    
    $
    14,299Adjustment for interest expense on convertible
subordinated notes, net of tax
    
    
    376
    
    
    
    64Numerator for diluted net income per share
    
    $
    16,812
    
    
    $
    14,363Denominator:Denominator for basic net income per share -weighted
average
shares outstanding
    
    
    83,398
    
    
    
    82,561Effect of dilutive securities:Dilutive options outstanding
    
    
    1,964
    
    
    
    912Dilutive common shares from assumed conversion of
convertible
subordinated notes
    
    
    5,463
    
    
    
    11,243Denominator for diluted net income per share 
adjusted weighted average shares outstanding
    
    


    90,825
    
    
    
    94,716Basic net income per share
    
    $
    0.20
    
    
    $
    0.17Diluted net income per share
    
    $
    0.19
    
    
    $
    0.16Antidilutive options excluded from the computations
    
    
    8,486
    
    
    
    10,079Average market price of common stock
    
    $
    19.88
    
    
    $
    11.24
 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 October 2, 2005 and September 26, 2004. In accordance
with EITF 04-08, which was effective December 15, 2004, the diluted net income per share
amounts for the three months ended September 26, 2004 have been restated to include the effect
of the Companys contingent convertible subordinated notes.
 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
   Executive Overview
  14




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##### Table of Contents



www.emulex.com
 Results of Operations
  Percentage of Net RevenuesThree months endedOctober 2,
    
    September 26,2005
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    36.5
    
    
    
    39.9Gross profit
    
    
    63.5
    
    
    
    60.1Operating expenses:Engineering and development
    
    
    21.0
    
    
    
    27.6Selling and marketing
    
    
    7.6
    
    
    
    10.2General and administrative
    
    
    5.7
    
    
    
    (0.6
    )Amortization of other intangibles
    
    
    6.1
    
    
    
    9.0Impairment of goodwill
    
    
    
    
    
    
    2.4Total operating expenses
    
    
    40.4
    
    
    
    48.6Operating income
    
    
    23.1
    
    
    
    11.5Nonoperating income:Interest income
    
    
    3.6
    
    
    
    4.1Interest expense
    
    
    (0.6
    )
    
    
    (1.8
    )Gain on repurchase of convertible subordinated notes
    
    
    
    
    
    
    17.9Total non-operating income
    
    
    3.0
    
    
    
    20.2Income before income taxes
    
    
    26.1
    
    
    
    31.7Income tax provision
    
    
    10.4
    
    
    
    12.2Net income
    
    
    15.7
    %
    
    
    19.5
    %
 15




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##### Table of Contents



Three months ended October 2, 2005, compared to three months ended September 26, 2004
 Net Revenues.
  Net Revenues by Product LineThree Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageOctober 2,
    
    of Net
    
    September 26,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2005
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    ChangeFibre Channel
    
    $
    104,349
    
    
    
    100
    %
    
    $
    73,216
    
    
    
    100
    %
    
    $
    31,133
    
    
    
    43
    %IP networking
    
    
    28
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    24
    
    
    
    600
    %Other
    
    
    2
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (3
    )
    
    
    (60
    )%Total net revenues
    
    $
    104,379
    
    
    
    100
    %
    
    $
    73,225
    
    
    
    100
    %
    
    $
    31,154
    
    
    
    43
    %
   Net Revenues by Major CustomersDirect Revenues
    
    Total Direct and Indirect Revenues (2)ThreeThree Months
    
    MonthsThree Months
    
    Ended
    
    Ended
    
    Three MonthsEnded
    
    September 26,
    
    October 2,
    
    EndedOctober 2, 2005
    
    2004
    
    2005
    
    September 26, 2004Net revenue percentage (1):EMC
    
    
    
    
    
    
    
    
    
    
    26
    %
    
    
    14
    %Hewlett-Packard
    
    
    10
    %
    
    
    17
    %
    
    
    10
    %
    
    
    19
    %IBM
    
    
    26
    %
    
    
    28
    %
    
    
    26
    %
    
    
    28
    %Info-X
    
    
    24
    %
    
    
    
    
    
    
    
    
    
    
    
 
 (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. 16




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##### Table of Contents



Net Revenues by Sales ChannelThree Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageOctober 2,
    
    of Net
    
    September 26,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2005
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    61,752
    
    
    
    59
    %
    
    $
    50,851
    
    
    
    70
    %
    
    $
    10,901
    
    
    
    21
    %Distribution
    
    
    42,618
    
    
    
    41
    %
    
    
    22,262
    
    
    
    30
    %
    
    
    20,356
    
    
    
    91
    %Other
    
    
    9
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    (103
    )
    
    
    (92
    %)Total net revenues
    
    $
    104,379
    
    
    
    100
    %
    
    $
    73,225
    
    
    
    100
    %
    
    
    31,154
    
    
    
    43
    %
  Net
Domestic and International RevenuesThree Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageOctober 2,
    
    of Net
    
    September 26,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2005
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    57,327
    
    
    
    55
    %
    
    $
    37,675
    
    
    
