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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 1934For the quarterly period ended March 28, 2004OR[  ]
    
    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 May 5, 2004, the registrant had 82,175,718 shares of common stock
outstanding.




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EMULEX CORPORATION AND SUBSIDIARIES INDEX  
 PAGEPart I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets March 28, 2004 and June 29, 2003
    
    
    2Condensed Consolidated Statements of Operations Three and nine months ended March 28, 2004 and March 30, 2003
    
    
    3Condensed Consolidated Statements of Cash Flows Three and nine months ended March 28, 2004 and March 30, 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    45Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    45Item 2. Changes in Securities and Use of Proceeds
    
    
    47Item 6. Exhibits and Reports on Form 8-K
    
    
    48Signatures
    
    
    51EXHIBIT 10.29EXHIBIT 31.AEXHIBIT 31.BEXHIBIT 32
  1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements EMULEX CORPORATION AND SUBSIDIARIES 
 
 March 28,
    
    June 29,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    182,864
    
    
    $
    136,971Restricted cash
    
    
    246
    
    
    
    9,342Investments
    
    
    225,193
    
    
    
    239,302Accounts and other receivables, net
    
    
    64,752
    
    
    
    46,678Litigation settlements receivable
    
    
    5,101
    
    
    
    13,095Inventories, net
    
    
    30,684
    
    
    
    10,998Prepaid expenses
    
    
    5,704
    
    
    
    5,516Deferred income taxes
    
    
    25,514
    
    
    
    36,330Total current assets
    
    
    540,058
    
    
    
    498,232Property and equipment, net
    
    
    62,100
    
    
    
    26,585Investments
    
    
    221,302
    
    
    
    234,847Goodwill
    
    
    583,490
    
    
    
    397,256Other intangibles, net
    
    
    129,216
    
    
    
    27,067Deferred income taxes
    
    
    8,610
    
    
    
    Other assets
    
    
    1,467
    
    
    
    5,782$
    1,546,243
    
    
    $
    1,189,769Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    
    26,584
    
    
    
    11,298Accrued liabilities
    
    
    22,408
    
    
    
    18,806Accrued litigation settlements
    
    
    
    
    
    
    39,500Income taxes payable
    
    
    16,586
    
    
    
    5,457Total current liabilities
    
    
    65,578
    
    
    
    75,061Convertible subordinated notes
    
    
    523,873
    
    
    
    208,518Contracts payable
    
    
    9
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    4,260Total liabilities
    
    
    589,460
    
    
    
    287,839Commitments and contingencies (note 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;
82,008,337 and 82,465,813 issued and outstanding at
March 28, 2004, and June 29, 2003, respectively
    
    
    8,201
    
    
    
    8,247Additional paid-in capital
    
    
    928,577
    
    
    
    907,976Deferred compensation
    
    
    (9,392
    )
    
    
    (3,159
    )Retained earnings (accumulated deficit)
    
    
    29,397
    
    
    
    (11,134
    )Total stockholders equity
    
    
    956,783
    
    
    
    901,930$
    1,546,243
    
    
    $
    1,189,769
 See accompanying notes to condensed consolidated financial statements. 2




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EMULEX CORPORATION AND SUBSIDIARIES 
 
 Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 30,
    
    March 28,
    
    March 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    99,038
    
    
    $
    79,573
    
    
    $
    277,984
    
    
    $
    226,446Cost of sales
    
    
    36,374
    
    
    
    29,088
    
    
    
    99,507
    
    
    
    84,311Gross profit
    
    
    62,664
    
    
    
    50,485
    
    
    
    178,477
    
    
    
    142,135Operating expenses:Engineering and development
    
    
    19,046
    
    
    
    15,823
    
    
    
    53,701
    
    
    
    45,418Selling and marketing
    
    
    8,366
    
    
    
    4,896
    
    
    
    19,818
    
    
    
    13,919General and administrative
    
    
    6,014
    
    
    
    30,573
    
    
    
    15,259
    
    
    
    36,641Amortization of other intangibles
    
    
    6,795
    
    
    
    1,452
    
    
    
    12,546
    
    
    
    4,357In-process research and development
    
    
    
    
    
    
    
    
    
    
    11,400
    
    
    
    Total operating expenses
    
    
    40,221
    
    
    
    52,744
    
    
    
    112,724
    
    
    
    100,335Operating income (loss)
    
    
    22,443
    
    
    
    (2,259
    )
    
    
    65,753
    
    
    
    41,800Nonoperating income:Interest income
    
    
    2,224
    
    
    
    3,142
    
    
    
    6,700
    
    
    
    10,081Interest expense
    
    
    (1,525
    )
    
    
    (1,236
    )
    
    
    (3,285
    )
    
    
    (4,267
    )Gain (loss) on repurchase of
convertible subordinated notes
    
    
    (231
    )
    
    
    
    
    
    
    2,670
    
    
    
    28,729Other income (expense), net
    
    
    (23
    )
    
    
    (46
    )
    
    
    141
    
    
    
    (132
    )Total nonoperating income
    
    
    445
    
    
    
    1,860
    
    
    
    6,226
    
    
    
    34,411Income (loss) before income taxes
    
    
    22,888
    
    
    
    (399
    )
    
    
    71,979
    
    
    
    76,211Income tax provision (benefit)
    
    
    8,560
    
    
    
    (151
    )
    
    
    31,448
    
    
    
    28,961Net income (loss)
    
    $
    14,328
    
    
    $
    (248
    )
    
    $
    40,531
    
    
    $
    47,250Net income (loss) per share:Basic
    
    $
    0.18
    
    
    $
    (0.00
    )
    
    $
    0.49
    
    
    $
    0.58Diluted
    
    $
    0.17
    
    
    $
    (0.00
    )
    
    $
    0.48
    
    
    $
    0.57Number of shares used in per share
computations:Basic
    
    
    81,872
    
    
    
    82,055
    
    
    
    82,928
    
    
    
    81,959Diluted
    
    
    84,592
    
    
    
    82,055
    
    
    
    86,874
    
    
    
    83,511
 See accompanying notes to condensed consolidated financial statements. 3




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EMULEX CORPORATION AND SUBSIDIARIES 
  
 Nine Months EndedMarch 28,
    
    March 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    40,531
    
    
    $
    47,250Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    9,254
    
    
    
    8,189Amortization of discount on 0.25% convertible subordinated
notes
    
    
    1,052
    
    
    
    Gain on repurchase of convertible subordinated notes
    
    
    (2,670
    )
    
    
    (28,729
    )Litigation settlements accrual
    
    
    
    
    
    
    27,007Stock-based compensation
    
    
    5,265
    
    
    
    3,447Amortization of other intangibles
    
    
    12,546
    
    
    
    4,357In-process research and development
    
    
    11,400
    
    
    
    Loss on disposal of property and equipment
    
    
    66
    
    
    
    164Deferred income taxes
    
    
    7,932
    
    
    
    20,364Tax benefit from exercise of stock options
    
    
    5,597
    
    
    
    2,308Provision for doubtful accounts
    
    
    106
    
    
    
    182Changes in assets and liabilities:Accounts and other receivables
    
    
    (12,026
    )
    
    
    (9,828
    )Inventories
    
    
    (18,285
    )
    
    
    (3,594
    )Prepaid expenses and other assets
    
    
    2,466
    
    
    
    (1,403
    )Accounts payable
    
    
    13,507
    
    
    
    1,615Accrued liabilities
    
    
    (6,102
    )
    
    
    (1,493
    )Payment of litigation settlements, net of insurance recovery
    
    
    (31,506
    )
    
    
    Income taxes payable
    
    
    11,086
    
    
    
    (2,077
    )Net cash provided by operating activities
    
    
    50,219
    
    
    
    67,759Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    
    53
    
    
    
    Additions to property and equipment
    
    
    (42,743
    )
    
    
    (11,002
    )Decrease (increase) in restricted cash related to the construction
escrow Account
    
    
    9,096
    
    
    
    (9,826
    )Payments for Vixel Corporation, net of cash acquired
    
    
    (294,096
    )
    
    
    Payments for the technology assets of Trebia Networks, Inc.
    
    
    (2,094
    )
    
    
    Purchases of investments
    
    
    (280,149
    )
    
    
    (500,510
    )Maturities of investments
    
    
    317,479
    
    
    
    412,803Net cash used in investing activities
    
    
    (292,454
    )
    
    
    (108,535
    )Cash flows from financing activities:Payments for short term indebtedness, notes payable and capital leases
    
    
    (175,290
    )
    
    
    Proceeds from short term indebtedness
    
    
    174,000
    
    
    
    Proceeds from issuance of common stock under stock option plans
    
    
    9,149
    
    
    
    1,055Proceeds from issuance of common stock under employee
stock purchase plan
    
    
    1,199
    
    
    
    437Repurchase of common stock
    
    
    (40,500
    )
    
    
    Net proceeds from issuance of 0.25% convertible subordinated notes
    
    
    505,179
    
    
    
    Repurchase of 1.75% convertible subordinated notes
    
    
    (185,609
    )
    
    
    (104,169
    )Net cash provided by (used in) financing activities
    
    
    288,128
    
    
    
    (102,677
    )Net increase (decrease) in cash and cash equivalents
    
    
    45,893
    
    
    
    (143,453
    )Cash and cash equivalents at beginning of period
    
    
    136,971
    
    
    
    282,561Cash and cash equivalents at end of period
    
    $
    182,864
    
    
    $
    139,108Supplemental disclosures:Noncash investing and financing activities:Fair value of assets acquired
    
    $
    20,936
    
    
    $
    Fair value of liabilities assumed
    
    
    13,449
    
    
    
    Stock options assumed for acquired business
    
    
    47,538
    
    
    
    Cash paid during the period for:Interest
    
    $
    2,226
    
    
    $
    4,878Income taxes
    
    
    6,888
    
    
    
    8,852
 See accompanying notes to 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
March 28, 2004, and June 29, 2003, and its condensed consolidated statements
of operations for the three and nine months ended March 28, 2004, and March
30, 2003, and its condensed consolidated statements of cash flows for the
nine month periods then ended. Interim results for the three and nine
months ended March 28, 2004, are not necessarily indicative of the results
that may be expected for the year ending June 27, 2004. The interim
financial statements should be read in conjunction with the Companys Annual
Report on Form 10-K for the fiscal year ended June 29, 2003.Recently Adopted Accounting StandardsThe Emerging Issues Task Force (EITF) recently reached a consensus on its
tentative conclusions for EITF 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides accounting guidance for customer
solutions where delivery or performance of products, services and/or
performance may occur at different points in time or over different periods
of time. Companies are required to adopt this consensus for fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
material impact on the Companys financial position, results of operations
or liquidity.In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation 46,  Consolidation of Variable Interest Entities. In
December 2003, the FASB issued Interpretation 46 (Revised) (FIN 46-R) to
address certain Interpretation 46 implementation issues. FIN 46-R requires
that the assets, liabilities and results of activities of a Variable
Interest Entity (VIE) be consolidated into the financial statements of the
enterprise that has a controlling interest in the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the
end of the first interim or reporting period ending after March 15, 2004,
except for those VIEs that are considered to be special purpose entities,
for which the effective date is no later than the end of the first interim
or annual reporting period ending after December 15, 2003. For all entities
acquired subsequent to January 31, 2003, this interpretation is effective as
of the first interim or annual period ending after December 31, 2003. The
adoption of the provisions of the interpretation did not have a material
impact on the Companys financial position, results of operation or
liquidity.In April 2003, the FASB issued Statement of Financial Accounting Standards
No. (Statement) 149, an amendment of FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which requires
prospective application for contracts entered into or modified after June
30, 2003, except for contracts that exist in fiscal quarters that began
prior to June 15, 2003, and for hedging relationships designated after June
30, 2003. For existing contracts in fiscal quarters that began prior to
June 15, 2003, the provisions of this Statement that relate to Statement 133
implementation issues should continue to be applied in accordance with their
respective effective dates. Statement 149 requires that contracts with
comparable characteristics be accounted for similarly. The adoption of this
pronouncement did not have a material impact on the Companys financial
position, results of operations or liquidity.In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity.
Statement 150 requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer.
Statement 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for public companies
during the first interim period beginning after June 15, 2003. The adoption
of this pronouncement did not have a material impact on the Companys
financial position, results of operations or liquidity.In December 2003, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB No. 104), which supercedes SAB No. 101
Revenue Recognition in Financial Statements. The primary purpose of SAB
No. 104 is to rescind accounting guidance contained in SAB No. 101 related
to multiple 5




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EMULEX CORPORATION AND SUBSIDIARIES   element revenue arrangements that was superceded as a result of the issuance
of EITF 00-21. While the wording of SAB No. 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB No. 101
remain largely unchanged by the issuance of SAB No. 104. The adoption of
SAB No. 104 did not have a material impact on the Companys financial
position, results of operations or liquidity.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 123, the Companys net income would have been
the pro forma amounts indicated below: Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 30,
    
    March 28,
    
    March 302004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    14,328
    
    
    $
    (248
    )
    
    $
    40,531
    
    
    $
    47,250Add: total employee
stock-based compensation
expense included in net
income as reported, net of
related tax effects
    
    
    1,596
    
    
    
    817
    
    
    
    3,924
    
    
    
    1,230Deduct: Total employee
stock-based compensation
expense determined
under fair value method for
all awards, net of related
tax effects
    
    
    (2,925
    )
    
    
    (6,987
    )
    
    
    (22,507
    )
    
    
    (23,548
    )Pro forma net income (loss)
    
    $
    12,999
    
    
    $
    (6,418
    )
    
    $
    21,948
    
    
    $
    24,932Pro forma net income (loss)
per shareBasic  as reported
    
    $
    0.18
    
    
    $
    (0.00
    )
    
    $
    0.49
    
    
    $
    0.58Basic  pro forma
    
    $
    0.16
    
    
    $
    (0.08
    )
    
    $
    0.26
    
    
    $
    0.30Diluted  as reported
    
    $
    0.17
    
    
    $
    (0.00
    )
    
    $
    0.48
    
    
    $
    0.57Diluted  pro forma
    
    $
    0.15
    
    
    $
    (0.08
    )
    
    $
    0.26
    
    
    $
    0.30
  The fair value of each option granted during the three and nine months ended
March 28, 2004, and March 30, 2003, was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 30,
    
    March 28,
    
    March 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    2.1
    %
    
    
    2.2
    %
    
    
    1.0% to 2.5
    %
    
    
    1.6% to 2.3
    %Stock volatility
    
    
    106.1
    %
    
    
    98.4
    %
    
    
    41.0% to 117.7
    %
    
    
    98.4% to 99.1
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Average expected lives (years)
    
    
    3.4
    
    
    
    3.6
    
    
    
    0.5 to 3.4
    
    
    
    0.5 to 3.7Weighted-average fair value
per option granted
    
    $
    17.98
    
    
    $
    12.19
    
    
    $
    4.92 to $17.98
    
    
    $
    11.51 to $16.42
  The Black-Scholes model, and other currently accepted option valuation
models, were developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Companys stock option plans. These models also require
highly subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated fair value
on the grant date. 6




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EMULEX CORPORATION AND SUBSIDIARIES   2.
    
    Business CombinationOn November 13, 2003, the Company completed the cash tender offer by Aviary
Acquisition Corporation, its wholly owned subsidiary, to acquire all
outstanding shares of Vixel Corporation for $10.00 net per share, without
interest. Approximately 23.9 million shares of Vixels common stock
(including the associated preferred stock purchase and other rights),
representing approximately 91.6 percent of Vixels outstanding common stock,
and 2.9 million shares of Vixels Series B convertible preferred stock,
representing all of Vixels outstanding preferred stock, were tendered in
the offer. Through its wholly owned subsidiary, the Company accepted
payment for all validly tendered shares. On November 17, 2003, the Company
completed its acquisition of Vixel by means of a short-form merger of Aviary
Acquisition Corp., with and into Vixel.The Company acquired Vixel to expand its Fibre Channel product line and paid
$298.4 million in cash for all outstanding common stock, preferred stock
and warrants of Vixel Corporation. The Company also incurred
acquisition-related expenses of $6.1 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
$352.1 million. The Company calculated the fair value of the 2.2 million
stock options issued at the date of acquisition using the Black-Scholes
option-pricing model. Operations of Vixel will be included within the
Companys one operating segment, networking products.The Company accounted for the acquisition of Vixel under the purchase method
of accounting and recorded a one-time expense of $11.4 million for purchased
in-process research and development, or IPR&D, during the three months ended
December 28, 2003. The values assigned to these projects were determined by
identifying projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use. The
features of the related products had not been released to the market as of
the date of the acquisition, but the features and functionality of the
products had been defined.The IPR&D related to two significant internal product development efforts.
The first project accounted for $7.4 million of the expenses. The second
project accounted for $4.0 million of the expenses. Both projects are for
embedded switching products.The first project was in development at the time of acquisition, but had not
yet completed the full design, development and testing phases.
Approximately 35 percent of the total expected time to be spent on the first
project was complete at the date of the acquisition with the remaining
activities of the design, development and testing phases as well as the
validation and readiness stages still to occur. The estimated costs to
complete the first project are $2.7 million. As of March 28, 2004, testing
activities are in process, and the original estimates have not changed
materially.The second project had completed design and development, and testing had
begun as of the acquisition date. Approximately 70 percent of the total
expected time to be spent on the second project was complete at the date of
the acquisition with the remaining testing activities as well as the
validation and readiness stages still to occur. The estimated costs to
complete the second project are $1.2 million. As of March 28, 2004, testing
activities and qualifications are in process, and the original estimates
have not changed materially.The risks and uncertainties associated with these two projects include, but
are not limited to, delays in product release to market if there are design
flaws or testing does not go as planned. In addition, if the projects are
delayed, such delay could potentially harm the Companys relationships with
its customers. Also, even if a product is successfully developed it may not
be accepted in the marketplace.The values of these projects were determined using the Income Forecast
Method. In applying the Income Forecast Method the value of the acquired
technologies was estimated by discounting to present value the free cash
flows generated by the products to which the technologies are associated
over the remaining lives of the technologies. To distinguish between the
cash flows attributable to the underlying technology and cash flows
attributable to other assets available for generating product revenues,
adjustments were made to provide for a 7




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EMULEX CORPORATION AND SUBSIDIARIES   fair return to fixed assets, working
capital and other assets that contribute to value. The estimates were based
on the following assumptions:  
    
    The estimated revenues associated with the first project were
evaluated over seven years with peak revenues expected in fiscal
years 2008 and 2009 and declining revenues thereafter. The
estimated revenues associated with the second project were evaluated
over nine years with peak revenues expected in fiscal years 2008 and
2009 and declining revenues thereafter. These projections are based
on managements estimates over the expected remaining lives of the
technologies.
    
