##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended January 1, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 Commission File No. 001-31353
 EMULEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(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
 
 þ o
  þ o o
 o þ




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PAGEPart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets January 1, 2006 and July 3, 2005
    
    
    2Condensed Consolidated Statements of Income Three and six months ended January 1, 2006, and December 26, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows Six months ended January 1, 2006, and December 26, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 6. Exhibits
    
    
    39Signatures
    
    
    41EXHIBIT 31.AEXHIBIT 31.BEXHIBIT 32
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
    January 1,
    
    
    July 3,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    142,193
    
    
    $
    120,317Investments
    
    
    423,634
    
    
    
    346,675Accounts and other receivables, net
    
    
    68,806
    
    
    
    47,730Inventories, net
    
    
    24,537
    
    
    
    36,266Prepaid expenses
    
    
    4,406
    
    
    
    4,508Deferred income taxes
    
    
    27,609
    
    
    
    28,961Total current assets
    
    
    691,185
    
    
    
    584,457Property and equipment, net
    
    
    63,586
    
    
    
    65,976Investments
    
    
    23,955
    
    
    
    54,936Intangibles, net
    
    
    82,600
    
    
    
    95,806Other assets
    
    
    596
    
    
    
    606$
    861,922
    
    
    $
    801,781Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    24,609
    
    
    $
    29,778Accrued liabilities
    
    
    20,829
    
    
    
    21,505Income taxes payable
    
    
    36,545
    
    
    
    25,361Total current liabilities
    
    
    81,983
    
    
    
    76,644Convertible subordinated notes
    
    
    234,280
    
    
    
    233,382Deferred income taxes and other
    
    
    13,021
    
    
    
    14,164Total liabilities
    
    
    329,284
    
    
    
    324,190Commitments and contingencies (notes 7 and 8)Stockholders equity:Preferred stock, $0.01 par value; 1,000,000 shares authorized
(150,000 shares designated as Series A Junior Participating
Preferred Stock); none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.10 par value; 240,000,000 shares authorized;
83,990,203 and 83,201,002 issued and outstanding at
January 1, 2006 and July 3, 2005, respectively
    
    
    8,399
    
    
    
    8,320Additional paid-in capital
    
    
    962,461
    
    
    
    944,545Deferred compensation
    
    
    
    
    
    
    (3,407
    )Accumulated deficit
    
    
    (438,222
    )
    
    
    (471,867
    )Total stockholders equity
    
    
    532,638
    
    
    
    477,591$
    861,922
    
    
    $
    801,781
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Three Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004Net revenues
    
    $
    110,268
    
    
    $
    91,671
    
    
    $
    214,647
    
    
    $
    164,896Cost of sales
    
    
    41,712
    
    
    
    33,546
    
    
    
    79,861
    
    
    
    62,792Gross profit
    
    
    68,556
    
    
    
    58,125
    
    
    
    134,786
    
    
    
    102,104Operating expenses:Engineering and development
    
    
    22,335
    
    
    
    19,746
    
    
    
    44,190
    
    
    
    39,943Selling and marketing
    
    
    9,254
    
    
    
    7,587
    
    
    
    17,211
    
    
    
    15,011General and administrative
    
    
    5,904
    
    
    
    3,579
    
    
    
    11,848
    
    
    
    3,158Amortization of intangibles
    
    
    6,373
    
    
    
    6,548
    
    
    
    12,757
    
    
    
    13,095Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,793Total operating expenses
    
    
    43,866
    
    
    
    37,460
    
    
    
    86,006
    
    
    
    73,000Operating income
    
    
    24,690
    
    
    
    20,665
    
    
    
    48,780
    
    
    
    29,104Nonoperating income:Interest income
    
    
    4,792
    
    
    
    2,867
    
    
    
    8,538
    
    
    
    5,901Interest expense
    
    
    (622
    )
    
    
    (1,056
    )
    
    
    (1,246
    )
    
    
    (2,403
    )Gain on repurchase of
convertible subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,090Other income (expense), net
    
    
    (18
    )
    
    
    82
    
    
    
    (20
    )
    
    
    72Total nonoperating income
    
    
    4,152
    
    
    
    1,893
    
    
    
    7,272
    
    
    
    16,660Income before income taxes
    
    
    28,842
    
    
    
    22,558
    
    
    
    56,052
    
    
    
    45,764Income tax provision
    
    
    11,633
    
    
    
    8,357
    
    
    
    22,407
    
    
    
    17,264Net income
    
    $
    17,209
    
    
    $
    14,201
    
    
    $
    33,645
    
    
    $
    28,500Net income per share:Basic
    
    $
    0.21
    
    
    $
    0.17
    
    
    $
    0.40
    
    
    $
    0.34Diluted
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.38
    
    
    $
    0.32Number of shares used in per share
computations:Basic
    
    
    83,821
    
    
    
    82,732
    
    
    
    83,609
    
    
    
    82,646Diluted
    
    
    91,266
    
    
    
    92,632
    
    
    
    91,115
    
    
    
    93,659
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Six Months EndedJanuary 1,
    
    
    December 26,2006
    
    
    2004Cash flows from operating activities:Net income
    
    $
    33,645
    
    
    $
    28,500Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    8,159
    
    
    
    6,684Amortization of discount on 0.25% convertible
subordinated notes
    
    
    898
    
    
    
    1,579Gain on repurchase of convertible subordinated notes
    
    
    
    
    
    
    (13,090
    )Insurance recovery on shareholder litigation settlements
    
    
    
    
    
    
    (4,649
    )Stock-based compensation
    
    
    10,637
    
    
    
    2,381Amortization of intangibles
    
    
    12,758
    
    
    
    13,095Impairment of goodwill
    
    
    
    
    
    
    1,793Deferred income taxes
    
    
    237
    
    
    
    8,684Tax benefit from exercise of stock options
    
    
    
    
    
    
    459Other
    
    
    62
    
    
    
    52Changes in assets and liabilities:Accounts and other receivables
    
    
    (21,076
    )
    
    
    11,511Inventories
    
    
    11,857
    
    
    
    8,846Prepaid expenses and other assets
    
    
    112
    
    
    
    (66
    )Accounts payable and accrued liabilities
    
    
    (5,873
    )
    
    
    1,454Net reimbursement of litigation settlements
    
    
    
    
    
    
    9,052Income taxes payable
    
    
    11,184
    
    
    