    52
    %
    
    $
    19,652
    
    
    
    52
    %Pacific Rim
    
    
    16,092
    
    
    
    15
    %
    
    
    11,297
    
    
    
    15
    %
    
    
    4,795
    
    
    
    42
    %Europe and rest of
the world
    
    
    30,960
    
    
    
    30
    %
    
    
    24,253
    
    
    
    33
    %
    
    
    6,707
    
    
    
    28
    %Total net revenues
    
    $
    104,379
    
    
    
    100
    %
    
    $
    73,225
    
    
    
    100
    %
    
    $
    31,154
    
    
    
    43
    %
  Gross Profit.
 17




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##### Table of Contents



Engineering and Development.
 Selling and Marketing.
 General and Administrative.
 18




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##### Table of Contents



Amortization of Intangibles.
 Impairment of Goodwill.
 Nonoperating Income.
 Income Taxes
 Critical Accounting Policies
  19




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##### Table of Contents



Revenue Recognition
 Warranty.
 Allowance for Doubtful Accounts
 Intangibles and Other Long-Lived Assets .
 Inventories .
 Income Taxes
 20




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Stock-Based Compensation
 Liquidity and Capital Resources
     .
  21




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##### Table of Contents



Payments Due by Period(in thousands)Less than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 Year (2)
    
    Years (3)
    
    Years (4)
    
    YearsConvertible subordinated
notes and interest (1)
    
    $
    236,885
    
    
    $
    590
    
    
    $
    236,295
    
    
    $
    
    
    
    $
    Leases
    
    
    9,482
    
    
    
    1,096
    
    
    
    3,417
    
    
    
    3,137
    
    
    
    1,832Inventory purchase commitments
    
    
    29,019
    
    
    
    29,019
    
    
    
    
    
    
    
    
    
    
    
    Other commitments
    
    
    825
    
    
    
    825
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    276,211
    
    
    $
    31,530
    
    
    $
    239,712
    
    
    $
    3,137
    
    
    $
    1,832
 
 (1)
    
    The principal payment related to the remaining outstanding 0.25 percent contingent convertible
subordinated notes of $236.0 million is shown as a payment in the period for the two fiscal years
ending June 2008 above as holders of these 20-year notes may require us to purchase the notes for
cash by giving us written notice as early as 20 business days prior to each of December 15, 2006,
December 15, 2008, December 15, 2013, and December 15, 2018.(2)
    
    Fiscal year ending July 2, 2006.(3)
    
    Fiscal years ending July 1, 2007, and June 29, 2008.(4)
    
    Fiscal years ending June 28, 2009, and June 27, 2010. Risk Factors
 A downturn in information technology spending in general or spending on computer and storage
systems in particular could adversely affect our revenues and results of operations.
  22




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Our business depends upon the continued growth of the Fibre Channel storage networking market, and
our business will be adversely affected if such growth does not occur or occurs more slowly than we
anticipate.
  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, or our customers failure to make timely payments to us, could adversely
affect our business.
    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.
  23




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##### Table of Contents



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.
  
    
    changes in the size, mix, timing and terms of OEM and other customer orders;
    
    changes in the sales and deployment cycles for our products and/or desired inventory
levels for our products;
    
    acquisitions or strategic investments by our customers, competitors or us;
    
    the timing and market acceptance of new or enhanced product introductions by us, our OEM
customers and/or competitors;
    
    market share losses or difficulty in gaining incremental market share growth;
    
    fluctuations in product development, procurement, resource utilization and other operating expenses;
    
    component shortages;
    
    reduced demand from our customers if there is a shortage of, or difficulties in
acquiring, components or other products, such as Fibre Channel disk drives, used in
conjunction with our products in the deployment of systems;
    
    the inability of our electronics manufacturing service providers to produce and
distribute our products in a timely fashion;
    
    difficulties with updates, changes or additions to our information technology systems;
    
    breaches of our network security, including viruses;
    
    changes in general social and economic conditions, including but not limited to natural
disasters, 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; and
    
    changes in our accounting or other policies resulting from the adoption of new laws,
regulations or pronouncements.
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##### Table of Contents



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.
  Our industry is subject to rapid technological change, and we must keep pace with the changes to
successfully compete.
  We have experienced losses in our history and may experience losses in our future that may
adversely affect our stock price and financial condition.
  The migration of our customers toward newer product platforms may have a significant adverse
effect.
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##### Table of Contents



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.
  Rapid changes in the evolution of technology, including the unexpected extent or timing of the
transition from HBA solutions or embedded switch box solutions to lower-priced ASIC solutions,
could adversely affect our business.
  If customers elect to utilize lower-end HBAs in higher-end environments or applications, our
business could be negatively affected.
  A decrease in the average unit selling prices and/or an increase in the manufactured cost of our
products could adversely affect our revenue, gross margins and financial performance.
  Delays in product development could adversely affect our business.
  