    The discount rates used in the valuation reflect the relative
risk of the product lines, with a discount rate of 20% used for the
first project and a discount rate of 18% used for the second
project. These discount rates were based on the amount and risk of
effort remaining to complete the respective projects.  The Company believes that the foregoing assumptions used in determining the
income forecast associated with the IPR&D products were reasonable. No
assurance can be given, however, that the underlying assumptions used to
estimate the income forecast, the ultimate revenues and costs on such
projects or the events associated with such projects will transpire as
estimated.As a result of the acquisition, the Company will reduce the headcount
obtained from Vixel prior to the acquisition by a total of 24 employees, 21
of whom left during the Companys second and third fiscal quarters of 2004.
The remaining three employees are expected to leave during the Companys
fourth fiscal quarter ending June 27, 2004. The Company accrued $1.5
million at November 13, 2003 , the date the Company gained effective
control of Vixel, as an estimate for this reduction. The Company
subsequently reduced the estimate and the acquisition value by $0.7 million
and also paid $0.7 million through March 28, 2004, leaving a remaining
accrual of $0.1 million at March 28, 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
    
    $
    31,376Liabilities
    
    
    13,449Net tangible assets
    
    
    17,927Identifiable intangible assetsIn-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
    
    
    9,986Goodwill
    
    
    186,234Deferred compensation
    
    
    13,926$
    352,073
  In accordance with Statement 141, Business Combinations, the allocation
period, which is the period that is required to identify and measure the
fair value of the assets acquired and liabilities assumed in a business
combination, should not exceed one year from the date that the Company
gained effective control of Vixel. 8




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EMULEX CORPORATION AND SUBSIDIARIES   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 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.Following is the summarized unaudited pro forma combined results of
operations for the three and nine months ended March 28, 2004, and March 30,
2003, assuming the acquisition had taken place at the beginning of each
fiscal year. The unaudited pro forma combined statement of income for the
nine months ended March 28, 2004, was prepared based upon the statement of
income of Emulex for the nine months ended March 28, 2004, and the statement
of operations of Vixel for the period from June 30, 2003, to November 12,
2003. All operating results of Vixel were included in the statement of
income of Emulex since November 13, 2003, the date Emulex gained effective
control of Vixel. The unaudited pro forma combined statement of operations
for the three and nine months ended March 30, 2003, was prepared based upon
the statement of operations of Emulex for the three and nine months ended
March 30, 2003, and the statement of operations of Vixel for the three and
nine months ended March 30, 2003. The unaudited pro forma results exclude
the effects of the IPR&D charge of $11.4 million but include the
amortization of other intangibles, the amortization of deferred compensation
and the increase and decrease to interest expense and interest income,
respectively, resulting from the acquisition. The unaudited pro forma
results are not necessarily indicative of the future operations or
operations that would have been reported had the acquisitions been completed
when assumed. The following unaudited information is presented in
thousands, except for the per share data. Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 30,
    
    March 28,
    
    March 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Net revenues
    
    $
    99,038
    
    
    $
    84,564
    
    
    $
    289,236
    
    
    $
    242,553Net income (loss)
    
    $
    14,328
    
    
    $
    (8,104
    )
    
    $
    37,919
    
    
    $
    27,207Net income (loss) per diluted share
    
    $
    0.17
    
    
    $
    (0.10
    )
    
    $
    0.45
    
    
    $
    0.32
  3.
    
    InventoriesInventories, net, are summarized as follows: March 28,
    
    June 29,2004
    
    2003(in thousands)Raw materials.
    
    $
    17,190
    
    
    $
    3,802Finished goods
    
    $
    13,494
    
    
    $
    7,196$
    30,684
    
    
    $
    10,998
  Starting in late September 2001, some of the Companys major customers made
announcements that general economic conditions, exacerbated by the increase
in economic uncertainty in the aftermath of the terrorist events of
September 11, 2001, were having a negative impact on their financial
results. The announcements 9




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EMULEX CORPORATION AND SUBSIDIARIES   made, and forecasts received, indicated
deteriorating demand for the Companys one gigabit per second (Gbps)
products as these customers were expected to migrate to two Gbps products
for future purchases. As a result, the Company recorded an excess and
obsolete inventory charge totaling $13.6 million during the three months
ended September 30, 2001. After initially recording this one Gbps reserve
in September 2001, the Company has subsequently reduced this reserve by a
total of $8.9 million through March 28, 2004, as previously-reserved
inventory was sold. Overall, the Company has been able to recover a
significant portion of this reserved inventory that was not expected based
on the Companys forecasts and the forecasts received from its customers
when this excess and obsolete inventory charge was recorded. In addition to
the sale of some of this previously-reserved product, the Company has also
scrapped $3.4 million of this reserved inventory and negotiated and paid
cancellation charges of $0.2 million through March 28, 2004, related to this
excess and obsolete inventory charge since it was initially recorded. As of
March 28, 2004, the remaining reserve for one Gbps products was $1.1
million. However, as with all inventory, the Company regularly compares
forecasted demand for its one Gbps products against inventory on hand and
open purchase commitments and accordingly, the Company may have to record
reductions to the carrying value of excess and obsolete inventory if
forecasted demand decreases. As of March 28, 2004, the Company had
unreserved one Gbps inventory on hand of approximately $0.5 million.  4.
    
    Goodwill and Other IntangiblesGoodwill and other intangibles, net, are as follows: March 28,
    
    June 29,2004
    
    2003(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    99,094
    
    
    $
    40,600Accumulated amortization, core technology and patents
    
    
    (21,161
    )
    
    
    (13,533
    )Developed technology
    
    
    9,400
    
    
    
    Accumulated amortization, developed technology
    
    
    (884
    )
    
    
    Customer relationships
    
    
    38,200
    
    
    
    Accumulated amortization, customer relationships
    
    
    (2,875
    )
    
    
    Tradename
    
    
    5,000
    
    
    
    Accumulated amortization, tradename
    
    
    (269
    )
    
    
    Covenants not-to-compete
    
    
    3,100
    
    
    
    Accumulated amortization, covenants not-to-compete
    
    
    (389
    )
    
    
    Intangible assets subject to amortization
    
    $
    129,216
    
    
    $
    27,067Intangible assets not subject to amortization (in thousands):Goodwill balance as of June 29, 2003
    
    $
    397,256Goodwill acquired during year
    
    
    186,234Goodwill balance as of March 28, 2004
    
    $
    583,490
  Goodwill relates to the purchase of Vixel in November 2003 and the purchase
of Giganet in fiscal 2001. Core technology and patents relate to the
purchase of Vixel and Giganet and to the purchase of the technology assets
of Trebia Corporation for $2.0 million in October 2003. The technology
assets purchased from Trebia are being amortized on a straight-line basis
over a four-year life. All other intangible assets subject to amortization
relate to the purchase of Vixel.Effective July 1, 2002, the Company adopted Statement 142, Goodwill and
Other Intangible Assets and, as a result, the Company ceased amortizing
goodwill of $397.3 million related to the purchase of Giganet. Goodwill
will be tested for impairment at least annually, but also on an interim
basis if an event or circumstance indicates that it is more likely than not
that an impairment loss has been incurred.  The intangible assets subject to amortization are being amortized on a
straight-line basis over lives ranging from three months to seven years.
Aggregated amortization expense for these intangibles for the three and nine 10




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EMULEX CORPORATION AND SUBSIDIARIES   months ended March 28, 2004, was $6.8 million and $12.5 million,
respectively, and for the three and nine months ended March 30, 2003, was
$1.5 million and $4.4 million, respectively. For the next five full fiscal
years aggregated amortization expense is expected to be (in thousands): 2004
    
    $
    19,0932005
    
    $
    26,1902006
    
    $
    26,1272007
    
    $
    25,4422008
    
    $
    21,302
 5. Other Assets Components of other assets are as follows: March 28,
    
    June 29,2004
    
    2003( in thousands)Deferred debt issuance costs-
Convertible subordinated notes, net
    
    $
    917
    
    
    $
    4,670Longterm prepaid assets
    
    
    302
    
    
    
    1,016Refundable deposits
    
    
    248
    
    
    
    96$
    1,467
    
    
    $
    5,782
  6.
    
    Accrued LiabilitiesComponents of accrued liabilities are as follows: March 28,
    
    June 29,2004
    
    2003( in thousands)Payroll and related costs
    
    $
    7,547
    
    
    $
    8,406Accrued inventory purchases
    
    
    
    
    
    
    1,449Accrued interest
    
    
    415
    
    
    
    1,502Warranty reserves
    
    
    4,499
    
    
    
    2,349Deferred revenue
    
    
    1,053
    
    
    
    2,054Accrued advertising and promotions
    
    
    1,319
    
    
    
    719Contracts payable
    
    
    24
    
    
    
    Other
    
    
    7,551
    
    
    
    2,327$
    22,408
    
    
    $
    18,806
  Deferred revenue includes an accrual for estimated returns and allowances of
$1.0 million and $1.9 million at March 28, 2004 and June 29, 2003,
respectively. Deferred revenue also includes the revenue related to legacy
cLAN products with unspecified upgrade rights of $16 thousand and $0.2
million at March 28, 2004, and June 29, 2003, respectively.The Company provides a warranty of between one and three years on its
Input/Output Fibre Channel and Internet Protocol products and provides a
warranty of between one and five years on its Fibre Channel switching and
traditional networking products. The Company records a provision for
estimated warranty related costs at the time of sale based on historical
product returns and the Companys expected future cost of fulfilling its
warranty obligations. 11




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EMULEX CORPORATION AND SUBSIDIARIES   Changes to the warranty reserve for the nine months ended March 28, 2004,
and March 30, 2003, were: March 28,
    
    March 30,2004
    
    2003( in thousands)Balance at beginning of period
    
    $
    2,349
    
    
    $
    2,244Additions to costs and expenses
    
    
    2,279
    
    
    
    1,020Amounts charged against reserve
    
    
    (1,582
    )
    
    
    (633
    )Beginning balance of Vixel Corporation
    
    
    1,453
    
    
    
    Balance at end of period
    
    $
    4,499
    
    
    $
    2,631
  Changes to the warranty reserve for the three months ended March 28, 2004,
and March 30, 2003, were: March 28,
    
    March 30,2004
    
    2003( in thousands)Balance at beginning of period.
    
    $
    4,204
    
    
    $
    2,595Additions to costs and expenses
    
    
    796
    
    
    
    250Amounts charged against reserve
    
    
    (501
    )
    
    
    (214
    )Balance at end of period
    
    $
    4,499
    
    
    $
    2,631
  7.
    
    Convertible Subordinated NotesOn January 29, 2002, the Company completed a $345.0 million private
placement of 1.75 percent convertible subordinated notes due February 1,
2007. Interest is payable in cash on February 1 and August 1 of each year
beginning August 1, 2002. These notes may be converted by the holder at any
time into shares of the Companys common stock at the conversion price of
$53.84 per share, subject to the potential adjustments described in the
terms of the notes issued. The Company may redeem the notes on or after
February 5, 2005, in whole or in part. The Company incurred associated
issuance costs of approximately $11.0 million.During the three months ended September 29, 2002, the Companys Board of
Directors expanded the Companys stock repurchase program to include
repurchase of the Companys 1.75 percent convertible subordinated notes as
well as shares of the Companys common stock. In August 2002, the Company
bought back at a discount to face value approximately $136.5 million in face
value of its convertible subordinated notes for $104.2 million. The
resulting net pre-tax gain of $28.7 million was recorded for the three
months ended September 29, 2002.During the three months ended September 28, 2003, the Companys Board of
Directors expanded the Companys stock repurchase program to include the
repurchase of all of the Companys 1.75 percent convertible subordinated
notes and extended the entire program to June 2005. The combined program
authorizes the repurchase of up to 4.0 million shares of common stock and
the repurchase of all of the remaining outstanding convertible subordinated
notes. Also during the three months ended September 28, 2003, the Company
bought back approximately $93.9 million in face value of its convertible
subordinated notes at a discount to face value for approximately $87.3
million. The resulting net pre-tax gain of approximately $4.7 million was
recorded in the three months ended September 28, 2003. The repurchased
notes were cancelled.  During the three months ended December 28, 2003, the Company bought back
approximately $85.4 million in face value of its 1.75 percent convertible
subordinated notes for approximately $85.9 million. The resulting net
pre-tax loss of approximately $1.8 million was recorded in the three months
ended December 28, 2003 and was due to the expensing of the remaining
deferred debt issuance costs. Also during the three months ended March 28,
2004, the Company bought back approximately $12.3 million face value of its
1.75 percent convertible subordinated notes for approximately $12.4 million.
The resulting net pre-tax loss of approximately $0.2 million due to the
expensing of the remaining deferred debt issuance costs was recorded during
the three months ended March 28, 2004. 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 12




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EMULEX CORPORATION AND SUBSIDIARIES   in the issuance of approximately 0.3 million shares. At March 28,
2004, the entire $17.0 million face amount of the outstanding 1.75 percent
convertible subordinated notes remained authorized for repurchase. In
addition, 1.5 million shares of common stock remain authorized for
repurchase, reflecting the repurchase of 1.5 million common shares during
the three months ended December 28, 2003.  On December 12, 2003, the Company completed a $450.0 million private
placement of 0.25 percent convertible subordinated notes due 2023. Interest
is payable in cash on June 15th and December 15th of each year beginning
June 15, 2004. Under the terms of the offering, the notes will be
convertible, at the option of the holder and subject to the satisfaction of
certain conditions, into shares of Emulex common stock at a price of
$43.20 per share.In addition, the Company granted the initial purchasers
of the notes an option, which they exercised during the three months ended
March 28, 2004, to purchase an additional $67.5 million principal amount of
the notes. The notes will mature in twenty years and will not be callable
for the first five years. Holders of the notes may require the Company to
purchase the notes for cash by giving written notice within the 20 business
days prior to each of December 15, 2006, December 15, 2008, December 15,
2013, and December 15, 2018. The Company incurred 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 recorded as an asset and will also be
amortized over the effective life of the notes. The effective life of the
Companys 0.25 percent 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, instead of the 20 year term of the notes.  8.
    
    Commitments and ContingenciesLitigationOn February 28, 2003, Vixel Corporation, prior to the Companys acquisition
of it, filed a patent infringement action against QLogic Corporation in the
United States District Court for the District of Delaware. The complaint
states that QLogic is infringing U.S. Patent No. 6,118,776, entitled
Methods and Apparatus for Fibre Channel Interconnection of Private Loop
Devices, through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products, including but not
limited to, QLogics SANBox2 series of products. On March 28, 2003, Vixel
filed a first amended complaint stating that QLogic is also infringing U.S.
Patent No. 6,185,203, entitled Fibre Channel Switching Fabric and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, QLogics SANBox2 series of
products. On May 23, 2003, Vixel filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District Court for
the Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching
products, including but not limited to, Brocades Silkworm switch products.
QLogic and Brocade denied infringement and challenged the validity of the
patents referenced. Brocade also challenged the enforceability of those
patents. In both of these suits, Vixel was seeking unspecified past
damages, potential future royalties, or, alternatively, injunctive relief.On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that
one of Vixels products, the 7200 Fibre Channel Switch, infringes U.S.
Patent No. 4,821,034, entitled Digital Exchange Switch Element and
Network. The suit seeks unspecified monetary damages as well as injunctive
relief.  On December 15, 2003, the Company and QLogic tentatively agreed to settle
the claims and mutually release each other from any liability associated
with the claims (and the related counterclaims filed by QLogic) in exchange
for payments by QLogic. In connection with the settlement, QLogic will be
required to make an upfront payment and pay quarterly royalties associated
with the future sales of certain products. The settlements are subject to
execution of final written agreements with normal and customary terms and
court approval of the dismissal of the lawsuits. On February 27, 2004,
Emulex Design & Manufacturing Corporation (the new name 13




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EMULEX CORPORATION AND SUBSIDIARIES   given to Vixel)
filed a complaint against QLogic in the United States District Court for the
District of Delaware asserting the validity and enforceability of the
December 15, 2003 settlements and seeking a declaration that the U.S. Patent
No. 4,821,034 is invalid and is not infringed. On March 18, 2004, QLogic
filed an answer that included denials of the Companys assertions concerning
U.S. Patent 4,821,034 and a denial that a valid and enforceable settlement
had been reached.  On November 15, 2001, prior to the Companys acquisition of Vixel
Corporation, a securities class action was filed in the United States
District Court in the Southern District of New York against Vixel and two of
its officers and directors and certain underwriters who participated in the
Vixel initial public offering in late 1999. The amended complaint alleges
violations under Section 10(b) of the Exchange Act and Section 11 of the
Securities Act and seeks unspecified damages on behalf of persons who
purchased Vixel stock during the period
October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers
and directors until September 30, 2003, and on the basis of this agreement,
Vixels officers and directors were dismissed from the lawsuit without
prejudice. During June 2003, Vixel and the other issuer defendants in the
action reached a tentative settlement with the plaintiffs that would, among
other things, result in the dismissal with prejudice of all claims against
the defendants and their officers and directors. In connection with the
possible settlement, those officers and directors who had entered tolling
agreements with the plaintiffs agreed to extend those agreements so that
they would not expire prior to any settlement being finalized. Although
Vixel approved this settlement proposal in principle, it remains subject to
a number of procedural conditions, as well as formal approval by the court.  On October 9, 2003, before the Companys acquisition of Vixel, a purported
class action lawsuit was filed in King County Superior Court of the State of
Washington against Vixel and each of Vixels directors and certain unnamed
individuals (the Vixel Parties), entitled Russell Fink v. Vixel
Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made general
allegations that, among other things, Vixels directors breached their
fiduciary duties to Vixel stockholders in connection with the approval of
the merger with Emulex and sought to enjoin the tender offer and have the
merger agreement declared unlawful, among other forms of relief. On November
7, 2003, the Vixel Parties entered into a memorandum of understanding for a
$0.7 million settlement with the plaintiff in the class action suit pursuant
to which the parties have agreed to settle the action, subject to court
approval. The $0.7 million was recorded as general and administrative
expense for the three months ended December 28, 2003. Formal settlement
documents were signed on May 5, 2004 and the plaintiff has completed
discovery as agreed to by the parties. The consummation of the settlement
is subject to the final court approval (as defined by law) of the settlement
and dismissal of the action with prejudice.  Beginning on or about February 20, 2001, the Company and certain of its
officers and directors were named as defendants in a number of securities
class action lawsuits filed in the United States District Court, Central
District of California. The plaintiffs in the actions represent purchasers
of the Companys common stock during various periods ranging from January
18, 2001, through February 9, 2001. The complaints alleged that the Company
and certain of its officers and directors made misrepresentations and
omissions in violation of sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended. The complaints generally seek compensatory
damages, costs and attorneys fees in an unspecified amount. In addition,
the Company has received inquiries about events giving rise to the lawsuits
from the SEC and the Nasdaq Stock Market. On April 22, 2003, the Company
entered into two Memoranda of Understanding agreeing to terms of settlement
for both the class action and derivative litigation. The settlement was
approved and $39.5 million held in escrow was paid to the plaintiffs. The
Company is currently seeking to recover a portion of this amount from the
Companys insurance carriers. The final amount collected for the Companys
receivable from its insurance carriers related to the settlements of
securities class action and derivative lawsuits may be materially different
from the receivable amount. 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 during the three months ended March 28, 2004.  Each of the foregoing lawsuits or arbitrations is pending, and presents
risks inherent in disputes of this type, any of which could have a material
adverse effect on the Companys business, financial condition or results of
operations. Such potential risks include the continuing expenses of
litigation, the risk of loss of patent rights, the risk of injunction
against the sale of products incorporating the technology in question,
counterclaims and attorneys fee liability. 14