    7,075Net cash provided by operating activities
    
    
    62,600
    
    
    
    83,360Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    
    3
    
    
    
    26Additions to property and equipment
    
    
    (5,834
    )
    
    
    (6,643
    )Net decrease in restricted cash related to the construction
escrow account
    
    
    
    
    
    
    23Purchases of investments
    
    
    (1,059,040
    )
    
    
    (322,087
    )Maturities of investments
    
    
    1,013,062
    
    
    
    312,555Net cash used in investing activities
    
    
    (51,809
    )
    
    
    (16,126
    )Cash flows from financing activities:Proceeds from issuance of common stock under stock option plans
    
    
    8,609
    
    
    
    3,125Repurchase of convertible subordinated notes
    
    
    
    
    
    
    (137,206
    )Excess tax benefits from stock-based payment arrangements
    
    
    2,476
    
    
    
    Net cash provided by (used in) financing activities
    
    
    11,085
    
    
    
    (134,081
    )Net increase (decrease) in cash and cash equivalents
    
    
    21,876
    
    
    
    (66,847
    )Cash and cash equivalents at beginning of period
    
    
    120,317
    
    
    
    192,137Cash and cash equivalents at end of period
    
    $
    142,193
    
    
    $
    125,290Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    297
    
    
    $
    611Income taxes
    
    
    8,771
    
    
    
    1,280
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1.
    
    Summary of Significant Accounting Policies and Basis of PresentationIn the opinion of the Company, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which are normal recurring accruals) necessary to present
fairly its financial position as of January 1, 2006 and July 3, 2005, and its condensed
consolidated statements of income and cash flows for the three and six months ended January 1,
2006 and December 26, 2004. Interim results for the six months ended January 1, 2006, are not
necessarily indicative of the results that may be expected for the year ending July 2, 2006.
The interim financial statements should be read in conjunction with the Companys Annual Report
on Form 10-K for the fiscal year ended July 3, 2005. Certain reclassifications have been made
to prior period amounts to conform to the current period presentation.New and Recently Adopted Accounting StandardsStatement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs requires that
items such as idle facility expense, excessive spoilage, double freight and rehandling costs be
recognized as current-period charges and requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of production facilities.
SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company has
applied the provisions of SFAS No. 151 to the inventory costs prospectively from July 4, 2005.
The adoption of SFAS No. 151 did not have a significant impact on the Companys consolidated
results of operations for the three and six months ended January 1, 2006 or financial position
at January 1, 2006.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154), which replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changes,
and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes and error
corrections. It requires retrospective application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to determine either the
period-specific effect or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005.In September 2005, the FASB reached a final consensus on Emerging Issues Task Force (EITF)
Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty.
EITF 04-13 concludes that two or more legally separated exchange transactions with the same
counterparty should be combined and considered as a single arrangement for purposes of applying
APB Opinion No. 29, Accounting for Nonmonetary Transactions, when the transactions were
entered into in contemplation of one another. The consensus contains several indicators to be
considered in assessing whether two transactions are entered into in contemplation of one
another. If, based on consideration of the indicators and the substance of the arrangement, two
transactions are combined and considered a single arrangement, an exchange of finished goods
inventory for either raw material or work-in-process should be accounted for at fair value. The
provisions of EITF 04-13 are applied to transactions completed in reporting periods beginning
after March 15, 2006.In November 2005, the FASB issued FASB Staff Position (FSP) SFAS No. 115-1 and SFAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,
whether that impairment is other than temporary, and the measurement of an impairment loss.
This FSP also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary impairments. The guidance in this FSP amends
FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
APB Opinion No. 118, The Equity Method of Accounting for Investments in Common Stock. The
FSP is effective for reporting periods beginning after December 15, 2005. The FSP is not
expected to have a significant impact on the carrying value of the Companys investments.In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, or SFAS
No. 123(R). Effective July 4, 2005, the Company adopted SFAS No. 123(R) and related guidance,
using the modified prospective application transition method which provides for only current and
future period stock-based awards to be measured and recognized at fair value. See note 9 for
additional information.
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2.
    
    Business CombinationOn November 13, 2003, the Company completed the cash tender offer to acquire all outstanding
shares of Vixel Corporation for $10.00 net per share, without interest. On November 17, 2003,
the Company completed its acquisition of Vixel. The Company acquired Vixel to expand its Fibre
Channel product line and paid $298.4 million in cash for all outstanding common stock,
preferred stock and warrants of Vixel Corporation. The Company also incurred
acquisition-related expenses of $6.7 million in cash. In addition, the Company issued 2.2
million stock options with a fair value of approximately $47.5 million and kept the original
vesting periods for the options in exchange for the outstanding Vixel options for a total
acquisition value of $352.7 million. The Company calculated the fair value of the 2.2 million
stock options issued at the date of acquisition using the Black-Scholes option-pricing model.In connection with the preparation of Vixel Corporations tax return in the first quarter of
fiscal 2005, the Company revised estimates and discovered errors related to the deferred tax
assets of Vixel Corporation (acquired in November 2003). As a result, the Company recorded a
$1.8 million impairment of goodwill in the three months ended September 26, 2004. The Company
does not believe that this $1.8 million impairment of goodwill was material to fiscal 2005
operations or financial results. Excluding this adjustment, net income for the six months
ended December 26, 2004, would have been $30.3 million.3.
    
    InventoriesInventories, net, are summarized as follows:
 January 1,
    
    
    July 3,2006
    
    
    2005(in thousands)Raw materials
    
    $
    5,616
    
    
    $
    20,269Finished goods
    
    
    18,921
    
    
    
    15,997$
    24,537
    
    
    $
    36,266
 4.
    
    Intangibles, netIntangibles, net, are as follows:
 January 1,
    
    
    July 3,2006
    
    
    2005(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    98,516
    
    
    $
    98,742Accumulated amortization, core technology and patents
    
    
    (46,336
    )
    
    
    (39,216
    )Developed technology
    
    
    9,304
    
    
    
    9,341Accumulated amortization, developed technology
    
    
    (4,940
    )
    
    
    (3,818
    )Customer relationships
    
    
    37,809
    
    
    
    37,962Accumulated amortization, customer relationships
    
    
    (16,103
    )
    
    
    (12,415
    )Tradename
    
    
    4,949
    
    
    
    4,969Accumulated amortization, tradename
    
    
    (1,509
    )
    
    
    (1,161
    )Covenants not-to-compete
    
    
    3,068
    
    
    
    3,081Accumulated amortization, covenants not-to-compete
    
    
    (2,158
    )
    
    
    (1,679
    )Intangible assets subject to amortization
    
    $
    82,600
    
    
    $
    95,806
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2006
    
    $
    25,4162007
    
    $
    24,8162008
    
    $
    20,8902009
    
    $
    11,8542010
    
    $
    8,491
 5.
    
