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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q   (Mark One)þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended December 26, 2004
 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)   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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ Noo As of January 28, 2005 the registrant had 82,833,920 shares of common stock outstanding.




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES INDEX PAGEPart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
December 26, 2004, and June 27, 2004
    
    
    2Condensed Consolidated Statements of Income
Three and six months ended December 26, 2004, and December 28, 2003
    
    
    3Condensed Consolidated Statements of Cash Flows
Six months ended December 26, 2004, and December 28, 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 6. Exhibits
    
    
    41Signatures
    
    
    43EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 31.AEXHIBIT 31.BEXHIBIT 32
 1




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##### Table of Contents



Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements EMULEX CORPORATION AND SUBSIDIARIES 
 
 December 26,
    
    
    June 27,2004.
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    125,290
    
    
    $
    192,137Restricted cash
    
    
    -
    
    
    
    23Investments
    
    
    315,074
    
    
    
    220,114Accounts and other receivables, net
    
    
    50,209
    
    
    
    61,720Litigation settlements receivable
    
    
    -
    
    
    
    5,101Inventories, net
    
    
    22,989
    
    
    
    31,835Prepaid expenses
    
    
    3,649
    
    
    
    3,572Deferred income taxes
    
    
    24,272
    
    
    
    26,824Total current assets
    
    
    541,483
    
    
    
    541,326Property and equipment, net
    
    
    64,451
    
    
    
    64,570Investments
    
    
    157,697
    
    
    
    243,125Other intangibles, net
    
    
    109,572
    
    
    
    122,667Other assets
    
    
    1,130
    
    
    
    1,293$
    874,333
    
    
    $
    972,981Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    23,091
    
    
    $
    21,747Accrued liabilities
    
    
    22,175
    
    
    
    22,839Income taxes payable
    
    
    16,985
    
    
    
    9,910Total current liabilities
    
    
    62,251
    
    
    
    54,496Convertible subordinated notes
    
    
    376,056
    
    
    
    524,845Deferred income taxes and other
    
    
    8,407
    
    
    
    486Total liabilities
    
    
    446,714
    
    
    
    579,827Commitments and contingencies (notes 7 and 8)Stockholders equity:Preferred stock, $0.01 par value; 1,000,000 shares authorized
(150,000 shares designated as Series A Junior Participating
Preferred Stock); none issued and outstanding
    
    
    -
    
    
    
    -Common stock, $0.10 par value; 240,000,000 shares authorized;
82,763,221 and 82,413,845 shares issued and outstanding at
December 26, 2004, and June 27, 2004, respectively
    
    
    8,276
    
    
    
    8,241Additional paid-in capital
    
    
    939,331
    
    
    
    936,123Deferred compensation
    
    
    (5,032
    )
    
    
    (7,754
    )Accumulated deficit
    
    
    (514,956
    )
    
    
    (543,456
    )Total stockholders equity
    
    
    427,619
    
    
    
    393,154$
    874,333
    
    
    $
    972,981
 See accompanying notes to the condensed consolidated financial statements. 2




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EMULEX CORPORATION AND SUBSIDIARIES 
 
 Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenues
    
    $
    91,671
    
    
    $
    94,369
    
    
    $
    164,896
    
    
    $
    178,946Cost of sales
    
    
    33,546
    
    
    
    34,806
    
    
    
    62,792
    
    
    
    63,133Gross profit
    
    
    58,125
    
    
    
    59,563
    
    
    
    102,104
    
    
    
    115,813Operating expenses:Engineering and development
    
    
    19,746
    
    
    
    18,311
    
    
    
    39,943
    
    
    
    34,655Selling and marketing
    
    
    7,587
    
    
    
    6,850
    
    
    
    15,011
    
    
    
    11,452General and administrative
    
    
    3,579
    
    
    
    5,588
    
    
    
    3,158
    
    
    
    9,245In-process research and development
    
    
    -
    
    
    
    11,400
    
    
    
    -
    
    
    
    11,400Impairment of goodwill
    
    
    -
    
    
    
    -
    
    
    
    1,793
    
    
    
    -Amortization of intangibles
    
    
    6,548
    
    
    
    4,301
    
    
    
    13,095
    
    
    
    5,751Total operating expenses
    
    
    37,460
    
    
    
    46,450
    
    
    
    73,000
    
    
    
    72,503Operating income
    
    
    20,665
    
    
    
    13,113
    
    
    
    29,104
    
    
    
    43,310Nonoperating income (loss):Interest income
    
    
    2,867
    
    
    
    1,978
    
    
    
    5,901
    
    
    
    4,476Interest expense
    
    
    (1,056
    )
    
    
    (727
    )
    
    
    (2,403
    )
    
    
    (1,760
    )Gain (loss) on repurchase of
convertible subordinated notes
    
    
    -
    
    
    
    (1,764
    )
    
    
    13,090
    
    
    
    2,901Other income, net
    
    
    82
    
    
    
    58
    
    
    
    72
    
    
    
    164Total nonoperating income (loss)
    
    
    1,893
    
    
    
    (455
    )
    
    
    16,660
    
    
    
    5,781Income before income taxes
    
    
    22,558
    
    
    
    12,658
    
    
    
    45,764
    
    
    
    49,091Income tax provision
    
    
    8,357
    
    
    
    9,043
    
    
    
    17,264
    
    
    
    22,888Net income
    
    $
    14,201
    
    
    $
    3,615
    
    
    $
    28,500
    
    
    $
    26,203Net income per share:Basic
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.34
    
    
    $
    0.32Diluted
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.32
    
    
    $
    0.31Number of shares used in per share
computations:Basic
    
    
    82,732
    
    
    
    82,558
    
    
    
    82,646
    
    
    
    82,550Diluted
    
    
    92,632
    
    
    
    88,447
    
    
    
    93,659
    
    
    
    87,909
 See accompanying notes to the condensed consolidated financial statements. 3




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EMULEX CORPORATION AND SUBSIDIARIES 
 
 Six Months EndedDecember 26,
    
    
    December 28,2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    28,500
    
    
    $
    26,203Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    6,684
    
    
    
    5,849Amortization of intangibles
    
    
    13,095
    
    
    
    5,751Impairment of goodwill
    
    
    1,793
    
    
    
    -In-process research and development
    
    
    -
    
    
    
    11,400Amortization of discount on 0.25% convertible
subordinated notes
    
    
    1,579
    
    
    
    -Gain on repurchase of convertible subordinated notes
    
    
    (13,090
    )
    
    
    (2,901
    )Insurance recovery on shareholder litigation settlements
    
    
    (4,649
    )
    
    
    -Stock-based compensation
    
    
    2,381
    
    
    
    3,040Deferred income taxes
    
    
    8,684
    
    
    
    10,081Tax benefit from exercise of stock options
    
    
    459
    
    
    
    3,397Other
    
    
    52
    
    
    
    123Changes in assets and liabilities:Accounts and other receivables
    
    
    11,511
    
    
    
    (6,274
    )Inventories
    
    
    8,846
    
    
    
    (10,123
    )Prepaid expenses and other assets
    
    
    (66
    )
    
    
    2,216Accounts payable and accrued liabilities
    
    
    1,454
    
    
    
    12,444Payment of litigation settlements, net of reimbursement
    
    
    9,052
    
    
    
    (39,500
    )Income taxes payable
    
    
    7,075
    
    
    
    2,618Net cash provided by operating activities
    
    
    83,360
    
    
    
    24,324Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    

    26
    
    
    
    36Additions to property and equipment
    
    
    (6,643
    )
    
    
    (22,124
    )Decrease (increase) in restricted cash related to the construction
escrow
account
    
    
    23
    
    
    
    7,962Payments for Vixel Corporation, net of cash acquired
    
    
    -
    
    
    
    (294,755
    )Payments for the technology assets of Trebia Networks, Inc.
    
    
    -
    
    
    
    (2,094
    )Purchases of investments
    
    
    (322,087
    )
    
    
    (121,942
    )Maturities of investments
    
    
    312,555
    
    
    
    232,390Net cash used in investing activities
    
    
    (16,126
    )
    
    
    (200,527
    )Cash flows from financing activities:Payments for notes payable and capital leases
    
    
    -
    
    
    
    (1,279
    )Issuance of common stock under stock option and employee
stock purchase plans
    
    
    3,125
    
    
    
    6,704Repurchase of common stock
    
    
    -
    
    
    
    (40,500
    )Net proceeds from issuance of convertible subordinated notes
    
    
    -
    
    
    
    439,198Repurchase of convertible subordinated notes
    
    
    (137,206
    )
    
    
    (173,251
    )Net cash provided by (used in) financing activities
    
    
    (134,081
    )
    
    
    230,872Net decrease in cash and cash equivalents
    
    
    (66,847
    )
    
    
    54,669Cash and cash equivalents at beginning of period
    
    
    192,137
    
    
    
    136,971Cash and cash equivalents at end of period
    
    $
    125,290
    
    
    $
    191,640Supplemental disclosures:Noncash investing and financing activities:Fair value of assets acquired
    
    $
    -
    
    
    $
    20,936Fair value of liabilities assumed
    
    
    -
    
    
    
    13,449Stock options assumed for acquired business
    
    
    -
    
    
    
    47,538Cash paid during the period for:Interest
    
    $
    611
    
    
    $
    1,982Income taxes
    
    
    1,280
    
    
    
    6,788
 See accompanying notes to the condensed consolidated financial statements. 4