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EMULEX CORPORATION AND SUBSIDIARIES   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 recorded an estimated excess and obsolete inventory charge of
$13.6 million associated with older-generation one Gbps products during the
three months ended September 30, 2001. After initially recording this one
Gbps reserve in September 2001, the Company has subsequently reduced this
reserve by a total of $8.9 million through March 28, 2004, as
previously-reserved inventory has been sold. Overall, the Company has been
able to recover a significant portion of this reserved inventory that was
not expected based on the Companys forecast and the forecasts received from
its customers when this excess and obsolete
inventory charge was recorded. In addition to the sale of some of this
previously-reserved product, the Company has also scrapped $3.4 million of
this reserved inventory and negotiated and paid cancellation charges of $0.2
million through March 28, 2004, related to this excess and obsolete
inventory charge since it was initially recorded. As of March 28, 2004, the
remaining reserve for one Gbps products was $1.1 million. However, as with
all inventory, the Company regularly compares forecasted demand for its one
Gbps products against inventory on hand and open purchase commitments and
accordingly, the Company may have to record reductions to the carrying value
of excess and obsolete inventory if forecasted demand decreases. As of
March 28, 2004, the Company had unreserved one Gbps inventory on hand of
approximately $0.5 million.The Company was required to enter into purchase agreements for eight key
inventory components, and as of March 28, 2004, the Companys remaining
purchase obligation for the eight components was $5.7 million. In addition,
the Company has a $1.0 million letter of credit in place in lieu of a rental
deposit on one of its facilities.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 dilutive potential common shares from stock
option plans and convertible subordinated notes had been issued. The
dilutive effect of outstanding stock options is reflected in diluted net
income per share by application of the treasury stock method. The following
table sets forth the computation of basic and diluted net income per share: 15




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EMULEX CORPORATION AND SUBSIDIARIES  Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 30,
    
    March 28,
    
    March 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income (loss)
    
    $
    14,328
    
    
    $
    (248
    )
    
    $
    40,531
    
    
    $
    47,250Adjustment
for interest expense on convertible subordinated notes, net of tax
    
    
    75
    
    
    
    
    
    
    
    888
    
    
    
    Numerator for diluted net income (loss) per
share
    
    $
    14,403
    
    
    $
    (248
    )
    
    $
    41,419
    
    
    $
    47,250Denominator:Denominator for basic net income (loss) per
share  weighted average shares outstanding
    
    
    81,872
    
    
    
    82,055
    
    
    
    82,928
    
    
    
    81,959Effect of dilutive securities:Dilutive options outstanding
    
    
    2,340
    
    
    
    
    
    
    
    2,132
    
    
    
    1,552Dilutive common shares from assumed
conversion of subordinated notes
    
    
    380
    
    
    
    
    
    
    
    1,814
    
    
    
    Denominator for diluted net income (loss) per
share  adjusted weighted average shares
outstanding
    
    
    84,592
    
    
    
    82,055
    
    
    
    86,874
    
    
    
    83,511Basic net income (loss) per share
    
    $
    0.18
    
    
    $
    (0.00
    )
    
    $
    0.49
    
    
    $
    0.58Diluted net income (loss) per share
    
    $
    0.17
    
    
    $
    (0.00
    )
    
    $
    0.48
    
    
    $
    0.57Antidilutive options excluded from computation
    
    
    3,954
    
    
    
    10,382
    
    
    
    3,937
    
    
    
    6,778Average market price of common stock
    
    $
    25.53
    
    
    $
    19.91
    
    
    $
    25.62
    
    
    $
    18.83
  The antidilutive options were excluded from the computation of diluted net
income per share because the options exercise price was greater than the
average market price of the common shares during the three and nine months
ended March 28, 2004. As the Company recorded a net loss for the three
months ended March 30, 2003, all outstanding stock options and common stock
equivalents associated with the Companys 1.75 percent convertible
subordinated notes were excluded for the three months ended March 30, 2003,
as the effect would have been antidilutive. The effect of the common stock
equivalents associated with the Companys 1.75 percent convertible
subordinated notes was excluded for the nine months ended March 30, 2003, as
the effect would have been antidilutive. The effect of the 0.25 percent
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 and nine months ended
March 28, 2004. 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Forward-Looking Statements Certain statements contained in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. We may also make forward-looking statements in other reports filed
with the Securities and Exchange Commission, in materials delivered to
stockholders and in press releases. In addition, our representatives may from
time to time make oral forward-looking statements. Forward-looking statements
provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or
current fact. Words such as anticipates, in the opinion, believes,
intends, expects, may, will, should, could, plans, forecasts,
estimates, predicts, projects, potential, continue and similar
expressions may be intended to identify forward-looking statements. Actual future results could differ materially from those described in the
forward-looking statements as a result of a variety of factors, including those
discussed in Managements Discussion and Analysis of Financial Condition and
Results of Operations set forth below, and, in particular, the subsection
entitled Risk Factors set forth therein, and in our most recently filed
Annual Report on Form 10-K. These factors include risks related to the recent
acquisition of Vixel and the fact that the economy generally, and the
technology and storage segments specifically, have 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 and resulting political or economic instability; the
highly competitive nature of the markets for our products as well as pricing
pressures that may result from such competitive conditions; our ability and the
ability of our OEM customers to keep pace with the rapid technological changes
in our industry and gain market acceptance for new products and technologies;
the effect of rapid migration of customers towards newer product platforms;
possible transitions from board or box level to application specific integrated
circuit, or ASIC, solutions for selected applications; a shift in the use of
lower-end host bus adapters, or HBAs, in higher-end environments or
applications; a decrease in the average unit selling prices or an increase in
the manufactured cost of our products; delays in product development; our
reliance on third-party suppliers and subcontractors for components and
assembly; any inadequacy of our intellectual property protection or the
potential for third-party claims of infringement; our ability to attract and
retain key technical personnel; our dependence on foreign sales and
foreign-produced products; the effect of acquisitions; changes in tax rates or
changes in accounting standards. Readers should carefully review these cautionary statements since they identify
certain important factors that could cause actual results to differ materially
from those in the forward-looking statements and from historical trends and are
in addition to other factors discussed elsewhere in this Form 10-Q, in our
filings with the Securities and Exchange Commission or in materials
incorporated therein by reference. We caution the reader, however, that these
lists of risk factors may not be exhaustive. We expressly disclaim any
obligation or undertaking to release publicly any updates or changes to these
forward-looking statements that may be made to reflect any future events or
circumstances. Company Overview Emulex Corporation is the world leader in Fibre Channel 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 17




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##### Table of Contents



appliances, delivering improved performance and reliability
and storage connections. Emulexs architecture offers customers a stable
applications program interface, or API, that has been preserved across multiple
generations of storage
networking solutions and to which many of the worlds leading OEMs have
customized software for mission-critical server and storage system
applications. Substantially all of our revenues during the third quarter of fiscal 2004 ended
March 28, 2004, were comprised of products based on Fibre Channel technology.
Our Fibre Channel development efforts began in 1992, and we shipped our first
Fibre Channel product in volume in 1996. According to IDC, in calendar 2003 we
were the worlds largest provider of Fibre Channel HBAs, in terms of revenue
and units shipped. Many of the worlds leading server and storage providers
rely on Emulex HBAs, embedded storage switching and I/O controller products to
build reliable, scalable and high performance storage solutions. The Emulex
award winning product families, including our LightPulse HBAs and InSpeed
embedded storage switching products, are based on internally developed ASIC,
firmware and software technologies, and offer customers high performance,
scalability, flexibility and reduced total cost of ownership. Emulexs
products have been selected by many of the worlds leading server and storage
providers, including Dell, EMC, Fujitsu Ltd., Fujitsu-Siemens, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance, Quantum
Corp., StorageTek, Sun Microsystems, Unisys and Xyratex. In addition, we
include industry leaders Brocade, Computer Associates, Intel, McDATA, Microsoft
and VERITAS among our strategic partners. We market to OEMs and end users
through our own worldwide selling organization as well as our two tier
distribution partners, including ACAL, Avnet, Bell Microproducts, Info-X,
Netmarks, Tech Data, Tidalwire and Tokyo Electron. Corporate headquarters are
located in Costa Mesa, California. Our periodic and current reports filed with
or furnished to the Securities and Exchange Commission pursuant to the
requirements of the Securities and Exchange Act of 1934 are available free of
charge through our website (www.emulex.com) as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the
Securities and Exchange Commission. As of March 28, 2004, we had a total of
510 employees. References contained herein to Emulex, the Company, the
Registrant, we, our, and us, refer to Emulex Corporation and its
subsidiaries. Business Combination On November 13, 2003, we completed the cash tender offer by Aviary Acquisition
Corporation, our wholly owned subsidiary, to acquire all outstanding shares of
Vixel Corporation for $10.00 net per share, without interest. Approximately
23.9 million shares (including the associated preferred stock purchase and
other nights) of Vixels common stock representing approximately 91.6 percent
of Vixels outstanding common stock, and 2.9 million shares of Vixels Series B
convertible preferred stock, representing all of Vixels outstanding preferred
stock, were tendered in the offer. Through our wholly owned subsidiary, we
accepted payment for all validly tendered shares. On November 17, 2003, we
completed our acquisition of Vixel by means of a short-form merger of Aviary
Acquisition Corp., with and into Vixel. We acquired Vixel to expand our Fibre Channel product line and paid $298.4
million in cash for all outstanding common stock, preferred stock and warrants
of Vixel Corporation. We also incurred acquisition-related expenses of $6.1
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 $352.1 million. We calculated the fair value of the 2.2
million stock options issued at the date of acquisition using the Black-Scholes
option-pricing model. The operations of Vixel will be included within the
Companys one operating segment, networking products. We accounted for the acquisition of Vixel under the purchase method of
accounting and recorded a one-time expense of $11.4 million for purchased
in-process research and development, or IPR&D, during the three months ended
December 28, 2003. The values assigned to these projects were determined by
identifying projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use. The
features of the related products had not been released to the market as of the
date of the acquisition, but the features and functionality of the products had
been defined. For more information regarding in-process research and
development see note 2 to the condensed consolidated financial statements. Convertible Subordinated Notes Offering On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004. Under the
terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.In addition, we 18




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##### Table of Contents



granted he initial purchasers of the notes an option, which they exercised during the
three months ended March 28, 2004, to purchase an additional $67.5 million
principal amount of the notes. We incurred total associated bankers fees of
$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 approximately $0.7 million of other associated debt issuance
costs, which have been recorded as an asset and will be amortized over the
effective life of the notes. Holders of the notes may require the Company to
purchase the notes for cash by giving written notice within the 20 business
days prior to each of December 15, 2006, December 15, 2008, December 15, 2013,
and December 15, 2018. Consequently, the effective life of our 0.25 percent
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,
instead of the 20-year term of the notes. When we issued our earnings release
for the three and nine months ended March 28, 2004, interest expense, related
to the accretion of the bankers fees and amortization of the associated debt
issuance costs, was inadvertently calculated using a life longer than the
three-year effective life of our 0.25 percent convertible subordinated notes.
The net impact after tax of using the shorter effective life was a decrease to
net income of $223 thousand. Basic and diluted net earnings per share for the
three and nine months ended March 28, 2004, did not change. See Part II, Item
2 Changes in Securities and Use of Proceeds for a more detailed discussion of
the convertible subordinated notes offering. 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 ended
    
    Nine months endedMarch 28,
    
    March 30,
    
    March 28,
    
    March 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    36.7
    
    
    
    36.6
    
    
    
    35.8
    
    
    
    37.2Gross profit
    
    
    63.3
    
    
    
    63.4
    
    
    
    64.2
    
    
    
    62.8Operating expenses:Engineering and development
    
    
    19.2
    
    
    
    19.9
    
    
    
    19.3
    
    
    
    20.1Selling and marketing
    
    
    8.4
    
    
    
    6.2
    
    
    
    7.1
    
    
    
    6.1General and administrative
    
    
    6.1
    
    
    
    38.3
    
    
    
    5.5
    
    
    
    16.2Amortization of other intangibles
    
    
    6.9
    
    
    
    1.8
    
    
    
    4.5
    
    
    
    1.9In-process research and development
    
    
    
    
    
    
    
    
    
    
    4.1
    
    
    
    Total operating expenses
    
    
    40.6
    
    
    
    66.2
    
    
    
    40.5
    
    
    
    44.3Operating income (loss)
    
    
    22.7
    
    
    
    (2.8
    )
    
    
    23.7
    
    
    
    18.5Nonoperating income :Interest income
    
    
    2.2
    
    
    
    3.9
    
    
    
    2.4
    
    
    
    4.4Interest expense
    
    
    (1.5
    )
    
    
    (1.6
    )
    
    
    (1.2
    )
    
    
    (1.9
    )Gain (loss) on repurchase of
convertible subordinated
notes
    
    
    (0.3
    )
    
    
    
    
    
    
    1.0
    
    
    
    12.7Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonoperating income
    
    
    0.4
    
    
    
    2.3
    
    
    
    2.2
    
    
    
    15.2Income (loss) before income taxes
    
    
    23.1
    
    
    
    (0.5
    )
    
    
    25.9
    
    
    
    33.7Income tax provision (benefit)
    
    
    8.6
    
    
    
    (0.2
    )
    
    
    11.3
    
    
    
    12.8Net income (loss)
    
    
    14.5
    %
    
    
    (0.3
    )%
    
    
    14.6
    %
    
    
    20.9
    %
 Three months ended March 28, 2004, compared to three months ended March 30,
2003 Net Revenues.Net revenues for the third quarter of fiscal 2004 ended March
28, 2004, increased by $19.5 million, or 24 percent, to $99.0 million, compared
to the same quarter of fiscal 2003 ended March 30, 2003. 19




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##### Table of Contents



From a product line perspective, net revenues generated from our Fibre Channel
products for the three months ended March 28, 2004, were $99.0 million, an
increase of $20.8 million, or 27 percent, compared to the three months ended
March 30, 2003, and represented substantially all of our net revenues. We
believe that our net revenues from our
broad range of Input/Output, or I/O, and Fibre Channel switching products are
being generated primarily as a result of our product certifications and
qualifications with OEM customers, which take product both directly and through
distribution. The following chart details our net revenues by product line for
the three months ended March 28, 2004 and March 30, 2003: Net Revenues by Product Line Three Months
    
    Percentage
    
    Three Months
    
    Percentage ofEnded March 28,
    
    of Net
    
    Ended March 30,
    
    Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeFibre Channel
    
    $
    99,016
    
    
    
    100
    %
    
    $
    78,185
    
    
    
    98
    %
    
    $
    20,831
    
    
    
    27
    %IP networking
    
    
    16
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    (295
    )
    
    
    (95
    %)Traditional networking
    
    
    6
    
    
    
    
    
    
    
    1,077
    
    
    
    2
    %
    
    
    (1,071
    )
    
    
    (99
    %)Total net revenues
    
    $
    99,038
    
    
    
    100
    %
    
    $
    79,573
    
    
    
    100
    %
    
    $
    19,465
    
    
    
    24
    %
 Our IP networking products consist of both our iSCSI products, which have not
completed development, as well as legacy VI and cLAN products. We expect that
our VI, cLAN and traditional networking products, which have all entered
end-of-life status, will contribute negligible revenues to succeeding quarters.
We do not expect material revenue from iSCSI products for the foreseeable
future. In addition to direct sales, some of our larger OEM customers purchased or
marketed products indirectly through distributors, resellers or other third
parties. Customers whose direct net revenues, or total direct and indirect net
revenues (including customer-specific models purchased or marketed indirectly
through distributors, resellers and other third parties), exceeded 10 percent
of our net revenues were as follows: Net Revenues by Major Customers Direct Revenues
    
    Total Direct and Indirect Revenues (2)Three Months
    
    Three Months
    
    Three Months
    
    Three MonthsEnded March 28,
    
    Ended March 30,
    
    Ended March 28,
    
    Ended March 30,2004
    
    2003
    
    2004
    
    2003Net revenue
percentage
(1) :EMC
    
    
    
    
    
    
    
    
    
    
    26
    %
    
    
    20
    %Hewlett-Packard
    
    
    15
    %
    
    
    21
    %
    
    
    17
    %
    
    
    21
    %IBM
    
    
    21
    %
    
    
    28
    %
    
    
    21
    %
    
    
    32
    %Info-X
    
    
    13
    %
    
    
    
    
    
    
    
    
    
    
    