    Other AssetsComponents of other assets are as follows:
 January 1,
    
    
    July 3,2006
    
    
    2005(in thousands)Deferred debt issuance costs-
convertible subordinated notes, net
    
    $
    99
    
    
    $
    151Long-term prepaid assets
    
    
    424
    
    
    
    354Refundable deposits
    
    
    73
    
    
    
    101$
    596
    
    
    $
    606
 6.
    
    Accrued LiabilitiesComponents of accrued liabilities are as follows:
 January 1,
    
    
    July 3,2006
    
    
    2005(in thousands)Payroll and related costs
    
    $
    7,584
    
    
    $
    8,204Warranty reserves
    
    
    3,246
    
    
    
    4,085Sales returns and allowances
    
    
    2,788
    
    
    
    3,442Accrued advertising and promotions
    
    
    1,718
    
    
    
    1,674Accrued property, sales, franchise and related taxes
    
    
    1,951
    
    
    
    1,280Other
    
    
    3,542
    
    
    
    2,820$
    20,829
    
    
    $
    21,505
   Three Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004(in thousands)Balance at beginning of period
    
    $
    3,606
    
    
    $
    3,949
    
    
    $
    4,085
    
    
    $
    4,046Additions to costs and expenses
    
    
    553
    
    
    
    751
    
    
    
    1,252
    
    
    
    1,237Amounts charged against reserve
    
    
    (913
    )
    
    
    (548
    )
    
    
    (2,091
    )
    
    
    (1,131
    )Balance at end of period
    
    $
    3,246
    
    
    $
    4,152
    
    
    $
    3,246
    
    
    $
    4,152
 7.
    
    Convertible Subordinated NotesIn 2002, the Company completed a $345.0 million private placement of 1.75 percent convertible
subordinated notes due February 1, 2007. These notes were convertible by the holder at any
time into shares of the Companys common stock at the conversion price of $53.84 per share,
subject to the potential adjustments described in the terms of the notes issued. The Company
incurred associated issuance costs of approximately $11.0 million. Beginning in the three
months ended September 29, 2002 through July 3, 2005, the Company
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
    
    prior to December 15, 2021, on any date during any fiscal quarter (and only
during such fiscal quarter) after the fiscal quarter ending December 31, 2003, if
the closing sale price of the Companys common stock was more than 120 percent of
the then current conversion price for at least 20 trading days in the period of
the 30 consecutive trading days ending on the last day of the previous fiscal
quarter;
    
    on or after December 15, 2021, at all times on or after any date on which the
closing sale price of the Companys common stock is more than 120 percent of the
then current conversion price of the notes;
    
    if the Company elects to redeem the notes on or after December 20, 2008;
    
    upon the occurrence of specified corporate transactions or significant
distributions to holders of the Companys common stock; or
    
    subject to specified exceptions, for the ten business day period after any five
consecutive trading day period in which the average trading prices for the notes
for such five trading day period was less than 98 percent of the average
conversion value of the notes during that period.
 The notes will mature in December 2023 and may not be called by the Company prior to December
20, 2008. Holders of the notes may require the Company to purchase the notes for cash by
giving written notice within the 20 business days prior to each of December 15, 2006, December
15, 2008, December 15, 2013 or December 15, 2018 or upon a change in control. The Company
incurred total associated bankers fees of approximately $11.6 million, which were recorded as
a reduction to the proceeds from the issuance of the notes and will be accreted over the
effective life of the notes, as well as $0.7 million of other associated debt issuance costs,
which have been included in other assets and will also be amortized over the effective life of
the notes. The effective life of the Companys 0.25 percent contingent convertible
subordinated notes due 2023 is three years, which is the period up to the first date that the
holders can require us to repurchase the notes.During the six months ended December 26, 2004, the Company repurchased approximately $153.0
million of its 0.25 percent convertible subordinated notes at a discount to face value,
spending approximately $137.2 million. The resulting net pre-tax gain of $13.1 million from
the repurchase of these 0.25 percent convertible subordinated notes was recorded in the six
months ended December 26, 2004. The repurchased notes were cancelled.Throughout the remainder of fiscal 2005, the Company repurchased approximately $128.5 million
of its 0.25 percent convertible subordinated notes at a discount to face value, spending
approximately $119.3 million. The resulting net pre-tax gain of $7.7 million from the
repurchase of these 0.25 percent convertible subordinated notes was recorded in subsequent
periods throughout fiscal 2005. The repurchased notes were cancelled, leaving 0.25 percent
convertible subordinated notes outstanding at January 1, 2006 with a face value of
approximately $236.0 million that, if converted, would result in the issuance of approximately
5.5 million shares.8.
    
    Commitments and ContingenciesLitigationOn November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities
class action was filed in the United States District Court in the Southern District of New
York as Case No. 01 CIV. 10053
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(SAS), Master File No. 21 MC 92 (SAS) against Vixel and two of its officers and directors and
certain underwriters who participated in the Vixel initial public offering in late 1999. The
amended complaint alleges violations under Section 10(b) of the Exchange Act and Section 11 of
the Securities Act and seeks unspecified damages on behalf of persons who purchased Vixel
stock during the period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and directors until
September 30, 2003, and on the basis of this agreement, Vixels officers and directors were
dismissed from the lawsuit without prejudice. During June 2003, Vixel and the other issuer
defendants in the action reached a tentative settlement with the plaintiffs that would, among
other things, result in the dismissal with prejudice of all claims against the defendants and
their officers and directors. In connection with the possible settlement, those officers and
directors who had entered tolling agreements with the plaintiffs agreed to extend those
agreements so that they would not expire prior to any settlement being finalized. Although
Vixel approved this settlement proposal in principle, it remains subject to a number of
procedural conditions, as well as formal approval by the court. On August 31, 2005, a
Preliminary Order In Connection With Settlement Proceedings was issued by the court which
among other items, sets a date for a Settlement Fairness Hearing, and the form of notice to
the Settlement Classes of the Issuers Settlement Stipulation. In December 2005, the
settlement notices authorized by the court were sent to former Vixel stockholders and the web
site www.iposecuritieslitigation.com was created for claimants, as well as a March 24, 2006
objection deadline. The Company believes the final resolution of this litigation will not
have a material adverse effect on the Companys consolidated financial position, results of
operation or liquidity.Ongoing lawsuits present inherent risks, any of which could have a material adverse effect on
the Companys business, financial condition or results of operations. Such potential risks
include the continuing expenses of litigation, counterclaims and attorneys fee liability.Additionally, the Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Companys consolidated financial
position, results of operations or liquidity.Other Commitments and ContingenciesThe Company has entered into various agreements for purchases. As of January 1, 2006, the
Companys purchase obligation associated with inventory was $40.3 million.9.
    