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EMULEX CORPORATION AND SUBSIDIARIES 
   1.
    Summary of Significant Accounting Policies and Basis of Presentation In the opinion of the Company, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which are normal recurring accruals) necessary to present
fairly its financial position as of December 26, 2004, and June 27, 2004, and its condensed
consolidated statements of income for the three and six months ended December 26, 2004, and
December 28, 2003, and its condensed consolidated statements of cash flows for the six months
then ended. Interim results for the six months ended December 26, 2004, are not necessarily
indicative of the results that may be expected for the year ending July 3, 2005. The interim
financial statements should be read in conjunction with the Companys Annual Report on Form
10-K for the fiscal year ended June 27, 2004. New Accounting Standards Emerging Issues Task Force Issue 04-08, The Effect of Contingently Convertible Debt on Diluted
Earnings per Share, (EITF 04-08) became effective for fiscal periods ending after December
15, 2004. EITF 04-08 requires the inclusion of shares related to certain contingently
convertible debt instruments for computing diluted earnings per share using the if-converted
method, even when a market price contingency has not been met. The effect of EITF 04-08 has
increased our weighted average shares outstanding by approximately 8.4 million (related to the
Companys currently outstanding 0.25 percent contingent convertible subordinated notes of
$364.5 million issued in December 2003 and January 2004) in calculating the Companys diluted
earnings per share calculation for the quarter ended December 26, 2004. Prior periods earnings
per share amounts presented for comparative purposes have been restated to conform to this
method. In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 151 Inventory Costs, an amendment of ARB No. 43, Chapter 4
(SFAS 151). The amendments made by SFAS 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company does not believe SFAS 151 will have a significant impact on the
Companys consolidated results of operations or financial position. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 states
that exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance. The provisions of SFAS 153 shall be applied prospectively. The Company does not
believe the adoption of SFAS 153 will have a significant impact on the Companys consolidated
results of operations or financial position. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS
123R). SFAS 123R requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of
share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS
123R replaces SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS 123R is effective as of the first interim or annual reporting period that begins after
June 15, 2005; however, early adoption is permitted. The adoption of SFAS 123R will have a
significant impact on the Companys results of operations, as demonstrated by the SFAS 123
pro-forma disclosures below. In November 2003, the EITF reached an interim consensus on EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments, to require
additional disclosure 5




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements requirements for securities classified as available-for-sale or held-to-maturity for fiscal
years ending after December 15, 2003. In March 2004, the EITF reached a final consensus on
this Issue, to provide additional guidance, which companies must follow in determining whether
investment securities have an impairment, which should be considered other-than-temporary. The
effective date of this consensus has been delayed pending further FASB action. EITF 03-01 is
not expected to have a significant impact on the carrying value of the Companys investments. Stock-Based Compensation The Company currently accounts for its stock-based awards to employees using the intrinsic
value method under APB 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 SFAS 123, the
Companys net income would have been the pro forma amounts indicated below (in thousands,
except per share data): Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income as reported
    
    $
    14,201
    
    
    $
    3,615
    
    
    $
    28,500
    
    
    $
    26,203Add: total employee
stock-based compensation
expense included in net
income as reported, net of
related tax effects
    
    
    748
    
    
    
    1,732
    
    
    
    1,679
    
    
    
    2,328Deduct: Total employee
stock-based compensation
expense determined
under fair value method
for all awards, net of
related tax effects
    
    
    (6,592
    )
    
    
    (11,540
    )
    
    
    (13,471
    )
    
    
    (19,514
    )Pro forma net income (loss)
    
    $
    8,357
    
    
    $
    (6,193
    )
    
    $
    16,708
    
    
    $
    9,017Pro forma net income
(loss) per shareBasic  as reported
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.34
    
    
    $
    0.32Basic  pro forma
    
    $
    0.10
    
    
    $
    (0.08
    )
    
    $
    0.20
    
    
    $
    0.11Diluted  as reported
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.32
    
    
    $
    0.31Diluted  pro forma
    
    $
    0.09
    
    
    $
    (0.08
    )
    
    $
    0.18
    
    
    $
    0.11
 The fair value of each option granted during the three and six months ended December 26, 2004,
and December 28, 2003, was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Risk-free interest rate
    
    2.0% to 3.3%
    
    1.0% to 2.5%
    
    2.0% to 3.3%
    
    1.0% to 2.5%Stock volatility
    
    51.3% to 51.7%
    
    41% to 113.4%
    
    51.3% to 84%
    
    41% to 117.7%Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Average expected lives (years)
    
    
    0.5 to 2.7
    
    
    
    0.5 to 2.9
    
    
    
    0.5 to 2.8
    
    
    
    0.5 to 2.9Weighted-average fair value
per option granted
    
    $
    3.49 to $4.64
    
    
    $
    4.92 to $17.62
    
    
    $
    3.49 to $5.34
    
    
    $
    4.92 to $17.62
 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
Notes to Condensed Consolidated Financial Statements  2.
    Business Combination On November 13, 2003, the Company completed the cash tender offer to acquire all outstanding shares
of Vixel Corporation. On November 17, 2003, the Company completed its acquisition of
Vixel. The Company acquired Vixel to expand its Fibre Channel product line and paid $298.4
million in cash for all outstanding common stock, preferred stock and warrants of Vixel
Corporation. The Company also incurred acquisition-related expenses of $6.7 million in cash.
In addition, the Company issued 2.2 million stock options with a fair value of approximately
$47.5 million and kept the original vesting periods for the options in exchange for the
outstanding Vixel options for a total acquisition value of $352.7 million. The Company
calculated the fair value of the 2.2 million stock options issued at the date of acquisition
using the Black-Scholes option-pricing model. Operations of Vixel, since the acquisition, have
been included within the Companys one operating segment, networking products. As a result of
the acquisition, the Company reduced the headcount obtained from Vixel by a total of 24
employees. The acquisition has been included in the condensed consolidated balance sheets of the Company
and the operating results of Vixel have been included in the condensed consolidated statements
of operations of the Company since the date that the Company gained effective control of Vixel,
November 13, 2003. In connection with the preparation of Vixel Corporations tax return in the first quarter of
fiscal 2005, the Company revised estimates and discovered errors related to the deferred tax
assets of Vixel Corporation (acquired in November 2003). As a result, the Company recorded a
$1.8 million impairment of goodwill in the three months ended September 26, 2004. Had these
items been recorded in fiscal 2004, the Companys net loss would have been $1.8 million higher,
or $534.1 million, instead of $532.3 million. The Company does not believe that this $1.8
million impairment of goodwill is material to fiscal 2004 or will be material to fiscal 2005
operations or financial results. Excluding this adjustment, net income for the six months
ended December 26, 2004, would have been $30.3 million.  3.
    Inventories Inventories, net, are summarized as follows: December 26,
    
    
    June 27,2004
    
    
    2004(in thousands)Raw materials
    
    $
    12,200
    
    
    $
    19,181Finished goods
    
    
    10,789
    
    
    
    12,654$
    22,989
    
    
    $
    31,835
  4.
    Other Intangibles Other intangibles, net, are as follows: December 26,
    
    
    June 27,2004
    
    
    2004(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    99,094
    
    
    $
    99,094Accumulated amortization, core technology and patents
    
    
    (32,000
    )
    
    
    (24,774
    )Developed technology
    
    
    9,400
    
    
    
    9,400Accumulated amortization, developed technology
    
    
    (2,647
    )
    
    
    (1,472
    )Customer relationships
    
    
    38,200
    
    
    
    38,200Accumulated amortization, customer relationships
    
    
    (8,606
    )
    
    
    (4,786
    )Tradename
    
    
    5,000
    
    
    
    5,000Accumulated amortization, tradename
    
    
    (805
    )
    
    
    (448
    )Covenants not-to-compete
    
    
    3,100
    
    
    
    3,100Accumulated amortization, covenants not-to-compete
    
    
    (1,164
    )
    
    
    (647
    )Intangible assets subject to amortization
    
    $
    109,572
    
    
    $
    122,667
 7




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements The intangible assets subject to amortization are being amortized on a straight-line basis over
lives ranging from two to seven years. Aggregated amortization expense for these intangibles
for the three and six months ended December 26, 2004, was $6.5 million and $13.1 million,
respectively. For the following five full fiscal years aggregated amortization expense is
expected to be (in thousands): 2005
    
    $
    26,1902006
    
    $
    26,1272007
    
    $
    25,4422008
    
    $
    21,3022009
    
    $
    11,597
  5.
    Other Assets Components of other assets are as follows: December 26,
    
    
    June 27,2004
    
    
    2004(in thousands)Deferred debt issuance costs-convertible subordinated notes, net
    
    $
    536
    
    
    $
    833Long-term prepaid assets
    
    
    490
    
    
    
    236Refundable deposits
    
    
    104
    
    

    
    224$
    1,130
    
    
    $
    1,293
  6.
    Accrued Liabilities Components of accrued liabilities are as follows: December 26,
    
    
    June 27,2004
    
    
    2004(in thousands)Payroll and related costs
    
    $
    8,649
    
    
    $
    8,936Accrued interest
    
    
    149
    
    
    
    162Warranty reserves
    
    
    4,152
    
    
    
    4,046Deferred revenue
    
    
    1,596
    
    
    
    1,561Accrued advertising and promotions
    
    
    1,397
    
    
    
    1,139Other
    
    
    6,232
    
    
    
    6,995$
    22,175
    
    
    $
    22,839
 Deferred revenue includes an accrual for estimated returns and allowances of $1.6 million at
December 26, 2004 and June 27, 2004. The Company provides a warranty of between one and five years on its products. The Company
records a provision for estimated warranty-related costs based on historical product returns
and the Companys expected future cost of fulfilling its warranty obligations. 8




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements Changes to the warranty reserve for the three and six months ended December 26, 2004, and
December 28, 2003, were: Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)Balance at beginning of period
    
    $
    3,949
    
    
    $
    2,570
    
    
    $
    4,046
    
    
    $
    2,349Additions to costs and expenses
    
    
    751
    
    
    
    835
    
    
    
    1,237
    
    
    
    1,483Amounts charged against reserve
    
    
    (548
    )
    
    
    (654
    )
    
    
    (1,131
    )
    
    
    (1,081
    )Beginning balance of Vixel
Corporation
    
    
    -
    
    
    
    1,453
    
    
    
    -
    
    
    