  (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 65 percent of total net
revenues for the three months ended March 28, 2004, compared to 69 percent for
the three months ended March 30, 2003, and we expect to be similarly
concentrated in the future. Our EMC OEM products are sold both directly to EMC
and indirectly through distributors such as Info-X. As a result, for the three
months ended March 28, 2004, and March 30, 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. From a sales channel perspective, net revenues generated from OEM customers
were 62 percent of total net revenues and sales through distribution were 38
percent in the three months ended March 28, 2004 compared to net revenues from
OEM customers of 69 percent and sales through distribution of 31 percent in the
three months ended March 30, 2003. Our OEM customers may take products both
directly 20




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##### Table of Contents



and through distribution channels. The following chart details our
net revenues by sales channel for the three months ended March 28, 2004, and
March 30, 2003: Net Revenues by Sales Channel Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March 28,
    
    of Net
    
    Ended March 30,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    61,502
    
    
    
    62
    %
    
    $
    54,820
    
    
    
    69
    %
    
    $
    6,682
    
    
    
    12
    %Distribution
    
    
    37,499
    
    
    
    38
    %
    
    
    24,736
    
    
    
    31
    %
    
    
    12,763
    
    
    
    52
    %Other
    
    
    37
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    20
    
    
    
    118
    %Total net revenues
    
    $
    99,038
    
    
    
    100
    %
    
    $
    79,573
    
    
    
    100
    %
    
    $
    19,465
    
    
    
    24
    %
 In the three months ended March 28, 2004, domestic net revenues increased by
$6.2 million, or 14 percent, and international net revenues increased by $13.3
million, or 38 percent, compared to the three months ended March 30, 2003. The
following chart details our net domestic and international revenues based on
billed-to location for the three months ended March 28, 2004, and March 30,
2003: Net Domestic and International Revenues Three Months
    
    Percentage
    
    Three Months
    
    PercentageEnded March 28,
    
    of Net
    
    Ended March 30,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    51,006
    
    
    
    51
    %
    
    $
    44,835
    
    
    
    56
    %
    
    $
    6,171
    
    
    
    14
    %Europe
    
    
    38,406
    
    
    
    39
    %
    
    
    28,398
    
    
    
    36
    %
    
    
    10,008
    
    
    
    35
    %Pacific Rim
    
    
    9,626
    
    
    
    10
    %
    
    
    6,340
    
    
    
    8
    %
    
    
    3,286
    
    
    
    52
    %Total net revenues
    
    $
    99,038
    
    
    
    100
    %
    
    $
    79,573
    
    
    
    100
    %
    
    $
    19,465
    
    
    
    24
    %
 We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products.
However, because we sell to OEMs and distributors who ultimately resell our
products to their customers, the geographic mix of our net revenues may not be
reflective of the geographic mix of end-user demand or installations. Gross Profit.Cost of sales included the cost of production of finished
products as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. For the three months
ended March 28, 2004, cost of sales included $0.6 million of retention bonuses
for terminated employees related to the Vixel acquisition and amortized
deferred stock-based compensation expenses. For the three months ended March
30, 2003, cost of sales included $0.1 million of amortized deferred stock-based
compensation expenses. In the three months ended March 28, 2004, gross profit
increased $12.2 million, or 24 percent, to $62.7 million, from $50.5 million in
the three months ended March 30, 2003. The remaining increase in gross profit
in the three months ended March 28, 2004, compared to the three months ended
March 30, 2003, was primarily due to higher net revenues and volumes. Gross
margin stayed relatively flat at 63 percent in both the three months ended
March 28, 2004, and March 30, 2003. We have recorded reductions related to
our one gigabit per second, or Gbps, reserve, as previously-reserved inventory
was sold. In the three months ended March 28, 2004, and March 30, 2003, the
reductions were $45 thousand and $0.3 million, respectively. This reserve was
initially recorded during the first quarter of fiscal 2002. Engineering and Development.Engineering and development expenses consisted
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of our products. These expenses included
third-party fees paid to consultants, prototype development expenses and
computer services costs related to supporting computer tools used in the
engineering and design process. Engineering and development expenses were
$19.0 million and $15.8 million in the three months ended March 28, 2004, and
March 30, 2003, representing 19 percent and 20 percent of net revenues in each
period, respectively. Engineering and development expenses increased by $3.2
million, or 20 percent, in the three months ended March 28, 2004, compared to
the three months ended March 30, 2003. This increase was primarily due to the
inclusion of the engineering and development expenses associated with our
acquisition of Vixel, driven in part by the addition of 60 employees and their
associated expenses. Since we completed our integration of Vixels day-to-day
operations during the three months ended 21




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##### Table of Contents



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 83 percent of the overall $3.2 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 $0.7
million and $0.9 million of amortized deferred stock-based compensation
expenses for the three months ended March 28, 2004 and March 30, 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. While our engineering
expenses in the three months ended March 28, 2004, increased at a similar rate
as net revenues in comparison to the three months ended March 30, 2003,
engineering expenses can fluctuate significantly from quarter to quarter
depending on several factors, including, but not limited to, non-recurring
engineering charges associated with new product introduction schedules, hiring
patterns and depreciation of capital equipment. Selling and Marketing.Selling and marketing expenses consisted primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of our products, as well as trade shows, product
literature, promotional support costs and other advertising-related costs.
Selling and marketing expenses were $8.4 million and $4.9 million in the three
months ended March 28, 2004, and March 30, 2003, representing eight and six
percent of net revenues, respectively. Selling and marketing expenses
increased by $3.5 million, or 71 percent, in the three months ended March 28,
2004, compared to the three months ended March 30, 2003. This increase was
primarily due to the inclusion of the selling and marketing expenses associated
with our acquisition of Vixel, driven in part by the addition of 22 employees
and their associated expenses. 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 $1.5 million, or approximately 42 percent of the overall $3.5
million increase. The remaining increases in selling and marketing expenses
were due primarily to increased customer promotions and channel support
programs of approximately $0.9 million and Vixel training and transition
expenses of approximately $0.2 million. For the three months ended March 28,
2004, selling and marketing expenses included $0.6 million of retention bonuses
for terminated employees related to the Vixel acquisition and amortized
deferred stock-based compensation expenses. For the three months ended March
30, 2003 selling and marketing expenses included $0.4 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 net revenue increases, the expenses have not expanded at the same rate as
our net revenues. General and Administrative.Ongoing general and administrative expenses
consisted primarily of salaries and related expenses for executives, financial
accounting support, human resources, administrative services, professional fees
and other associated corporate expenses. General and administrative expenses
were $6.0 million and $30.6 million in the three months ended March 28, 2004,
and March 30, 2003, representing six percent and 38 percent of net revenues in
each period, respectively. General and administrative expenses decreased by
$24.6 million, or 80 percent, in the three months ended March 28, 2004,
compared to the three months ended March 30, 2003. This decrease was primarily
due to the net $27.0 million charge associated with the settlements of
securities class action and derivative lawsuits in the three months ended March
30, 2003. The decrease was partially offset by the inclusion of the general
and administrative expenses associated with our acquisition of Vixel, driven in
part by the addition of 15 employees and their associated expenses. 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 $1.6 million of the offset to the
overall decrease in general and administrative expenses. Other increases in
general and administrative expenses were primarily due to increased accounting,
tax and legal expenses of approximately $0.4 million. For the three months
ended March 28, 2004, general and administrative expenses included $1.0 million
of retention bonuses for terminated employees related to the Vixel acquisition
and amortized deferred stock-based compensation expenses. For the three months
ended March 30, 2003, general and administrative expenses included $0.1 million
of amortized deferred stock-based compensation expenses. Amortization of Other Intangibles.Amortization of other intangibles included
the amortization of intangible assets with estimable lives. For the three
months ended March 28, 2004, amortization of other intangibles was for
intangible assets related to the purchase of Vixel and the purchase of the
technology assets of Trebia Corporation, which were both completed during the
three months ended December 28, 2003, and the purchase Giganet, completed
during fiscal 2001. The $5.3 million increase in amortization of other
intangibles to $6.8 million for the three months ended March 28, 2004, from
$1.5 million for the three months ended March 30, 2003, was due to the addition
of 22




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amortization related to the Vixel acquisition and the purchase of the
technology assets of Trebia Corporation. Amortization of other intangibles
represented seven and two percent of net revenues for the three months ended
March 28, 2004, and for the three months ended March 30, 2003, respectively. Nonoperating Income.Nonoperating income consisted primarily of interest
income, interest expense and other non-operating income and expense items such
as the loss on the repurchase of convertible subordinated notes. Our
nonoperating income decreased by $1.4 million to $0.4 million in the three
months ended March 28, 2004, from $1.9 million in the three months ended March
30, 2003. The decrease was due primarily to interest income decreasing by $0.9
million to $2.2 million in the three months ended March 28, 2004, from $3.1
million in the three months ended March 30, 2003, primarily due to lower
interest yields. Additionally, we incurred a loss on the repurchase of
convertible subordinated notes of $0.2 million in the three months ended March
28, 2004, due to the expensing of the remaining deferred debt issuance costs.
Interest expense increased by $0.3 million to $1.5 million in the three months
ended March 28, 2004, from $1.2 million in the three months ended March 30,
2003, due primarily to the outstanding balance of convertible subordinated
notes. Income Taxes. In the three months ended March 28, 2004, we recorded a tax
provision in the amount of $8.6 million, or approximately 38 percent of our
income before income taxes. In the three months ended March 30, 2003, we
recorded a tax benefit in the amount of $0.2 million, or approximately 38
percent of our loss before income taxes. Nine months ended March 28, 2004, compared to nine months ended March 30, 2003 Net Revenues.Net revenues for the nine months of fiscal 2004 ended March 28,
2004, increased $51.5 million, or 23 percent, to $278.0 million, compared to
the nine month period of fiscal 2003 ended March 30, 2003. From a product line perspective, net revenues generated from our Fibre Channel
products for the nine months ended March 28, 2004, were $277.5 million, an
increase of $54.3 million, or 24 percent, compared to the nine months ended
March 30, 2003, and represented substantially all of our net revenues. The
following chart details our net revenues by product line for the nine months
ended March 28, 2004, and March 30, 2003. Net Revenues by Product Line Nine MonthsNine Months
    
    Percentage
    
    Ended
    
    PercentageEnded March 28,
    
    of Net
    
    March 30,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeFibre Channel
    
    $
    277,451
    
    
    
    100
    %
    
    $
    223,182
    
    
    
    99
    %
    
    $
    54,269
    
    
    
    24
    %IP networking
    
    
    519
    
    
    
    
    
    
    
    2,128
    
    
    
    1
    %
    
    
    (1,609
    )
    
    
    (76
    %)Traditional networking
    
    
    14
    
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    (1,122
    )
    
    
    (99
    %)Total net revenues
    
    $
    277,984
    
    
    
    100
    %
    
    $
    226,446
    
    
    
    100
    %
    
    $
    51,538
    
    
    
    23
    %
 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)Nine Months
    
    Nine Months
    
    Nine Months
    
    Nine MonthsEnded March 28,
    
    Ended March 30,
    
    Ended March 28,
    
    Ended March 30,2004
    
    2003
    
    2004
    
    2003Net revenue percentage (1)
EMC
    
    
    
    
    
    
    
    
    
    
    25
    %
    
    
    20
    %Hewlett-Packard
    
    
    19
    %
    
    
    23
    %
    
    
    21
    %
    
    
    23
    %IBM
    
    
    23
    %
    
    
    23
    %
    
    
    23
    %
    
    
    27
    %Info-X
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    
 23




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##### Table of Contents



(1)
    
    Amounts less than 10 percent are not presented.(2)
    
    Customer-specific models sold indirectly are included with the OEMs revenues in these columns rather than as
revenue for the distributors, resellers or other third parties. Direct sales to our top five customers accounted for 69 percent of total net
revenues for the nine months ended March 28, 2004, compared to 66 percent for
the nine months ended March 30, 2003, and we expect to be similarly
concentrated in the future. Our net revenues from our customers can be
significantly impacted by changes in the business models of our customers. Our
EMC OEM products are sold both directly to EMC and indirectly through
distributors such as Info-X. As a result, 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. From a sales channel perspective, net revenues generated from OEM customers
were 63 percent of net revenues and sales through distribution were 37 percent
in the nine months ended March 28, 2004 compared to net revenues from OEM
customers of 68 percent and sales through distribution of 32 percent in the
nine month ended March 30, 2003. The following chart details our net revenues
by sales channel for the nine months ended March 28, 2004, and March 30, 2003: Net Revenues by Sales Channel Nine Months
    
    
    
    
    
    Nine MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageMarch 28,
    
    of Net
    
    March 30,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    175,819
    
    
    
    63
    %
    
    $
    153,414
    
    
    
    68
    %
    
    $
    22,405
    
    
    
    15
    %Distribution
    
    
    102,031
    
    
    
    37
    %
    
    
    72,907
    
    
    
    32
    %
    
    
    29,124
    
    
    
    40
    %Other
    
    
    134
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    9
    
    
    
    7
    %Total net revenues
    
    $
    277,984
    
    
    
    100
    %
    
    $
    226,446
    
    
    
    100
    %
    
    $
    51,538
    
    
    
    23
    %
 We believe that our net revenues are being generated primarily as a result of
product certifications and qualifications with our OEM customers, which take
product both directly and through distribution. In the nine months ended March 28, 2004, domestic net revenues increased by
$19.7 million, or 15 percent, and international net revenues increased by $31.9
million, or 35 percent, compared to the nine months ended March 30, 2003. The
following chart details our net domestic and international revenues based on
billed-to location for the nine months ended March 28, 2004, and March 30,
2003: Net Domestic and International Revenues Nine Months
    
    Percentage
    
    Nine Months
    
    PercentageEnded March 28,
    
    of Net
    
    Ended March 30,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    155,568
    
    
    
    56
    %
    
    $
    135,894
    
    
    
    60
    %
    
    $
    19,674
    
    
    
    14
    %Europe
    
    
    94,635
    
    
    
    34
    %
    
    
    73,612
    
    
    
    33
    %
    
    
    21,023
    
    
    
    29
    %Pacific Rim
    
    
    27,781
    
    
    
    10
    %
    
    
    16,940
    
    
    
    7
    %
    
    
    10,841
    
    
    
    64
    %Total
net
revenues
    
    $
    277,984
    
    
    
    100
    %
    
    $
    226,446
    
    
    
    100
    %
    
    $
    51,538
    
    
    
    23
    %
 We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products. We
believe the increase in international net revenues at a higher rate than
domestic net revenues is due to the continued increase in market acceptance of
Fibre Channel products outside of the United States. However, because we sell
to OEMs and distributors who ultimately resell our products to their customers,
the geographic mix of our net revenues may not be reflective of the geographic
mix of end-user demand or installations. Gross Profit.For the nine months ended March 28, 2004, gross profit increased
$36.3 million, or 26 percent, to $178.5 million, from $142.1 million for the
nine months ended March 30, 2003. Gross margin increased to 64 percent in the
nine months ended March 28, 2004, compared to 63 percent in the nine months
ended March 30, 2003. Starting in late September 2001, some of our major
customers made announcements that general economic conditions, exacerbated by
the increase in economic uncertainty in the aftermath of the terrorist events
of September 11, 2001, were having a negative impact on their financial
results. The announcements made, and forecasts received, indicated 24




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deteriorating demand for our one Gbps products as these customers were expected
to migrate to two Gbps products for future purchases. As a result, we recorded
an estimated excess and obsolete inventory charge totaling $13.6
million during the first quarter of fiscal 2002. After initially recording
this one Gbps reserve during the first quarter of fiscal 2002, we have
subsequently reduced this reserve by a total of $8.9 million through March 28,
2004, as previously-reserved inventory has been sold. Overall, we have been
able to recover a significant portion of this reserved inventory that was not
expected based on our forecasts and the forecasts received from our customers
when this excess and obsolete charge was recorded. In addition to the sale of
this previously-reserved product, we have also scrapped $3.4 million of this
reserved inventory and negotiated and paid cancellation charges of $0.2 million
through March 28, 2004, related to this excess and obsolete inventory charge
since it was initially recorded. In the nine months ended March 28, 2004, and
March 30, 2003, the reductions related to our one Gbps reserve, as
previously-reserved inventory was sold, were $1.9 million and $1.6 million,
respectively. Excluding the reductions of the excess and obsolete inventory
reserve of $1.9 million in the nine months ended March 28, 2004, and $1.6
million in the nine months ended March 30, 2003, gross profit would have been
$176.5 million and $140.5 million, respectively, and gross margin would have
been 64 percent in the nine months ended March 28, 2004, and 62 percent in the
nine months ended March 30, 2003. The remaining increase in gross profit and
gross margin in the nine months ended March 28, 2004, compared to the nine
months ended March 30, 2003, was due to cost reductions, higher net revenues
and volumes, and changes in product mix. For the nine months ended March 28,
2004, cost of sales included $0.9 million of retention bonuses for terminated
employees related to the Vixel acquisition and amortized deferred stock-based
compensation expenses. For the nine months ended March 30, 2003, cost of sales
included $0.1 million of amortized deferred stock-based compensation expenses. Engineering and Development.Engineering and development expenses were $53.7
million and $45.4 million in the nine months ended March 28, 2004, and March
30, 2003, representing 19 percent and 20 percent of net revenues in each
period, respectively. Engineering and development expenses increased by $8.3
million, or 18 percent, in the nine months ended March 28, 2004, compared to
the nine months ended March 30, 2003. This increase was primarily due to the
inclusion of the engineering and development expenses associated with our
acquisition of Vixel, driven in part by the addition of 60 employees and their
associated expenses. 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
$4.8 million, or approximately 58 percent of the overall $8.3 million increase.
The remaining increase was due to our continued investment in Fibre Channel
and IP engineering and development, which represented substantially all of our
engineering and development efforts and expenses prior to the acquisition of
Vixel. Engineering and development expenses included $1.7 million and $2.1
million of amortized deferred stock-based compensation expenses for the nine
months ended March 28, 2004, and March 30, 2003, respectively. Selling and Marketing.Selling and marketing expenses were $19.8 million and
$13.9 million in the nine months ended March 28, 2004, and March 30, 2003,
representing seven percent and six percent of net revenues, respectively.
Selling and marketing expenses increased by $5.9 million, or 42 percent, in the
nine months ended March 28, 2004, compared to the nine months ended March 30,
2003. This increase was primarily due to the inclusion of the selling and
marketing expenses associated with our acquisition of Vixel, driven in part by
the addition of 22 employees and their associated expenses. 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 $3.5 million, or
approximately 59 percent of the overall $5.9 million increase. The remaining
increases in selling and marketing expenses were due primarily to increased
customer promotions and channel support programs of $1.1 million and Vixel
training and transition expenses of $0.2 million. For the nine months ended
March 28, 2004, selling and marketing expenses included $2.0 million of
retention bonuses for terminated employees related to the Vixel acquisition and
amortized deferred stock-based compensation expenses. For the nine months
ended March 30, 2003, selling and marketing expenses included $1.0 million of
amortized deferred stock-based compensation expenses. The $1.0 million
increase in amortized deferred stock-based compensation is due primarily to the
acquisition of Vixel. As a portion of selling and marketing expenses, such as
selling and marketing employees base compensation and amortized deferred
stock-based compensation expense, is not driven directly by net revenue
increases, the expenses have not expanded at the same rate as our net revenues. General and Administrative.General and administrative expenses were $15.3
million and $36.6 million in the nine months ended March 28, 2004, and March
30, 2003, representing five percent and 16 percent of net revenues in each
period, respectively. General and administrative expenses decreased by $21.4
million, or 58 percent, in the nine months ended March 28, 2004, compared to
the nine months ended March 30, 2003. This decrease was primarily due to the
net $27.0 million charge associated with the settlements of securities class
action and derivative lawsuits in 25




