##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q   (Mark One)[X]

    Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934
 For the quarterly period ended September 26, 2004
 OR [  ]

    Transition Report Pursuant to Section 13 or 15(d) of theSecurities 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.)3333 Susan Street
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 1, 2004, the registrant had 82,730,324 shares of common stock
outstanding.




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EMULEX CORPORATION AND SUBSIDIARIES INDEX PAGEPart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
September 26, 2004, and June 27, 2004
    
    
    2Condensed Consolidated Statements of Income
Three months ended September 26, 2004, and September 28, 2003
    
    
    3Condensed Consolidated Statements of Cash Flows
Three months ended September 26, 2004, and September 28, 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    38EXHIBIT 31.AEXHIBIT 31.BEXHIBIT 32
  1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements EMULEX CORPORATION AND SUBSIDIARIES 
  
 September 26,
    
    June 27,2004.
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    110,018
    
    
    $
    192,137Restricted cash
    
    
    
    
    
    
    23Investments
    
    
    249,857
    
    
    
    220,114Accounts and other receivables, net
    
    
    47,816
    
    
    
    61,720Litigation settlements receivable
    
    
    
    
    
    
    5,101Inventories, net
    
    
    25,021
    
    
    
    31,835Prepaid expenses
    
    
    4,036
    
    
    
    3,572Deferred income taxes
    
    
    26,066
    
    
    
    26,824Total current assets
    
    
    462,814
    
    
    
    541,326Property and equipment, net
    
    
    64,481
    
    
    
    64,570Investments
    
    
    197,424
    
    
    
    243,125Other intangibles, net
    
    
    116,120
    
    
    
    122,667Other assets
    
    
    1,067
    
    
    
    1,293$
    841,906
    
    
    $
    972,981Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    15,939
    
    
    $
    21,747Accrued liabilities
    
    
    20,658
    
    
    
    22,839Income taxes payable
    
    
    9,822
    
    
    
    9,910Total current liabilities
    
    
    46,419
    
    
    
    54,496Convertible subordinated notes
    
    
    375,372
    
    
    
    524,845Deferred income taxes and other
    
    
    9,706
    
    
    
    486Total liabilities
    
    
    431,497
    
    
    
    579,827Commitments 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;
82,595,052 and 82,413,845 issued and outstanding at
September 26, 2004, and June 27, 2004, respectively
    
    
    8,260
    
    
    
    8,241Additional paid-in capital
    
    
    937,434
    
    
    
    936,123Deferred compensation
    
    
    (6,128
    )
    
    
    (7,754
    )Accumulated deficit
    
    
    (529,157
    )
    
    
    (543,456
    )Total stockholders equity
    
    
    410,409
    
    
    
    393,154$
    841,906
    
    
    $
    972,981
 See accompanying notes to the condensed consolidated financial statements. 2




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EMULEX CORPORATION AND SUBSIDIARIES 
  
 Three Months EndedSeptember 26,
    
    September 28,2004
    
    2003Net revenues
    
    $
    73,225
    
    
    $
    84,577Cost of sales
    
    
    29,246
    
    
    
    28,327Gross profit
    
    
    43,979
    
    
    
    56,250Operating expenses:Engineering and development
    
    
    20,197
    
    
    
    16,344Selling and marketing
    
    
    7,424
    
    
    
    4,602General and administrative
    
    
    (421
    )
    
    
    3,657Amortization of other intangibles
    
    
    6,547
    
    
    
    1,450Impairment of goodwill
    
    
    1,793
    
    
    
    Total operating expenses
    
    
    35,540
    
    
    
    26,053Operating income
    
    
    8,439
    
    
    
    30,197Nonoperating income:Interest income
    
    
    3,034
    
    
    
    2,498Interest expense
    
    
    (1,347
    )
    
    
    (1,033
    )Gain on repurchase of convertible subordinated notes
    
    
    13,090
    
    
    
    4,665Other income (expense), net
    
    
    (10
    )
    
    
    106Total nonoperating income
    
    
    14,767
    
    
    
    6,236Income before income taxes
    
    
    23,206
    
    
    
    36,433Income tax provision
    
    
    8,907
    
    
    
    13,845Net income
    
    $
    14,299
    
    
    $
    22,588Net income per share:Basic
    
    $
    0.17
    
    
    $
    0.27Diluted
    
    $
    0.17
    
    
    $
    0.27Number of shares used in per share computations:Basic
    
    
    82,561
    
    
    
    82,541Diluted
    
    
    83,788
    
    
    
    87,472
 See accompanying notes to the condensed consolidated financial statements. 3




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EMULEX CORPORATION AND SUBSIDIARIES 
  
 Three Months EndedSeptember 26,
    
    September 28,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    14,299
    
    
    $
    22,588Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization of property and equipment
    
    
    3,297
    
    
    
    2,874Amortization of discount on 0.25% convertible subordinated
notes
    
    
    895
    
    
    
    Gain on repurchase of convertible subordinated notes
    
    
    (13,090
    )
    
    
    (4,665
    )Insurance recovery on shareholder litigation settlements
    
    
    (4,399
    )
    
    
    Stock-based compensation
    
    
    1,285
    
    
    
    597Amortization of other intangibles
    
    

    6,547
    
    
    
    1,450Impairment of goodwill
    
    
    1,793
    
    
    
    Loss (gain) on disposal of property and equipment
    
    
    4
    
    
    
    (1
    )Deferred income taxes
    
    
    8,187
    
    
    
    7,172Tax benefit from exercise of stock options
    
    
    145
    
    
    
    751Provision for doubtful accounts
    
    
    
    
    
    
    34Changes in assets and liabilities:Accounts and other receivables
    
    
    23,404
    
    
    
    (6,103
    )Inventories
    
    
    6,814
    
    
    
    (1,481
    )Prepaid expenses and other assets
    
    
    (390
    )
    
    
    755Accounts payable and accrued liabilities
    
    
    (7,911
    )
    
    
    6,623Restricted cash related to litigation settlements
    
    
    
    
    
    
    (39,500
    )Income taxes payable
    
    
    (88
    )
    
    
    5,911Net cash provided by (used in) operating activities
    
    
    40,792
    
    
    
    (2,995
    )Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    
    
    
    
    
    6Additions to property and equipment
    
    
    (3,212
    )
    
    
    (10,545
    )Decrease in restricted cash related to the construction escrow account
    
    
    23
    
    
    
    5,686Purchases of investments
    
    
    (102,363
    )
    
    
    (114,918
    )Maturities of investments
    
    
    118,321
    
    
    
    144,043Net cash provided by investing activities
    
    
    12,769
    
    
    
    24,272Cash flows from financing activities:Proceeds from issuance of common stock under stock option plans
    
    
    1,526
    
    
    
    1,245Repurchase of convertible subordinated notes
    
    
    (137,206
    )
    
    
    (87,312
    )Net cash used in financing activities
    
    
    (135,680
    )
    
    
    (86,067
    )Net decrease in cash and cash equivalents
    
    
    (82,119
    )
    
    
    (64,790
    )Cash and cash equivalents at beginning of period
    
    
    192,137
    
    
    
    136,971Cash and cash equivalents at end of period
    
    $
    110,018
    
    
    $
    72,181Supplemental disclosures:Noncash investing and financing activities:Cash paid during the period for:Interest
    
    $
    151
    
    
    $
    1,826Income taxes
    
    
    664
    
    
    
    11
 See accompanying notes to the condensed consolidated financial statements. 4




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EMULEX CORPORATION AND SUBSIDIARIES 
   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
September 26, 2004, and June 27, 2004, and its condensed consolidated
statements of income for the three months ended September 26, 2004, and
September 28, 2003, and its condensed consolidated statements of cash flows
for the three months then ended. Interim results for the three months ended
September 26, 2004, are not necessarily indicative of the results that may
be expected for the year ending July 3, 2005. 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 27, 2004.New Accounting StandardsThe Emerging Issues Task Force (EITF) recently reached consensus on EITF
04-08, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share, which was ratified by the Financial Accounting Standards Board, or
FASB, on October 13, 2004. EITF 04-08 will require the inclusion of shares
related to contingently convertible debt instruments for computing diluted
earnings per share using the if-converted method, even when the market price
contingency has not been met. The effect of EITF 04-08 would increase the
weighted average shares outstanding by approximately 8.4 million (related to
the Companys currently outstanding 0.25 percent contingent convertible
subordinated notes issued in December 2003) in calculating the Companys
diluted earnings per share calculation, if dilutive. EITF 04-08 would
require prior periods earnings per share amounts presented for comparative
purposes to be recalculated to conform to this method. This consensus is
expected to be effective for fiscal periods beginning after December 15,
2004, upon the effective date of a proposed FASB standard on earnings per
share.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. The effective date of this
consensus has been delayed pending further FASB action. EITF 03-01 is not
expected to have a significant impact on the carrying value of the Companys
investments.Stock-Based CompensationThe 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 of Financial Accounting Standards 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): Three Months EndedSeptember 26,
    
    September 28,2004
    
    2003Net income as reported
    
    $
    14,299
    
    
    $
    22,588Add: total employee stock-based compensation expense included
in net income as reported, net of related tax effects
    
    
    931
    
    
    
    596Deduct: Total employee stock-based compensation expense
determined under fair value method for all awards, net of
related tax effects
    
    
    (6,900
    )
    
    
    (7,976
    )Pro forma net income
    
    $
    8,330
    
    
    $
    15,208Pro forma net income per share:Basic  as reported
    
    $
    0.17
    
    
    $
    0.27Basic  pro forma
    
    $
    0.10
    
    
    $
    0.18Diluted  as reported
    
    $
    0.17
    
    
    $
    0.27Diluted  pro forma
    
    $
    0.10
    
    
    $
    0.18
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  The fair value of each option granted during the three months ended
September 26, 2004, and September 28, 2003, was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: Three Months EndedSeptember 26,
    
    September 28,2004
    
    2003Risk-free interest rate
    
    
    2.9
    %
    
    
    2.3
    %Stock volatility
    
    
    84.0
    %
    
    
    117.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Average expected lives (years)
    
    
    2.8
    
    
    
    2.6Weighted-average fair value per option granted
    
    $
    5.34
    
    
    $
    15.64
  The Black-Scholes model, and other currently accepted option valuation
models, were developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Companys stock option plans. These models also require
highly subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated fair value
on the grant date.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. Operations of Vixel, since the
acquisition, have been included within the Companys one operating segment,
networking products.As a result of the acquisition, the Company reduced the headcount obtained
from Vixel by a total of 24 employees, 23 of whom left during fiscal 2004.
The remaining employee left during the three months ended September 26,
2004.The total purchase and allocation among the fair values of tangible and
intangible assets and liabilities (including purchased IPR&D) are summarized
as follows (in thousands): Tangible assets
    