    1,453Balance at end of period
    
    $
    4,152
    
    
    $
    4,204
    
    
    $
    4,152
    
    
    $
    4,204
  7.
    Convertible Subordinated Notes In fiscal 2002, the Company completed a $345.0 million private placement of 1.75 percent
convertible subordinated notes due February 1, 2007. Interest is payable in cash on February
1 and August 1 of each year beginning August 1, 2002. These notes may be converted by the
holder at any time into shares of the Companys common stock at the conversion price of $53.84
per share, subject to the potential adjustments described in the terms of the notes issued. 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. Additionally, during the three months ended
September 28, 2003, the Company repurchased approximately $93.9 million in face value of its
1.75 percent convertible subordinated note for approximately $87.3 million. The resulting net
pre-tax gain of $4.7 million was recorded for the three months ended September 28, 2003.
Beginning in the quarter ended September 29, 2002, to date, the Company has bought back
approximately $328.0 million face value of its 1.75 percent convertible subordinated notes.
The repurchased notes were cancelled, leaving 1.75 percent convertible subordinated notes
outstanding with a face value of approximately $17.0 million that, if converted, would result
in the issuance of approximately 0.3 million shares.
At December 26, 2004, the entire $17.0
million face amount of the outstanding 1.75 percent convertible subordinated notes remained
authorized for repurchase. On January 27, 2005, the Company announced the redemption of all
of its 1.75 percent convertible notes effective February 22, 2005. In fiscal 2004, the Company completed a $517.5 million private placement of 0.25 percent
contingent convertible subordinated notes due December 15, 2023. Interest is payable in cash
on June 15 and December 15 of each year beginning June 15, 2004. Under the terms of the
offering, the notes will be convertible into shares of Emulex common stock at a price of
$43.20 per share at the option of the holder upon the occurrence of any of the following:  
    prior to December 15, 2021, on any date during any fiscal quarter (and only
during such fiscal quarter) after the fiscal quarter ending December 31, 2003, if
the closing sale price of the Companys common stock was more than 120% of the
then current conversion price for at least 20 trading days in the period of the 30
consecutive trading days ending on the last day of the previous fiscal quarter;
    on or after December 15, 2021, at all times on or after any date on which the
closing sale price of the Companys common stock is more than 120% of the then
current conversion price of the notes;
    if the Company elects to redeem the notes on or after December 20, 2008;
    upon the occurrence of specified corporate transactions or significant
distributions to holders of the Companys common stock; or 9




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements  
    subject to specified exceptions, for the ten business day period after any five
consecutive trading day period in which the average trading prices for the notes
for such five trading day period was less than 98% of the average conversion value
of the notes during that period. The notes will mature in twenty years and will not be callable for the first five years.
Holders of the notes may require the Company to purchase the notes for cash by giving written
notice within the 20 business days prior to each of December 15, 2006, December 15, 2008,
December 15, 2013 or December 15, 2018 or upon a change in control. The Company incurred
total associated bankers fees of approximately $11.6 million, which were recorded as a
reduction to the proceeds from the issuance of the notes and will be accreted over the
effective life of the notes, as well as $0.7 million of other associated debt issuance costs,
which have been included in other assets and will also be amortized over the effective life of
the notes. The effective life of the Companys 0.25 percent contingent convertible
subordinated notes due 2023 is three years, which is the period up to the first date that the
holders can require us to repurchase the notes. On August 25, 2004, the Company repurchased approximately $153.0 million of its 0.25 percent
convertible subordinated notes at a discount to face value, spending approximately $137.2
million. The resulting net pre-tax gain of $13.1 million from the repurchase of these 0.25
percent convertible subordinated notes was recorded in the three months ended September 26,
2004.The repurchased notes were cancelled, leaving 0.25 percent convertible
subordinated notes outstanding with a face value of approximately $364.5 million that, if
converted, would result in the issuance of approximately 8.4 million shares. At December 26,
2004, approximately $47 million aggregate par value of the Companys 0.25 percent contingent
convertible notes remained authorized for repurchase at a discount to par value.  8.
    Commitments and Contingencies Litigation On May 23, 2003, Vixel filed a patent infringement action against Brocade Communications
Systems, Inc. in the United States District Court for the Northern District of California,
Civil Action No. C-030-02446. The complaint states that Brocade is infringing U.S. Patent No.
6,185,203, entitled Fibre Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled
Methods and Apparatus for Fibre Channel Interconnection of Private Loop Devices, and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use, sale and offering
for sale of various storage area network switching products, including but not limited to,
Brocades Silkworm switch products. Brocade denied infringement and challenged the validity
of the patents referenced. Brocade also challenged the enforceability of those patents. In
the suit against Brocade, Vixel was seeking unspecified past damages, potential future
royalties, or, alternatively, injunctive relief. On September 24, 2004, Emulex Corporation and Brocade Communications Systems, Inc. entered
into a settlement including a litigation standstill agreement whereby Emulex and Brocade
agreed to dismiss without prejudice their claims and counterclaims against each other in the
pending patent infringement case in the United States District Court for the Northern District
of California entitled Vixel Corporation. v. Brocade Communications Systems, Inc., Civil
Action No. C-030-02446. The settlement included the formation of a strategic relationship
under which the parties are to work together to pursue mutual objectives. Under the
litigation standstill agreement both parties preserved their respective rights, no
restrictions of any kind were imposed on either partys ability to sell products, no licenses
were granted by either party, no money was exchanged, and they agreed to a three year
standstill during which neither party may initiate litigation against the other party with
respect to certain of their respective patents. On November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities
class action was filed in the United States District Court in the Southern District of New
York as Case No. 01 CIV. 10053(SAS), Master File No. 21 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 10




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements officers and directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice. During June 2003,
Vixel and the other issuer defendants in the action reached a tentative settlement with the
plaintiffs that would, among other things, result in the dismissal with prejudice of all
claims against the defendants and their officers and directors. In connection with the
possible settlement, those officers and directors who had entered tolling agreements with the
plaintiffs agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal in principle, it
remains subject to a number of procedural conditions, as well as formal approval by the court. On October 9, 2003, before the Companys acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington against Vixel and
each of Vixels directors and certain unnamed individuals (the Vixel Parties), entitled
Russell Fink v. Vixel Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made
general allegations that, among other things, Vixels directors breached their fiduciary
duties to Vixel stockholders in connection with the approval of the merger with Emulex and
sought to enjoin the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a memorandum of
understanding for a $0.7 million settlement with the plaintiff in the class action suit
pursuant to which the parties have agreed to settle the action, subject to court approval. The
$0.7 million was recorded as general and administrative expense during the three months ended
December 28, 2003. Formal settlement documents were signed on May 5, 2004 and the plaintiff
has completed discovery as agreed to by the parties. In August 2004, final court approval was
obtained for the settlement of the Fink v. Vixel litigation, and the Company paid the $0.7
million settlement. During the three months ended December 26, 2004, the Company received a
$0.3 million reimbursement from its insurer relating to the Fink v. Vixel litigation. Beginning on or about February 20, 2001, the Company and certain of its officers and directors
were named as defendants in a number of securities class action lawsuits filed in the United
States District Court, Central District of California, Case No. SACV-01-219 GLT (ANx). The
plaintiffs in the actions represent purchasers of the Companys common stock during various
periods ranging from January 18, 2001, through February 9, 2001. The complaints alleged that
the Company and certain of its officers and directors made misrepresentations and omissions in
violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The
complaints generally seek compensatory damages, costs and attorneys fees in an unspecified
amount. In addition, the Company has received inquiries about events giving rise to the
lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003, the Company entered into
two Memoranda of Understanding agreeing to terms of settlement for both the class action and
derivative litigation. The settlement was approved and $39.5 million held in escrow was paid
by the Company into the settlement fund during the six months ended December 28, 2003.
Gateway Partners filed a challenge to the allocation of settlement funds among the plaintiffs
and adequacy of the settlement notice, and the district court ruled against such challenge on
November 23, 2004. On December 13, 2004, Gateway Partners filed an appeal and a motion to
stop distribution from the settlement fund; both of which were filed with the United States
Court of Appeals for the Ninth Circuit (Index No. 04-57123). On January 12, 2005, attorneys
for Gateway Partners sent a letter to the appeals court stating that a stipulation would be
filed confirming that no proceeds of the settlement fund would be distributed until the appeal
is resolved, and that Gateway Partners would not have to post a bond. Related to the
Companys insurance coverage, during the three months ended March 28, 2004, the Company
reached an agreement with one of its insurers, under which the Company received $10.0 million
less $2.0 million previously paid by the insurer for the defense of the securities class
action lawsuits, resulting in a net payment to the Company of $8.0 million. In July 2004, the
Company obtained an arbitration award against two of its insurers, and subsequently collected
a total of $9.5 million plus $0.3 million in interest. As amounts received exceeded the $5.1
million receivable reflected on the Companys books, the Company recorded a reduction in
general and administrative expenses during the three months ended September 26, 2004, of $4.4
million, as well as interest income of $0.3 million. 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. 11




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements Other Commitments and Contingencies The Company has entered into purchase agreements for certain key inventory components, and as
of December 26, 2004, the Companys remaining purchase obligation for these key components
accounted for $5.2 million of the Companys total inventory purchase obligation of $15.4
million.  9.
    Earnings per Share Basic net income per share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per share is computed by
dividing adjusted net income by the weighted average number of common shares outstanding
during the period increased to include, if dilutive, the number of additional common shares
that would be outstanding if the potential common shares from stock option plans and
convertible subordinated notes had been issued. The dilutive effect of outstanding stock
options is reflected in diluted net income per share by application of the treasury stock
method. The dilutive effect of convertible subordinated notes is reflected in diluted net
income per share by application of the if-converted method. The following table sets forth
the computation of basic and diluted net income per share: Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator:Net income
    
    $
    14,201
    
    
    $
    3,615
    
    
    $
    28,500
    
    
    $
    26,203Adjustment for interest expense convertible
subordinated notes, net of tax
    
    
    661
    
    
    
    163
    
    
    
    1,492
    
    
    
    856Numerator for diluted net income per share
    
    $
    14,862
    
    
    $
    3,778
    
    
    $
    29,992
    
    
    $
    27,059Denominator:Denominator for basic net income per share 
weighted average shares outstanding
    
    
    82,732
    
    
    
    82,558
    
    
    
    82,646
    
    
    
    82,550Effect of dilutive securities:Dilutive options outstanding
    
    
    1,147
    
    
    
    2,457
    
    
    
    1,015
    
    
    
    2,027Dilutive common shares from assumed
conversion of subordinated notes
    
    
    8,753
    
    
    
    3,432
    
    
    
    9,998
    
    
    
    3.332Denominator for diluted net income per share 
adjusted weighted average shares outstanding
    
    
    92,632
    
    
    
    88,447
    
    
    
    93,659
    
    
    
    87,909Basic net income per share
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.34
    