    Stock-Based CompensationIn December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, or SFAS
No. 123(R). SFAS No. 123(R) requires that the compensation cost related to share-based payment
transactions, measured based on the fair value of the equity or liability instruments issued, be
recognized in the financial statements. The adoption of SFAS No. 123(R) is required in fiscal
years beginning after June 15, 2005. Determining the fair value of options using the
Black-Scholes model requires subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated fair value on the grant date.For the three and six months ended December 26, 2004, the Company accounted for its stock-based
awards to employees using the intrinsic value method under APB Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations. Stock-based awards to non-employees, if
any, were recorded using the fair value method. Had the Company determined compensation cost
based on the fair value at the grant date for all its stock options under SFAS No. 123,
Accounting for Stock Based Compensation, the Companys net income would have been the pro
forma amounts indicated below (in thousands, except per share data):
 9




---



##### Table of Contents



Three
    
    
    SixMonths Ended
    
    
    Months EndedDecember 26,
    
    
    December 26,2004
    
    
    2004Net income as reported
    
    $
    14,201
    
    
    $
    28,500Add: total employee stock-based compensation expense
included
in net income as reported, net of related tax effects
    
    
    748
    
    
    
    1,679Deduct: Total employee stock-based compensation expense
determined under fair value method for all awards, net
of related tax effects
    
    
    (6,592
    )
    
    
    (13,471
    )Pro forma net income
    
    $
    8,357
    
    
    $
    16,708Pro forma net income per share:Basic  as reported
    
    $
    0.17
    
    
    $
    0.34Basic  pro forma
    
    $
    0.10
    
    
    $
    0.20Diluted  as reported
    
    $
    0.16
    
    
    $
    0.32Diluted  pro forma
    
    $
    0.09
    
    
    $
    0.18
  Three
    
    SixMonths Ended
    
    Months EndedDecember 26,
    
    December 26,2004
    
    2004Risk-free interest rate
    
    
    2.0% - 3.3
    %
    
    
    2.0% - 3.3
    %Stock volatility
    
    
    51.3% - 51.7
    %
    
    
    51.3% - 84.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Average expected lives (years)
    
    
    0.5  2.7
    
    
    
    0.5  2.8Weighted-average fair value per option granted
    
    $
    3.49 - $4.64
    
    
    $
    3.49 - $5.34
   Three Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    January 1,2006
    
    
    2006(in thousands)
    
    
    (in thousands)Total cost of stock-based payment plans during the period
    
    $
    5,780
    
    
    $
    10,767Amounts capitalized in inventory and fixed assets during the
period
    
    
    (128
    )
    
    
    (282
    )Amounts recognized in income for amounts previously
capitalized in inventory and fixed assets
    
    
    154
    
    
    
    154Amounts charged against income, before income tax benefit
    
    $
    5,806
    
    
    $
    10,639Amount of related income tax benefit recognized in income
    
    $
    1,216
    
    
    $
    2,204
 10




---



##### Table of Contents



Employee Stock Option and Equity Incentive Plans
       11




---



##### Table of Contents



12




---



##### Table of Contents



All Other Plans
    
    Purchase PlanThree Months
    
    Six Months
    
    Three Months
    
    Six MonthsExpected volatility
    
    
    41% - 74
    %
    
    
    41%  74
    %
    
    
    37
    %
    
    
    37
    %Weighted average
expected volatility
    
    
    40% - 56
    %
    
    
    40%  56
    %
    
    
    37
    %
    
    
    37
    %Expected dividends
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected term (in years)
    
    
    2.0  4.2
    
    
    
    2.0  5.0
    
    
    
    0.5
    
    
    
    0.5Weighted average
expected term (in
years)
    
    
    3.25
    
    
    
    3.25
    
    
    
    0.5
    
    
    
    0.5Risk-free rate
    
    
    4.33% - 4.38
    %
    
    
    4.11%  4.38
    %
    
    
    3.9
    %
    
    
    3.9
    %
  WeightedAverage
    
    AggregateWeighted
    
    Remaining
    
    IntrinsicAverage
    
    Contractual
    
    ValueOptions
    
    Exercise Price
    
    Term (years)
    
    (in millions)Balance, July 3, 2005
    
    
    14,110,464
    
    
    $
    22.15Granted
    
    
    1,821,789
    
    
    
    20.34Exercised
    
    
    (691,710
    )
    
    
    10.17Canceled
    
    
    (454,433
    )
    
    
    38.17Forfeited
    
    
    (28,612
    )
    
    
    18.83Balance, January 1, 2006
    
    
    14,757,498
    
    
    $
    22.00
    
    
    
    6.2
    
    
    $
    48.1Exercisable January 1,
2006
    
    
    9,712,058
    
    
    $
    23.92
    
    
    
    5.6
    
    
    $
    33.3
 As of January 1, 2006 there was $23.7 million of total unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted-average period of 1.3 years. The weighted average
fair value of option awards granted during the three and six months ended January 1, 2006 was
$7.19 and $7.78, respectively.The total intrinsic value of stock options exercised was $6.9 million during the six months
ended January 1, 2006.Cash received from share option exercises under stock-based payment plans for the six months
ended January 1, 2006 is $8.6 million. The actual tax benefit realized for the tax deductions
from option exercise of stock-based payment plans totaled $2.7 million for the six months
ended January 1, 2006.As of January 1, 2006, the amount of shares authorized under the Plan, the 2004 Plan, the
Directors Plan and the Purchase Plan are sufficient to cover future stock option exercises and
the Company issues new shares to satisfy such future exercises. As of January 1, 2006, there
are no stock or debt repurchase programs authorized by the Board of Directors.10.
    