    $
    31,289Liabilities
    
    
    12,736Net tangible assets
    
    
    18,553Identifiable intangible assets :In-process research and development
    
    
    11,400Core technology
    
    
    43,300Developed technology
    
    
    9,400Patents
    
    
    13,100Backlog
    
    
    500Customer relationships
    
    
    38,200Tradename
    
    
    5,000Covenants not-to-compete
    
    
    3,100Deferred taxes
    
    
    8,193Goodwill
    
    
    188,036Deferred compensation
    
    
    13,926$
    352,708
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  Intangible assets with identifiable lives are being amortized on a
straight-line basis since the acquisition date for their remaining estimated
lives as follows: Core technology
    
    7 yearsDeveloped technology
    
    4 yearsPatents
    
    
    2 to 7 yearsBacklog
    
    3 monthsCustomer relationships
    
    5 yearsTradename
    
    7 yearsCovenants not-to-compete
    
    3 yearsWeighted-average amortization period
    
    6 years
  The acquisition has been included in the condensed consolidated balance
sheets of the Company and the operating results of Vixel have been included
in the condensed consolidated statements of operations of the Company since
the date that the Company gained effective control of Vixel, November 13,
2003.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. Had these items
been recorded in fiscal 2004, the Companys net loss would have been $1.8
million higher, or $534.1 million, instead of $532.3 million. The Company
does not believe that this $1.8 million impairment of goodwill is material
to fiscal 2004 or will be 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: September 26,
    
    June 27,2004
    
    2004(in thousands)Raw materials
    
    $
    15,277
    
    
    $
    19,181Finished goods
    
    
    9,744
    
    
    
    12,654$
    25,021
    
    
    $
    31,835
  4.
    
    Other IntangiblesOther intangibles, net, are as follows: September 26,
    
    June 27,2004
    
    2004(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    99,094
    
    
    $
    99,094Accumulated amortization, core technology and patents
    
    
    (28,387
    )
    
    
    (24,774
    )Developed technology
    
    
    9,400
    
    
    
    9,400Accumulated amortization, developed technology
    
    
    (2,059
    )
    
    
    (1,472
    )Customer relationships
    
    
    38,200
    
    
    
    38,200Accumulated amortization, customer relationships
    
    
    (6,696
    )
    
    
    (4,786
    )Tradename
    
    
    5,000
    
    
    
    5,000Accumulated amortization, tradename
    
    
    (626
    )
    
    
    (448
    )Covenants not-to-compete
    
    
    3,100
    
    
    
    3,100Accumulated amortization, covenants not-to-compete
    
    
    (906
    )
    
    
    (647
    )Intangible assets subject to amortization
    
    $
    116,120
    
    
    $
    122,667
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  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
September 26, 2004, was $6.5 million. For the following five full fiscal
years aggregated amortization expense is expected to be (in thousands): 2005
    
    
    
    
    
    $
    26,1902006
    
    
    
    
    
    $
    26,1272007
    
    
    
    
    
    $
    25,4422008
    
    
    
    
    
    $
    21,3022009
    
    
    
    
    
    $
    11,597
  5.
    
    Other AssetsComponents of other assets are as follows: September 26,
    
    June 27,2004
    
    2004(in thousands)Deferred debt issuance costs-convertible subordinated notes, net
    
    $
    602
    
    
    $
    833Long-term prepaid assets
    
    
    363
    
    
    
    236Refundable deposits
    
    
    102
    
    
    
    224$
    1,067
    
    
    $
    1,293
  6.
    
    Accrued LiabilitiesComponents of accrued liabilities are as follows: September 26,
    
    June 27,2004
    
    2004(in thousands)Payroll and related costs
    
    $
    7,388
    
    
    $
    8,936Accrued interest
    
    
    305
    
    
    
    162Warranty reserves
    
    
    3,949
    
    
    
    4,046Deferred revenue
    
    
    1,384
    
    
    
    1,561Accrued advertising and promotions
    
    
    1,216
    
    
    
    1,139Other
    
    
    6,416
    
    
    
    6,995$
    20,658
    
    
    $
    22,839
  Deferred revenue includes an accrual for estimated returns and allowances of
$1.4 million and $1.6 million at September 26, 2004 and June 27, 2004,
respectively.The Company provides a warranty of between one and three years on its
Input/Output Fibre Channel and Internet Protocol products and provides a
warranty of between one and five years on its Fibre Channel switching and
traditional networking products. The Company records a provision for
estimated warranty-related costs 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 26,
2004, and September 28, 2003, were: September 26,
    
    September 28,2004
    
    2003(in thousands)Balance at beginning of period
    
    $
    4,046
    
    
    $
    2,349Additions to costs and expenses
    
    
    486
    
    
    
    648Amounts charged against reserve
    
    
    (583
    )
    
    
    (427
    )Balance at end of period
    
    $
    3,949
    
    
    $
    2,570
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  7.
    
    Convertible Subordinated NotesIn fiscal 2002, the Company completed a $345.0 million private placement of
1.75 percent convertible subordinated notes due February 1, 2007. Interest
is payable in cash on February 1 and August 1 of each year beginning August
1, 2002. These notes may be converted by the holder at any time into
shares of the Companys common stock at the conversion price of $53.84 per
share, subject to the potential adjustments described in the terms of the
notes issued. The Company may redeem the notes on or after February 5,
2005, in whole or in part. The Company incurred associated issuance costs
of approximately $11.0 million.During the three months ended September 28, 2003, as part of a repurchase
program authorized by the Companys Board of Directors, the Company bought
back approximately $93.9 million in face value of its 1.75 percent
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. Beginning in the quarter ended September 29, 2002, to date, the
Company has bought back approximately $328.0 million face value of its 1.75
percent convertible subordinated notes for approximately $289.8 million,
resulting in a net pre-tax gain of approximately $31.4 million recorded in
prior periods. The repurchased notes were cancelled, leaving 1.75 percent
convertible subordinated notes outstanding with a face value of
approximately $17.0 million that, if converted, would result in the
issuance of approximately 0.3 million shares. At September 26, 2004, the
entire $17.0 million face amount of the outstanding 1.75 percent
convertible subordinated notes remained authorized for repurchase.In fiscal 2004, the Company completed a $517.5 million private placement of
0.25 percent contingent 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 Emulex 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% 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% 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% of the average conversion
value of the notes during that period. The notes will mature in twenty years and will not be callable for the
first five years. Holders of the notes may require the Company to purchase
the notes for cash by giving written notice within the 20 business days
prior to each of December 15, 2006, December 15, 2008, December 15, 2013 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. During the three months ended
September 26, 2004, the Companys Board of Directors expanded the Companys repurchase program to include up to $200
million aggregate par value of the Companys issued and outstanding 0.25
percent contingent convertible subordinated notes at a discount to par
value. On August 9




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  25, 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,
leaving 0.25 percent convertible subordinated notes outstanding with a face
value of approximately $364.5 million that, if converted, would result in
the issuance of approximately 8.4 million shares. At September 26, 2004,
approximately $47 million aggregate par value of the Companys 0.25 percent
contingent convertible notes remained authorized for repurchase.8.
    
    Commitments and ContingenciesLitigationOn May 23, 2003, Vixel filed a patent infringement action against Brocade
Communications Systems, Inc. in the United States District Court for the
Northern District of California, Civil Action No. C-030-02446. The
complaint states that Brocade is infringing U.S. Patent No. 6,185,203,
entitled Fibre Channel Switching Fabric, U.S. Patent No. 6,118,776,
entitled Methods and Apparatus for Fibre Channel Interconnection of
Private Loop Devices, and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private
Loop Devices, through the unauthorized manufacture, use, sale and offering
for sale of various storage area network switching products, including but
not limited to, Brocades Silkworm switch products. Brocade denied
infringement and challenged the validity of the patents referenced.
Brocade also challenged the enforceability of those patents. In the suit
against Brocade, Vixel was seeking unspecified past damages, potential
future royalties, or, alternatively, injunctive relief.On September 24, 2004, Emulex Corporation and Brocade Communications
Systems, Inc. entered into a settlement including a litigation standstill
agreement whereby Emulex and Brocade agreed to dismiss without prejudice
their claims and counterclaims against each other in the pending patent
infringement case in the United States District Court for the Northern
District of California entitled Vixel Corporation. v. Brocade
Communications Systems, Inc., Civil Action No. C-030-02446. The settlement
included the formation of a strategic relationship under which the parties
are to work together to pursue mutual objectives. Under the litigation
standstill agreement both parties preserved their respective rights, no
restrictions of any kind were imposed on either partys ability to sell
products, no licenses were granted by either party, no money was exchanged,
and they agreed to a three year standstill during which neither party may
initiate litigation against the other party with respect to certain of
their respective patents.On November 15, 2001, prior to the Companys acquisition of Vixel
Corporation, a securities class action was filed in the United States
District Court in the Southern District of New York 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 October 9, 2003, before the Companys acquisition of Vixel, a purported
class action lawsuit was filed in King County Superior Court of the State
of Washington against Vixel and each of Vixels directors and certain
unnamed individuals (the Vixel Parties), entitled Russell Fink v. Vixel
Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made general
allegations that, among other things, Vixels directors breached their
fiduciary duties to Vixel stockholders in connection with the approval of
the merger with Emulex and 10




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  sought to enjoin the tender offer and have the
merger agreement declared unlawful, among other forms of
relief. On November 7, 2003, the Vixel Parties entered into a memorandum of
understanding for a $0.7 million settlement with the plaintiff in the class
action suit pursuant to which the parties have agreed to settle the action,
subject to court approval. The $0.7 million was recorded as general and
administrative expense during the three months ended December 28, 2003.
Formal settlement documents were signed on May 5, 2004 and the plaintiff
has completed discovery as agreed to by the parties. In August 2004, final
court approval was obtained for the settlement of the Fink v. Vixel
litigation, and the Company paid the $0.7 million settlement. Subsequent
to the three months ended September 26, 2004, the Company received a $0.3
million reimbursement from its insurer relating to the Fink v. Vixel
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, Case No. SACV-01-219 GLT (ANx). The plaintiffs in
the actions represent purchasers of the Companys common stock during
various periods ranging from January 18, 2001, through February 9, 2001.
The complaints alleged that the Company and certain of its officers and
directors made misrepresentations and omissions in violation of sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The
complaints generally seek compensatory damages, costs and attorneys fees
in an unspecified amount. In addition, the Company has received inquiries
about events giving rise to the lawsuits from the SEC and the Nasdaq Stock
Market. On April 22, 2003, the Company entered into two Memoranda of
Understanding agreeing to terms of settlement for both the class action and
derivative litigation. The settlement was approved and $39.5 million held
in escrow was paid to the plaintiffs. Gateway Partners filed a challenge
to the allocation of settlement funds among the plaintiffs and adequacy of
the settlement notice, and a hearing on such challenge was scheduled for
November 22, 2004. During the three months ended March 28, 2004, the
Company reached an agreement with one of its insurers, under which the
Company received $10.0 million less $2.0 million previously paid by the
insurer for the defense of the securities class action lawsuits, resulting
in a net payment to the Company of $8.0 million. In July 2004, the Company
obtained an arbitration award against two of its insurers, and subsequently
collected a total of $9.5 million plus $0.3 million in interest. As
amounts received exceeded the $5.1 million receivable reflected on the
Companys books, the Company recorded a reduction in general and
administrative expenses during the three months ended September 26, 2004,
of $4.4 million, as well as interest income of $0.3 million.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 September 26, 2004, the Companys remaining purchase
obligation for these key components was $4.6 million. The Companys total
remaining inventory purchase obligation as of September 26, 2004, was $18.1
million.9.
    