    
    $
    0.32Diluted net income per share
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.32
    
    
    $
    0.31Antidilutive options excluded from computation
    
    
    10,475
    
    
    
    3,774
    
    
    
    10,785
    
    
    
    4,670Average market price of common stock
    
    $
    12.69
    
    
    $
    27.64
    
    
    $
    11.97
    
    
    $
    25.66
 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 periods presented. The effect of the Companys 1.75 percent convertible
subordinated notes and 0.25 percent contingent convertible subordinated notes issued in
December 2003 and January 2004 are included in the calculations above, using the if-converted
method. The three and six months ended December 26, 2004 have been calculated in accordance
with EITF 04-08. Additionally, prior periods have been restated in accordance with EITF 04-08
for our 0.25 percent contingent convertible subordinated notes. 12




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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. These factors include risks related to the
fact that the economy generally, and the technology and storage segments specifically, have been in
a state of uncertainty making it difficult to determine if past experience is a good guide to the
future and making it impossible to determine if markets will grow or shrink in the short term. Our
results have been significantly impacted by a widespread slowdown in information technology
investment that has also pressured the storage networking market that is the mainstay of our
business. A continued downturn in information technology spending could adversely affect our
revenues and results of operations. As a result of this uncertainty, we are unable to predict with
any accuracy what future results might be. Other factors affecting these forward-looking
statements include, but are not limited to, the following: slower than expected growth of the
storage networking market or the failure of our Original Equipment Manufacturer, or OEM, customers
to successfully incorporate our products into their systems; our dependence on a limited number of
customers and the effects of the loss of, or decrease or delays in orders by, any such customers,
or the failure of such customers to make payments; the emergence of new or stronger competitors as
a result of consolidation movements in the market; the timing and market acceptance of our or our
OEM customers new or enhanced products; the variability in the level of our backlog and the
variable booking patterns of our customers; the effects of terrorist activities, natural disasters
and resulting political or economic instability; the highly competitive nature of the markets for
our products, as well as pricing pressures that may result from such competitive conditions; our
ability and the ability of our OEM customers to keep pace with the rapid technological changes in
our industry and gain market acceptance for new products and technologies; the effect of rapid
migration of customers towards newer, lower cost product platforms; possible transitions from board
or box level to application specific integrated circuit, or ASIC, solutions for selected
applications; a shift in unit product mix from high-end to lower-end products; a decrease in the
average unit selling prices or an increase in the manufactured cost of our products; delays in
product development; our reliance on third-party suppliers and subcontractors for components and
assembly; any inadequacy of our intellectual property protection or the potential for third-party
claims of infringement; inadequacy of our system of internal controls; our ability to attract,
retain and motivate key technical personnel; our dependence on foreign sales and foreign-produced
products; the effect of acquisitions; impairment charges; and changes in tax rates or changes in
accounting standards, including changes in the accounting treatment of employee stock options. 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. 13




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##### Table of Contents



Executive Overview Emulex is the industrys preeminent source for a broad range of advanced storage networking
infrastructure solutions. Our products and technologies leverage an adaptable common architecture
that extends from deep within the storage array to the server edge of storage networks. Our
award-winning storage networking solution offerings include host bus adapters, or HBAs, embedded
storage switches, storage Input/Output, or I/O, controllers and storage area network, or SAN,
storage switch products. HBAs are the data communication products that enable servers to connect
to storage networks by offloading communication-processing tasks as information is delivered and
sent to the storage network. Embedded storage switches and I/0 controllers are deployed inside
storage arrays, tape libraries and other storage appliances, delivering improved performance and
reliability and storage connectivity. The worlds largest storage and server OEMs rely on our
highly flexible common architecture to establish a robust foundation for cost-effectively
integrating a wide array of storage protocols, standards and speeds. We rely almost exclusively on OEMs and sales through distribution channels for our revenue. The
worlds leading server and storage providers, including Dell, EMC, Engenio, Fujitsu Ltd., Fujitsu
Siemens, Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance, Quantum Corp.,
StorageTek, Sun Microsystems, Unisys and Xyratex, have selected our products. Our distribution
partners include ACAL, Avnet, Bell Microproducts, Info-X, Netmarks, Tech Data and Tokyo Electron.
In addition, we include industry leaders Brocade, Computer Associates, Intel, McDATA, Microsoft and
VERITAS among our strategic partners. The market for storage networking infrastructure solutions
is concentrated among large OEMs and, as such, a significant portion of our revenues is generated
from sales to a limited number of customers. We believe that our investment in the storage networking infrastructure solutions represents an
opportunity for revenue growth and profitability for the future. Although we did reduce our
headcount by 27 in August 2004 in an effort to realign our resources, we continue to, and currently
plan to invest in research and development, sales and marketing, and capital equipment to deliver
leading-edge products to our customers, including additional four gigabit per second connectivity
solutions, increased Linux offerings, and products focused on the
small to medium business and blade
server markets. As of December 26, 2004, we had a total of 494 employees. Our corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626. Our
periodic and current reports filed with or furnished to the Securities and Exchange Commission
pursuant to the requirements of the Securities and Exchange Act of 1934 are available free of
charge through our website (www.emulex.com) as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the Securities and Exchange Commission. References
contained herein to Emulex, the Company, the Registrant, we, our and us refer to Emulex
Corporation and its subsidiaries. Business Combination On November 13, 2003, we completed the cash tender offer by Aviary Acquisition Corporation, our
wholly owned subsidiary, to acquire all outstanding shares of Vixel Corporation. On November 17,
2003, we completed our acquisition of Vixel. We acquired Vixel, a leading supplier of embedded
switch ASICs and subsystems for the storage networking market, to expand our Fibre Channel product
line and paid $298.4 million in cash for all outstanding common stock, preferred stock and warrants
of Vixel Corporation. We also incurred acquisition-related expenses of $6.7 million in cash. In
addition, we issued 2.2 million stock options with a fair value of approximately $47.5 million and
kept the original vesting periods for the options in exchange for the outstanding Vixel options for
a total acquisition value of $352.7 million. We calculated the fair value of the 2.2 million stock
options issued at the date of acquisition using the Black-Scholes option-pricing model. The
operations of Vixel, since its acquisition, are included within the Companys one operating
segment, networking products. Additional information is contained below under Impairment of
Goodwill. 14




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##### Table of Contents



Results of Operations The following discussion and analysis should be read in conjunction with the Condensed Consolidated
Financial Statements included elsewhere herein. Percentage of Net RevenuesThree months ended
    
    
    Six months endedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    36.6
    
    
    
    36.9
    
    
    
    38.1
    
    
    
    35.3Gross profit
    
    
    63.4
    
    
    
    63.1
    
    
    
    61.9
    
    
    
    64.7Operating expenses:Engineering and development
    
    
    21.5
    
    
    
    19.4
    
    
    
    24.2
    
    
    
    19.4Selling and marketing
    
    
    8.3
    
    
    
    7.3
    
    
    
    9.1
    
    
    
    6.4General and administrative
    
    
    3.9
    
    
    
    5.9
    
    
    
    1.9
    
    
    
    5.1Amortization of intangibles
    
    
    7.2
    
    
    
    4.5
    
    
    
    8.0
    
    
    
    3.2Impairment of goodwill
    
    
    -
    
    
    
    -
    
    
    
    1.1
    
    
    
    -In-process research and development
    
    
    -
    
    
    
    12.1
    
    
    
    -
    
    
    
    6.4Total operating expenses
    
    
    40.9
    
    
    
    49.2
    
    
    
    44.3
    
    
    
    40.5Operating income
    
    
    22.5
    
    
    
    13.9
    
    
    
    17.6
    
    
    
    24.2Nonoperating income (loss):Interest income
    
    
    3.1
    
    
    
    2.1
    
    
    
    3.6
    
    
    
    2.5Interest expense
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (1.4
    )
    
    
    (1.0
    )Gain (loss) on repurchase of convertible
subordinated notes
    
    
    -
    
    
    
    (1.9
    )
    
    
    7.9
    
    
    
    1.6Other income, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Total non-operating income (loss)
    
    
    2.1
    
    
    
    (0.5
    )
    
    
    10.2
    
    
    
    3.2Income before income taxes
    
    
    24.6
    
    
    
    13.4
    
    
    
    27.8
    
    
    
    27.4Income tax provision
    
    
    9.1
    
    
    
    9.6
    
    
    
    10.5
    
    
    
    12.8Net income
    
    
    15.5
    %
    
    
    3.8
    %
    
    
    17.3
    %
    
    
    14.6
    %
 Three months ended December 26, 2004, compared to three months ended December 28, 2003 Net Revenues.Net revenues for the second quarter of fiscal 2005 ended December 26, 2004,
decreased by $2.7 million, or 3 percent, to $91.7 million, compared to $94.4 million for the same
quarter of fiscal 2004 ended December 28, 2003. The following chart details our net revenues by product line for the three months ended December
26, 2004 and December 28, 2003: Net Revenues by Product Line Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeFibre Channel
    
    $
    91,668
    
    
    
    100
    %
    
    $
    94,335
    
    
    
    100
    %
    
    $
    (2,667
    )
    
    
    (3
    )%IP networking
    
    
    1
    
    
    
    -
    
    
    
    31
    
    
    
    -
    
    
    
    (30
    )
    
    
    (97
    )%Other
    
    
    2
    
    
    
    -
    
    
    
    3
    
    
    
    -
    
    
    
    (1
    )
    
    
    (33
    )%Total net revenues
    
    $
    91,671
    
    
    
    100
    %
    
    $
    94,369
    
    
    
    100
    %
    
    $
    (2,698
    )
    
    
    (3
    )%
 From a product line perspective, net revenues generated from our Fibre Channel products for the
three months ended December 26, 2004, were $91.7 million, a decrease of $2.7 million, or three
percent, compared to Fibre Channel product revenues of $94.3 million for the three months ended
December 28, 2003. Net revenues from our Fibre 15




---



##### Table of Contents



Channel products have continued to represent substantially all of our net revenues. We believe
that our net revenues from our Fibre Channel products are being generated primarily as a result of
our product certifications and qualifications with OEM customers, which generate both direct OEM
sales and indirect sales through distribution. 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
    