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the three months ended March 30, 2003. The
decrease was partially offset by the inclusion of the general and
administrative expenses associated with our acquisition of Vixel, driven in
part by the addition of 15 employees and their associated expenses. 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 offset approximately $3.0 million of the overall decrease in general and
administrative expenses. The remaining increases in general and administrative
expenses were due primarily to increased insurance expenses of $1.2 million and
increased accounting, tax and legal expenses of $1.2 million. For the nine
months ended March 28, 2004, general and administrative expenses included $1.4
million of retention bonuses for terminated employees related to the Vixel
acquisition and amortized deferred stock-based compensation expenses.
Additionally, expenses for the nine months ended March 28, 2004, included $0.7
million for the settlement of shareholder litigation related to the Vixel
acquisition, based on a memo of understanding with the plaintiff in the case.
For the nine months ended March 30, 2003, general and administrative expenses
included $0.3 million of amortized deferred stock-based compensation expenses. Amortization of Other Intangibles.For the nine months ended March 28, 2004,
amortization is for intangible assets related to the purchase of Vixel and the
purchase of the technology assets of Trebia Corporation, which were both
completed during the nine months ended March 28, 2004, and the purchase of
Giganet, completed during fiscal 2001. For the nine months ended March 30,
2003, amortization is for intangible assets related to the purchase of Giganet.
The $8.2 million increase in amortization of other intangibles to $12.5
million for the nine months ended March 28, 2004, was due to the addition of
amortization related to the Vixel acquisition and the purchase of the
technology assets of Trebia Corporation. Amortization of other intangibles
represented five and two percent of net revenues for the nine months ended
March 28, 2004, and March 30, 2003, respectively. In-Process Research and Development Expense.The in-process research and
development expense of $11.4 million was related to our acquisition of Vixel
during the nine months ended March 28, 2004, and represented four percent of
our net revenues. There were no in-process research and development expenses
for the nine months ended March 30, 2003. Nonoperating Income.Our nonoperating income decreased by $28.2 million to
$6.2 million in the nine months ended March 28, 2004, from nonoperating income
of $34.4 million in the nine months ended March 30, 2003. The decrease was due
primarily to a decrease in the net overall gain on the repurchase of
convertible subordinated notes by $26.1 million to $2.7 million in the nine
months ended March 28, 2004, from $28.7 million in the nine months ended March
30, 2003. Additionally, interest income decreased by $3.4 million to $6.7
million in the nine months ended March 28, 2004, from $10.1 million in the nine
months ended March 30, 2003, primarily due to lower interest yields during the
nine months ended March 28, 2004. The lower amount of 1.75 percent convertible
subordinated notes outstanding during the nine months ended March 28, 2004,
compared to the nine months ended March 30, 2003, as well as the issuance of
0.25 percent convertible subordinated notes during the nine months ended March
28, 2004, partially offset the other decreases to nonoperating income by
causing interest expense to decrease by $1.0 million to $3.3 million in the
nine months ended March 28, 2004, from $4.3 million in the nine months ended
March 30, 2003. Income Taxes. In the nine months ended March 28, 2004, we recorded a tax
provision in the amount of $31.4 million, or approximately 44 percent of our
income before income taxes. In the nine months ended March 30, 2003, we
recorded a tax provision in the amount of $29.0 million, or approximately 38
percent of our income before income taxes. The increase in the effective tax
rate for the nine months ended March 28, 2004, was primarily due to the IPR&D
charge associated with the Vixel acquisition being non-deductible for tax
purposes. Critical Accounting Policies The preparation of the financial statements requires estimation and judgment
that affect the reported amounts of net revenues, expenses, assets and
liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could potentially
result in materially different results under different assumptions and
conditions. If these estimates differ significantly from actual results, the
impact to the financial statements may be material. We have identified the following as critical accounting policies: revenue
recognition; allowance for doubtful accounts; goodwill, other intangibles and
long-lived assets; inventories; income taxes and stock-based compensation. 26




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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
revenues on our standard products sold to our Distributors based on data
received from the Distributors and managements estimates to approximate the
point that these products have been resold by the Distributors. As
OEM-specific models sold to our Distributors are governed under the related OEM
agreements rather than under these distribution agreements, we recognize
revenue at the time of shipment to the Distributors when title and risk of loss
have passed, evidence of an arrangement has been obtained and collectibility
has been reasonably assured. Additionally, we maintain accruals and allowances
for price protection and cooperative marketing programs. For products with unspecified software upgrade rights, which are our legacy
cLAN products that contribute negligible revenues, we apply the American
Institute of Certified Public Accountants Statement of Position, or SOP, 97-2,
Software Revenue Recognition as amended by SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition With Respect to Certain Transactions.
Under SOP 97-2, as amended by SOP 98-9, revenue is recognized from software
licenses, provided the software has been delivered to the customer, persuasive
evidence of an arrangement exists, the price charged to the customer is fixed
or determinable at fair value, there are no significant Company obligations
related to the sale and the resulting receivable is deemed collectible, net of
an allowance for doubtful accounts. In accordance with SOP 97-2, as amended by
SOP 98-9, we have deferred the revenue over the upgrade period for certain
legacy cLAN products with unspecified software upgrade rights. Furthermore, we provide a warranty of between one and three years on our I/O
Fibre Channel and Internet Protocol products and provide a warranty of between
one and five years on our Fibre Channel switching and traditional networking
products. We record a provision for estimated warranty-related costs at the
time of sale based on historical product return rates and our expected future
costs of fulfilling our warranty obligations. Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts based upon historical write-offs as a percentage of net revenues.
Although we have not experienced significant losses on accounts receivable
historically, our accounts receivable are concentrated with a small number of
customers. Consequently, any write-off associated with one of these customers
could have a significant impact on our allowance for doubtful accounts and
results of operations. Goodwill, Other Intangibles and Long-Lived Assets.Goodwill and other
intangibles resulting from the acquisitions of Vixel and Giganet and the
purchase of the technology assets of Trebia Corporation are carried at cost
less accumulated amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the estimated
economic lives of the respective intangible assets, ranging from two to seven
years. Our annual impairment test occurred in the fourth quarter of fiscal
2003 with no impairment charges resulting. In accordance with Statement 142,
goodwill and other intangibles that have indeterminate lives will be tested for
impairment at least annually, but also on an interim basis if an event or
circumstance indicates that it is more likely than not that an impairment loss
has been incurred. Any future impairment loss could materially and adversely
affect our financial position and results of operations. Additionally, Statement 144, under which the recoverability of long-lived
assets is assessed by determining whether the carrying value of an asset can be
recovered through projected undiscounted future operating cash flows over its
remaining life whenever events or changes in circumstances indicate that we may
not be able to recover the assets carrying value. The amount of impairment,
if any, is measured based on fair value, which is determined using projected
discounted future operating cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. Inventories.Inventories are stated at the lower of cost or net realizable
value on a first-in, first-out basis. We use a standard cost system for
purposes of determining cost. The standards are adjusted periodically to
ensure they represent actual cost. We regularly compare forecasted demand and
the composition of the forecast against inventory on hand and open purchase
commitments in an effort to ensure the carrying value of inventory does not
exceed net realizable value. Accordingly, we may have to record reductions to
the carrying value of excess and obsolete inventory if forecasted demand
decreases. We have previously recorded reductions to the carrying value of
excess and obsolete inventory, as described in the Gross Profit section of the
Results of Operations for the nine months ended March 28, 2004, compared to
the nine months ended March 30, 2003. 27




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Income Taxes. We account for income taxes using the asset and liability
method, which recognizes deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. We regularly review historical
and anticipated future pre-tax results of operations to determine whether we
will be able to realize the benefit of our deferred tax assets. A valuation
allowance is required to reduce the potential deferred tax asset when it is
more likely than not that all or some portion of the potential deferred tax
asset will not be realized due to the lack of sufficient taxable income. Stock-Based Compensation. We account for our stock-based awards to employees
using the intrinsic value method. Stock-based awards to non-employees, if any,
are recorded using the fair value method. See note 1 of the Condensed
Consolidated Financial Statements for more information. Although we have no
plans to adopt the fair value provisions of Statement 123 unless required to
under new accounting standards for all stock awards, if we were required to
account for all stock-based awards based on the fair value method, it would
have a material non-cash impact on our results of operations. Liquidity and Capital Resources At March 28, 2004, we had $474.5 million in working capital and $629.6 million
in cash and cash equivalents, restricted cash, current investments and
long-term investments. At June 29, 2003, we had $423.2 million in working
capital and $620.5 million in cash and cash equivalents, restricted cash,
current investments and long-term investments. Our cash and cash equivalents
increased by $45.9 million to $182.9 million as of March 28, 2004, from $137.0
million as of June 29, 2003. The increase in cash and cash equivalents was due
to our financing and operating activities, which provided $288.1 million and
$50.2 million of cash and cash equivalents, respectively. The cash and cash
equivalents provided by financing and operating activities were partially
offset by our investing activities, which used $292.5 million of cash and cash
equivalents. In the nine months ended March 28, 2004, operating activities provided $50.2
million of cash and cash equivalents. The primary reason for the increase in
cash provided by operating activities was net income of $40.5 million adjusted
for non-cash reconciling items, the most significant of which were
amortization of other intangibles, in-process research and development and the
depreciation and amortization of property and equipment. The remaining items
most significantly impacting cash provided by operating activities were
increased accounts payable and income taxes payable offset by increased
inventories, increased accounts and other receivables and the payment of the
litigation settlement. The cash provided by operating activities in the nine
months ended March 30, 2003, was primarily from net income adjusted for
non-cash reconciling items, the most significant of which were the gain on
repurchase of convertible subordinated notes, deferred income taxes,
depreciation and amortization of property and equipment, amortization of other
intangibles, stock-based compensation, and the tax benefit from the exercise
of stock options, as well as the litigation settlements accrual and changes in
other working capital balances. In the nine months ended March 28, 2004, cash used in investing activities was
$292.5 million. The primary use of cash was payments for the purchase of Vixel
of $294.1 million, net of cash acquired. Additional uses of cash were for
purchases of investments of $280.1 million; additions to property and equipment
of $42.7 million and payments for the technology assets of Trebia Networks of
$2.1 million, offset by maturities of investments of $317.5 million and a
decrease in restricted cash related to the construction escrow account of $9.1
million. In the nine months ended March 30, 2003 investing activities used
$108.5 million of cash and cash equivalents due primarily to purchases of
investments, additions to property and equipment and an increase in restricted
cash related to the construction escrow account, offset by maturities of
investments. Financing activities provided $288.1 million of cash and cash equivalents in
the nine months ended March 28, 2004. This increase in cash and cash
equivalents was primarily due to our net proceeds from the issuance of 0.25
percent convertible subordinated notes of $505.2 million offset by the
repurchase of $191.6 million in face value of 1.75 percent convertible
subordinated notes at a net discount to face value, spending $185.6 million,
the repurchase of 1.5 million shares of common stock for $40.5 million and net
payments for short term indebtedness related to the Vixel acquisition, notes
payable and capital leases of $1.3 million. Additionally, the proceeds from
the issuance of common stock under stock option and employee stock purchase
plans provided $10.3 million. For the nine months ended March 30, 2003,
financing activities used $102.7 million of cash and cash equivalents due
primarily to our 28




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repurchase of 1.75 percent convertible subordinated notes
partially offset by cash and cash equivalents provided by the issuance of
common stock under stock option plans and under the employee stock purchase
plan. On January 29, 2002, we completed a $345.0 million private placement of 1.75
percent convertible subordinated notes due February 1, 2007. During the three
months ended September 29, 2002, we bought back at a discount to
face value approximately $136.5 million in face value of our 1.75 percent
convertible subordinated notes for $104.2 million. The resulting net pre-tax
gain of approximately $28.7 million was recorded for the three months ended
September 29, 2002. During the nine months ended March 28, 2004, we bought back approximately
$191.6 million in face value of our 1.75 percent convertible subordinated
notes at a discount to face value for approximately $185.6 million. The
resulting net pre-tax gain of approximately $2.7 million was recorded for the
nine months ended March 28, 2004. 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. Also, during the nine months
ended March 28, 2004, we repurchased 1.5 million common shares for $40.5
million. As of March 28, 2004, we are authorized by our Board of Directors to
repurchase an additional 1.5 million shares and the entire $17.0 million face
amount of the outstanding 1.75 percent convertible subordinated notes. On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004. Under the
terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.In addition, we granted
the initial purchasers of the notes an option, which they exercised during the
three months ended March 28, 2004, to purchase an additional $67.5 million
principal amount of the notes. 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. We 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 three-year effective life
of the notes, as well as $0.7 million of other associated debt issuance costs,
which have been recorded as an asset and will also be amortized over the
effective life of the notes. We were required to enter into purchase agreements for eight key inventory
components, and as of March 28, 2004, our remaining purchase obligation for the
eight components was $5.7 million. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding with the plaintiff in the class action suit
pursuant to which the parties have agreed to settle the action, subject to
court approval. Formal settlement documents were signed on May 5, 2004, and
the plaintiff has completed discovery as agreed to by the parties. The
consummation of the settlement is subject to the final court approval (as
defined by law) of the settlement and dismissal of the action with prejudice.
We expect to pay the settlement amount of $0.7 million during fiscal 2004. We reached an agreement with one of our three insurers under which we received
$10.0 million less $2.0 million previously paid by the insurer, resulting in a
net payment to us of $8.0 million, for the defense of previous securities
class action lawsuits for which we paid $39.5 million to the plaintiffs during
the nine months ended March 28, 2004. The $39.5 million was previously held
in escrow. During the three months ended March 28, 2004, we exercised our option to
complete the purchase of the land and building for our headquarters property
and began depreciating the building. For the nine months ended March 28,
2004, we spent $35.8 million related to the land and building for our
headquarters property, for a total of $43.0 million through March 28, 2004.
In addition, we have a $1.0 million letter of credit in place in lieu of a
rental deposit on one of our other facilities. As part of our commitment to storage networking product development, including
Fibre Channel, which includes our recent acquisition of Vixel Corporation, and
IP Networking, we expect to continue our investments in property and 29




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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
March 28, 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)
    
    $
    539,241
    
    
    $
    647
    
    
    $
    3,182
    
    
    $
    535,412
    
    
    
    Leases
    
    
    4,045
    
    
    
    683
    
    
    
    3,309
    
    
    
    53
    
    
    
    Non-cancelable purchase obligations for end
Of life components
    
    
    5,652
    
    
    
    5,652
    
    
    
    
    
    
    
    
    
    
    
    Litigation settlements
    
    
    698
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    Letter of credit
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    550,636
    
    
    $
    8,860
    
    
    $
    6,491
    
    
    $
    535,465
    
    
    
    
 (1) The principal payment related to the 0.25 percent private placement of
$517.5 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 June 27, 2004. (3) Fiscal years ending July 3, 2005, and July 2, 2006. (4) Fiscal years ending July 1, 2007, and June 29, 2008. 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 represented approximately 100
percent of our net revenues for the nine months ended March 28, 2004, has been
driven by the demand for high-performance storage networking products and
solutions that support enterprise computing applications, including on-line
transaction processing, data mining, data warehousing, multimedia and Internet
applications. Any significant downturn in demand for such products, solutions
and applications, such as the slowdown experienced beginning in early 2001 and
exacerbated by the September 11, 2001 terrorist attacks and resulting political
and economic uncertainty, could adversely affect our business, results of
operations and financial condition. The adverse effects of any sustained
downturn in information technology spending on our operating results may be
exacerbated by our research and development investments, strategic investments
and merger and acquisition activity, as well as customer service and support,
which are expected to continue despite any such downturn. Our business depends upon the continued growth of the Fibre Channel storage
networking market, and our business will be adversely affected if such growth
does not occur or occurs more slowly than we anticipate. The size of our potential market is largely dependent upon the broadening
acceptance of our Fibre Channel storage networking technologies as alternatives
to other technologies traditionally utilized for network and storage
communications, as well as the overall demand for storage. We believe that our
investment in the Fibre Channel storage networking market represents our
greatest opportunity for revenue growth and profitability for the foreseeable
future. However, the market for Fibre Channel storage networking products may
not gain broader acceptance and customers may choose alternative technologies
and products supplied by other companies. Recently, interest has re-emerged
for iSCSI storage networking solutions, which may satisfy some I/0 connectivity 30