    Earnings per ShareBasic 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 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: 11




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements Three Months EndedSeptember 26,
    
    September 28,2004
    
    2003(in thousands, except per share data)Numerator:Net income
    
    $
    14,299
    
    
    $
    22,588Adjustment for interest expense on convertible
subordinated notes, net of tax
    
    
    64
    
    
    
    640Numerator for diluted net income per
Share
    
    $
    14,363
    
    
    $
    23,228Denominator:Denominator
for basic net income per share 
weighted average shares outstanding
    
    
    82,561
    
    
    
    82,541Effect of dilutive securities:Dilutive options outstanding
    
    
    912
    
    
    
    1,700Dilutive common shares from assumed
conversion of 1.75% convertible
subordinated notes
    
    
    315
    
    
    
    3,231Denominator for diluted net income per
share  adjusted weighted average shares
outstanding
    
    
    83,788
    
    
    
    87,472Basic net income per share
    
    $
    0.17
    
    
    $
    0.27Diluted net income per share
    
    $
    0.17
    
    
    $
    0.27Antidilutive options excluded from computations
    
    
    10,079
    
    
    
    7,077Average market price of common stock
    
    $
    11.24
    
    
    $
    23.68
 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 26, 2004 and September 28, 2003. The effect of the Companys 1.75
percent convertible subordinated notes is included in the calculations
above. The effect of the Companys 0.25 percent contingent convertible
subordinated notes issued in December 2003 was excluded as these are
contingent convertible subordinated notes and did not meet the criteria for
conversion into common stock during the three months ended September 26,
2004. However, EITF 04-08 would require the inclusion of shares related to
contingently convertible debt instruments for computing diluted earnings per
share using the if-converted method, even when the market price contingency
has not been met. See note 1 for more information on EITF 04-08. 12




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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. These factors include risks related to the fact that
the economy generally, and the technology and storage segments specifically,
have 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. Our results have been
significantly impacted by a widespread slowdown in information technology
investment that has also pressured the storage networking market that is the
mainstay of our business. A continued downturn in information technology
spending could adversely affect our revenues and results of operations. As a
result of this uncertainty, we are unable to predict with any accuracy what
future results might be. Other factors affecting these forward-looking
statements include, but are not limited to, the following: slower than expected
growth of the storage networking market or the failure of our Original
Equipment Manufacturer, or OEM, customers to successfully incorporate our
products into their systems; our dependence on a limited number of customers
and the effects of the loss of, or decrease or delays in orders by, any such
customers, or the failure of such customers to make payments; the emergence of
new or stronger competitors as a result of consolidation movements in the
market; the timing and market acceptance of our or our OEM customers new or
enhanced products; the variability in the level of our backlog and the variable
booking patterns of our customers; the effects of terrorist activities, natural
disasters 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, lower cost product
platforms; possible transitions from board or box level to application specific
integrated circuit, or ASIC, solutions for selected applications; a shift in
unit product mix from high-end to lower-end 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;
inadequacy of our system of internal controls; our ability to attract, retain
and motivate key technical personnel; our dependence on foreign sales and
foreign-produced products; the effect of acquisitions; impairment charges; and
changes in tax rates or changes in accounting standards, including changes in
the accounting treatment of employee stock options and contingent convertible
debt. 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. Executive Overview Emulex Corporation is the world leader in Fibre Channel host bus adapters, or
HBAs, and delivers a broad range of intelligent building blocks, including
embedded storage switches and Input/Output, or I/0, controllers for next
generation storage networking systems. HBAs are the data communication
products that enable servers to connect to storage networks by offloading
communication-processing tasks as information is delivered and sent to the
storage network. Embedded storage switches and I/0 controllers are deployed
inside storage arrays, tape libraries and other storage appliances, delivering
improved performance and reliability and storage connectivity. The demand for
our 13




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##### Table of Contents



Fibre Channel products has been driven by the demand for high-performance
storage networking products and solutions that support enterprise-computing
applications. We rely almost exclusively on OEMs and sales through
distribution channels for our revenue. Our products have been selected by the
worlds leading server and storage providers, including Dell, EMC, Fujitsu
Ltd., Fujitsu Siemens, Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC,
Network Appliance, Quantum Corp., StorageTek, Sun Microsystems, Unisys and
Xyratex. Our distribution partners include ACAL, Avnet, Bell Microproducts,
Info-X, Netmarks, Tech Data, Tidalwire and Tokyo Electron. In addition, we
include industry leaders Brocade, Computer Associates, Intel, McDATA, Microsoft
and VERITAS among our strategic partners. The market for storage networking
products is concentrated among large OEMs and, as such, a significant portion
of our revenues is generated from sales to a limited number of customers. Despite the downturn in information technology spending in general and the
computer and storage systems in particular, we believe that our investment in
the storage networking market represents our greatest opportunity for revenue
growth and profitability for the foreseeable future. Although we did reduce
our headcount by 27 in August in an effort to realign our resources, we
continue to, and currently plan to invest in capital equipment and increase
research and development spending to deliver leading-edge products to our
customers, including four gigabit per second connectivity solutions, increased
Linux offerings, and products focused on the small to medium business markets.
We focus on on-time development of leading-edge next-generation products and
on-time deliveries of current products to our customers and high-quality,
cost-effective manufacturing to ensure that we continue having the gross margin
and operating margins necessary to sustain profitability and cash flow from
operations to fund our future business needs. As of September 26, 2004, we had
a total of 487 employees. Our corporate headquarters are located at 3333 Susan Street, Costa Mesa,
California 92626. Our periodic and current reports filed with or furnished to
the Securities and Exchange Commission pursuant to the requirements of the
Securities and Exchange Act of 1934 are available free of charge through our
website (www.emulex.com) as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the Securities and Exchange
Commission. References contained herein to Emulex, the Company, the
Registrant, we, our, and us refer to Emulex Corporation and its
subsidiaries. Business Combination On November 13, 2003, we completed the cash tender offer by Aviary Acquisition
Corporation, our wholly owned subsidiary, to acquire all outstanding shares of
Vixel Corporation for $10.00 net per share, without interest. On November 17,
2003, we completed our acquisition of Vixel. We acquired Vixel, a
leading supplier of embedded switch ASICs and subsystems for
the storage networking market, to expand our
Fibre Channel product line and paid $298.4 million in cash for all outstanding
common stock, preferred stock and warrants of Vixel Corporation. We also
incurred acquisition-related expenses of $6.7 million in cash. In addition, we
issued 2.2 million stock options with a fair value of approximately $47.5
million and kept the original vesting periods for the options in exchange for
the outstanding Vixel options for a total acquisition value of $352.7 million.
We calculated the fair value of the 2.2 million stock options issued at the
date of acquisition using the Black-Scholes option-pricing model. The
operations of Vixel, since its acquisition, are included within the Companys
one operating segment, networking products. Additional information is
contained below under Impairment of Goodwill. 14




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##### Table of Contents



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 RevenuesThree months endedSeptember 26,
    
    September 28,2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    39.9
    
    
    
    33.5Gross profit
    
    
    60.1
    
    
    
    66.5Operating expenses:Engineering and development
    
    
    27.6
    
    
    
    19.3Selling and marketing
    
    
    10.2
    
    
    
    5.5General and administrative
    
    
    (0.6
    )
    
    
    4.3Amortization of other intangibles
    
    
    9.0
    
    
    
    1.7Impairment of goodwill
    
    
    2.4
    
    
    
    Total operating expenses
    
    
    48.6
    
    
    
    30.8Operating income
    
    
    11.5
    
    
    
    35.7Nonoperating income:Interest income
    
    
    4.1
    
    
    
    3.0Interest expense
    
    
    (1.8
    )
    
    
    (1.2
    )Gain on repurchase of convertible subordinated notes
    
    
    17.9
    
    
    
    5.5Other income (expense), net
    
    
    
    
    
    
    0.1Total non-operating income
    
    
    20.2
    
    
    
    7.4Income before income taxes
    
    
    31.7
    
    
    
    43.1Income tax provision
    
    
    12.2
    
    
    
    16.4Net income
    
    
    19.5
    %
    
    
    26.7
    %
 Three months ended September 26, 2004, compared to three months ended September
28, 2003 Net Revenues.Net revenues for the first quarter of fiscal 2005 ended
September 26, 2004, decreased by $11.4 million, or 13 percent, to $73.2
million, compared to $84.6 million for the same quarter of fiscal 2004 ended
September 28, 2003. The following chart details our net revenues by product line for the three
months ended September 26, 2004 and September 28, 2003: Net Revenues by Product Line Three Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageSeptember 26,
    
    of Net
    
    September 28,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeFibre Channel
    
    $
    73,216
    
    
    
    100
    %
    
    $
    84,100
    
    
    
    99
    %
    
    $
    (10,884
    )
    
    
    (13
    )%IP networking
    
    
    4
    
    
    
    
    
    
    
    472
    
    
    
    1
    %
    
    
    (468
    )
    
    
    (99
    )%Other
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Total net revenues
    
    $
    73,225
    
    
    
    100
    %
    
    $
    84,577
    
    
    
    100
    %
    
    $
    (11,352
    )
    