    
    Ended
    
    
    Ended
    
    
    EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenue percentage (1) :IBM
    
    
    30
    %
    
    
    27
    %
    
    
    30
    %
    
    
    27
    %Info-X
    
    
    18
    %
    
    
    -
    
    
    
    -
    
    
    
    -Hewlett-Packard
    
    
    14
    %
    
    
    23
    %
    
    
    16
    %
    
    
    25
    %EMC
    
    
    -
    
    
    
    -
    
    
    
    21
    %
    
    
    17
    %
   (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 70 percent of total net revenues for the three
months ended December 26, 2004, compared to 69 percent for the three months ended December 28,
2003, and we expect to be similarly concentrated in the future. Our net revenues from our
customers can be significantly impacted by changes to our customers business and their business
models. Our EMC-specific models are sold both directly to EMC and indirectly through distributors
such as Info-X. As a result, for the three months ended December 26, 2004, and December 28, 2003,
direct revenues attributable to EMC were less than 10 percent of our total net revenues, but direct
and indirect revenues attributable to EMC were greater than 10 percent of our total net revenues. The following chart details our net revenues by sales channel for the three months ended December
26, 2004, and December 28, 2003: Net Revenues by Sales Channel Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeOEM
    
    $
    60,146
    
    
    
    66
    %
    
    $
    66,307
    
    
    
    70
    %
    
    $
    (6,161
    )
    
    
    (9
    %)Distribution
    
    
    31,199
    
    
    
    34
    %
    
    
    28,005
    
    
    
    30
    %
    
    
    3,194
    
    
    
    11
    %Other
    
    
    326
    
    
    
    -
    
    
    
    57
    
    
    
    -
    
    
    
    269
    
    
    
    472
    %Total net revenues
    
    $
    91,671
    
    
    
    100
    %
    
    $
    94,369
    
    
    
    100
    %
    
    $
    (2,698
    )
    
    
    (3
    %)
 From a sales channel perspective, net revenues generated from OEM customers were 66 percent of
total net revenues and sales through distribution were 34 percent in the three months ended
December 26, 2004 compared to net revenues from OEM customers of 70 percent and sales through
distribution of 30 percent in the three months ended December 28, 2003. The decrease in our net
OEM revenues was due to a decline in our Hewlett-Packard business, while the increase in our net
revenues from distribution was driven by an increase in our EMC business, which is largely
fulfilled through distribution channel sales. 16




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##### Table of Contents



The following chart details our net domestic and international revenues based on billed-to location
for the three months ended December 26, 2004, and December 28, 2003: Net Domestic and International Revenues Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeUnited States
    
    $
    50,695
    
    
    
    55
    %
    
    $
    51,587
    
    
    
    55
    %
    
    $
    (892
    )
    
    
    (2
    %)Pacific Rim Countries
    
    
    12,384
    
    
    
    14
    %
    
    
    9,579
    
    
    
    10
    %
    
    
    2,805
    
    
    
    29
    %Europe and rest of
world
    
    
    28,592
    
    
    
    31
    %
    
    
    33,203
    
    
    
    35
    %
    
    
    (4,611
    )
    
    
    (14
    %)Total net revenues
    
    $
    91,671
    
    
    
    100
    %
    
    $
    94,369
    
    
    
    100
    %
    
    $
    (2,698
    )
    
    
    (3
    %)
 Because we sell to OEMs and distributors who ultimately resell our products to their customers, the
geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand
or installations. Gross Profit.Cost of sales included the cost of production of finished products as well as
support costs and other expenses related to inventory management, manufacturing quality and order
fulfillment. In the three months ended December 26, 2004, gross profit decreased $1.4 million, or
two percent, to $58.1 million, from $59.6 million in the three months ended December 28, 2003. The
decrease in gross profit in the three months ended December 26, 2004, compared to the three months
ended December 26, 2003, was primarily due to lower revenues. Additionally, the three months ended
December 28, 2003, included a benefit of $0.1 million as previously reserved one gigabit per second
excess and obsolete inventory was sold, as discussed below. For the three months ended December
26, 2004, and December 28, 2003, cost of sales included $37 thousand and $0.2 million of amortized
deferred stock-based compensation expenses, respectively. Gross margins remained relatively
unchanged at approximately 63 percent for both the three months ended December 26, 2004, and
December 28, 2003. 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 $19.7 million and $18.3 million in
the three months ended December 26, 2004 and December 28, 2003, representing 22 and 19 percent of
net revenues in each period, respectively. Engineering and development expenses increased by $1.4
million, or eight percent, in the three months ended December 26, 2004, compared to the three
months ended December 28, 2003. This increase was primarily due to the inclusion of the
engineering and development expenses associated with our acquisition of Vixel for the entire three
months ended December 26, 2004, compared to only part of the three months ended December 28, 2003.
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 $0.8 million
of the overall $1.4 million increase. The remaining increase in engineering and development
expenses was due to our continued investment in our storage networking infrastructure product
development. Engineering and development expenses included $0.4 million and $0.6 million of
amortized deferred stock-based compensation expenses for the three months ended December 26, 2004,
and December 28, 2003, respectively. Due to the technical nature of our products, engineering
support is a critical part of our strategy during both the development of our products and the
support of our customers from product design through deployment into the market. We intend to
continue to make significant investments in the technical support and enhancement of our current
products, as well as the continued development of new products. Engineering expenses can fluctuate
significantly from quarter to quarter depending on several factors, including, but not limited to,
non-recurring engineering charges associated with new product introduction schedules, hiring
patterns and depreciation of capital equipment. Selling and Marketing.Selling and marketing expenses consisted primarily of salaries, commissions
and related expenses for personnel engaged in the marketing and sales of our products, as well as
trade shows, product literature, promotional support costs and other advertising-related costs.
Selling and marketing expenses were $7.6 million and $6.9 million in the three months ended
December 26, 2004 and December 28, 2003, representing eight and seven percent of net revenues,
respectively. Selling and marketing expenses increased by $0.7 million, or 11 percent, in the
three months ended December 26, 2004, compared to the three months ended December 28, 2003.
Selling and marketing expenses for the three months ended December 26, 2004, related to personnel
increased $0.6 million, while those related to advertising and other promotions increased $0.2
million, compared to the same period of the prior year. Similar to engineering and development
expenses, we no longer track former-Vixel operations separately. 17




---



##### Table of Contents



However, the expenses associated with the former-Vixel operations are estimated to account for
approximately a $0.3 million decrease in selling and marketing expenses in the three months ended
December 26, 2004 compared to the three months ended December 28, 2003, partially offsetting the
increases above. For the three months ended December 26, 2004, selling and marketing expenses
included $0.2 million of amortized deferred stock-based compensation expenses. For the three
months ended December 28, 2003 selling and marketing expenses included $1.3 million of amortized
deferred stock-based compensation expenses, primarily related to the acquisition of Vixel. General and Administrative.Ongoing general and administrative expenses consisted primarily of
salaries and related expenses for executives, financial accounting support, human resources,
administrative services, professional fees and other associated corporate expenses. General and
administrative expenses were $3.6 million, or four percent of net revenues, in the three months
ended December 26, 2004, compared to $5.6 million, or six percent of net revenues, for the three
months ended December 28, 2003, resulting in a decrease of $2.0 million, or 36 percent. This
decrease was primarily due to the inclusion of general and administrative expenses associated with
our acquisition of Vixel of $1.3 million in three months ended December 28, 2003, including $0.7
million for the settlement of shareholder litigation related to the Vixel acquisition. 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 $0.2 million in the three
months ended December 26, 2004, resulting in a decrease from the comparable period of the prior
year of $1.1 million, as the majority of the general and administrative costs of Vixel Corporation
were redundant with the general and administrative costs of Emulex Corporation prior to the
acquisition. Additionally, general and administrative expenses for the three months ended December
26, 2004, included a $0.3 million reduction related to reimbursement received from our insurance
carrier related to shareholder litigation on the Vixel acquisition. For the three months ended
December 26, 2004 and December 28, 2003, general and administrative expenses included $0.5 million
and $0.4 million of amortized deferred stock-based compensation expenses, respectively. In-Process Research and Development.The in-process research and development expense of $11.4
million, or 12 percent of net revenues, recorded in the three months ended December 28, 2003, was
related to our acquisition of Vixel Corporation in November 2003. There was no in-process research
and development expense for the three months ended December 26, 2004. Amortization of Intangibles.Amortization of intangibles included the amortization of intangible
assets with estimable lives related to the acquisitions of Vixel in November 2003 and Giganet in
March 2001, as well as the purchase of the technology assets of Trebia Networks in October 2003.
For the three months ended December 26, 2004, amortization of intangibles was $6.5 million, or
seven percent of net revenues. In addition to amortization associated with the acquisition of
Giganet, amortization of intangibles for the three months ended December 28, 2003, included
amortization expense associated with the acquisition of Vixel and the technology assets of Trebia
Networks from the date of their respective acquisitions in November 2003 and October 2003,
resulting in amortization expense of $4.3 million, or five percent of net revenues. Because the
results of operations for the three months ended December 28, 2003 did not include amortization of
intangibles resulting from the Vixel acquisition and the acquisition of the technology assets of
Trebia Networks for the entire three month period, amortization of intangibles for the three months
ended December 26, 2004 increased by $2.2 million in comparison to the three months ended December
28, 2003. Nonoperating Income (Loss).Nonoperating income consisted primarily of interest income, interest
expense and other non-operating income and expense items such as the gains or losses on the
repurchase of convertible subordinated notes. Our nonoperating income increased by $2.3 million to
net nonoperating income of $1.9 million in the three months ended December 26, 2004, compared to a
net nonoperating loss of $0.5 million in the three months ended December 28, 2003. The three
months ended December 28, 2003 included a $1.8 million loss resulting from the repurchase of $85.4
million in face value of our 1.75 percent convertible subordinated notes. No convertible
subordinated notes were repurchased during the three months ended December 26, 2004. Excluding the
$1.8 million loss on the convertible subordinated note repurchase, nonoperating income would have
been $1.3 million for the three months ended December 28, 2003. In the three months ended December
26, 2004, interest income was $2.9 million, or $0.9 million higher than in the three months ended
December 28, 2003, primarily due to higher overall balances of cash and investments, as well as
some improvement in interest rates. Interest expense was $1.1 million, or $0.3 million higher, in
the three months ended December 26, 2004, compared to the three months ended December 28, 2003,
primarily due to our 0.25 percent contingent convertible debt issued in December 2003 and January
2004. Income Taxes. In the three months ended December 26, 2004 we recorded a tax provision in the
amount of $8.4 million, or approximately 37 percent of our income before income taxes. In the
three months ended December 28, 18