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requirements through standard Ethernet adapters and software at little to no
incremental cost. Such iSCSI solutions are likely to compete with Fibre
Channel I/0 solutions, particularly in the low end of the market. Additionally,
since our products are sold as parts of integrated systems, demand for our
products is driven by the demand for these integrated systems, including other
companies complementary products. A lack of demand for the integrated systems
or a lack of complementary products required for these integrated systems could
have a material adverse effect on our business, results of operations and
financial condition. If the Fibre Channel storage networking market does not
grow, or grows more
slowly than we anticipate, attracts more competitors than we expect, as
discussed below, or if our products do not achieve market acceptance, our
business, results of operations and financial condition could be materially
adversely affected. Because a significant portion of our revenues are generated from sales to a
limited number of customers, none of which are the subject of exclusive or
long-term contracts, the loss of one or more of these customers could adversely
affect our business. We rely almost exclusively on original equipment manufacturers, or OEMs, and
sales through distribution channels for our revenue. For the nine months ended
March 28, 2004, we derived approximately 63 percent of our net revenues from
OEMs and 37 percent from sales through distribution. Furthermore, because the
majority of our sales through distribution channels consists of OEM-certified
products, OEM customers effectively controlled more than 87 percent of our
revenue for the nine months ended March 28, 2004. We may be unable to retain
our current OEM and distributor customers or to recruit additional or
replacement customers. For the nine months ended March 28, 2004, direct sales amounted to 23 percent
for IBM, 19 percent for Hewlett-Packard, and 11 percent for Info-X. Direct
sales to our top five customers accounted for 69 percent of total net revenues
for the nine months ended March 28, 2004. Additionally, some of our larger OEM
customers purchased or marketed products indirectly through distributors,
resellers or other third parties. Total net revenues, including direct sales to
our OEM customers and their OEM-specific models purchased or marketed
indirectly through other distribution channels, amounted to 25 percent of our
total net revenues for EMC, 23 percent for IBM and 21 percent for Hewlett
Packard for the nine months ended March 28, 2004. Although we have attempted to
expand our base of customers including customers for embedded switching
products, we believe our revenues in the future will continue to be similarly
derived from a limited number of customers, especially in light of the
continuing consolidation the industry has experienced. As a result, to the
extent that sales to any of our significant customers do not increase in
accordance with our expectations or are reduced, our business, results of
operations and financial condition could be materially adversely affected. As is common in the technology industry, our agreements with OEMs and
distributors are typically non-exclusive, have no volume commitments, and often
may be terminated by either party without cause. Indeed, it is increasingly
commonplace for our OEM and distributor customers to carry or utilize competing
product lines. If we were to lose business from one or more significant OEM or
distributor customers to a competitor, our business, results of operations and
financial condition could be materially adversely affected. Our markets are highly competitive and our business and results of operations
may be adversely affected by entry of new competitors into the markets,
aggressive pricing and the introduction or expansion of competitive products
and technologies. The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. We expect that our markets will continue to
attract new competition. Our current and potential competition consists of
major domestic and international companies, some of which have substantially
greater financial, technical, marketing and distribution resources than we
have. Additional companies may enter the markets for our storage networking
products and new or stronger competitors may emerge as a result of
consolidation movements in the marketplace. Furthermore, larger companies in
other related industries may develop or acquire technologies and apply their
significant resources, such as distribution channels and brand recognition, to
acquire market share. Emerging companies attempting to obtain a share of the
existing markets act as potential competition as well. Additionally, our
existing competitors continue to introduce products with improved
price/performance characteristics, and we will have to do the same to remain
competitive. As the market grows and matures, we expect more customers to
qualify multiple sources for OEM or standard products where we have prevailed
previously as a single source, thus introducing competition into our existing
customer accounts. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share,
any of which could have a material adverse effect on our business, results of
operations and financial condition. 31




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Alternative legacy technologies such as SCSI compete with our Fibre Channel
storage networking technologies for customers. Legacy technologies such as port
bypass circuits compete with our embedded switch products. Our success depends
in part on our own ability and on the ability of our OEM customers to develop
storage networking solutions that are competitive with these alternative legacy
technologies. Some of our competitors already have well-established
relationships with our current and potential customers, have extensive
knowledge of the markets we serve and may
have better name recognition and more extensive development, sales and
marketing resources than us. Additionally, in the future other technologies
that we are not currently developing may evolve to address the storage
networking applications currently served by our Fibre Channel product line
today, reducing our market opportunity. We may not realize the anticipated benefits and may encounter unforeseen
difficulties related to our acquisition of Vixel Corporation. On November 17, 2003, we completed our acquisition of Vixel Corporation.
Achieving the benefits of the acquisition of Vixel will depend in part on our
ability to integrate the technology, operations and personnel of Vixel into our
company in a timely and efficient manner. Future revenue from Vixel may decline
from prior periods or may not meet our expectations, and current and ongoing
expenses also may exceed our expectations. In addition, Vixel may be unable to
obtain design wins in accordance with past practice or our expectations, and
the design wins obtained to date may not translate into revenue in the amounts
and during the periods we expect. Moreover, integrating Emulex and Vixel will
be a complex, time consuming and expensive process and may disrupt our business
if not completed in a timely and efficient manner. The ongoing activities
related to the integration of Vixels business with Emulex will involve a
number of risks and challenges, including:  
    
    difficulties and expenses in combining the operations, technology
and systems of the two companies;
    
    difficulties and expenses in assimilating and retaining employees,
including integrating teams that have not previously worked together;
    
    difficulties in creating and maintaining uniform standards, controls, procedures and policies; and/or
    
    different geographic locations of the principal operations of Emulex and Vixel. As a result of these and other difficulties, we may not realize the anticipated
benefits of the acquisition and may encounter difficulties that could have a
material adverse effect on our business and operating results or cause
expectations with respect to Vixel and the combined companies to be inaccurate. Our reported financial results will be impacted by the accounting for the Vixel
Corporation acquisition. In November 2003, we completed the acquisition of Vixel Corporation for a total
purchase price of $298.4 million in cash for the outstanding common stock,
preferred stock and warrants of Vixel Corporation. We also incurred
acquisition-related expenses of $6.1 million in cash. In addition, we issued
2.2 million stock options with a fair value of approximately $47.5 million in
exchange for the Vixel options we assumed for a total acquisition value of
$352.1 million. We calculated the fair value of the 2.2 million stock options
issued at the date of acquisition using the Black-Scholes option-pricing model.
In accordance with generally accepted accounting principles, or GAAP, we
accounted for the acquisition using the purchase method of accounting. Under
the purchase method, the purchase price is allocated among identifiable assets
and liabilities of Vixel based upon their fair market value, and the excess of
the purchase price over the fair market value of the assets and liabilities
will be allocated to goodwill. The amount allocated to identifiable intangible
assets is being amortized over the estimated life of the identifiable
intangible assets. Also, we are amortizing deferred stock-based compensation
related to the options issued over the remaining vesting periods of each
option. The amortization expenses will reduce our earnings. Additionally,
$11.4 million of the purchase price has been allocated to in-process research
and development acquired as part of the transaction, which was expensed during
the three months ended December 28, 2003, that also reduced earnings. In
accordance with Statement 141, Business Combinations, the allocation period,
which is the period that is required to identify and measure the fair value of
the assets acquired and liabilities assumed in a business combination, should
not exceed one year from the date that we gained effective control of Vixel and
made the initial purchase price allocation. 32




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Some of our suppliers, our strategic partners or our OEM customers could become
competitors. Some of our suppliers, our strategic partners and our OEM customers currently
have or could develop products internally or could purchase another company
with products or technology that would replace or compete with our products and
technology. To the extent that our customers or suppliers are successful in
developing and marketing competitive solutions, the resulting reductions in
sales of our products could have a material adverse effect on our business,
results of operations and financial condition. Our operating results are difficult to forecast and could be adversely affected
by many factors, and our stock price may decline if our results fail to meet
expectations. Our revenues and results of operations have varied on a quarterly basis in the
past and may vary significantly in the future. Accordingly, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful, and you should not rely on such comparisons as indications of our
future performance. We may be unable to maintain our current levels of growth
or profitability in the future. Our revenues and results of operations are
difficult to forecast and could be adversely affected by many factors,
including, among others:  
    
    the gain or loss of significant OEMs, OEM design wins or other customers;
    
    changes in the size, timing and terms of OEM and other customer orders;
    
    changes in the sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
    
    changes in our significant customers desired inventory levels;
    
    our acquisition of Vixel;
    
    the timing and market acceptance of new or enhanced product
introductions by us, our OEM customers and our competitors;
    
    changes in the selling price of our products;
    
    changes in the mix of product sales or the mix of sales channels;
    
    difficulties in obtaining incremental market share growth;
    
    fluctuations in product development and other operating expenses;
    
    fluctuations in manufacturing costs, including the cost of components we use to produce our products;
    
    component shortages experienced by us, or reduced demand from our
customers if our customers are unable to acquire the components used in
conjunction with our products in their deployments;
    
    the ability of our electronics manufacturing service providers to
produce and distribute our products in a timely fashion;
    
    difficulties with updates, changes or additions to our Enterprise
Resource Planning (ERP) System;
    
    changes in general social and economic conditions, including but
not limited to terrorism, public health and slower than expected market
growth, with resulting changes in customer technology budgeting and
spending;
    
    changes in technology, industry standards or consumer preferences;
    
    seasonality; 33




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
    
    changes in our accounting or other policies resulting from the
adoption of new laws, regulations or pronouncements; and/or
    
    fluctuations in foreign currency exchange rates. As a result of these and other unexpected factors or developments, we expect
that in the future operating results will from time to time be below the
expectations of investors or market analysts, which would have a material
adverse effect on our stock price. Our relatively small backlog of unfilled orders, possible customer delays or
deferrals and our tendency to generate a large percentage of our quarterly
sales near the end of the quarter contribute to possible fluctuations in our
operating results that could have an adverse impact on our results of
operations and stock price. Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially
on orders booked during that quarter. Alternatively, orders already in backlog
may be deferred or cancelled, as was experienced and disclosed by us in early
February of calendar 2001. Also, we have typically generated a large percentage
of our quarterly revenues in the last month of the quarter. Our customers may
change their accounting practices and purchasing patterns, thus reducing our
ability to predict our quarterly sales. Additionally, we use blanket purchase
orders with some customers, with customer-provided forecasts and customer
controlled just-in-time pulls of products from hub warehouses, thus reducing
our ability to predict our quarterly sales. As a result of these and other
factors, we may not be able to accurately predict our quarterly sales. Because
our expense levels are partially based on our expectations of future sales, in
the event we experience unexpected decreases in quarterly sales, our expenses
may be disproportionately large relative to our revenues and we may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. A material shortfall in sales in relation to our quarterly
expectations or any delay, deferral or cancellation of customer orders would
likely have an immediate and adverse impact on our results of operations and
may adversely affect our stock price. The failure of one or more of our significant customers to make payments could
adversely affect our business. We are subject to credit risk associated with the concentration of our accounts
receivable from our customers. Our days sales outstanding, or DSOs, were 42
days at March 28, 2004, and 37 days at June 29, 2003. There can be no assurance
they will remain at this level or improve. If one of our current significant
customers were to declare bankruptcy, if we were to lose one of our current
significant customers and did not receive their payments due to us, or if one
of our current significant customers were to dispute a significant amount owed
to us, we could experience a material adverse effect on our business, results
of operations and financial condition. Our industry is subject to rapid technological change, and we must keep pace
with the changes to successfully compete. The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in large part on our ability to
enhance our existing products and to introduce new products on a timely basis
to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as 4, 8 and 10 gigabit per
second, or Gbps, Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI Express;
iSCSI; Serial ATA, or SATA; Serial Attached SCSI, or SAS; Virtual Interface, or
VI; and Remote Direct Memory Access, or RDMA; are in development by many
companies and their ultimate acceptance and deployment in the market is
uncertain. We are developing some, but not all of these technologies, and we
cannot be sure that the technologies we chose to develop will achieve market
acceptance, or that technologies that we chose not to develop will be available
to purchase or license from third parties or will be immaterial to our
business. Our embedded switch products are associated with emerging
next-generation storage architectures, and their success is dependent on
developing market acceptance and facilitating transitions from legacy
architectures. We cannot be certain that we will be successful in developing,
manufacturing and marketing new products or product enhancements that respond
to technological changes in a timely manner and achieve market acceptance. In
addition, a key element of our current business strategy is to develop ASICs in
order to increase system performance, enhance integration and reduce
manufacturing costs, thereby enhancing the price/performance of our storage
networking products. We cannot be certain that we will be successful at
developing and incorporating ASICs effectively and in a timely manner.
Additionally, the cost and time required for developing ASICs has been
increasing and we cannot be certain of the impact on our business of such 34




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increases. If we are unable, for technological or other reasons, to develop new
products, enhance or sell existing products, or consume existing products in a
timely and cost-effective manner in response to technological and market
changes, our business, results of operations and financial condition may be
materially adversely affected. We have experienced losses in our history and may experience losses in our
future that may adversely affect our stock price and financial condition. We have experienced losses in our history, most recently a net loss of $96.2
million in fiscal 2002, and $23.6 million in fiscal 2001. The net loss in
fiscal 2002 included $156.2 million of amortization of goodwill and other
intangibles
related to the acquisition of Giganet, Inc. and a net excess and obsolete
inventory charge of $10.1 million. The net loss in fiscal 2001 included $22.3
million of in-process research and development expenses and $52.1 million of
amortization of goodwill and other intangibles related to the acquisition of
Giganet. Beginning in the first quarter of fiscal 2003, when we adopted
Statement 142, Goodwill and Other Intangible Assets, we no longer amortize
goodwill and other intangibles that have indeterminate useful lives. As of
March 28, 2004, we had net goodwill related to the Vixel and Giganet
acquisitions in the amount of $583.5 million and other intangibles related to
the Giganet and Vixel acquisitions and the purchase of the technology assets of
Trebia Corporation of $129.2 million that will be reviewed at least annually
for impairment. Any losses, including losses caused by impairment of goodwill,
may adversely affect the perception of our business by analysts and investors,
which could adversely affect our stock price. While our recent losses were not
accompanied by negative cash flow from operations, to the extent that we are
unable to generate positive operating profits and positive cash flow from
operations, our financial condition may be materially adversely affected. The migration of our customers toward newer product platforms may have a
significant adverse effect on our results of operations, including lower
average selling prices or charges for obsolete inventory. As our customers migrate from one platform to the enhanced price/performance of
the next platform, we may experience reduced revenue, gross profit or gross
margin levels associated with lower average selling prices or higher relative
product costs associated with improved performance. Also, economic conditions
during platform migration periods can have a significant impact on results.
While we regularly compare forecasted demand for our products against inventory
on hand and open purchase commitments, to the extent that customers migrate to
newer product platforms more quickly than anticipated, the corresponding
reduction in demand for older product platforms may result in obsolete
inventory and related charges which could have an adverse effect on our
financial condition and results of operations. Any failure of our OEM customers to keep up with rapid technological change and
successfully market and sell systems that incorporate new technologies could
adversely affect our business. Our revenues depend significantly upon the ability and willingness of our OEM
customers to develop, promote and deliver, on a timely basis, products that
incorporate our technology. OEMs must commit significant resources to develop
products that incorporate our technology or solutions. The ability and
willingness of OEM customers to develop, promote and deliver such products are
significantly influenced by a variety of factors, many of which are outside of
our control. We cannot be certain of the ability or willingness of our OEM
customers to continue developing, marketing and selling products that
incorporate our technology or solutions. In addition, while we have secured
numerous design wins for our storage networking products from OEM customers, we
cannot be certain that our customers will be able to or will choose to ship
systems that incorporate our products, or that their shipped systems will be
commercially successful. Our business is dependent on our relationships with
our OEM and distributor customers, so the inability or unwillingness of any of
our significant customers to develop or promote products that use our
technology or solutions would have a material adverse effect on our business,
results of operations and financial condition. Rapid changes in the evolution of technology, including the unexpected extent
or timing of the transition from HBA solutions or embedded switch box solutions
to lower-priced ASIC solutions, could adversely affect our business. Historically, the electronics industry has developed higher performance ASICs
that create chip level solutions that replace selected board level or box level
solutions at a significantly lower average selling price. We have previously
offered ASICs to certain customers for certain applications that have
effectively resulted in a lower-priced solution when compared to an HBA
solution. This transition may occur for our products in other applications as
well. This transition may also occur from embedded switch box products to lower
priced embedded switch ASIC products. The 35