    
    (13
    )%
 From a product line perspective, net revenues generated from our Fibre Channel
products for the three months ended September 26, 2004, were $73.2 million, a
decrease of $10.9 million, or 13 percent, compared to Fibre Channel product
revenues of $84.1 million for the three months ended September 28, 2003, and
represented substantially all of our net revenues. We believe that our net
revenues from our broad range of Fibre Channel Input/Output, or I/O, and
switching products are being generated primarily as a result of our product
certifications and qualifications with OEM customers, which generate both
direct OEM sales and indirect sales through distribution. Our IP networking 15




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##### Table of Contents



products consist of both our iSCSI products, which have not completed
development, as well as legacy VI and cLAN products. We expect that our VI,
cLAN and traditional networking products, which have all entered end-of-life
status, will contribute negligible revenues to succeeding quarters. We do not
expect material revenue from iSCSI products for the foreseeable future. In addition to direct sales, some of our larger OEM customers purchased or
marketed products indirectly through distributors, resellers or other third
parties. Customers whose direct net revenues, or total direct and indirect net
revenues (including customer-specific models purchased or marketed indirectly
through distributors, resellers and other third parties), exceeded 10 percent
of our net revenues were as follows: Net Revenues by Major Customers Direct Revenues
    
    Total Direct and Indirect Revenues (2)Three Months
    
    Three Months
    
    Three Months
    
    Three MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 26,
    
    September 28,
    
    September 26,
    
    September 28,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net revenue percentage (1) :IBM
    
    
    28
    %
    
    
    21
    %
    
    
    28
    %
    
    
    21
    %Hewlett-Packard
    
    
    17
    %
    
    
    19
    %
    
    
    19
    %
    
    
    21
    %Tidalwire
    
    
    
    
    
    
    16
    %
    
    
    
    
    
    
    Info-X
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    EMC
    
    
    
    
    
    
    
    
    
    
    14
    %
    
    
    31
    %
  (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 62 percent of total net
revenues for the three months ended September 26, 2004, compared to 74 percent
for the three months ended September 28, 2003, and we expect to be similarly
concentrated in the future. Our net revenues from our customers can be
significantly impacted by changes to our customers business, as well as changes
in the business models of our customers. Our EMC-specific models are sold both
directly to EMC and indirectly through distributors such as Info-X and
Tidalwire. As a result, for the three months ended September 26, 2004, and
September 28, 2003, direct revenues attributable to EMC were less than 10
percent, but direct and indirect revenues attributable to EMC were greater than
10 percent of total net revenues. Under
EMCs upcoming Select Program, a portion of the sales of our EMC-specific models will no
longer be sold through EMCs distribution partners, but instead will be
directly purchased by EMC from Emulex. These direct purchases will remain in
our inventory and will not be recognized as revenue until they are
shipped out to EMCs customers, whereas purchases of
EMC-specific models made by EMCs distribution partners are
recognized as revenue upon shipment and title transfer to these
distributors. During the three months ended September 26, 2004, as
the level of inventory held by EMCs distribution partners was
decreased in preparation for EMCs Select Program, fewer
EMC-specific models were sold to EMCs distribution partners,
reducing our revenue. The following chart details our net revenues by sales channel for the three
months ended September 26, 2004, and September 28, 2003: Net Revenues by Sales Channel Three Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageSeptember 26,
    
    of Net
    
    September 28,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    50,851
    
    
    
    70
    %
    
    $
    48,010
    
    
    
    57
    %
    
    $
    2,841
    
    
    
    6
    %Distribution
    
    
    22,262
    
    
    
    30
    %
    
    
    36,527
    
    
    
    43
    %
    
    
    (14,265
    )
    
    
    (39
    %)Other
    
    
    112
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    72
    
    
    
    180
    %Total net revenues
    
    $
    73,225
    
    
    
    100
    %
    
    $
    84,577
    
    
    
    100
    %
    
    $
    (11,352
    )
    
    
    (13
    %)
 From a sales channel perspective, net revenues generated from OEM customers
were 70 percent of total net revenues and sales through distribution were 30
percent in the three months ended September 26, 2004 compared to net revenues
from OEM customers of 57 percent and sales through distribution of 43 percent
in the three months ended 16




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##### Table of Contents



September 28, 2003. The decrease in distribution sales is primarily due to the
reduced sales of EMC-specific models to EMCs distribution partners as
discussed above. The following chart details our net domestic and international revenues based
on billed-to location for the three months ended September 26, 2004, and
September 28, 2003: Net Domestic and International Revenues Three Months
    
    
    
    
    
    Three MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageSeptember 26,
    
    of Net
    
    September 28,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    37,675
    
    
    
    52
    %
    
    $
    52,975
    
    
    
    63
    %
    
    $
    (15,300
    )
    
    
    (29
    %)Europe
    
    
    24,253
    
    
    
    33
    %
    
    
    23,026
    
    
    
    27
    %
    
    
    1,227
    
    
    
    5
    %Pacific Rim
    
    
    11,297
    
    
    
    15
    %
    
    
    8,576
    
    
    
    10
    %
    
    
    2,721
    
    
    
    32
    %Total net revenues
    
    $
    73,225
    
    
    
    100
    %
    
    $
    84,577
    
    
    
    100
    %
    
    $
    (11,352
    )
    
    
    (13
    %)
 We believe the decreases in domestic net revenues were principally due to the
reduced sales of EMC-specific models to EMCs distribution partners as
discussed above. 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 26, 2004, gross profit decreased $12.3 million, or 22 percent,
to $44.0 million, from $56.3 million in the three months ended September 28,
2003. The decrease in gross profit in the three months ended September 26,
2004, compared to the three months ended September 26, 2003, was primarily due
to lower net revenues and production volumes and the increased mix of lower
margin Fibre Channel switch business acquired in the acquisition of Vixel
Corporation in November 2003. For the three months ended September 26, 2004,
and September 28, 2003, cost of sales included only $38 thousand and $4
thousand of amortized deferred stock-based compensation expenses, respectively.
Gross margin decreased from 67 percent for the three months ended September
28, 2003, to 60 percent for the three months ended September 26, 2004. This
decrease in gross margin is also due primarily to lower production volumes of
HBAs as we temporarily curtailed production to reduce inventory,
spreading our fixed manufacturing costs across fewer units during the three
months ended September 26, 2004, compared to the three months ended September
28, 2003, as well as to the increased mix of Fibre Channel switches which carry
lower gross margins than HBAs. Additionally, the three months ended September
28, 2003, included a benefit of $1.8 million as previously-reserved one gigabit
per second excess and obsolete inventory was sold. 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
$20.2 million and $16.3 million in the three months ended September 26, 2004,
and September 28, 2003, representing 28 and 19 percent of net revenues in each
period, respectively. Engineering and development expenses increased by $3.9
million, or 24 percent, in the three months ended September 26, 2004, compared
to the three months ended September 28, 2003. This increase was primarily due
to the inclusion of the engineering and development expenses associated with
our acquisition of Vixel. Since we completed our integration of Vixels
day-to-day operations during the three months ended March 28, 2004, we no
longer separately track former-Vixel operations. However, the expenses
associated with the former-Vixel operations are estimated to account for
approximately $2.7 million, or approximately 70 percent of the overall $3.9
million increase. The remaining increase was due to our continued investment
in Fibre Channel I/O and IP engineering and development, which represented
substantially all of our engineering and development efforts and expenses prior
to the acquisition of Vixel. Engineering and development expenses included
$0.5 million and $0.4 million of amortized deferred stock-based compensation
expenses for the three months ended September 26, 2004, and September 28, 2003,
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. Engineering expenses can fluctuate
significantly from quarter to quarter depending on several factors, including,
but not limited to, non-recurring 17




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##### Table of Contents



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 $7.4 million and $4.6 million in the three
months ended September 26, 2004, and September 28, 2003, representing 10 and
five percent of net revenues, respectively. Selling and marketing expenses
increased by $2.8 million, or 61 percent, in the three months ended September
26, 2004, compared to the three months ended September 28, 2003. This increase
was primarily due to the inclusion of the selling and marketing expenses
associated with our acquisition of Vixel. Similar to engineering and
development expenses, we no longer track former-Vixel operations separately.
However, the expenses associated with the former-Vixel operations are estimated
to account for approximately $1.4 million, or approximately 49 percent of the
overall $2.8 million increase. Additionally, selling and marketing expenses
related to personnel; travel and entertainment; and advertising and other
promotions for the three months ended September 26, 2004, increased by
approximately $0.3 million, $0.3 million and $0.5 million, respectively,
compared to the same period of the prior year. For the three months ended
September 26, 2004, selling and marketing expenses included $0.2 million of
amortized deferred stock-based compensation expenses. For the three months
ended September 28, 2003 selling and marketing expenses included $0.1 million
of amortized deferred stock-based compensation expenses. As a portion of
selling and marketing expenses, such as selling and marketing employees base
compensation and amortized deferred stock-based compensation expense, is not
driven directly by increases or decreases in net revenues, the expenses have
fluctuated as a percent of 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 $(0.4) million in the three months ended September 26, 2004. General and
administrative expenses for the three months ended September 26, 2004, included
a $4.4 million reduction related to reimbursement received from our insurance
carriers during the three months ended September 26, 2004, in excess of our
receivable. This reimbursement is related to the shareholder litigation
settled and recorded as general and administrative expense in our fiscal year
ended June 29, 2003. General and administrative expenses for the three months
ended September 26, 2004, excluding this $4.4 million insurance reimbursement
would have been $4.0 million, or five percent of net revenues, compared to $3.7
million, or four percent of net revenues, for the three months ended September
28, 2003. This would represent an increase of $0.3 million, or nine percent,
in the three months ended September 26, 2004, excluding the insurance recovery,
compared to the three months ended September 28, 2003. The increase includes
general and administrative expenses associated with our acquisition of Vixel.
Similar to other operating expenses, we no longer track former-Vixel operations
separately. However, the expenses associated with the former-Vixel operations
are estimated to account for approximately $0.2 million of the increase in
general and administrative expenses. For the three months ended September 26,
2004, general and administrative expenses included $0.5 million of amortized
deferred stock-based compensation expenses. For the three months ended
September 28, 2003, general and administrative expenses included $37 thousand
of amortized deferred stock-based compensation expenses. Amortization of Other Intangibles.Amortization of other intangibles included
the amortization of intangible assets with estimable lives related to the
acquisitions of Vixel in November 2003 and Giganet in March 2001, as well as
the purchase of the technology assets of Trebia Networks in October 2003. For
the three months ended September 26, 2004, amortization of other intangibles
was $6.5 million, or nine percent of net revenues. Amortization of other
intangibles for the three months ended September 28, 2003, only include the
acquisition of Giganet and was $1.5 million, or two percent of net revenues.
The $5.1 million increase in amortization of other intangibles for the three
months ended September 26, 2004, in comparison to the same three month period
of the prior year was due to the addition of amortization related to the Vixel
acquisition and the purchase of the technology assets of Trebia Networks. Impairment of Goodwill.On June 30, 2004, we announced that tepid demand
experienced in the fourth fiscal quarter of 2004 from two of our customers,
resulted in lower than expected revenue, earnings and cash flows in the fourth
fiscal quarter of 2004 and was expected to result in lower sequential revenue,
earnings and cash flows in the first fiscal quarter of 2005. These events and
circumstances resulted in a subsequent drop in our stock price, which indicated
a potential impairment might have occurred. As a result, we conducted a FAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
analysis, as well as a FAS 142, Goodwill and Other Intangible Assets,
analysis, including a second step goodwill impairment test. The results of the
FAS 144 analysis indicated that our long-lived assets were not impaired.
However, the FAS 142 analysis indicated that goodwill was impaired. This
determination was made at the reporting unit level and consisted of two steps.
First, the fair value of our only 18