---



##### Table of Contents



2003, we recorded a tax provision in the amount of $9.0 million, or approximately 71 percent of our
income before income taxes, primarily due to the in-process research and development expense of
$11.4 million associated with the Vixel acquisition being non-deductible for tax purposes. Six months ended December 26, 2004, compared to Six months ended December 28, 2003 Net Revenues.Net revenues for the six months ended December 26, 2004 decreased by $14.1 million,
or eight percent, to $164.9 million, compared to $178.9 million for the corresponding period of the
prior year ended December 28, 2003. The following chart details our net revenues by product line for the six months ended December 26,
2004 and December 28, 2003: Net Revenues by Product Line Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeFibre Channel
    
    $
    164,884
    
    
    
    100
    %
    
    $
    178,435
    
    
    
    100
    %
    
    $
    (13,551
    )
    
    
    (8
    )%IP networking
    
    
    5
    
    
    
    -
    
    
    
    503
    
    
    
    -
    
    
    
    (498
    )
    
    
    (99
    )%Other
    
    
    7
    
    
    
    -
    
    
    
    8
    
    
    
    -
    

    
    
    (1
    )
    
    
    (13
    )%Total net revenues
    
    $
    164,896
    
    
    
    100
    %
    
    $
    178,946
    
    
    
    100
    %
    
    $
    (14,050
    )
    
    
    (8
    )%
 From a product line perspective, net revenues generated from our Fibre Channel products for the six
months ended December 26, 2004, were $164.9 million, a decrease of $13.6 million, or eight percent,
compared to Fibre Channel product revenues of $178.4 million for the six months ended December 28,
2003. We believe the lower net revenue from Fibre Channel products for the six months ended
December 26, 2004, compared to the corresponding period of the prior year, is primarily due to
reduced demand from one of our major OEM customers, Hewlett-Packard, and preparation for the shift
to EMCs Select Program as discussed below. 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)Six Months
    
    
    Six Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedDecember 26,
    
    
    December 28,
    
    
    December 26,
    
    
    December 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenue percentage (1) :IBM
    
    
    29
    %
    
    
    24
    %
    
    
    29
    %
    
    
    24
    %Hewlett-Packard
    
    
    15
    %
    
    
    21
    %
    
    
    17
    %
    
    
    23
    %Info-X
    
    
    12
    %
    
    
    10
    %
    
    
    -
    
    
    
    -Tidalwire
    
    
    -
    
    
    
    10
    %
    
    
    -
    
    
    
    -EMC
    
    
    -
    
    
    
    -
    
    
    
    18
    %
    
    
    24
    %
   (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 six
months ended December 26, 2004, compared to 71 percent for the six months ended December 28, 2003,
and we expect to be similarly concentrated in the future. Our net revenues from our customers can
be significantly impacted by changes to our customers business and their business models. Under
our planned participation in EMCs Select Program, a portion of the sales of our EMC-specific
models are to be directly purchased by EMC from Emulex instead of being sold through EMCs
distribution partners. During the six months ended December 26, 2004, as fewer EMC-specific 19




---



##### Table of Contents



models were sold to EMCs distribution partners, the level of inventory held by EMCs
distribution partners was decreased in preparation for EMCs Select Program, thereby reducing our
revenue. The following chart details our net revenues by sales channel for the six months ended December 26,
2004, and December 28, 2003: Net Revenues by Sales Channel Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeOEM
    
    $
    110,997
    
    
    
    67
    %
    
    $
    114,317
    
    
    
    64
    %
    
    $
    (3,320
    )
    
    
    (3
    %)Distribution
    
    
    53,461
    
    
    
    33
    %
    
    
    64,532
    
    
    
    36
    %
    
    
    (11,071
    )
    
    
    (17
    %)Other
    
    
    438
    
    
    
    -
    
    
    
    97
    
    
    
    -
    
    
    
    341
    
    
    
    352
    %Total net revenues
    
    $
    164,896
    
    
    
    100
    %
    
    $
    178,946
    
    
    
    100
    %
    
    $
    (14,050
    )
    
    
    (8
    %)
 From a sales channel perspective, net revenues generated from OEM customers were 67 percent of
total net revenues and sales through distribution were 33 percent in the six months ended December
26, 2004 compared to net revenues from OEM customers of 64 percent and sales through distribution
of 36 percent in the six months ended December 28, 2003. The following chart details our net domestic and international revenues based on billed-to location
for the six months ended December 26, 2004, and December 28, 2003: Net Domestic and International Revenues Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Percentage
    
    
    Ended
    
    
    PercentageDecember 26,
    
    
    of Net
    
    
    December 28,
    
    
    of Net
    
    
    Increase/
    
    
    Percentage(in thousands)
    
    2004
    
    
    Revenues
    
    
    2003
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeUnited States
    
    $
    88,370
    
    
    
    54
    %
    
    $
    104,562
    
    
    
    59
    %
    
    $
    (16,192
    )
    
    
    (15
    %)Pacific Rim Countries
    
    
    23,681
    
    
    
    14
    %
    
    
    18,155
    
    
    
    10
    %
    
    
    5,526
    
    
    
    30
    %Europe and rest of
world
    
    
    52,845
    
    
    
    32
    %
    
    
    56,229
    
    
    
    31
    %
    
    
    (3,384
    )
    
    
    (6
    %)Total net revenues
    
    $
    164,896
    
    
    
    100
    %
    
    $
    178,946
    
    
    
    100
    %
    
    $
    (14,050
    )
    
    
    (8
    %)
 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.In the six months ended December 26, 2004, gross profit decreased $13.7 million, or
12 percent, to $102.1 million, from $115.8 million in the six months ended December 28, 2003.
Gross margin decreased to 62 percent in the six months ended December 26, 2004, compared to 65
percent in the six months ended December 28, 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 deteriorating demand for our one gigabit per second, or 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 December 26,
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 $4.2 million of
this reserved inventory and negotiated and paid cancellation charges of $0.2 million through
December 28, 2003, related to this excess and obsolete inventory charge since it was initially
recorded. In the six months ended December 28, 2003, the reduction related to our one Gbps
reserve, as previously reserved inventory was sold, was $1.9 million. There was no reduction in
the six months ended December 26, 2004. Excluding the reduction of the excess and obsolete
inventory reserve of $1.9 million in the six months ended December 28, 2003, gross profit would
have been $113.9 million and gross margin would have been 64 percent in the six months ended
December 28, 2003. The remaining decrease in gross profit and gross margin in the six months ended
December 26, 2004, compared to the six months ended December 28, 2003, was primarily due to lower
production volumes of HBAs as we temporarily curtailed production to reduce inventory, spreading
our fixed 20




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manufacturing costs across fewer units, especially during the three months ended September 26,
2004, and product mix, including the increased mix of Fibre Channel switch products which carry
lower gross margins than HBAs. Also, cost of sales included $0.1 million and $0.2 million of
amortized deferred stock-based compensation expense for the six months ended December 26, 2004, and
December 28, 2003, respectively. Engineering and Development.Engineering and development expenses were $39.9 million and $34.7
million in the six months ended December 26, 2004 and December 28, 2003, representing 24 and 19
percent of net revenues in each period, respectively. Engineering and development expenses
increased by $5.3 million, or 15 percent, in the six months ended December 26, 2004 compared to the
six months ended December 28, 2003. This increase was primarily due to the inclusion of the
engineering and development expenses associated with our acquisition of Vixel for the entire six
months ended December 26, 2004 versus only a part of the corresponding period of the prior year.
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 $3.5 million
of the overall $5.3 million increase. The remaining increase was due to our continued investment
in our storage networking infrastructure product development. Engineering and development expenses
included $0.9 million and $1.0 million of amortized deferred stock-based compensation expenses for
the six months ended December 26, 2004 and December 28, 2003, respectively. Selling and Marketing.Selling and marketing expenses were $15.0 million and $11.5 million in the
six months ended December 26, 2004 and December 28, 2003, representing nine and six percent of net
revenues, respectively. Selling and marketing expenses increased by $3.6 million, or 31 percent,
in the six months ended December 26, 2004, compared to the six months ended December 28, 2003.
This increase was partially due to the inclusion of the selling and marketing expenses associated
with our acquisition of Vixel in November 2003. As discussed previously, we no longer track
former-Vixel operations separately. However, the expenses associated with the former-Vixel
operations are estimated to account for approximately $1.1 million of the overall $3.6 million
increase in selling and marketing expenses. Additionally, selling and marketing expenses related
to personnel and advertising and other promotions for the six months ended December 26, 2004
increased by approximately $0.9 million and $0.7 million, respectively, compared to the same period
of the prior year. For the six months ended December 26, 2004, selling and marketing expenses
included $0.5 million of amortized deferred stock-based compensation expenses. For the six months
ended December 28, 2003 selling and marketing expenses included $1.4 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 increases or decreases in net revenues, the expenses fluctuate as a
percent of net revenues. General and Administrative.General and administrative expenses were $3.2 million in the six
months ended December 26, 2004. General and administrative expenses for the six months ended
December 26, 2004, included a $4.6 million reduction related to reimbursement received from our
insurance carriers during the period, in excess of our receivable. This reimbursement is primarily
related to the shareholder litigation settled and recorded as general and administrative expense in
our fiscal year ended June 29, 2003. General and administrative expenses for the six months ended
December 26, 2004, excluding this $4.6 million insurance reimbursement would have been $7.8
million, or five percent of net revenues, compared to $9.2 million, or five percent of net
revenues, for the six months ended December 28, 2003. This would represent a decrease of $1.4
million in the six months ended December 26, 2004, excluding the insurance recovery, compared to
the six months ended December 28, 2003. Similar to other operating expenses, we no longer track
former-Vixel operations separately. However, the expenses associated with the former-Vixel
operations are estimated to account for approximately $0.9 million of the decrease in general and
administrative expenses, as the majority of the general and administrative costs of Vixel
Corporation were redundant with the general and administrative costs of Emulex Corporation prior to
the acquisition. For the six months ended December 26, 2004, general and administrative expenses
included $1.0 million of amortized deferred stock-based compensation expenses. For the six months
ended December 28, 2003, general and administrative expenses included $0.4 million of amortized
deferred stock-based compensation expenses. In-Process Research and Development.The in-process research and development expense of $11.4
million, or six percent of net revenues, recorded in the six months ended December 28, 2003, was
related to our acquisition of Vixel Corporation in November 2003. There was no in-process research
and development expense for the six months ended December 26, 2004 Amortization of Intangibles.Amortization of intangibles included the amortization of intangible
assets with estimable lives related to the acquisitions of Vixel in November 2003 and Giganet in
March 2001, as well as the purchase of the technology assets of Trebia Networks in October 2003.
For the six months ended December 26, 21