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result of this transition may be an
adverse effect on our revenues and profits. If this transition is more abrupt
or is more widespread than anticipated, there can be no assurance that we will
be able to modify our business model in a timely manner, if at all, in order to
mitigate the effects of this transition on our business, results of operations
and financial position. In the future, a similar adverse effect to our
business could occur if there were rapid shifts in customer purchases from our
midrange server and storage solutions to products for the small and
medium-sized business market. 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 recent quarters, an increasing percentage of revenue has come
from midrange server and storage solutions, which typically have lower average
selling prices than our high-end server and storage solutions. In the future,
increased revenues are expected to come from SMB server and storage solutions,
which also 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 Fibre Channel products could adversely affect our
revenue, gross margins and financial performance. Since we introduced our first Fibre Channel products, we have experienced
downward pressure on their average unit selling prices. We may provide pricing
discounts to customers based upon volume purchase criteria, and achievement of
such discounts may reduce our average unit selling prices. To the extent that
growth in unit demand fails to offset decreases in average unit selling prices,
our revenues and financial performance could be materially adversely affected.
Although historically we have achieved offsetting cost reductions, to the
extent that average unit selling prices of our Fibre Channel products decrease
without a corresponding decrease in the costs of such products, our gross
margins and financial performance could be materially adversely affected.
Furthermore, if the manufactured cost of our products were to increase due to
inflation or other factors, our gross margins and financial performance could
be materially adversely affected. Delays in product development could adversely affect our business. We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our products and the relatively long product development
cycles, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could have a material adverse effect on
our business, results of operations and financial condition. Prior delays have
resulted from numerous factors, such as:  
    
    difficulties in hiring and retaining necessary personnel;
    
    difficulties in reallocating engineering resources and other resource limitations;
    
    difficulties with independent contractors;
    
    unanticipated engineering or manufacturing complexity;
    
    undetected errors or failures in software and hardware;
    
    changing OEM product specifications;
    
    delays in the acceptance or shipment of products by OEM customers; and/or
    
    changing market or competitive product requirements. 36




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In addition, while we have secured numerous design wins for our storage
networking products from OEM customers, if our customers are unable to or
otherwise do not ship systems that incorporate our products, or if their
shipped systems are not commercially successful, our business, results of
operations and financial condition would be materially adversely affected. Our products are complex and may contain undetected software or hardware errors
that could lead to an increase in our costs, reduce our net revenues or damage
our reputation. Our products are complex and may contain undetected errors, especially when
first introduced or as new versions are released. The occurrence of hardware or
software errors could adversely affect sales of our products, cause us to incur
significant repair costs, divert the attention of our engineering personnel
from product development efforts and cause us to lose credibility with current
or prospective customers. Our joint development activities may result in products that are not
commercially successful or that are not available in a timely fashion. We have engaged in joint development projects with third parties in the past
and we expect to continue doing so in the future. Joint development can magnify
several risks for us, including the loss of control over development of aspects
of the jointly developed products and over the timing of product availability.
Accordingly, we face increased risk that joint development activities will
result in products that are not commercially successful or that are not
available in a timely fashion. During April 2003 we announced a joint development activity with Intel
Corporation relating to storage processors that integrate SATA, SAS and Fibre
Channel interfaces within a single architecture. Under the agreement, we will
develop the protocol controller hardware, firmware and drivers. Intel will
integrate its Intel® Xscale microarchitecture as the core technology for
the new processors and will manufacture the processors on its 90-nanometer
process technology. We will market the resulting Fibre Channel products and
Intel will market the SATA and SAS product. This activity has risks resulting
from unproven new-generation manufacturing technology, from the licensing of
SATA, SAS and other 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;
    
    undetected errors, failures or production quality issues;
    
    timeliness of product delivery;
    
    financial stability and viability of our suppliers and electronics manufacturing service providers;
    
    changes in business strategies of our suppliers and electronics manufacturing service providers;
    
    disruption in shipping channels;
    
    natural disasters;
    
    environmental, tax or legislative changes in the location where our products are produced;
    
    difficulties associated with foreign operations; and/or
    
    market shortages. 37




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There is a risk that we will not be able to retain our current suppliers or
change to alternative suppliers. An interruption in supply or the cost of
shifting to a new supplier or electronics manufacturing service providers could
have a material adverse effect on our business, results of operations and
financial condition. Additionally, key components that we use in our products may only be available
from single sources with which we do not have contracts. We may obtain sole
source components manufactured by companies such as Cypress, E20, Finisar, ICS,
Intel, Lattice, Micrel, Micron, Motorola, NEC, Quicklogic, Samsung, Seiko
Epson, Siliconix, Tundra Semiconductor and Vitesse. In addition, we design our
own ASICs that are embedded in our products. These ASICs are also sole sourced
and manufactured by third- party semiconductor foundries including IBM, Marvell
and LSI Logic. In addition to hardware, we design software to provide
functionality to our hardware products. The loss of one or more of our sole
suppliers or third party foundries could have a material adverse effect on our
business, results of
operations and financial condition. In addition, an announcement made by one of
our sole suppliers or third party foundries that they intend to stop producing
a component in the future could cause us, based on forecasted demand that may
or may not materialize, to enter into a long-term purchase commitment or make a
last-time purchase that could have a material adverse effect on our business,
results of operations and financial condition. Because we outsource the production of our products to electronics
manufacturing service providers, or EMS providers, we only manage the supply of
a small number of our product components. Currently, we rely upon our EMS
providers to complete numerous component purchases for our products.
Consequently, we cannot be certain that the necessary components will be
available to meet our future requirements at favorable prices, if at all. In March 2004, Celestica Inc., a leading EMS provider, completed their
acquisition of Manufacturers Services Limited (MSL), one of our primary EMS
providers. While we are unable to predict the effects that such acquisition
will have on our relationship with MSL, it is possible that the integration of
MSL with Celestica could result in disruptions that would adversely affect our
ability to timely and efficiently produce and ship our products. Moreover,
consolidation among EMS providers could result in decreased competition among
EMS providers, which could adversely affect our ability to negotiate favorable
arrangements with EMS providers. In June 2003, we selected Benchmark
Electronics, Inc., or Benchmark, as an additional EMS provider and have begun
shipping product from Benchmarks facility in Guadalajara, Mexico. At this
time, the majority of our customers have qualified the Benchmark facility in
Mexico. Embedded switch products are obtained from an EMS facility, Suntron, in
Texas. Although we do not expect these changes to our EMS providers to have a
significant impact on us, if we were to experience significant delays in
product qualifications, completing production runs or shipping product as a
result of these changes, and we were unable to compensate for this disruption
elsewhere, it could have a material adverse effect on our business, results of
operations and financial condition. Moreover, because we rely upon our EMS
providers to manufacture, store and ship our products, the manufacturing and
sale of our products would be temporarily suspended if one or all of our EMS
providers are unable or unwilling to complete production runs for us in the
future, or experience any significant delays in completing production runs or
shipping product. We conduct business with our EMS providers through contracts
with fairly short terms (usually one year), sometimes with termination for
convenience rights of the EMS upon as little as six months notice. If an EMS
provider decides to terminate the agreement, allows the agreement to expire, or
materially changes the terms of our purchases, or if our supply from an EMS
provider is otherwise interrupted, we will not be able to easily replace the
manufacturing capability. Securing a new EMS relationship, production ramp-up
and customer qualification of new facilities can take many months or longer. An
interruption in supply of our products and the cost of qualifying and shifting
production to an alternative manufacturing and distribution facility could have
a material adverse effect on our business, results of operations and financial
condition. Furthermore, we rely upon the financial stability of our EMS
providers and their ability and willingness to continue as our EMS providers. If our intellectual property protections are inadequate, it could adversely
affect our business. We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of
product support and customer relations. At the same time, our success is
partially dependent on the proprietary technology contained in our products. We
currently rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual provisions to establish and protect our
intellectual property rights in our products. For a more complete description
of our intellectual property, you should read the Business  Intellectual
Property section of our most recently filed Annual Report on Form 10-K. We cannot be certain that the steps we take to protect our intellectual
property will adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or superior technology,
or that we can maintain such technology as trade secrets. In addition, the laws
of some of the countries in which our products 38




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are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all.
Furthermore, we enter into various development projects and arrangements with
other companies. In some cases, these arrangements allow for the sharing or use
of our intellectual property. Our failure to protect our intellectual property
rights could have a material adverse effect on our business, results of
operations and financial condition. On February 28, 2003, Vixel Corporation, prior to our acquisition of it, filed
a patent infringement action against QLogic Corporation in the United States
District Court for the District of Delaware. The complaint states that QLogic
is infringing U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, through the
unauthorized manufacture, use, sale and offering for sale of various storage
area network switching products, including but not limited to, QLogics SANBox2
series of products. On March 28, 2003,
Vixel filed a first amended complaint stating that QLogic is also infringing
U.S. Patent No. 6,185,203, entitled Fibre Channel Switching Fabric and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, QLogics SANBox2 series of
products. On May 23, 2003, Vixel filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District Court for
the Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for Fibre
Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching products,
including but not limited to, Brocades Silkworm switch products. QLogic and
Brocade denied infringement and challenged the validity of the patents
referenced. Brocade also challenged the enforceability of those patents. In
both of these suits, Vixel was seeking unspecified past damages, potential
future royalties, or, alternatively, injunctive relief. On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that one
of Vixels products, the 7200 Fibre Channel Switch, infringes U.S. Patent No.
4,821,034, entitled Digital Exchange Switch Element and Network. The suit
seeks unspecified monetary damages as well as injunctive relief. On December 15, 2003, we and QLogic tentatively agreed to settle the claims and
mutually release each other from any liability associated with the claims (and
the related counterclaims filed by QLogic) in exchange for payments by QLogic.
In connection with the settlement, QLogic will be required to make an upfront
payment and pay quarterly royalties associated with the future sales of certain
products. The settlements are subject to execution of final written agreements
with normal and customary terms and court approval of the dismissal of the
lawsuits. On February 27, 2004, Emulex Design & Manufacturing Corporation (the
new name given to Vixel) filed a complaint against QLogic in the United States
District Court for the District of Delaware asserting the validity and
enforceability of the December 15, 2003 settlements and seeking a declaration
that the U.S. Patent No. 4,821,034 is invalid and is not infringed. On March
18, 2004, QLogic filed an answer that included denials of our assertions
concerning U.S, Patent 4,821,034 and a denial that a valid and enforceable
settlement had been reached. Each of the foregoing lawsuits is pending, and presents risks inherent in
disputes of this type, any of which could have a material adverse effect on our
business, financial condition or results of operations. Such potential risks
include the continuing expenses of litigation, the risk of loss of patent
rights, the risk of injunction against the sale of products incorporating the
technology in question, counterclaims and attorneys fee liability. Third-party claims of intellectual property infringement could adversely affect
our business. We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements, which may or may not be available. However, we have in the past
obtained, and may be required in the future to obtain, licenses of technology
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
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The inability to attract or the loss of key managerial and technical personnel
could adversely affect our business. Our success depends to a significant degree upon the performance and continued
service of key managers as well as engineers involved in the development of our
storage networking technologies and technical support of our storage networking
products and customers. Our future success depends upon our ability to attract,
train and retain such personnel. We may need to increase the number of key
managers as well as technical staff members with experience in high-speed
networking applications as we further develop our storage networking product
lines. Competition for such highly skilled employees the communities in which
we operate as well as our industry is intense, and we cannot be certain that we
will be successful in recruiting and retaining such personnel. In addition,
employees may leave our company and subsequently compete against us. Also, many
of these key managerial and technical personnel receive stock options. New
regulations, volatility in the stock market and other factors could diminish
the value of our stock
options, putting us at a competitive disadvantage and forcing us to use more
cash compensation. If we are unable to attract new managerial and technical
employees, or are unable to retain our current key managerial and technical
employees, our business, results of operations and financial condition could be
materially adversely affected. Our international business activities subject us to risks that could adversely
affect our business. For the nine months ended March 28, 2004, sales in the United States accounted
for 56 percent of our total net revenues, sales in Europe accounted for 34
percent of our total net revenues, and sales in the Pacific Rim countries
accounted for 10 percent of our total net revenues. We expect that sales in the
United States and Europe will continue to account for the substantial majority
of our net revenues for the foreseeable future. All of our sales are currently
denominated in U.S. dollars. As a result, if the value of the U.S. dollar
increases relative to foreign currencies, our products could become less
competitive in international markets. Additionally, a significant portion of
our products is produced at a manufacturing subcontractors production facility
in Valencia, Spain and in the future products will be produced in Guadalajara,
Mexico. As a result, we are subject to the risks inherent in international
operations. Our international business activities could be affected, limited or
disrupted by a variety of factors, including:  
    
    the imposition of governmental controls and regulatory requirements;
    
    the costs and risks of localizing products for foreign countries;
    
    longer accounts receivable payment cycles;
    
    changes in the value of local currencies relative to our functional currency;
    
    trade restrictions;
    
    changes in tariffs;
    
    loss of tax benefits due to international production;
    
    general economic and social conditions within foreign countries; and/or
    
    political instability, war or terrorism. In addition, the revenues we earn in various countries in which we do business
may be subject to taxation by more than one jurisdiction, thereby adversely
affecting our earnings. All of these factors could harm future sales of our
products to international customers or future production outside of the United
States of our products, and have a material adverse effect on our business,
results of operations and financial condition. Export restrictions may adversely affect our business. Our products are subject to U.S. Department of Commerce export control
restrictions. Neither our customers nor we may export such products without
obtaining an export license, where applicable. These U.S. export laws also
prohibit the export of our products to a number of countries deemed by the
United States to be hostile. These restrictions may make foreign competitors
facing less stringent controls on their products more competitive in the global
market than our customers or us. The U.S. government may not approve any
pending or future export license requests. In addition, the list of products
and countries for which export approval is required, and the regulatory
policies with 40




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respect thereto, could be revised. The sale of our products could
be harmed by our inability or the inability of our customers to obtain the
required licenses or by the costs of compliance. Potential acquisitions or strategic investments may be more costly or less
profitable than anticipated and may adversely affect the price of our company
stock. We may pursue acquisitions or strategic investments, such as the acquisition of
Vixel Corporation, that could provide new technologies, products or service
offerings. Future acquisitions or strategic investments may negatively impact
our results of operations as a result of operating losses incurred by the
acquired entity, the use of significant amounts of cash, potentially dilutive
issuances of equity or equity-linked securities, incurrence of debt or
amortization of intangible assets with determinable lives. Furthermore, we may
incur significant expenses pursuing acquisitions or
strategic investments that ultimately may not be completed. Moreover, to the
extent that any proposed acquisition or strategic investment is not favorably
received by stockholders, analysts and others in the investment community, the
price of our common stock could be adversely affected. In addition,
acquisitions or strategic investments involve numerous risks, including:  
    
    difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
    
    the diversion of managements attention from other business concerns;
    
    risks of entering markets in which we have no or limited prior experience;
    
    risks related to the effect that the acquired companys internal
control processes might have on our financial reporting and
managements report on our internal controls over financial reporting;
and/or
    
    the potential loss of key employees of the acquired company. In the event that an acquisition or strategic investment does occur and we are
unable to obtain anticipated profits or successfully integrate operations,
technologies, products or personnel that we acquire, our business, results of
operations and financial condition could be materially adversely affected. Our stock price is volatile, which has and may result in lawsuits against us
and our officers and directors. The stock market in general and the stock prices in technology-based companies
in particular have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in
the future as well. For example, during calendar year 2003 the reported high
and low closing sales prices of our common stock ranged from a low of $17.20
per share to a high of $29.59 per share. Factors that could have a significant
impact on the market price of our common stock include, but are not limited to,
the following:  
    
    quarterly variations in operating results;
    
    announcements of new products by us or our competitors;
    
    the gain or loss of significant customers or design wins;
    
    changes in analysts earnings estimates;
    
    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; 41




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
    
    dilution resulting from conversion of outstanding convertible
subordinated notes into shares of our common stock;
    
    general conditions in the computer, storage or communications markets; and/or
    
    events affecting other companies that investors deem to be comparable to us. In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. In this
regard, we and certain of our officers and directors were named as defendants
in a number of securities class action lawsuits filed in the United States
District Court, Central District of California. The plaintiffs in the actions
represent purchasers of our common stock during various periods ranging from
January
18, 2001, through February 9, 2001. The complaints allege that we and certain
of our officers and directors made misrepresentations and omissions in
violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended. The complaints generally seek compensatory damages, costs and
attorneys fees in an unspecified amount. In addition, we have received
inquiries about events giving rise to the lawsuits from the SEC and the Nasdaq
Stock Market. On April 22, 2003, we entered into two Memoranda of Understanding
agreeing to terms of settlement for both the class action and derivative
litigation. The settlement was approved and $39.5 million held in escrow was
paid to the plaintiffs. We are currently seeking to recover a portion of this
amount from our insurance carriers and have recorded a receivable for the
amount we estimate will be recovered. For a more detailed description, see the
next Risk Factor listed below. The final amount collected for our receivable
from our insurance carriers related to the settlements of securities class
action and derivative lawsuits may be materially different from the receivable
amount. If we were to be the subject of similar litigation in the future it
could have a material adverse effect on our results of operations and financial
condition. On November 15, 2001, prior to our acquisition of Vixel Corporation, a
securities class action was filed in the United States District Court in the
Southern District of New York against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleges violations under Section
10(b) of the Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock during the
period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and
directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice.
During June 2003, Vixel and the other issuer defendants in the action reached a
tentative settlement with the plaintiffs that would, among other things, result
in the dismissal with prejudice of all claims against the defendants and their
officers and directors. In connection with the possible settlement, those
officers and directors who had entered tolling agreements with the plaintiffs
agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal in
principle, it remains subject to a number of procedural conditions, as well as
formal approval by the court. This lawsuit is pending, and presents risks
inherent in litigation including continuing expenses, risks of loss, additional
claims, and attorney fee liability. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding for a $0.7 million settlement with the plaintiff in
the class action suit pursuant to which the parties have agreed to settle the
action, subject to court approval formal settlement documents were signed on
May 5, 2004 and the plaintiff has completed discovery as agreed to by the
parties. The consummation of the settlement is subject to final court approval
(as defined by law) of the settlement and dismissal of the action with
prejudice. This lawsuit is pending, and presents risks inherent in litigation
including continuing expenses, risks of loss, additional claims and attorney
fee liability. The final amount collected for our receivable from our insurance carriers
related to the tentative settlements of securities class action and derivative
lawsuits may be materially different from the receivable amount. As of March 30, 2003, we had recorded a $13.1 million receivable from our
insurance carriers relating to the tentative $39.5 million settlement of
securities class action and derivative lawsuits relating to Emulex
specifically. We had directors and officers insurance with a primary limit of
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for the period of February
2000 through February 2002; and excess insurance of $10 million for the period
of February 2000 through February 2001; and excess insurance of $20 million for
the period of February 2001 through February 2002. Our insurance carriers have
refused to pay the amount we believe they are obligated to pay, asserting
various defenses including coverage exclusions and late notice. Our actual
insurance recovery may be materially different from the receivable amount we
had recorded for various reasons, including the strength of the defenses
asserted by our insurance carriers. If one or all of our insurance carriers
were unable or refused to make some or all of the payments due to us, or if an
arbitrator or court determines that the recovery should be an amount other than
the receivable amount, or if ultimately the amount received by us is more or
less than the receivable amount, we would be required to record a corresponding
gain or loss. We reached an agreement with one of our insurers under which we
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
us of $8.0 million during the three months ended March 28, 2004. Terrorist activities and resulting military and other actions could adversely
affect our business. The terrorist attacks in New York and Washington, D.C. in September 2001
disrupted commerce throughout the United States and Europe. The continued
threat of terrorism within the United States and Europe and the military action
and heightened security measures in response to such threat may cause
significant disruption to commerce throughout the world. To the extent that
such disruptions result in delays or cancellations of customer orders, delays
in collecting cash, a general decrease in corporate spending on information
technology or our inability to effectively market, manufacture or ship our
products, our business, financial condition, and results of operations could be
materially and adversely affected. We are unable to predict whether the threat
of terrorism or the responses thereto will result in any long-term commercial
disruptions or if such activities or responses will have any long-term material
adverse effect on our business, results of operations or financial condition. Our corporate offices and principal product development facilities are located
in a region that is subject to earthquakes and other natural disasters. Our California and Washington facilities, including our corporate offices and
principal product development facilities, are located near major earthquake
faults. Any disruption in our business activities, personal injury or damage to
the facilities in excess of our currently insured amounts as a result of
earthquakes or other such natural disasters, could have a material adverse
effect on our business, results of operations and financial condition. Our shareholder rights plan, certificate of incorporation and Delaware law
could adversely affect the performance of our stock. Our shareholder rights plan and provisions of our certificate of incorporation
and of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. The shareholder rights plan and these provisions of our
certificate of incorporation and Delaware law are intended to encourage
potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. For more information, please read note 12 to the Consolidated Financial
Statements of our most recently filed Annual Report on Form 10-K, our
certificate of incorporation and Delaware law for more information on the
anti-takeover effects of provisions of our shareholder rights plan. Changes in laws, regulations and financial accounting standards may affect our
reported results of operations. The recently enacted Sarbanes-Oxley Act of 2002 and related regulations may
result in changes in accounting standards or accepted practices within our
industry. New pronouncements and varying interpretations of pronouncements have
occurred in the past and are likely to occur in the future as a result of
recent Congressional and regulatory actions. New laws, regulations and
accounting standards, as well as changes to currently accepted accounting
practices in the technology industry might adversely affect our reported
financial results, which could have an adverse effect on our stock price.
Proposals have been made concerning the expensing of stock options that could
result in rules or laws that may adversely affect our reported financial
results, which could have an adverse effect on our stock price. 43