    Earnings per ShareBasic net income per share for the three and six months ended January 1, 2006 and December 26,
2004 was computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net income per share was computed by dividing adjusted
net income by the weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common shares that would be
outstanding if the dilutive potential common shares from stock option
 13




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004Numerator:Net income
    
    $
    17,209
    
    
    $
    14,201
    
    
    $
    33,645
    
    
    $
    28,500Adjustment for interest expense on convertible
subordinated notes, net of tax
    
    
    371
    
    
    
    661
    
    
    
    747
    
    
    
    1,492Numerator for diluted net income per share
    
    $
    17,580
    
    
    $
    14,862
    
    
    $
    34,392
    
    
    $
    29,992Denominator:Denominator for basic net income per share 
weighted average shares outstanding
    
    
    83,821
    
    
    
    82,732
    
    
    
    83,609
    
    
    
    82,646Effect of dilutive securities:Dilutive options outstanding
    
    
    1,982
    
    
    
    1,147
    
    
    
    2,043
    
    
    
    1,015Dilutive common shares from assumed
conversion of subordinated notes
    
    
    5,463
    
    
    
    8,753
    
    
    
    5,463
    
    
    
    9,998Denominator for diluted net income per share 
adjusted weighted average shares outstanding
    
    
    91,266
    
    
    
    92,632
    
    
    
    91,115
    
    
    
    93,659Basic net income per share
    
    $
    0.21
    
    
    $
    0.17
    
    
    $
    0.40
    
    
    $
    0.34Diluted net income per share
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.38
    
    
    $
    0.32Antidilutive options excluded from computation
    
    
    8,927
    
    
    
    10,475
    
    
    
    8,695
    
    
    
    10,785Average market price of common stock
    
    $
    19.54
    
    
    $
    12.69
    
    
    $
    19.71
    
    
    $
    11.97
  14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
   Executive Overview
  15




---



##### Table of Contents



Results of Operations
  Percentage of Net RevenuesThree months ended
    
    
    Six months endedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    37.8
    
    
    
    36.6
    
    
    
    37.2
    
    
    
    38.1Gross profit
    
    
    62.2
    
    
    
    63.4
    
    
    
    62.8
    
    
    
    61.9Operating expenses:Engineering and development
    
    
    20.3
    
    
    
    21.5
    
    
    
    20.6
    
    
    
    24.2Selling and marketing
    
    
    8.4
    
    
    
    8.3
    
    
    
    8.0
    
    
    
    9.1General and administrative
    
    
    5.3
    
    
    
    3.9
    
    
    
    5.6
    
    
    
    1.9Amortization of intangibles
    
    
    5.8
    
    
    
    7.2
    
    
    
    5.9
    
    
    
    8.0Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1Total operating expenses
    
    
    39.8
    
    
    
    40.9
    
    
    
    40.1
    
    
    
    44.3Operating income
    
    
    22.4
    
    
    
    22.5
    
    
    
    22.7
    
    
    
    17.6Nonoperating income:Interest income
    
    
    4.4
    
    
    
    3.1
    
    
    
    4.0
    
    
    
    3.6Interest expense
    
    
    (0.6
    )
    
    
    (1.1
    )
    
    
    (0.6
    )
    
    
    (1.4
    )Gain on repurchase of convertible
subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.9Other income (expense), net
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total non-operating income
    
    
    3.8
    
    
    
    2.1
    
    
    
    3.4
    
    
    
    10.2Income before income taxes
    
    
    26.2
    
    
    
    24.6
    
    
    
    26.1
    
    
    
    27.8Income tax provision
    
    
    10.6
    
    
    
    9.1
    
    
    
    10.4
    
    
    
    10.5Net income
    
    
    15.6
    %
    
    
    15.5
    %
    
    
    15.7
    %
    
    
    17.3
    %
 16




---



##### Table of Contents



Three months ended January 1, 2006, compared to three months ended December 26, 2004
 Net Revenues.
  Net Revenues by Product LineThree Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    PercentageJanuary 1,
    
    
    of Net
    
    
    December 26,
    
    
    of Net
    
    
    Increase/
    
    
    Change,(in thousands)
    
    2006
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    Decrease
    
    
    if meaningfulFibre Channel
    
    $
    110,213
    
    
    
    100
    %
    
    $
    91,668
    
    
    
    100
    %
    
    $
    18,545
    
    
    
    20
    %IP networking
    
    
    52
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    51
    
    
    
    Other
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Total net revenues
    
    $
    110,268
    
    
    
    100
    %
    
    $
    91,671
    
    
    
    100
    %
    
    $
    18,597
    
    
    
    20
    %
   Net Revenues by Major CustomersDirect Revenues
    
    
    Total Direct and Indirect Revenues (1)Three Months
    
    
    Three Months
    
    
    Three Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJanuary 1,
    
    
    December 26,
    
    
    January 1,
    
    
    December 26,2006
    
    
    2004
    
    
    2006
    
    
    2004Net revenue percentage (2) :EMC
    
    
    
    
    
    
    
    
    
    
    24
    %
    
    
    21
    %Hewlett-Packard
    
    
    10
    %
    
    
    14
    %
    
    
    10
    %
    
    
    16
    %IBM
    
    
    32
    %
    
    
    30
    %
    
    
    32
    %
    
    
    30
    %Info-X
    
    
    22
    %
    
    
    18
    %
    
    
    
    
    
    
    
 
 (1)
    
    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.(2)
    
    Amounts less than 10 percent are not presented. 17




---



##### Table of Contents



Net Revenues by Sales ChannelThree Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    Percentage
    
    
    
    
    
    
    PercentageJanuary 1,
    
    
    of Net
    
    
    December 26,
    
    
    Of Net
    
    
    Increase/
    
    
    Change,(in thousands)
    
    2006
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    (Decrease)
    
    
    if meaningfulOEM
    
    $
    71,611
    
    
    
    65
    %
    
    $
    60,146
    
    
    
    66
    %
    
    $
    11,465
    
    
    
    19
    %Distribution
    
    
    38,563
    
    
    
    35
    %
    
    
    31,199
    
    
    
    34
    %
    
    
    7,364
    
    
    
    24
    %Other
    
    
    94
    
    
    
    
    
    
    
    326
    
    
    
    
    
    
    
    (232
    )
    
    
    Total net revenues
    
    $
    110,268
    
    
    