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2004, amortization of other intangibles was $13.1 million, or eight percent of net revenues.
Amortization of other intangibles for the six months ended December 28, 2003 was $5.8 million, or
three percent of net revenues. The $7.3 million increase in amortization of other intangibles for
the six months ended December 26, 2004 in comparison to the same relative period of the prior year
was due to the addition of amortization related to the Vixel acquisition and the purchase of the
technology assets of Trebia Networks, which due to the timing of the acquisition and purchase, was
not included for the full six month period ended December 28. 2003. Impairment of Goodwill.On June 30, 2004, we announced that tepid demand experienced in the fourth
fiscal quarter of 2004 from two of our customers resulted in lower than expected revenue, earnings
and cash flows in the fourth fiscal quarter of 2004 and was expected to result in lower sequential
revenue, earnings and cash flows in the first fiscal quarter of 2005. These events and
circumstances resulted in a subsequent drop in our stock price, which indicated a potential
impairment might have occurred. As a result, we conducted a FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, analysis, as well as a FAS 142, Goodwill and Other
Intangible Assets, analysis, including a second step goodwill impairment test. The results of the
FAS 144 analysis indicated that our long-lived assets were not impaired. However, the FAS 142
analysis indicated that goodwill was impaired. This determination was made at the reporting unit
level and consisted of two steps. First, the fair value of our only reporting unit was determined,
based on a market approach, and compared to its carrying amount. Next, as the carrying amount
exceeded the fair value, the second step of FAS 142 was performed. The implied fair value of
goodwill was determined by allocating the fair value in a manner similar to a purchase price
allocation, in accordance with FAS 141, Business Combinations. As a result of this FAS 142
analysis, on September 9, 2004, we concluded that a $583.5 million charge for goodwill impairment
should be recorded as of June 27, 2004. After recording this impairment charge, there was no
goodwill remaining on our balance sheet as of June 27, 2004. In connection with the preparation of
Vixel Corporations tax return in the first quarter of fiscal 2005, we revised estimates and
discovered errors related to the deferred tax assets of Vixel Corporation (acquired in November
2003). These events resulted in a revision to Vixels purchase price allocation to decrease net
deferred tax assets and increase goodwill, which was impaired. This resulted in a $1.8 million
impairment of goodwill charge for the three months ended September 26, 2004. Had these items been
recorded in fiscal 2004, our net loss would have been $1.8 million higher, or $534.1 million,
instead of $532.3 million. We do not believe that this $1.8 million impairment of goodwill is
material to fiscal 2004 or will be material to fiscal 2005 operations or financial results.
Excluding this adjustment, net income for the six months ended December 26, 2004, would have been
$30.3 million. Nonoperating Income.Nonoperating income consisted primarily of interest income, interest expense
and other non-operating income and expense items such as the gains on the repurchase of convertible
subordinated notes. Our nonoperating income increased by $10.9 million to $16.7 million in the six
months ended December 26, 2004, from $5.8 million in the six months ended December 28, 2003. The
$10.9 million increase in nonoperating income was primarily due to a gain of $13.1 million related
to the partial repurchase of 0.25 percent contingent convertible subordinated notes in the six
months ended December 26, 2004, compared to a net gain of $2.9 million related to the partial
repurchase of our 1.75 percent convertible subordinated notes in the six months ended December 28,
2003. Additionally, interest income increased $1.4 million to $5.9 million in the six months ended
December 26, 2004, compared to $4.5 million in the six months ended December 28, 2003, due to the
receipt of $0.3 million of interest related to the insurance reimbursement discussed below in
Liquidity and Capital Resources, higher overall balances of cash and investments, and some
improvement in interest rates. Interest expense, which is primarily due to our outstanding
convertible subordinated notes, increased by $0.6 million to $2.4 million in the six months ended
December 26, 2004, compared to $1.8 million in the six months ended December 28, 2003. Income Taxes. In the six months ended December 26, 2004, we recorded a tax provision in the amount
of $17.3 million, or approximately 38 percent of our income before income taxes. In the six months
ended December 28, 2003, we recorded a tax provision in the amount of $22.9 million, or
approximately 47 percent of our income before income taxes, primarily due to the in-process
research and development expense of $11.4 million 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 in accordance with accounting
principles generally accepted in the United States. 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 22




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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 believe the following are critical accounting policies and require us to make significant
judgments and estimates in the preparation of our consolidated financial statements: revenue
recognition; warranty; allowance for doubtful accounts; goodwill; other intangibles and long-lived
assets; inventories; income taxes and stock-based compensation. Revenue Recognition. We recognize revenue at the time of shipment when title and risk of loss have
passed, evidence of an arrangement has been obtained and collectibility has been reasonably
assured. We make certain sales through two-tier distribution channels and have various
distribution agreements with selected distributors and Master Value Added Resellers, or
collectively the Distributors. These distribution agreements may be terminated upon written notice
by either party. Additionally, these Distributors are generally given privileges to return a
portion of inventory and to participate in price protection and cooperative marketing programs.
Therefore, we recognize revenue on our standard products sold to our Distributors based on data
received from the Distributors and managements estimates to approximate the point that these
products have been resold by the Distributors. As OEM-specific models sold to our Distributors are
governed under the related OEM agreements rather than under these distribution agreements, we
recognize revenue at the time of shipment to the Distributors when title and risk of loss have
passed, evidence of an arrangement has been obtained and collectibility has been reasonably
assured. Additionally, we maintain accruals and allowances for price protection and cooperative
marketing programs. Warranty. We provide a warranty of between one and five years on our products. We record a
provision for estimated warranty-related costs based on historical product return rates and
managements estimates of expected future costs to fulfill warranty obligations. Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based upon
historical write-offs as a percentage of net revenues. Although we have not experienced
significant losses on accounts receivable historically, our accounts receivable are concentrated
with a small number of customers. Consequently, any write-off associated with one of these
customers could have a significant impact on our allowance for doubtful accounts and results of
operations. Goodwill, Other Intangibles and Long-Lived Assets.Other intangibles resulting from the
acquisitions of Vixel and Giganet and the purchase of the technology assets of Trebia Networks are
carried at cost less accumulated amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the estimated economic lives of the
respective intangible assets, ranging from two to seven years. In accordance with SFAS No. 142,
goodwill and other intangibles that have indeterminate lives will be tested for impairment based on
discounted cash flows and market capitalization at least annually, but also on an interim basis if
an event or circumstance indicates that it is more likely than not that an impairment loss has been
incurred. Our annual impairment test occurs during our fourth fiscal quarter each year. Additionally, SFAS No. 144, under which the recoverability of long-lived assets is assessed by
determining whether the carrying value of an asset can be recovered through projected undiscounted
future operating cash flows over its remaining life whenever events or changes in circumstances
indicate that we may not be able to recover the assets carrying value, such as in the fiscal
fourth quarter of 2004 when tepid demand from two of our customers and a subsequent drop in our
stock price resulted in an indication of impairment to our goodwill and other intangible assets.
The amount of impairment, if any, is measured based on fair value, which is determined using
projected discounted future operating cash flows. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. At the end of June 2004, events and circumstances, including tepid fiscal fourth quarter of 2004
demand from two of our customers coupled with a subsequent drop in our stock price, indicated that
a potential impairment of goodwill existed. As a result, we conducted a SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, analysis, as well as a SFAS 142, Goodwill and
Other Intangible Assets analysis, including a second step goodwill impairment test. The result of
the Statement 144 analysis indicated that none of our long-lived assets had been impaired. Any
future impairment loss could materially and adversely affect our financial position and results of
operations. However, the SFAS 142 analysis indicated that all of our goodwill, which was in excess
of $580 million, was impaired. Inventories.Inventories are stated at the lower of cost on a first-in, first-out basis or
market. We use a standard cost system for purposes of determining cost. The standards are
adjusted periodically to ensure they represent actual cost. We regularly compare forecasted
demand and the composition of the forecast against inventory on hand and open purchase commitments
in an effort to ensure the carrying value of inventory does not exceed net realizable value. 23