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reporting unit was determined, based on a market approach, and compared to its
carrying amount. Next, as the carrying amount exceeded the fair value, the
second step of FAS 142 was performed. The implied fair value of goodwill was
determined by allocating the fair value in a manner similar to a purchase price
allocation, in accordance with FAS 141, Business Combinations. As a result
of this FAS 142 analysis, on September 9, 2004, we concluded that a $583.5
million charge for goodwill impairment should be recorded as of June 27, 2004.
After recording this impairment charge, there was no goodwill remaining on our
balance sheet as of June 27, 2004. In connection with the preparation of Vixel
Corporations tax return in the first quarter of fiscal 2005, we revised
estimates and discovered errors related to the deferred tax assets of Vixel
Corporation (acquired in November 2003). These events resulted in a revision
to Vixels purchase price allocation to decrease net deferred tax assets and
increase goodwill, which was impaired. This resulted in a $1.8 million
impairment of goodwill charge for the three months ended September 26, 2004.
Had these items been recorded in fiscal 2004, our net loss would have been $1.8
million higher, or $534.1 million, instead of $532.3 million. We do not
believe that this $1.8 million impairment of goodwill is material to fiscal
2004 or will be material to fiscal 2005 operations or financial results.
Excluding this adjustment, net income for the first quarter of fiscal 2005
would have been $16.1 million. Nonoperating Income.Nonoperating income consisted primarily of interest
income, interest expense and other non-operating income and expense items such
as the gains on the repurchase of convertible subordinated notes. Our
nonoperating income increased by $8.5 million to $14.8 million in the three
months ended September 26, 2004, from $6.2 million in the three months ended
September 28, 2003. The $8.5 million increase in nonoperating income was
primarily due to a gain of $13.1 million on the repurchase of $153.0 million
face value of our 0.25 percent contingent convertible subordinated notes in the
three months ended September 26, 2004, compared to a gain of $4.7 million on
the repurchase of $93.9 million face value of our 1.75 percent convertible
subordinated notes in the three months ended September 28, 2003. Additionally,
interest income increased $0.5 million to $3.0 million in the three months
ended September 26, 2004, compared to $2.5 million in the three months ended
September 28, 2003, primarily due to the receipt in the three months ended
September 26, 2004, of $0.3 million of interest related to the insurance
reimbursement discussed below in Liquidity and Capital Resources. Interest
expense increased by $0.3 million associated with our outstanding convertible
subordinated notes to $1.3 million in the three months ended September 26,
2004, compared to the three months ended September 28, 2003. Income Taxes. In the three months ended September 26, 2004, we recorded a tax
provision in the amount of $8.9 million, or approximately 38 percent of our
income before 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. Critical Accounting Policies The preparation of the financial statements requires estimation and judgment
that affect the reported amounts of net revenues, expenses, assets and
liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could potentially
result in materially different results under different assumptions and
conditions. If these estimates differ significantly from actual results, the
impact to the financial statements may be material. We have identified the following as critical accounting policies: revenue
recognition; allowance for doubtful accounts; goodwill, other intangibles and
long-lived assets; inventories; income taxes and stock-based compensation. Revenue Recognition. 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 revenue
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. 19




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Furthermore, we provide a warranty of between one and three years on our I/O
Fibre Channel and Internet Protocol products and provide a warranty of between
one and five years on our Fibre Channel switching and traditional networking
products. We record a provision for estimated warranty-related costs based on
historical product return rates and managements estimates of expected future
costs to fulfill 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 and
results of operations. Goodwill, Other Intangibles and Long-Lived Assets.Other intangibles resulting
from the acquisitions of Vixel and Giganet and the purchase of the technology
assets of Trebia Networks 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. In accordance with
Statement 142, goodwill and other intangibles that have indeterminate lives
will be tested for impairment based on discounted cash flows and market
capitalization 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. Our annual impairment test occurs during our fourth fiscal
quarter each year. 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, such as when tepid fiscal
fourth quarter of 2004 demand from two of our customers and a subsequent drop
in our stock price resulted in an indication of impairment to our goodwill and
other intangible assets. 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. At the end of June 2004, events and circumstances, including tepid fiscal
fourth quarter of 2004 demand from two of our customers coupled with a
subsequent drop in our stock price, indicated that a potential impairment of
goodwill existed. As a result, we conducted a Statement 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, analysis, as well as a
Statement 142, Goodwill and Other Intangible Assets analysis, including a
second step goodwill impairment test. The result of the Statement 144 analysis
indicated that none of our long-lived assets had been impaired. Any future
impairment loss could materially and adversely affect our financial position
and results of operations. However, the Statement 142 analysis indicated that
all of our goodwill, which was in excess of $580 million, was impaired. Inventories.Inventories are stated at the lower of cost on a first-in,
first-out basis or market. 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, as we have previously, including an excess and obsolete inventory
charge of $13.6 million during the three months ended September 30, 2001. 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. We have no plans to
adopt the fair value provisions of Statement 123 until required to under new
accounting standards, such as those being considered under the Financial 20




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Accounting Standards Boards Exposure Draft for Share-Based Payment, for all
stock awards. If we were required to account for all stock-based awards based
on the fair value method, it would have a material non-cash impact on our
results of operations. Liquidity and Capital Resources As of September 26, 2004, we had $416.4 million in working capital and $557.3
million in cash and cash equivalents, current investments and long-term
investments. At June 27, 2004, we had $486.8 million in working capital and
$655.4 million in cash and cash equivalents, restricted cash, current
investments and long-term investments. Our cash and cash equivalents decreased
by $82.1 million to $110.0 million as of September 26, 2004, from $192.1
million as of June 27, 2004. The decrease in cash and cash equivalents was due
to our financing activities, which used $135.7 million. The cash and cash
equivalents used by financing activities were partially offset by our operating
and investing activities, which provided $40.8 million and $12.8 million of
cash and cash equivalents, respectively. In the three months ended September 26, 2004, operating activities provided
$40.8 million of cash and cash equivalents compared to using $3.0 million in
the three months ended September 28, 2003. The primary reason for the
increase in cash provided by operating activities for the three months ended
September 26, 2004 was net income of $14.3 million adjusted for non-cash
reconciling items, the most significant of which were amortization of other
intangibles, depreciation and amortization of property and equipment, deferred
income taxes, a gain on the repurchase of our 0.25 percent contingent
convertible subordinated notes, and a recovery related to insurance
reimbursement on shareholder litigation settlements. Additionally, decreases
in inventories and accounts and other receivables, partially offset by a
decrease in accounts payable and accrued liabilities, increased our net cash
provided by operating activities. Net cash used in operating activities of
$3.0 million for the three months of the prior year included an increase of
restricted cash related to litigation settlements of $39.5 million. In the three months ended September 26, 2004, investing activities provided
$12.8 million of cash and cash equivalents, as the amount of investment
maturities out paced the purchases of new investments. For the three months
ended September 28, 2003, investing activities provided $24.3 million of cash
and cash equivalents, as the amount of investment maturities was again higher
that the purchases of new investments. Additionally, during the three months
ended September 26, 2004, Emulex spent $3.2 million on additions to property
and equipment compared to spending $10.5 million during the same period of the
prior year. The additions to property and equipment in the prior year included
amounts related to the building of our new corporate headquarters. Financing activities used $135.7 million of cash and cash equivalents in the
three months ended September 26, 2004. This decrease in cash and cash
equivalents was primarily due to the repurchase of $153.0 million in face value
of our 0.25 percent contingent convertible subordinated notes at a net
discount, spending $137.2 million. For the three months ended September 28,
2003, financing activities used $86.1 million of cash and cash equivalents due
primarily to the repurchase of $93.9 million in face value of our 1.75 percent
convertible subordinated notes at a discount, spending $87.3 million. As of September 26, 2004, Emulex had approximately $17.0 million in face value
of its 1.75 percent convertible subordinated notes due 2007 outstanding.
Interest on these notes is payable in cash on February 1 and August 1 of each
year. 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. As of September 26, 2004, Emulex had approximately $364.5 million in face value
of its 0.25 percent contingent convertible subordinated notes due 2023
outstanding. Interest is payable in cash on June 15th and December 15th of
each year. Under the terms of the offering, the notes will be convertible, at
the option of the holder and subject to the satisfaction of certain conditions,
into shares of Emulex common stock at a price of $43.20 per share.Holders of
the notes may require us to purchase the notes for cash by giving written
notice within the 20 business days prior to each of December 15, 2006, December
15, 2008, December 15, 2013, and December 15, 2018. See note 7 to the
condensed consolidated financial statements contained herein for more
information. We entered into purchase agreements for inventory, and as of September 26,
2004, our remaining inventory purchase obligation for these items was $18.1
million, including $4.6 million related to key inventory components. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The 21