    100
    %
    
    $
    91,671
    
    
    
    100
    %
    
    $
    18,597
    
    
    
    20
    %
  Net Domestic and International RevenuesThree Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageJanuary 1,
    
    
    of Net
    
    
    December 26,
    
    
    Of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2006
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    Decrease
    
    
    ChangeDomestic
    
    $
    58,816
    
    
    
    53
    %
    
    $
    50,695
    
    
    
    55
    %
    
    $
    8,121
    
    
    
    16
    %Pacific Rim
    
    
    12,865
    
    
    
    12
    %
    
    
    12,384
    
    
    
    14
    %
    
    
    481
    
    
    
    4
    %Europe and rest
of world
    
    
    38,587
    
    
    
    35
    %
    
    
    28,592
    
    
    
    31
    %
    
    
    9,995
    
    
    
    35
    %Total net revenues
    
    $
    110,268
    
    
    
    100
    %
    
    $
    91,671
    
    
    
    100
    %
    
    $
    18,597
    
    
    
    20
    %
  Gross Profit.
 Engineering and Development.
 18




---



##### Table of Contents



Selling and Marketing.
 General and Administrative.
 Amortization of Intangibles.
 Nonoperating Income.
 19




---



##### Table of Contents



Income Taxes
 Six months ended January 1, 2006, compared to six months ended December 26, 2004
 Net Revenues.
  Net Revenues by Product LineSix Months
    
    
    
    
    
    Six MonthsEnded
    
    Percentage
    
    Ended
    
    Percentage
    
    
    
    
    
    PercentageJanuary 1,
    
    of Net
    
    December 26,
    
    of Net
    
    Increase/
    
    Change,(in thousands)
    
    2006
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    if meaningfulFibre Channel
    
    $
    214,562
    
    
    
    100
    %
    
    $
    164,884
    
    
    
    100
    %
    
    $
    49,678
    
    
    
    30
    %IP networking
    
    
    80
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    75
    
    
    
    Other
    
    
    5
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    (2
    )
    
    
    Total net revenues
    
    $
    214,647
    
    
    
    100
    %
    
    $
    164,896
    
    
    
    100
    %
    
    
    49,751
    
    
    
    30
    %
 Net Revenues by Major CustomersDirect Revenues
    
    Total Direct and Indirect Revenues (1)Six Months
    
    Six Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJanuary 1,
    
    December 26,
    
    January 1,
    
    December 26,2006
    
    2004
    
    2006
    
    2004Net revenue percentage (2) :EMC
    
    
    
    
    
    
    
    
    
    
    25
    %
    
    
    18
    %Hewlett-Packard
    
    
    10
    %
    
    
    15
    %
    
    
    10
    %
    
    
    17
    %IBM
    
    
    29
    %
    
    
    29
    %
    
    
    29
    %
    
    
    29
    %Info-X
    
    
    23
    %
    
    
    12
    %
    
    
    
    
    
    
    
  
 (1)
    
    Customer-specific models sold indirectly are included with the OEMs revenues in
these columns rather than as revenues for the distributors, resellers or other third parties.(2)
    
    Amounts less than 10 percent are not presented. 20




---



##### Table of Contents



Net Revenues by Sales ChannelSix Months
    
    
    
    
    
    Six MonthsEnded
    
    Percentage
    
    Ended
    
    Percentage
    
    
    
    
    
    PercentageJanuary 1,
    
    of Net
    
    December 26,
    
    of Net
    
    Increase/
    
    Change,(in thousands)
    
    2006
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    if meaningfulOEM
    
    $
    133,363
    
    
    
    62
    %
    
    $
    110,997
    
    
    
    67
    %
    
    $
    22,366
    
    
    
    20
    %Distribution
    
    
    81,181
    
    
    
    38
    %
    
    
    53,461
    
    
    
    33
    %
    
    
    27,720
    
    
    
    52
    %Other
    
    
    103
    
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    (335
    )
    
    
    Total net revenues
    
    $
    214,647
    
    
    
    100
    %
    
    $
    164,896
    
    
    
    100
    %
    
    $
    49,751
    
    
    
    30
    %
  Net Domestic and International RevenuesSix Months
    
    
    
    
    
    Six MonthsEnded
    
    Percentage
    
    Ended
    
    PercentageJanuary 1,
    
    of Net
    
    December 26,
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2006
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    116,143
    
    
    
    54
    %
    
    $
    88,370
    
    
    
    54
    %
    
    $
    27,773
    
    
    
    31
    %Pacific Rim
    
    
    28,957
    
    
    
    14
    %
    
    
    23,681
    
    
    
    14
    %
    
    
    5,276
    
    
    
    22
    %Europe and rest of
world
    
    
    69,547
    
    
    
    32
    %
    
    
    52,845
    
    
    
    32
    %
    
    
    16,702
    
    
    
    32
    %Total net revenues
    
    $
    214,647
    
    
    
    100
    %
    
    $
    164,896
    
    
    
    100
    %
    
    $
    49,751
    
    
    
    30
    %
  Gross Profit.
 Engineering and Development.
 21




---



##### Table of Contents



Selling and Marketing.
 General and Administrative.
 Amortization of Intangibles.
 Impairment of Goodwill.
 Nonoperating Income.
 22




---



##### Table of Contents



Income Taxes
 Critical Accounting Policies
   Revenue Recognition
 Warranty.
 Allowance for Doubtful Accounts
 Intangibles and Other Long-Lived Assets
 Inventories
 23




---



##### Table of Contents



Income Taxes
 Stock-Based Compensation
 Liquidity and Capital Resources
     24




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##### Table of Contents



.
  www.iposecuritieslitigation.com
   25




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Payments Due by Period(in thousands)Less than
    
    13
    
    4-5
    
    After 5Total
    
    1 Year (1)
    
    Years(2)
    
    Years (3)
    
    YearsConvertible subordinated
notes and interest
(4)
    
    $
    236,590
    
    
    $
    295
    
    
    $
    236,295
    
    
    $
    -
    
    
    $
    -Leases
    
    
    9,175
    
    
    
    779
    
    
    
    3,427
    
    
    
    3,137
    
    
    
    1,832Inventory purchase commitments
    
    
    40,289
    
    
    
    40,289
    
    
    
    
    
    
    
    
    
    
    
    Other commitments
    
    
    1,039
    
    
    
    1,039
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    287,093
    
    
    $
    42,402
    
    
    $
    239,722
    
    
    $
    3,137
    
    
    $
    1,832
 
 (1)
    