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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 at a discount to face value
approximately an aggregate of $328.0 million in face value of such notes,
leaving approximately $17.0 million still outstanding as of March 28, 2004. On December 12, 2003, we completed a $450.0 million private placement of 0.25
percent convertible subordinated notes due 2023. Interest is payable in cash
on June 15th and December 15th of each year beginning June 15, 2004. Under the
terms of the offering, the notes will be convertible, at the option of the
holder and subject to the satisfaction of certain conditions, into shares of
Emulex common stock at a price of $43.20 per share.In addition, we granted
the initial purchasers of the notes an option, which they exercised in the
three months ended March 28, 2004, to purchase an additional $67.5 million
principal amount of the notes. Holders of the notes may require the Company to
purchase the notes for cash by giving written notice within the 20 business
days prior to each of December 15, 2006, December 15, 2008, December 15, 2013,
and December 15, 2018. We incurred total associated bankers fees of $11.6
million, which were recorded as a reduction to the proceeds from the issuance
of the notes and will be accreted over the three-year effective life of the
notes, as well as approximately $0.7 million of other associated acquisition
costs, which have been recorded as an asset and will also be amortized over the
effective life of the notes. If we have insufficient liquidity and capital resources to repay the principal
amounts of our outstanding convertible notes and the notes offered hereby when
due, we may be forced to raise additional funds through public or private debt
or equity financings, which may not be available on favorable terms, if at all.
If such financings were not available on favorable terms, our results of
operations and financial condition could be materially adversely affected. Conversion of our outstanding notes would dilute the ownership interest of
existing stockholders. The conversion of our notes into shares of our common stock would dilute the
ownership interests of existing stockholders. Any sales in the public market
of the common stock issuable upon conversion of the notes could adversely
affect prevailing market prices of our common stock. In addition, the
existence of the notes may 44




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encourage short selling by market participants due
to this dilution or to facilitate trading strategies involving notes and common
stock. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Sensitivity At March 28, 2004, our investment portfolio consisted primarily of fixed income
securities, excluding those classified as cash, cash equivalents and restricted
cash, of $446.5 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 March
28, 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. Our 0.25 percent convertible subordinated notes are
due in 2023 but the holders of the notes may require us to purchase the notes
for cash as early as 2006 under certain circumstances (see Part II, Item 2
Changes in Securities and Use of Proceeds for more information) and our 1.75
percent convertible subordinated notes are due February 1, 2007. Foreign Currency We have executed and will continue to execute transactions in foreign
currencies. As a result, we may be exposed to financial market risk resulting
from fluctuations in foreign currency rates, particularly the British Pound and
the Euro. Given the relatively small number of foreign currency transactions,
we do not believe that our potential exposure to fluctuations in foreign
currency rates is significant. 
 Item 4. Controls and Procedures We maintain disclosure controls and procedures designed to ensure that we are
able to collect the information we are required to disclose in the reports we
file with the Securities and Exchange Commission, or SEC, and to process,
summarize and disclose this information within the time periods specified in
the rules of the SEC. Based on their evaluation of our disclosure controls and
procedures, our management, with the participation of the Chief Executive and
Chief Financial Officers, has concluded that, as of the end of the period
covered by this Quarterly Report on Form 10-Q, these disclosure controls and
procedures were effective to ensure that we are able to record, process,
summarize and report the information we are required to disclose in the reports
we file with the SEC within the required time periods. There were no changes in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings On February 28, 2003, Vixel Corporation, prior to our acquisition of it, filed
a patent infringement action against QLogic Corporation in the United States
District Court for the District of Delaware. The complaint states that QLogic
is infringing U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, through the
unauthorized manufacture, use, sale and offering for sale of various storage
area network switching products, including but not limited to, QLogics SANBox2
series of products. On March 28, 2003, Vixel filed a first amended complaint
stating that QLogic is also infringing U.S. Patent No. 6,185,203, entitled
Fibre 45




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##### Table of Contents



Channel Switching Fabric and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop
Devices through the unauthorized manufacture, use, sale and offering for sale
of various storage area network switching products, including but not limited
to, QLogics SANBox2 series of products. On May 23, 2003, Vixel filed a patent
infringement action against Brocade Communications Systems, Inc. in the United
States District Court for the Northern District of California. The complaint
states that Brocade is infringing U.S. Patent No. 6,185,203, entitled Fibre
Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled Methods and
Apparatus for Fibre Channel Interconnection of Private Loop Devices, and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices, through the unauthorized
manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, Brocades Silkworm switch
products. QLogic and Brocade denied infringement and challenged the validity of
the patents referenced. Brocade also challenged the enforceability of those
patents. In both of these suits, Vixel was seeking unspecified past damages,
potential future royalties, or, alternatively, injunctive relief. On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that one
of Vixels products, the 7200 Fibre Channel Switch, infringes U.S. Patent No.
4,821,034, entitled Digital Exchange Switch Element and Network. The suit
seeks unspecified monetary damages as well as injunctive relief. On December 15, 2003, we and QLogic tentatively agreed to settle the claims and
mutually release each other from any liability associated with the claims (and
the related counterclaims filed by QLogic) in exchange for payments by QLogic.
In connection with the settlement, QLogic will be required to make an upfront
payment and pay quarterly royalties associated with the future sales of certain
products. The settlements are subject to execution of final written agreements
with normal and customary terms and court approval of the dismissal of the
lawsuits. On February 27, 2004, Emulex Design and Manufacturing Corporation
(the new name given to Vixel) filed a complaint against QLogic in the united
States District Court for the District of Delaware asserting the validity and
enforceability of the December 15, 2003 settlements, and seeking a declaration
that the U.S. Patent No. 4,821,034 is invalid and is not infringed. On March
18, 2004, QLogic filed an answer that included denials of our assertions
concerning U.S. Patent 4,821,034 and denial that a valid and enforceable
settlement had been reached. On November 15, 2001, prior to our acquisition of Vixel Corporation, a
securities class action was filed in the United States District Court in the
Southern District of New York against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleges violations under Section
10(b) of the Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock during the
period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and
directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice.
During June 2003, Vixel and the other issuer defendants in the action reached a
tentative settlement with the plaintiffs that would, among other things, result
in the dismissal with prejudice of all claims against the defendants and their
officers and directors. In connection with the possible settlement, those
officers and directors who had entered tolling agreements with the plaintiffs
agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal
in principle, it remains subject to a number of procedural conditions, as well
as formal approval by the court. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding for a $0.7 million settlement with the plaintiff in
the class action suit pursuant to which the parties have agreed to settle the
action, subject to court approval. Formal settlement documents were signed on
May 5, 2004 and the plaintiff has completed discovery as agreed to by the
parties. The consummation of the settlement is subject to the final court
approval (as defined by law), of the settlement and dismissal of the action
with prejudice. Beginning on or about February 20, 2001, we and certain of our officers and
directors were named as defendants in a number of securities class action
lawsuits filed in the United States District Court, Central District of
California. The 46




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plaintiffs in the actions represent purchasers of our common
stock during various periods ranging from January 18, 2001, through February 9,
2001. The complaints alleged that we and certain of our officers and directors
made misrepresentations and omissions in violation of sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended. The complaints generally
seek compensatory damages, costs and attorneys fees in an unspecified amount.
In addition, we have received inquiries about events giving rise to the
lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003, we
entered into two Memoranda of Understanding agreeing to terms of settlement for
both the class action and derivative litigation. The settlement was approved
and $39.5 million held in escrow was paid to the plaintiffs. We are currently
seeking to recover a portion of this amount from our insurance carriers and
have recorded a receivable for the amount we estimate will be recovered. The
final amount collected for our receivable from our insurance carriers related
to the settlements of securities class action and derivative lawsuits may be
materially different from the receivable amount. We reached an agreement with
one of our insurers, under which we 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 us of $8.0 million during the three
months ended March 28, 2004. Each of the foregoing lawsuits or arbitrations is pending, and presents risks
inherent in disputes of this type, any of which could have a material adverse
effect on our business, financial condition or results of operations. Such
potential risks include the continuing expenses of litigation, the risk of loss
of patent rights, the risk of injunction against the sale of products
incorporating the technology in question, counterclaims and attorneys fee
liability. Additionally, we are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity. 
 Item 2. Changes in Securities and Use of Proceeds On December 12, 2003, we sold $450 million in aggregate principal amount of
0.25% Convertible Subordinated Notes due 2023 to Credit Suisse First Boston LLC
and Deutsche Bank Securities, as initial purchasers. On January 15, 2004, we
sold an additional $67.5 million of such notes to the initial purchasers upon
exercise in full of their option to purchase up additional notes. The issuance
and sale of the notes and the subsequent offering and resale of the notes by
the initial purchaser were exempt from the registration provisions of the
Securities Act of 1933 pursuant to Section 4(2) of such act and Rule 144A
promulgated thereunder. The aggregate principal amount of the notes sold was $517.5 million. The
aggregate discount to the initial purchasers was $11.6 million. The notes accrue interest at an annual rate of 0.25 percent and are
convertible, at the option of the holder and subject to the satisfaction of
certain conditions, into our common stock at an initial conversion price of
$43.20 per share, subject to customary antidilution adjustments. This
represents a 60 percent conversion premium based on the closing bid price of
$27.00 of our common stock on December 8, 2003. At the initial conversion rate,
each $1,000 principal amount of notes will be convertible into 23.148 shares of
our common stock. The notes will mature in twenty years and will not be
callable for the first five years. We have filed with the Securities and Exchange Commission a registration
statement registering the notes and the shares underlying the notes are
obligated to have that registration statement declared effective within 180
days after December 12, 2003. We may not redeem the notes prior to December 20, 2008. Thereafter, we may
redeem the notes at 100% of their principal amount, plus accrued and unpaid
interest, if the closing price of its common stock for 20 trading days within a
period of 30 consecutive trading days ending on the trading day before the date
of mailing of the redemption notice exceeds 120% of the conversion price in
effect on such trading day. At any time on or after December 20, 2010, we may
redeem all or a portion of the notes at 100% of their principal amount plus
accrued and unpaid interest. Holders of the notes may require us to purchase the notes for cash by giving
written notice within the 20 business days prior to each of December 15, 2006,
December 15, 2008, December 15, 2013 and December 15, 2018. In connection with our sale of the notes, we repurchased an aggregate of 1.5
million shares of common stock at an average price of $27.00 per share during
the three months ended December 28, 2003. In addition, we repurchased an
aggregate of $97.7 million of our previously outstanding 1.75 percent
convertible notes due 2007 at an aggregate purchase price of $98.2 million for
the nine months ended March 28, 2004. For the three months ended March 28,
2004, we repurchased an aggregate of $12.3 million of our previously
outstanding 1.75 percent convertible notes due 47




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2007 at an aggregate purchase
price of $12.4 million. As noted in the following table, we did not repurchase
any equity securities during the three months ended March 28, 2004. ISSUER PURCHASES OF EQUITY SECURITIES Maximum Number (orTotal Number of
    
    Approximate DollarTotal
    
    
    
    
    
    Shares Purchased
    
    Value) of Shares thatNumber of
    
    Average
    
    as Part of Publicly
    
    May Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    ProgramsDecember 29, 2003
through January 25,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionJanuary 26, 2004
through February
22, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionFebruary 23, 2004
through March 28,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionTotal
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 million
 Our Board of Directors authorized the repurchase of up to four million shares
over the two years beginning in September 2001. The repurchase plan authorized
us to make purchases in the open market or through privately negotiated
transactions with the timing and terms of any purchase to be determined by
management based on market conditions. During the first quarter of fiscal
2002, we repurchased 1.0 million common shares and did not subsequently
repurchase any shares during fiscal 2002 and 2003. During the three months
ended September 28, 2003, our Board of Directors extended the repurchase
program to June 2005. Aside from the repurchases of shares and notes described above, we used
approximately $174 million of the proceeds to repay short term indebtedness
incurred in connection with our acquisition of Vixel and intend to use the
balance of the net proceeds of the note offering for general corporate
purposes, including working capital and potential acquisitions. We currently
have no understandings or agreements with respect to any acquisitions. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K
for 1997).
 48




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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 10.1
    
    Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).Exhibit 10.2
    
    Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the 2002 Proxy Statement
filed on October 21, 2002).Exhibit 10.3
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys 2002 Proxy Statement filed on October 21, 2002).
 49




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Exhibit 10.4
    
    Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys 2002 proxy
statement filed on October 21, 2002).Exhibit 10.5
    
    Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.6
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.7
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.27
    
    Lease Agreement between Vixel Corporation and Sun Life
Assurance Company of Canada (U.S.) dated December 6, 1996, as
amended January 22, 1997, and November 28, 2001 (incorporated by
reference to Exhibit 10.27 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 28, 2003).Exhibit 10.28
    
    Sublease Agreement between Vixel Corporation and Inter-Tel
Technologies, Inc., dated October 7, 2002 (incorporated by reference
to Exhibit 10.27 to the Companys Quarterly Report on Form 10-Q for
the quarterly period ended December 28, 2003).Exhibit 10.29
    
    Purchase and Sale Agreement and Joint Escrow Instructions
dated January 27, 2004, by and between C.J. Segerstrom & Sons, a
California General Partnership, as seller, and the Company, as
buyer.Exhibit 31A
    
    Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31B
    
    Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K  1.
    
    The Registrant filed Form 8-K on January 12, 2004, announcing
that the initial purchasers of its $450.0 million aggregate
principal amount of its 0.25 percent convertible subordinated notes
due 2023 completed on December 12, 2003, had agreed to extend the
option period for the initial purchasers to purchase an additional
$67.5 million of the notes from 30 days to 45 days.2.
    
    The Registrant filed Form 8-K on January 27, 2004, containing
a press release announcing the Registrants financial results for
the three months ended December 28, 2003.3.
    
    The Registrant filed Form 8-K on December 8, 2003, as amended
on Form 8-K/A on January 27, 2004, with respect to the acquisition
of Vixel Corporation reported under Item 2  Acquisition or
Disposition or Assets. 50




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: May 10, 2004 EMULEX CORPORATIONBy:
    /s/ Paul F. FolinoPaul F. FolinoChairman of the Board and Chief Executive Officer By:
    /s/ Michael J. RockenbachMichael J. RockenbachExecutive Vice President and
Chief Financial Officer
(Principal Financial and Chief Accounting Officer) 51




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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 Annual Report on Form 10-K
for 1997).Exhibit 3.2
    
    Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 2000).Exhibit 3.3
    
    Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.3 to the Companys quarterly report on form 10-Q for
the quarterly period ended September 29, 2002).Exhibit 3.4
    
    Amendment to Bylaws of the Company adopted by the Board of
Directors on March 2, 2001 (incorporated by reference to Exhibit 3.4
to the Companys 2002 Annual Report on Form 10-K).Exhibit 3.5
    
    Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4 to the
Companys Current Report on Form 8-K filed February 2, 1989).Exhibit 4.1
    
    Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Companys Current
Report on Form 8-K filed February 2, 1989).Exhibit 4.2
    
    Certificate regarding extension of Final Expiration Date of
Rights Agreement dated January 18, 1999 (incorporated by reference
to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on
Form S-3, filed on May 17, 1999).Exhibit 4.3
    
    Form of 1.75% Convertible Subordinated Note due February 1,
2007 (incorporated by reference to Exhibit 4.8 to the Registration
Statement on Form S-3, amended on June 28, 2002).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
January 29, 2002, related to the Companys 1.75% Convertible
Subordinated Notes due February 1, 2007 (incorporated by reference
to Exhibit 4.9 to the Registration Statement on Form S-3, amended on
June 28, 2002).Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit
Suisse First Boston Corporation dated January 29, 2002, related to
the Companys 1.75% Convertible Subordinated Notes due February 1,
2007 (incorporated by reference to Exhibit 4.10 to the Registration
Statement on Form S-3, amended on June 28, 2002).Exhibit 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 10.1
    
    Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).Exhibit 10.2
    
    Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the 2002 Proxy Statement
filed on October 21, 2002).Exhibit 10.3
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys 2002 Proxy Statement filed on October 21, 2002).




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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 2002 proxy
statement filed on October 21, 2002).Exhibit 10.5
    
    Vixel Corporation Amended and Restated 1995 Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.6
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.7
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8, dated November 21, 2003).Exhibit 10.27
    
    Lease Agreement between Vixel Corporation and Sun Life
Assurance Company of Canada (U.S.) dated December 6, 1996, as
amended January 22, 1997, and November 28, 2001 (incorporated by
reference to Exhibit 10.27 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 28, 2003).Exhibit 10.28
    
    Sublease Agreement between Vixel Corporation and Inter-Tel
Technologies, Inc., dated October 7, 2002 (incorporated by reference
to Exhibit 10.27 to the Companys Quarterly Report on Form 10-Q for
the quarterly period ended December 28, 2003).Exhibit 10.29
    
    Purchase and Sale Agreement and Joint Escrow Instructions
dated January 27, 2004, by and between C.J. Segerstrom & Sons, a
California General Partnership, as seller, and the Company, as
buyer.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.