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complaint made general allegations that, among other things, Vixels directors
breached their fiduciary duties to Vixel stockholders in connection with the
approval of the merger with Emulex and sought to enjoin the tender offer and
have the merger agreement declared unlawful, among other forms of relief. On
November 7, 2003, the Vixel Parties entered into a memorandum of understanding
for a $0.7 million settlement with the plaintiff in the class action suit
pursuant to which the parties have agreed to settle the action, subject to
court approval. The $0.7 million was recorded as general and administrative
expense for the three months ended December 28, 2003. Formal settlement
documents were signed on May 5, 2004 and the plaintiff has completed discovery
as agreed to by the parties. In August 2004, final court approval was obtained
for the settlement of the Fink v. Vixel litigation, and we paid the $0.7
million settlement. Subsequent to the quarter ended September 26, 2004, we
received a $0.3 million reimbursement from our insurer relating to the Fink v.
Vixel litigation. In July 2004, we obtained an arbitration award against two of its insurers
related to class action and derivative suits settled in 2003, and subsequently
collected a total of $9.5 million plus $0.3 million in interest during the
quarter ended September 26, 2004. As the amounts received exceeded the $5.1
million receivable reflected on our books, we recorded a reduction in general
and administrative expenses during the three months ended September 26, 2004,
of $4.4 million, as well as interest income of $0.3 million. As part of our commitment to storage networking product development, including
Fibre Channel, which includes our recent acquisition of Vixel Corporation, and
IP Networking, we expect to continue our investments in property and
equipment, most notably for additional engineering equipment, and continued
enhancement of our global IT infrastructure. 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 26, 2004, and the effect such obligations are expected to have on
our liquidity and cash flow in future periods: Payments Due by
Period(in thousands)Less than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 Year (2)
    
    Years (3)
    
    Years (4)
    
    YearsConvertible subordinated
notes and interest (1)
    
    $
    384,488
    
    
    $
    1,059
    
    
    $
    383,429
    
    
    $
    
    
    
    $
    Leases
    
    
    6,531
    
    
    
    1,393
    
    
    
    2,074
    
    
    
    1,539
    
    
    
    1,525Inventory purchase commitments
    
    
    18,053
    
    
    
    18,053
    
    
    
    
    
    
    
    
    
    
    
    Letter
of credit
    
    
    46
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    Other
commitments
    
    
    3,350
    
    
    
    3,350
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    412,468
    
    
    $
    23,901
    
    
    $
    385,503
    
    
    $
    1,539
    
    
    $
    1,525
  (1)
    
    The principal payment related to the remaining outstanding 0.25 percent
contingent convertible subordinated notes of $364.5 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 3, 2005.  (3)
    
    Fiscal years ending July 2, 2006, and July 1, 2007.  (4)
    
    Fiscal years ending June 29, 2008, and June 28, 2009. 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. The demand for our Fibre Channel products, which represents substantially all
of our net revenues, has been driven by the demand for high-performance storage
networking products and solutions that support enterprise computing
applications, including on-line transaction processing, data mining, data
warehousing, multimedia and Internet 22




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applications. Any significant downturn in demand for such products, solutions
and applications, such as the slowdown experienced beginning in early 2001 and
tepid demand experienced in mid calendar 2004, could adversely affect our
business, results of operations and financial condition. The adverse effects
of any sustained downturn in information technology spending on our operating
results may be exacerbated by our research and development investments,
strategic investments and merger and acquisition activity, as well as customer
service and support, which are expected to continue despite any such downturn. Our business depends upon the continued growth of the Fibre Channel storage
networking market, and our business will be adversely affected if such growth
does not occur or occurs more slowly than we anticipate. The size of our potential market is largely dependent upon the acceptance of
our Fibre Channel storage networking technologies, as well as the overall
demand for storage. We believe that our investment in the Fibre Channel
storage networking market represents our greatest opportunity for revenue
growth and profitability for the foreseeable future. However, the market for
Fibre Channel storage networking products may not gain broader acceptance and
customers may choose alternative technologies and/or products supplied by other
companies. Recently, interest has re-emerged for iSCSI storage networking
solutions, which may satisfy some I/0 connectivity requirements through
standard Ethernet adapters and software at little to no incremental cost to end
users. Such iSCSI solutions are likely to compete with Fibre Channel
solutions, particularly in the low end of the market. In addition, other
technologies such as Serial Attached SCSI or SAS, may compete with our Fibre
Channel embedded switched solutions in the future. Furthermore, since our
products are sold as parts of integrated systems, demand for our products is
driven by the demand for these integrated systems, including other companies
complementary products. A lack of demand for the integrated systems or a lack
of complementary products required for these integrated systems could have a
material adverse effect on our business, results of operations and financial
condition. If the Fibre Channel storage networking market does not grow, or
grows more slowly than we anticipate, attracts more competitors than we expect,
as discussed below, or if our products do not achieve continued 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, or our
customers failure to make timely payments to us, could adversely affect our
business. We rely almost exclusively on original equipment manufacturers, or OEMs, and
sales through distribution channels for our revenue. For the three months
ended September 26, 2004, we derived approximately 70 percent of our net
revenues from OEMs and 30 percent from sales through distribution.
Furthermore, because some of our sales through distribution channels consist of
OEM products, OEM customers effectively generated more than 86 percent of our
revenue for the year ended June 27, 2004. We may be unable to retain our
current OEM and distributor customers or to recruit additional or replacement
customers. Although we have attempted to expand our base of customers, including customers
for embedded switching products, we believe our revenues in the future will
continue to be similarly derived from a limited number of customers, especially
in light of the continuing consolidation the industry has experienced. As a
result, to the extent that sales to any of our significant customers do not
increase in accordance with our expectations or are reduced or delayed, as
occurred with two of our OEM customers during the three months ended June 27,
2004, our business, results of operations and financial condition could be
materially adversely affected. As is common in the technology industry, our agreements with OEMs and
distributors are typically non-exclusive, have no volume commitments, and often
may be terminated by either party without cause. It is increasingly
commonplace for our OEM and distributor customers to utilize or carry 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. In addition, our
OEMs may elect to change their business practices in ways that affect the
timing of our revenues, which may materially adversely affect our business,
results of operations and financial condition. 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 23




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international companies, some of which have substantially greater financial,
technical, marketing and distribution resources than we have. Additional
companies, including but not limited to our suppliers, strategic partners, OEM
customers and emerging 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. Additionally, our existing
competitors continue to introduce products with improved price/performance
characteristics, and we have to do the same to remain competitive. Increased
competition could result in increased 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 and port bypass circuits compete
with our Fibre Channel I/O and embedded switch products, respectively, 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. Additionally, in the
future other technologies that we are not currently developing may evolve to
address the storage networking applications currently served by our Fibre
Channel product line today, reducing our market opportunity. 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:  
    
    changes in the size, mix, timing and terms of OEM and other
customer orders, such as those experienced from two OEM customers in
the three months ended June 27, 2004;
    
    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 our 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 experienced by us, or reduced demand from our
customers if our customers are unable to acquire components used in
conjunction with our products in their deployments;
    
    the inability of our electronics manufacturing service, or EMS,
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/or
    
    changes in our accounting or other policies resulting from the
adoption of new laws, regulations or pronouncements. 24




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As a result of these and other unexpected factors or developments, we expect
that in the future operating results will be from time to time below the
expectations of investors or market analysts, which would have a material
adverse effect on our stock price. Our relatively small backlog of unfilled orders, possible customer delays or
deferrals and our tendency to generate a large percentage of our quarterly
sales near the end of the quarter contribute to possible fluctuations in our
operating results that could have an adverse impact on our results of
operations and stock price. Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially
on orders booked during that quarter. Alternatively, orders already in backlog
may be deferred or cancelled. Also, we have typically generated a large
percentage of our quarterly revenues in the last month of the quarter. Because
our expense levels are largely based on our expectations of future sales, in
the event we experience unexpected decreases in sales, our expenses may be
disproportionately large relative to our revenues and we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. A material shortfall in sales in relation to our quarterly
expectations or any delay, deferral or cancellation of customer orders would
likely have an immediate and adverse impact on our results of operations and
may adversely affect our stock price. Our industry is subject to rapid technological change, and we must keep pace
with the changes to successfully compete. The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in large part on our ability to
enhance our existing products and to introduce new products on a timely basis
to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as four, eight and ten gigabit
per second, or Gbps, Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI
Express; PCI Express Advanced Switching; iSCSI; Serial ATA, or SATA; Serial
Attached SCSI, or SAS; and Remote Direct Memory Access, or RDMA; are in
development by many companies and their ultimate acceptance and deployment in
the market is uncertain. We are developing some, but not all of these
technologies, and we cannot be sure that the technologies we chose to develop
will achieve market acceptance, or that technologies that we chose not to
develop will be available to purchase or license from third parties or will be
immaterial to our business. Furthermore, if our products are not available in
time for the qualification cycle at an OEM it may be up to three years, if
ever, before another qualification cycle is available to us. 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, including a loss of $532.3 million
in fiscal 2004. Any losses, including losses caused by impairment of
long-lived assets or goodwill, may adversely affect the perception of our
business by analysts and investors, which could adversely affect our stock
price. 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. As our customers migrate from one platform to the enhanced price/performance of
the next platform, we may experience reduced revenue, gross profit or gross
margin levels associated with lower average selling prices or higher relative
product costs associated with improved performance. While we regularly compare
forecasted demand for our products against inventory on hand and open purchase
commitments, to the extent that customers migrate more quickly than
anticipated, the corresponding reduction in demand for older product platforms
may result in obsolete inventory and related charges which could have a
material adverse effect on our financial condition and results of operations. 25




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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 commit significant resources to develop, promote and deliver
products that incorporate our technology. In addition, if our customers
products are not commercially successful, it 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 or embedded switch box solutions
to lower-priced ASIC solutions, could adversely affect our business. Historically, the electronics industry has developed higher performance ASICs
that create chip level solutions that replace selected board level or box level
solutions at a significantly lower average selling price. We have previously
experienced this trend and expect it to continue in the future. 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. If customers elect to utilize lower-end HBAs in higher-end environments or
applications, our business could be negatively affected. We supply three families of HBAs that target separate high-end, mid-range and
small and medium-sized business, or SMB, markets. Historically, the majority
of our Fibre Channel revenue has come from our high-end server and storage
solutions. In the future, increased revenues are expected to come from SMB and
midrange server and storage solutions, which have lower average selling prices.
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. In the past, we have experienced downward pressure on the average unit selling
prices of our products. We may provide pricing discounts to customers based
upon volume purchase criteria, and achievement of such discounts may reduce our
average unit selling prices. To the extent that growth in unit demand fails to
offset decreases in average unit selling prices, our revenues and financial
performance could be materially adversely affected. Although historically we
have achieved offsetting cost reductions, to the extent that average unit
selling prices of our 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. Prior delays have resulted from
numerous factors, such as:  
    
    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 including foundries
of our ASICs;
    