    Fiscal year ending July 2, 2006.(2)
    
    Fiscal years ending July 1, 2007, and June 29, 2008(3)
    
    Fiscal years ending June 28, 2009, and June 27, 2010.(4)
    
    The principal payment related to the
remaining outstanding 0.25 percent contingent convertible subordinated notes of
$236.0 million is shown as a payment in the period for the fiscal years ending
July 2007 and 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. 26




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##### Table of Contents



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.
  Our business depends upon the continued growth of the Fibre Channel storage networking market, and
our business will be adversely affected if such growth does not occur or occurs more slowly than we
anticipate.
  Because a significant portion of our revenues are generated from sales to a limited number of
customers, none of which are the subject of exclusive or long-term contracts, the loss of one or
more of these customers, or our customers failure to make timely payments to us, could adversely
affect our business.
    27




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##### Table of Contents



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.
   Our operating results are difficult to forecast and could be adversely affected by many factors,
and our stock price may decline if our results fail to meet expectations.
  
    
    changes in the size, mix, timing and terms of OEM and other customer orders;
    
    changes in the sales and deployment cycles for our products and/or desired inventory
levels for our products;
    
    acquisitions or strategic investments by our customers, competitors or us;
    
    the timing and market acceptance of new or enhanced product introductions by us, our OEM
customers and/or competitors;
    
    market share losses or difficulty in gaining incremental market share growth;
    
    fluctuations in product development, procurement, resource utilization and other operating expenses;
    
    component shortages;
    
    reduced demand from our customers if there is a shortage of, or difficulties in
acquiring, components or other products, such as Fibre Channel disk drives, used in
conjunction with our products in the deployment of systems;
    
    the inability of our electronics manufacturing service providers to produce and
distribute our products in a timely fashion;
    
    difficulties with updates, changes or additions to our information technology systems;
    
    breaches of our network security, including viruses;
 28




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##### Table of Contents




    
    changes in general social and economic conditions, including but not limited to natural
disasters, terrorism, public health and slower than expected market growth, with resulting
changes in customer technology budgeting and spending;
    
    changes in technology, industry standards or consumer preferences;
    
    seasonality; and
    
    changes in our accounting or other policies resulting from the adoption of new laws,
regulations or pronouncements.
  Our relatively small backlog of unfilled orders, possible customer delays or deferrals and our
tendency to generate a large percentage of our quarterly sales near the end of the quarter
contribute to possible fluctuations in our operating results that could have an adverse impact on
our results of operations and stock price.
  Our industry is subject to rapid technological change, and we must keep pace with the changes to
successfully compete.
  We have experienced losses in our history and may experience losses in our future that may
adversely affect our stock price and financial condition.
  29




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##### Table of Contents



The migration of our customers toward newer product platforms may have a significant adverse
effect.
  Any failure of our OEM customers to keep up with rapid technological change and successfully market
and sell systems that incorporate new technologies could adversely affect our business.
  Rapid changes in the evolution of technology, including the unexpected extent or timing of the
transition from HBA solutions or embedded switch box solutions to lower-priced ASIC solutions,
could adversely affect our business.
  If customers elect to utilize lower-end HBAs in higher-end environments or applications, our
business could be negatively affected.
  A decrease in the average unit selling prices and/or an increase in the manufactured cost of our
products could adversely affect our revenue, gross margins and financial performance.
  Delays in product development could adversely affect our business.
  
    
    difficulties in hiring and retaining necessary employees and independent contractors;
    
    difficulties in reallocating engineering resources and other resource limitations;
 30




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##### Table of Contents




    
    unanticipated engineering or manufacturing complexity, including from third-party
suppliers of intellectual property such as foundries of our ASICs;
    
    undetected errors or failures in software, firmware and hardware;
    
    changing OEM product specifications;
    
    delays in the acceptance or shipment of products by OEM customers; and
    
    changing market or competitive product requirements.
  Our joint development activities may result in products that are not commercially successful or
that are not available in a timely fashion.
   A change in our business relationships with our third-party suppliers or our Electronics
Manufacturing Service providers or EMS providers, could adversely affect our business.
  
    
    discontinued production by a supplier;
    
    required long-term purchase commitments;
    
    undetected errors, failures or production quality issues, including projected failures
that may exceed epidemic failure rates specified in agreements with our customers or that
may require us to make concessions or accommodations for continuing customer relationships;
    
    timeliness of product delivery;
    
    sole sourcing and components made by a small number of suppliers, including the
inability to obtain components and finished goods at reasonable cost from such sources and
suppliers;
    
    financial stability and viability of our suppliers and EMS providers;
    
    changes in business strategies of our suppliers and EMS providers;
    
    increases in manufacturing costs due to lower volumes or more complex manufacturing
process than anticipated;
    
    disruption in shipping channels;
 31




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##### Table of Contents




    
    natural disasters;
    
    inability or unwillingness of our suppliers or EMS providers to continue their business with us;
    
    environmental, tax or legislative changes in the location where our products are
produced or delivered, including implementation of European Union Directives 2002/95/EC
(RoHS) and 2002/96/EC (WEEE) ;
    
    difficulties associated with foreign operations; and
    
    market shortages.
    If our intellectual property protections are inadequate, it could adversely affect our business.
     Third-party claims of intellectual property infringement could adversely affect our business.
  32




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##### Table of Contents



The inability or increased cost of attracting, motivating or retaining key managerial and technical
personnel could adversely affect our business.
  Our international business activities subject us to risks that could adversely affect our business.
  
    
    the imposition of or changes in governmental controls, taxes, tariffs, trade
restrictions and regulatory requirements;
    
    the costs and risks of localizing products for foreign countries;
    
    longer accounts receivable payment cycles;
    
    changes in the value of local currencies relative to our functional currency;
    
    import and export restrictions;
    
    loss of tax benefits, or increases in tax expenses, due to international production;
    
    general economic and social conditions within foreign countries;
    
    taxation in multiple jurisdictions; and
    
    political instability, war or terrorism.
  33




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##### Table of Contents



Potential acquisitions or strategic investments may be more costly or less profitable than
anticipated and may adversely affect the price of our company stock.
  