    
    difficulties in hiring and retaining necessary employees and independent contractors;
    
    difficulties in reallocating engineering resources and other resource limitations;
    
    unanticipated engineering or manufacturing complexity, including from third-party
suppliers of intellectual property such as foundries of our ASICs;
    
    undetected errors or failures in software, firmware 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.
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##### Table of Contents



Our joint development activities may result in products that are not commercially successful or
that are not available in a timely fashion.
   A change in our business relationships with our third-party suppliers or our electronics
manufacturing service providers could adversely affect our business.
  
    
    discontinued production by a supplier;
    
    required long-term purchase commitments;
    
    undetected errors, failures or production quality issues, including projected failures
that may exceed epidemic failure rates specified in agreements with our customers or that
may require us to make concessions or accommodations for continuing customer relationships;
    
    timeliness of product delivery;
    
    sole sourcing;
    
    financial stability and viability of our suppliers and EMS providers;
    
    changes in business strategies of our suppliers and EMS providers;
    
    increases in manufacturing costs due to lower volumes or more complex manufacturing
process than anticipated;
    
    disruption in shipping channels;
    
    natural disasters;
    
    inability or unwillingness of our suppliers or EMS providers to continue their business with us;
    
    environmental, tax or legislative changes in the location where our products are
produced or delivered, including implementation of European Union Directives 2002/95/EC
(RoHS) and 2002/96/EC (WEEE) ;
    
    difficulties associated with foreign operations; and
    
    market shortages.
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If our intellectual property protections are inadequate, it could adversely affect our business.
     Third-party claims of intellectual property infringement could adversely affect our business.
  The inability or increased cost of attracting, motivating or retaining key managerial and technical
personnel could adversely affect our business.
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Our international business activities subject us to risks that could adversely affect our business.
  
    
    the imposition of or changes in governmental controls, taxes, tariffs, trade
restrictions 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;
    
    import and export restrictions;
    
    loss of tax benefits, or increases in tax expenses, due to international production;
    
    general economic and social conditions within foreign countries;
    
    taxation in multiple jurisdictions; and
    
    political instability, war or terrorism.
  Potential acquisitions or strategic investments may be more costly or less profitable than
anticipated and may adversely affect the price of our company stock.
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
    
    difficulties in the assimilation of the operations, technologies, products and personnel
of the acquired company;
    
    purchased technology that is not adopted by customers in the way or the time frame we anticipated;
    
    the diversion of managements attention from other business concerns;
    
    risks of entering markets in which we have limited or no prior experience;
    
    risks associated with assuming the legal obligations of the acquired company;
    
    minority interest in a company, resulting from a strategic investment, that could have
an impact on our results;
    
    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;
    
    the potential loss of key employees of the company we invested in or acquired; and
    
    there may exist unknown defects of an acquired companys products or assets that may not
be identified due to the inherent limitations involved in the due diligence process of an
acquisition.
  Our stock price is volatile, which has and may result in lawsuits against us and our officers and
directors.
  
    
    quarterly variations in customer demand and 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;
    
    general conditions in the computer, storage or communications markets; and
    
    events affecting other companies that investors deem to be comparable to us.
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Terrorist activities and resulting military and other actions could adversely affect our business.
  Our corporate offices and principal product development facilities are located in a region that is
subject to earthquakes and other natural disasters.
  Our shareholder rights plan, certificate of incorporation and Delaware law could adversely affect
the performance of our stock.
  Our system of internal controls may be inadequate.
  Changes in laws, regulations and financial accounting standards may affect our reported results of
operations.
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The final determination of our income tax liability may be materially different from our income tax
provisions and accruals.
  We may need additional capital in the future and such additional financing may not be available on
favorable terms.
  
    
    take advantage of unanticipated opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies;
    
    develop new products or services;
    
    repay outstanding indebtedness; and/or
    
    respond to unanticipated competitive pressures.
   Conversion of our outstanding notes would dilute the ownership interest of existing stockholders.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Sensitivity
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Foreign Currency
  
 Item 4.
Controls and Procedures
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PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
 Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Companys 1997 Annual Report on Form 10-K).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
    
    Amended and restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K filed on August 30, 2005).Exhibit 3.4
    
    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).
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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 0.25% Convertible Subordinated Note due December 15, 2023 (incorporated
by reference to Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended December 28, 2003).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated December 12, 2003, related to the
Companys 0.25% Convertible Subordinated Notes due 2023 (incorporated by reference to
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.8 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003).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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SIGNATURES
   EMULEX CORPORATIONBy:
    /s/  Paul F. FolinoPaul F. FolinoChairman of the Board and Chief Executive Officer By:
    /s/  Michael J. RockenbachMichael J. RockenbachExecutive Vice President and
Chief Financial 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 1997 Annual Report on Form 10-K).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
    
    Amended and restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K filed on August 30, 2005).Exhibit 3.4
    
    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 0.25% Convertible Subordinated Note due December 15, 2023 (incorporated
by reference to Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended December 28, 2003).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated December 12, 2003, related to the
Companys 0.25% Convertible Subordinated Notes due 2023 (incorporated by reference to
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.8 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003).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.