    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. 26




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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. Our products are complex and may contain undetected hardware of software
defects or bugs that could increase our costs, reduce our net revenues or
damage our reputation. Our products are complex and may contain undetected hardware or software
defects or bugs when first introduced or as newer versions are released. We
are also exposed to risks associated with latent defects in existing products.
From time to time, we have found errors in existing, new or enhanced products.
If any of our products contains defects or bugs, or has reliability, quality or
compatibility problems, our reputation may be damaged and customers may be
reluctant to buy our products, which could materially and adversely affect our
ability to retain existing customers and attract new customers. In addition,
these defects or bugs could interrupt or delay sales or shipment of our
products to our customers. Furthermore, if any of these problems are not found
until after we have commenced commercial shipment of a product, we may be
required to incur additional development costs and product recall, repair or
replacement costs. These problems may divert our technical and other resources
from other development efforts and could result in significant warranty and
repair costs. Our joint development activities may result in products that are not
commercially successful or that are not available in a timely fashion. We have engaged in joint development projects with third parties in the past
and we expect to continue doing so in the future. Joint development can
magnify several risks for us, including the loss of control over development of
aspects of the jointly developed products and over the timing of product
availability. Accordingly, we face increased risk that joint development
activities will result in products that are not commercially successful or that
are not available in a timely fashion. During April 2003 we announced a joint development activity with Intel
Corporation relating to storage processors that integrate SATA, SAS and Fibre
Channel interfaces within a single architecture. Under the agreement, we will
develop the protocol controller hardware, firmware and drivers. Intel will
integrate its Intel® Xscale microarchitecture as the core technology for
the new processors and will manufacture the processors on its 90-nanometer
process technology. This activity has risks resulting from unproven
new-generation manufacturing technology, from the licensing of technology to
Intel and from increased development costs. 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;
    
    required long-term purchase commitments;
    
    undetected errors, failures or production quality issues;
    
    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; 27




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
    
    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;
    
    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, the cost of
shifting to a new supplier or EMS providers or the cost associated with a
long-term purchase commitment could have a material adverse effect on our
business, results of operations and financial condition. 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 Business  Intellectual
Property contained within our 2004 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. For more information on legal proceedings related to Emulex, see Part II, Item
1, Legal Proceedings. Ongoing lawsuits present inherent risks, any of which could have a material
adverse effect on our business, financial condition or results of operations.
Such potential risks include the continuing expenses of litigation, the risk of
loss of patent rights, the risk of injunction against the sale of products
incorporating the technology in question, counterclaims and attorneys fee
liability. Third-party claims of intellectual property infringement could adversely affect
our business. We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally
receive communications from third parties alleging patent infringement, and
there is always the chance that third parties may assert infringement claims
against us. Any such claims, with or without merit, could result in costly
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements, which may or may not be available. However, we have
in the past obtained, and may be required in the future to obtain, licenses of
technology 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 or increased cost of attracting, motivating or retaining 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 28




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networking products and customers. Competition for such highly skilled
employees in the communities in which we operate, as well as our industry is
intense, and we cannot be certain that we will be successful in recruiting,
training and retaining such personnel. In addition, employees may leave our
company and subsequently compete against us. Also, many of these key managerial
and technical personnel receive stock options. New regulations, volatility in
the stock market and other factors could diminish the value of our stock
options, putting us at a competitive disadvantage and forcing us to use more
cash compensation. If we are unable to attract new managerial and technical
employees, or are unable to retain and motivate our current key managerial and
technical employees, or are forced to use more cash compensation to retain and
motivate key personnel, our business, results of operations and financial
condition could be materially adversely affected. Our international business activities subject us to risks that could adversely
affect our business. For the three months ended September 26, 2004, sales in the United States
accounted for 52 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 15 percent of our total net revenues. We expect that
our sales will be similarly distributed 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 our EMS providers production facilities
in Spain, Mexico and Malaysia. 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 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 due to international production;
    
    general economic and social conditions within foreign countries;
    
    taxation in multiple jurisdictions; and/or
    
    political instability, war or terrorism. All of these factors could harm future sales of our products to international
customers or future production outside of the United States of our products,
and have a material adverse effect on our business, results of operations and
financial condition. 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 that could provide new
technologies, products or service offerings. Future acquisitions or strategic
investments may negatively impact our results of operations as a result of
operating losses incurred by the acquired entity, the use of significant
amounts of cash, potentially dilutive issuances of equity or equity-linked
securities, incurrence of debt or amortization of intangible assets with
determinable lives. Furthermore, we may incur significant expenses pursuing
acquisitions or strategic investments that ultimately may not be completed.
Moreover, to the extent that any proposed acquisition or strategic investment
is not favorably received by stockholders, analysts and others in the
investment community, the price of our common stock could be adversely
affected. In addition, acquisitions or strategic investments involve numerous
risks, including:  
    
    difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company; 29




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
    
    purchased technology 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 no or limited prior experience;
    
    A strategic investment could result in a minority interest in a
company 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;
and/or
    
    the potential loss of key employees of the acquired company. In the event that an acquisition or strategic investment does occur and we are
unable to obtain anticipated profits or successfully integrate operations,
technologies, products or personnel that we acquire, our business, results of
operations and financial condition could be materially adversely affected. Our stock price is volatile, which has and may result in lawsuits against us
and our officers and directors. The stock market in general and the stock prices in technology-based companies
in particular have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in
the future as well. For example, during the first nine months of calendar year
2004 the market price of our common stock ranged from a low of $9.26 per share
to a high of $31.30 per share. Factors that could have a significant impact on
the market price of our common stock include, but are not limited to, the
following:  
    
    quarterly variations in 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;
    
    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, including us, that have experienced volatility in the
market price of their stock have been the objects of securities class action
litigation. If we were to be the subject of similar litigation in the future
or experience unfavorable outcomes in any of our pending litigation, as
discussed in Part II, Item 1, Legal Proceedings, contained elsewhere herein,
it could have a material adverse effect on our results of operations and
financial condition. 30




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Terrorist activities and resulting military and other actions could adversely
affect our business. The terrorist attacks in New York and Washington, D.C. in September 2001
disrupted commerce throughout the United States and Europe. The continued
threat of terrorism within the United States and Europe and the military action
and heightened security measures in response to such threat may cause
significant disruption to commerce throughout the world. To the extent that
such disruptions result in delays or cancellations of customer orders, delays
in collecting cash, a general decrease in corporate spending on information
technology or our inability to effectively market, manufacture or ship our
products, our business, financial condition, and results of operations could be
materially and adversely affected. We are unable to predict whether the threat
of terrorism or the responses thereto will result in any long-term commercial
disruptions or if such activities or responses will have any long-term material
adverse effect on our business, results of operations or financial condition. Our corporate offices and principal product development facilities are located
in a region that is subject to earthquakes and other natural disasters. Our California and Washington facilities, including our corporate offices and
principal product development facilities, are located near major earthquake
faults. Any disruption in our business activities, personal injury or damage
to the facilities in excess of our currently insured amounts as a result of
earthquakes or other such natural disasters, could have a material adverse
effect on our business, results of operations and financial condition. Our shareholder rights plan, certificate of incorporation and Delaware law
could adversely affect the performance of our stock. Our shareholder rights plan and provisions of our certificate of incorporation
and of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. The shareholder rights plan and these provisions of our
certificate of incorporation and Delaware law are intended to encourage
potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. For more information, please read note 12 to the Consolidated Financial
Statements contained in our 2004 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. Our system of internal controls may be inadequate. We maintain a system of internal controls in order to ensure we are able to
collect, process, summarize and disclose the information required by the
Securities and Exchange Commission within the time periods specified. Any
system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are
met. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. Additionally, public companies in
the United States are required to review their internal controls under the
Sarbanes-Oxley Act of 2002. If the internal controls put in place by us are
not adequate or in conformity with the requirements of the Sarbanes-Oxley Act
of 2002, and the rules and regulations of the Securities and Exchange
Commission, we may be required to restate our financial Statements and/or take
other actions which will divert significant financial and managerial resources,
as well as be subject to fines and/or other government enforcement actions. Changes in laws, regulations and financial accounting standards may affect our
reported results of operations. New laws, regulations and accounting standards, as well as changes to and
varying interpretations of 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. New or proposed
guidance related to the expensing of stock options and the treatment of
contingently convertible subordinated notes as common stock equivalents could
materially adversely affect our reported financial results and our stock price. 31




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The final determination of our income tax liability may be materially different
from our income tax provisions and accruals. We are subject to income taxes in both the United States and international
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are
many transactions where the ultimate tax determination is uncertain.
Additionally, our calculations of income taxes are based on our interpretations
of applicable tax laws in the jurisdictions in which we file. Although we
believe our tax estimates are reasonable, there is no assurance that the final
determination of our income tax liability will not be materially different than
what is reflected in our income tax provisions and accruals. Should additional
taxes be assessed as a result of new legislation, an audit or litigation, if
our effective tax rate should change as a result of changes in federal,
international or state and local tax laws, or if we were to change the
locations where we operate, there could be a material effect on our income tax
provision and net income in the period or periods in which that determination
is made. We may need additional capital in the future and such additional financing may
not be available on favorable terms. While we believe we have adequate working capital to meet our expected cash
requirements for the immediate future, we may need to raise additional funds
through public or private debt or equity financings in order to:  
    
    take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
    
    develop new products or services;
    
    repay outstanding indebtedness; and/or
    
    respond to unanticipated competitive pressures. Any additional financing we may need may not be available on terms favorable to
us, or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of business
opportunities, develop new products or services or otherwise respond to
unanticipated competitive pressures. In any such case, our business, results of
operations and financial condition could be materially adversely affected. In January 2002, we completed a $345.0 million private placement of 1.75
percent convertible subordinated notes, which are due February 1, 2007.
Subsequently, we repurchased and cancelled an aggregate of $328.0 million in
face value of our 1.75 percent notes, leaving approximately $17.0 million still
outstanding as of September 26, 2004. In fiscal 2004, we completed a $517.5
million private placement of 0.25 percent contingent convertible subordinated
notes due 2023. During the three months ended September 26, 2004, we
repurchased and cancelled $153.0 million in face value of these 0.25 percent
notes, leaving approximately $364.5 million still outstanding as of September
26, 2004. The holders of our 0.25 percent notes may require us to purchase the
notes for cash as early as December 2006. If we have insufficient liquidity
and capital resources to repay the principal amounts of our outstanding
convertible notes and the notes offered hereby when due, we may be forced to
raise additional funds through public or private debt or equity financings,
which may not be available on favorable terms, if at all. If such financings
were not available on favorable terms, our business, results of operations and
financial condition could be materially adversely affected. Conversion of our outstanding notes would dilute the ownership interest of
existing stockholders. The conversion of our notes into shares of our common stock would dilute the
ownership interests of existing stockholders. Any sales in the public market
of the common stock issuable upon conversion of the notes could adversely
affect prevailing market prices of our common stock. In addition, the
existence of the notes may encourage short selling by market participants due
to this dilution or to facilitate trading strategies involving notes and common
stock. See the Risk Factor Changes in laws, regulations and financial
accounting standards may affect our reported results of operationsabove. 32