    
    difficulties in the assimilation of the operations, technologies, products and personnel
of the acquired company;
    
    purchased technology that is not adopted by customers in the way or the time frame we anticipated;
    
    the diversion of managements attention from other business concerns;
    
    risks of entering markets in which we have limited or no prior experience;
    
    risks associated with assuming the legal obligations of the acquired company;
    
    minority interest in a company, resulting from a strategic investment, that could have
an impact on our results;
    
    risks related to the effect that the acquired companys internal control processes might
have on our financial reporting and managements report on our internal controls over
financial reporting;
    
    the potential loss of key employees of the company we invested in or acquired; and
    
    there may exist unknown defects of an acquired companys products or assets that may not
be identified due to the inherent limitations involved in the due diligence process of an
acquisition.
  Our stock price is volatile, which has and may result in lawsuits against us and our officers and
directors.
  
    
    quarterly variations in customer demand and operating results;
    
    announcements of new products by us or our competitors;
    
    the gain or loss of significant customers or design wins;
    
    changes in analysts earnings estimates;
    
    changes in analyst recommendations, price targets or other parameters that may not be
related to earnings estimates;
 34




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##### Table of Contents




    
    rumors or dissemination of false information;
    
    pricing pressures;
    
    short selling of our common stock;
    
    general conditions in the computer, storage or communications markets; and
    
    events affecting other companies that investors deem to be comparable to us.
  Terrorist activities and resulting military and other actions could adversely affect our business.
  Our corporate offices and principal product development facilities are located in a region that is
subject to earthquakes and other natural disasters.
  Our shareholder rights plan, certificate of incorporation and Delaware law could adversely affect
the performance of our stock.
  Our system of internal controls may be inadequate.
  35




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##### Table of Contents



Changes in laws, regulations and financial accounting standards may affect our reported results of
operations.
  The final determination of our income tax liability may be materially different from our income tax
provisions and accruals.
  We may need additional capital in the future and such additional financing may not be available on
favorable terms.
  
    
    take advantage of unanticipated opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies;
    
    develop new products or services;
    
    repay outstanding indebtedness; and
    
    respond to unanticipated competitive pressures.
   Conversion of our outstanding notes would dilute the ownership interest of existing stockholders.
  36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Sensitivity
   Foreign Currency
  
 Item 4. Controls and Procedures
   37




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##### Table of Contents



PART II: OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
 www.iposecuritieslitigation.com
   
 Item 1A Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Nominee
    
    In Favor
    
    WithheldFred B. Cox
    
    
    76,024,335
    
    
    
    2,698,723Michael P. Downey
    
    
    74,048,852
    
    
    
    4,674,215Bruce C. Edwards
    
    
    69,796,273
    
    
    
    8,926,794Paul F. Folino
    
    
    76,082,810
    
    
    
    2,640,257Robert H. Goon
    
    
    75,968,986
    
    
    
    2,754,081Don M. Lyle
    
    
    68,750,004
    
    
    
    9,973,063Dean A Yoost
    
    
    77,104,322
    
    
    
    1,618,745
 38




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##### Table of Contents



For
    
    
    37,007,413Against
    
    
    22,059,747Abstain
    
    
    125,883Broker Non-Vote
    
    
    19,530,024
  For
    
    
    45,781,187Against
    
    
    13,309,987Abstain
    
    
    101,869Broker Non-Vote
    
    
    19,530,024
  For
    
    
    77,875,919Against
    
    
    779,907Abstain
    
    
    67,241
 
 Item 6. Exhibits
 Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Companys 1997 Annual Report on Form 10-K).Exhibit 3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000).Exhibit 3.3
    
    Amended and restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K filed on August 30, 2005).Exhibit 3.4
    
    Certificate of Designations of Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 4 to the Companys Current Report on Form 8-K
filed February 2, 1989).Exhibit 4.1
    
    Rights Agreement dated January 19, 1989, as amended (incorporated by reference
to Exhibit 4 to the Companys Current Report on Form 8-K filed February 2, 1989).Exhibit 4.2
    
    Certificate regarding extension of Final Expiration Date of Rights Agreement
dated January 18, 1999 (incorporated by reference to Exhibit 4.2 of Amendment No. 2 to
the Registration Statement on Form S-3, filed on May 17, 1999).Exhibit 4.3
    
    Form of 0.25% Convertible Subordinated Note due December 15, 2023 (incorporated
by reference to Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended December 28, 2003).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated December 12, 2003, related to the
Companys 0.25% Convertible Subordinated Notes due 2023 (incorporated by reference to
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).
 39




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##### Table of Contents



Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.8 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003).Exhibit 31A
    
    Certification of the Principal Executive Officer Pursuant to 17 CFR
240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31B
    
    Certification of the Principal Financial Officer Pursuant to 17 CFR
240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906 of
the Sarbanes-Oxley Act of 2002.
 40




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##### Table of Contents



SIGNATURES
   EMULEX CORPORATIONBy:
    /s/  Paul F. FolinoPaul F. FolinoChairman of the Board and Chief
Executive OfficerBy:
    /s/  Michael J. RockenbachMichael J. RockenbachExecutive Vice President and Chief
Financial Officer
(Principal Financial and Chief Accounting Officer) 41




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##### Table of Contents



Exhibit Index
 Item 6. Exhibits
 Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Companys 1997 Annual Report on Form 10-K).Exhibit 3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000).Exhibit 3.3
    
    Amended and restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K filed on August 30, 2005).Exhibit 3.4
    
    Certificate of Designations of Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 4 to the Companys Current Report on Form 8-K
filed February 2, 1989).Exhibit 4.1
    
    Rights Agreement dated January 19, 1989, as amended (incorporated by reference
to Exhibit 4 to the Companys Current Report on Form 8-K filed February 2, 1989).Exhibit 4.2
    
    Certificate regarding extension of Final Expiration Date of Rights Agreement
dated January 18, 1999 (incorporated by reference to Exhibit 4.2 of Amendment No. 2 to
the Registration Statement on Form S-3, filed on May 17, 1999).Exhibit 4.3
    
    Form of 0.25% Convertible Subordinated Note due December 15, 2023 (incorporated
by reference to Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended December 28, 2003).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated December 12, 2003, related to the
Companys 0.25% Convertible Subordinated Notes due 2023 (incorporated by reference to
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.8 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003).Exhibit 31A
    
    Certification of the Principal Executive Officer Pursuant to 17 CFR
240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31B
    
    Certification of the Principal Financial Officer Pursuant to 17 CFR
240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906 of
the Sarbanes-Oxley Act of 2002.