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Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Sensitivity At September 26, 2004, our investment portfolio consisted primarily of fixed
income securities, excluding those classified as cash and cash equivalents, of
$447.3 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 26, 2004, the decline in the fair value of the portfolio would not be
material to our financial position, results of operations and cash flows.
However, if interest rates decreased and securities within our portfolio
matured and were re-invested in securities with lower interest rates, interest
income would decrease in the future. As of September 26, 2004, we had $364.5 million face value 0.25 percent
contingent convertible subordinated notes and $17.0 million face value 1.75
percent convertible subordinated notes issued and outstanding. The fair value,
based on quoted market prices, of our 0.25 percent and 1.75 percent convertible
subordinated notes at September 26, 2004, was $332.4 million and $17.0 million,
respectively. The fair value of these notes may increase or decrease due to
various factors, including fluctuations in the market price of our common
stock, fluctuations in market interest rates and fluctuations in general
economic conditions. Foreign Currency We have executed and will continue to execute transactions in foreign
currencies. As a result, we may be exposed to financial market risk resulting
from fluctuations in foreign currency rates, particularly the British Pound
and the Euro. Given the relatively small number of foreign currency
transactions, we do not believe that our potential exposure to fluctuations in
foreign currency rates is significant. 
 Item 4. Controls and Procedures We maintain disclosure controls and procedures designed to ensure that we are
able to collect the information we are required to disclose in the reports we
file with the Securities and Exchange Commission, or SEC, and to process,
summarize and disclose this information within the time periods specified in
the rules of the SEC. Based on their evaluation of our disclosure controls and
procedures, our management, with the participation of the Chief Executive and
Chief Financial Officers, has concluded that, as of the end of the period
covered by this Quarterly Report on Form 10-Q, these disclosure controls and
procedures were effective to ensure that we are able to record, process,
summarize and report the information we are required to disclose in the reports
we file with the SEC within the required time periods. There were no changes in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 33




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PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings Litigation On May 23, 2003, Vixel filed a patent infringement action against Brocade
Communications Systems, Inc. in the United States District Court for the
Northern District of California, Civil Action No. C-030-02446. The complaint
states that Brocade is infringing U.S. Patent No. 6,185,203, entitled Fibre
Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled Methods and
Apparatus for Fibre Channel Interconnection of Private Loop Devices, and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices, through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, Brocades Silkworm switch
products. Brocade denied infringement and challenged the validity of the
patents referenced. Brocade also challenged the enforceability of those
patents. In the suit against Brocade, Vixel was seeking unspecified past
damages, potential future royalties, or, alternatively, injunctive relief. On September 24, 2004, Emulex Corporation and Brocade Communications Systems,
Inc. entered into a settlement including a litigation standstill agreement
whereby Emulex and Brocade agreed to dismiss without prejudice their claims
and counterclaims against each other in the pending patent infringement case
in the United States District Court for the Northern District of California
entitled Vixel Corporation. v. Brocade Communications Systems, Inc., Civil
Action No. C-030-02446. The settlement included the formation of a strategic
relationship under which the parties are to work together to pursue mutual
objectives. Under the litigation standstill agreement both parties preserved
their respective rights, no restrictions of any kind were imposed on either
partys ability to sell products, no licenses were granted by either party, no
money was exchanged, and they agreed to a three year standstill during which
neither party may initiate litigation against the other party with respect to
certain of their respective patents. On November 15, 2001, prior to the Companys acquisition of Vixel Corporation,
a securities class action was filed in the United States District Court in the
Southern District of New York as Case No. 01 CIV. 10053(SAS), Master File No.
21 MC92 (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 October 9, 2003, before the Companys acquisition of Vixel, a purported
class action lawsuit was filed in King County Superior Court of the State of
Washington against Vixel and each of Vixels directors and certain unnamed
individuals (the Vixel Parties), entitled Russell Fink v. Vixel Corporation,
et al., Case No. 03-2-37226-9SEA. The complaint made general allegations that,
among other things, Vixels directors breached their fiduciary duties to Vixel
stockholders in connection with the approval of the merger with Emulex and
sought to enjoin the tender offer and have the merger agreement declared
unlawful, among other forms of relief. On November 7, 2003, the Vixel Parties
entered into a memorandum of understanding for a $0.7 million settlement with
the plaintiff in the class action suit pursuant to which the parties have
agreed to settle the action, subject to court approval. The $0.7 million was
recorded as general and administrative expense during the three months ended
December 28, 2003. Formal settlement documents were signed on May 5, 2004 and
the plaintiff has completed discovery as agreed to by the parties. In August
2004, final court approval was obtained for the settlement of the Fink v.
Vixel litigation, and the Company paid the $0.7 million settlement.
Subsequent to the quarter ended September 26, 2004, the Company received a
$0.3 million reimbursement from its insurer relating to the Fink v. Vixel 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, Case No. SACV-01-219 GLT (ANx). The plaintiffs in the
actions represent purchasers of the Companys 34




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##### Table of Contents



common stock during various periods ranging from January 18, 2001, through
February 9, 2001. The complaints alleged that the Company and certain of its
officers and directors made misrepresentations and omissions in violation of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.
The complaints generally seek compensatory damages, costs and attorneys fees
in an unspecified amount. In addition, the Company has received inquiries
about events giving rise to the lawsuits from the SEC and the Nasdaq Stock
Market. On April 22, 2003, the Company entered into two Memoranda of
Understanding agreeing to terms of settlement for both the class action and
derivative litigation. The settlement was approved and $39.5 million held in
escrow was paid to the plaintiffs. Gateway Partners filed a challenge to the
allocation of settlement funds, among the plaintiffs and adequacy of the
settlement notice, and a hearing on such challenge was scheduled for November
22, 2004. During the three months ended March 28, 2004, the Company reached
an agreement with one of its insurers, under which the Company received $10.0
million less $2.0 million previously paid by the insurer for the defense of
the securities class action lawsuits, resulting in a net payment to the
Company of $8.0 million. In July 2004, the Company obtained an arbitration
award against two of its insurers, and subsequently collected a total of $9.5
million plus $0.3 million in interest. As the amounts received exceeded the
$5.1 million receivable reflected on the Companys books, the Company recorded
a reduction in general and administrative expenses during the three months
ended September 26, 2004, of $4.4 million, as well as interest income of $0.3
million. 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. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds As noted in the following table, we did not repurchase any equity securities
during the three months ended September 26, 2004. However, we did repurchase
100 proximately $153.0 million of our 0.25 percent convertible subordinated notes
at a discount to face value, spending approximately $137.2 million. See note 7
to the Condensed Consolidated Financial Statements contained herein for more
information. ISSUER PURCHASES OF EQUITY SECURITIESTotal Number of
    
    Maximum Number (orTotal
    
    
    
    
    
    Shares Purchased as
    
    Approximate Dollar Value) ofNumber of
    
    Average
    
    Part of Publicly
    
    Shares that May Yet BeShares
    
    Price Paid
    
    Announced Plans or
    
    Purchased Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    ProgramsJune 28, 2004,
through July 25,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionJuly 26, 2004,
through August 22,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionAugust 23, 2004,
through September
26, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionTotal
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 million
 In September 2001, our Board of Directors authorized the repurchase of up to
four million shares. The repurchase plan authorized us to make purchases in
the open market or through privately negotiated transactions with the timing
and terms of any purchase to be determined by management based on market
conditions. As of September 26, 2004, a total of 2.5 million shares had been
repurchased and 1.5 million shares remain available for repurchase. 35




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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
    
    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 4.6
    
    Form of 0.25% Convertible Subordinated Note due 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 4.7
    
    Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (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 4.8
    
    Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated December 12, 2003, related to
the Companys 0.25% Convertible Subordinated Notes due 2023
(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 10.3
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys Definitive Proxy Statement for its Annual Meeting of
Stockholders held on November 21, 2002).
 36




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##### Table of Contents



Exhibit 10.4
    
    Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys Definitive
Proxy Statement for its Annual Meeting of Stockholders held on
November 21, 2002).Exhibit 10.5
    
    Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 10.2 of Amendment No. 1
to the Registration Statement on Form S-1 of Vixel Corporation (File
No. 333-81347), filed on August 16, 1999).Exhibit 10.6
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 10.23 of Amendment No. 1 to
the Registration Statement on Form S-1 of Vixel Corporation (File
No. 333-81347), filed on August 16, 1999).Exhibit 10.7
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporate reference to Exhibit 99.1 of the Registration Statement
on Form S-8/S-3 of Vixel Corporation (File No. 333-39000), filed on
June 9, 2000).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.
 37




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##### Table of Contents



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 4, 2004 EMULEX CORPORATIONBy:
    
    /s/ Paul F. FolinoPaul F. FolinoChairman of the Board and Chief Executive OfficerBy:
    
    /s/ Michael J. RockenbachMichael J. RockenbachExecutive Vice President andChief Financial Officer
(Principal Financial and Chief Accounting Officer)
 38




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INDEX TO 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
    
    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 4.6
    
    Form of 0.25% Convertible Subordinated Note due 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 4.7
    
    Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (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 4.8
    
    Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated December 12, 2003, related to
the Companys 0.25% Convertible Subordinated Notes due 2023
(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 10.3
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys Definitive Proxy Statement for its Annual Meeting of
Stockholders held on November 21, 2002).




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##### Table of Contents



Exhibit 10.4
    
    Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys Definitive
Proxy Statement for its Annual Meeting of Stockholders held on
November 21, 2002).Exhibit 10.5
    
    Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 10.2 of Amendment No. 1
to the Registration Statement on Form S-1 of Vixel Corporation (File
No. 333-81347), filed on August 16, 1999).Exhibit 10.6
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 10.23 of Amendment No. 1 to
the Registration Statement on Form S-1 of Vixel Corporation (File
No. 333-81347), filed on August 16, 1999).Exhibit 10.7
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporate reference to Exhibit 99.1 of the Registration Statement
on Form S-8/S-3 of Vixel Corporation (File No. 333-39000), filed on
June 9, 2000).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.