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Accordingly, we may have to record reductions to the carrying value of excess and obsolete
inventory if forecasted demand decreases, as we have previously recorded, including an excess and
obsolete inventory charge of $13.6 million during the three months ended September 30, 2001. Income Taxes. We account for income taxes using the asset and liability method, which recognizes
deferred tax assets and liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. We regularly
review historical and anticipated future pre-tax results of operations to determine whether we will
be able to realize the benefit of our deferred tax assets. A valuation allowance is required to
reduce the potential deferred tax asset when it is more likely than not that all or some portion of
the potential deferred tax asset will not be realized due to the lack of sufficient taxable income. Stock-Based Compensation. We account for our stock-based awards to employees using the intrinsic
value method. Stock-based awards to non-employees, if any, are recorded using the fair value
method. See note 1 of the Condensed Consolidated Financial Statements for more information. In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments, or SFAS 123R.
SFAS 123R 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. Determining the fair value of options using the Black-Scholes model, or
other currently accepted option valuation models, requires highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly affect the calculated
fair value on the grant date. SFAS 123R will be effective for our first interim period of fiscal
2006, which would be the three months ending October 2, 2005; however, earlier adoption is
permitted. The adoption of SFAS 123R will have a significant impact on our results of operations. Liquidity and Capital Resources As of December 26, 2004, we had $479.2 million in working capital and $598.1 million in cash and
cash equivalents, current investments and long-term investments. At June 27, 2004, we had $486.8
million in working capital and $655.4 million in cash and cash equivalents, restricted cash,
current investments and long-term investments. Our cash and cash equivalents decreased by $66.8
million to $125.3 million as of December 26, 2004, from $192.1 million as of June 27, 2004. The
decrease in cash and cash equivalents was due to our financing activities, which used $134.1
million, and our investing activities, which used $16.1 million. The cash and cash equivalents
used by financing and investing activities were partially offset by our operating activities, which
provided $83.4 million of cash and cash equivalents. In the six months ended December 26, 2004, operating activities provided $83.4 million of cash and
cash equivalents compared to providing $24.3 million in the six months ended December 28, 2003.
The primary reason for the increase in cash provided by operating activities for the six months
ended December 26, 2004 was net income of $28.5 million adjusted for non-cash reconciling items,
the most significant of which were amortization of other intangibles, depreciation and
amortization of property and equipment, deferred income taxes, a gain on the repurchase of our
0.25 percent contingent convertible subordinated notes, and a recovery related to insurance
reimbursement on shareholder litigation settlements. Additionally, decreases in inventories and
accounts and other receivables, and an increase in income taxes payable, increased our net cash
provided by operating activities. In the six months ended December 26, 2004, investing activities used $16.1 million of cash and cash
equivalents, as the amount of purchases of new investments exceeded the maturities of existing
investments. Additionally, during the six months ended December 26, 2004, we spent $6.6 million on
additions to property and equipment compared to spending $22.1 million during the same period of
the prior year. For the six months ended December 28, 2003, investing activities used $200.5
million of cash and cash equivalents, primarily due to the purchase of Vixel Corporation and the
technology assets of Trebia Networks, which was partially offset by net investment maturities in
excess of purchases of new investments. The additions to property and equipment in the prior year
included amounts related to the building of our new corporate headquarters. Financing activities used $134.1 million of cash and cash equivalents in the six months ended
December 26, 2004. This decrease in cash and cash equivalents was primarily due to the repurchase
of $153.0 million in face value of our 0.25 percent contingent convertible subordinated notes at a
net discount, for $137.2 million. For the six months 24




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ended December 28, 2003, financing activities provided $230.3 million of cash and cash equivalents
due primarily to net proceeds of $439.2 million from the issuance of our 0.25 percent contingent
convertible debt, partially offset by the repurchases of common stock and some of our 1.75 percent
convertible subordinated notes, for a combined total of $213.8 million. As of December 26, 2004, we had approximately $17.0 million in face value of our 1.75 percent
convertible subordinated notes due 2007 outstanding. Interest on these notes is payable in cash on
February 1 and August 1 of each year. These notes may be converted by the holder at any time into
shares of our common stock at the conversion price of $53.84 per share, subject to the potential
adjustments described in the terms of the notes issued. On January 27, 2005 we announced the
redemption of all of our 1.75 percent convertible notes effective February 22, 2005. We expect
that the aggregate redemption price of such notes will be $17.0 million plus accrued interest. As of December 26, 2004, we had approximately $364.5 million in face value of our 0.25 percent
contingent convertible subordinated notes due 2023 outstanding. Interest is payable in cash on
June 15 and December 15 of each year. Under the terms of the offering, the notes will be
convertible, at the option of the holder and subject to the satisfaction of certain conditions,
into shares of our common stock at a price of $43.20 per share.Holders of the notes may require
us to purchase the notes for cash by giving written notice within the 20 business days prior to
each of December 15, 2006, December 15, 2008, December 15, 2013, and December 15, 2018. See note 7
to the condensed consolidated financial statements contained herein for more information. We have entered into purchase agreements for inventory, and as of December 26, 2004, our remaining
inventory purchase obligation for these items was $15.4 million, including $5.2 million related to
key inventory components. On October 9, 2003, before our acquisition of Vixel, a purported class action lawsuit was filed in
King County Superior Court of the State of Washington against Vixel and each of Vixels directors
and certain unnamed individuals (the Vixel Parties), entitled Russell Fink v. Vixel Corporation,
et al., Case No. 03-2-37226-9SEA. The complaint made general allegations that, among other things,
Vixels directors breached their fiduciary duties to Vixel stockholders in connection with the
approval of the merger with Emulex and sought to enjoin the tender offer and have the merger
agreement declared unlawful, among other forms of relief. On November 7, 2003, the Vixel Parties
entered into a memorandum of understanding for a $0.7 million settlement with the plaintiff in the
class action suit pursuant to which the parties have agreed to settle the action, subject to court
approval. The $0.7 million was recorded as general and administrative expense for the three months
ended December 28, 2003. Formal settlement documents were signed on May 5, 2004 and the plaintiff
has completed discovery as agreed to by the parties. In August 2004, final court approval was
obtained for the settlement of the Fink v. Vixel litigation, and we paid the $0.7 million
settlement. During the three months ended December 26, 2004, we received a $0.3 million
reimbursement from our insurer relating to the Fink v. Vixel litigation. In July 2004, we obtained an arbitration award against two of our insurers related to class action
and derivative suits settled in 2003, and subsequently collected a total of $9.5 million plus $0.3
million in interest during the three months ended September 26, 2004. As the amounts received
exceeded the $5.1 million receivable reflected on our books, we recorded a reduction in general
and administrative expenses during the three months ended September 26, 2004, of $4.4 million, as
well as interest income of $0.3 million. As part of our commitment to storage networking infrastructure product development, we expect to
continue our investments in property and equipment, most notably for additional engineering
equipment, and continued enhancement of our global IT infrastructure. Furthermore, we plan to
devote additional resources to our engineering, sales and marketing efforts as part of our
on-going diversification and growth strategy. 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. 25




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As described above, the following summarizes our contractual obligations at December 26, 2004, and
the effect such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due by Period(in thousands)Less than 1
    
    
    1-3
    
    
    4-5
    
    
    After 5Total
    
    
    Year (2)
    
    
    Years (3)
    
    
    Years (4)
    
    
    YearsConvertible subordinated
notes and interest (1)
    
    $
    384,033
    
    
    $
    604
    
    
    $
    383,429
    
    
    $
    -
    
    
    $
    -Leases
    
    
    6,229
    
    
    
    946
    
    
    
    2,196
    
    
    
    1,562
    
    
    
    1,525Inventory purchase commitments
    
    
    15,367
    
    
    
    15,367
    
    
    
    -
    
    
    
    -
    
    
    
    -Letter of credit
    
    
    46
    
    
    
    46
    
    
    
    -
    
    
    
    -
    
    
    
    -Other commitments
    
    
    1,591
    
    
    
    1,591
    
    
    
    -
    
    
    
    -
    
    
    
    -Total
    
    $
    407,266
    
    
    $
    18,554
    
    
    $
    385,625
    
    
    $
    1,562
    
    
    $
    1,525
   (1)
    
    The principal payment related to the remaining outstanding 0.25 percent contingent convertible
subordinated notes of $364.5 million is shown as a payment in the period from July 4, 2005 through
July 1, 2007, or 1-3 years above, as holders of these 20-year notes may require us to purchase the
notes for cash by giving us written notice as early as 20 business days prior to each of December
15, 2006, December 15, 2008, December 15, 2013, and December 15, 2018.(2)
    
    Fiscal year ending July 3, 2005.(3)
    
    Fiscal years ending July 2, 2006, and July 1, 2007.(4)
    
    Fiscal years ending June 29, 2008, and June 28, 2009. Risk Factors A downturn in information technology spending in general or spending on computer and storage
systems in particular could adversely affect our revenues and results of operations. The demand for our Fibre Channel products, which represents substantially all of our net revenues,
has been driven by the demand for high-performance storage networking products and solutions that
support enterprise computing applications, including on-line transaction processing, data mining,
data warehousing, multimedia and Internet applications. Any significant downturn in demand for
such products, solutions and applications, 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 expenses associated with our
research and development investments, strategic investments and merger and acquisition activity, as
well as customer service and support, which are expected to continue despite any such downturn. Our business depends upon the continued growth of the Fibre Channel storage networking market, and
our business will be adversely affected if such growth does not occur or occurs more slowly than we
anticipate. The size of our potential market is largely dependent upon the acceptance of our Fibre Channel
storage networking technologies, as well as the overall demand for storage. We believe that our
investment in the Fibre Channel storage networking market provides opportunity for revenue growth
and profitability for the future. However, the market for Fibre Channel storage networking
products may not gain broader acceptance and customers may choose alternative technologies and/or
products supplied by other companies. Recently, interest has re-emerged for iSCSI storage
networking solutions, which may satisfy some I/0 connectivity requirements through standard
Ethernet adapters and software at little to no incremental cost to end users. Such iSCSI solutions
are likely to compete with Fibre Channel solutions, particularly in the low end of the market. In
addition, other technologies such as Serial Attached SCSI or SAS, may compete with our Fibre
Channel embedded switched solutions in the future. Furthermore, since our products are sold as
parts of integrated systems, demand for our products is driven by the demand for these integrated
systems, including other companies complementary products. A lack of demand for the integrated
systems or a lack of complementary products required for these integrated systems could have a
material adverse effect on our business, results of operations and financial condition. If the
Fibre Channel storage networking market does not grow, or grows more slowly than we anticipate,
attracts more competitors than we expect, as discussed below, or if our products do not achieve
continued market acceptance, our business, results of operations and financial condition could be
materially adversely affected. 26




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Because a significant portion of our revenues are generated from sales to a limited number of
customers, none of which are the subject of exclusive or long-term contracts, the loss of one or
more of these customers, or our customers failure to make timely payments to us, could adversely
affect our business. We rely almost exclusively on original equipment manufacturers, or OEMs, and sales through
distribution channels for our revenue. For the three months ended December 26, 2004, we derived
approximately 66 percent of our net revenues from OEMs and 34 percent from sales through
distribution. Furthermore, because some of our sales through distribution channels consist of OEM
products, OEM customers effectively generated more than 85 percent of our revenue for the three and
six months ended December 26, 2004. We may be unable to retain our current OEM and distributor
customers or to recruit additional or replacement customers. Although we have attempted to expand our base of customers, including customers for embedded
switching products, we believe our revenues in the future will continue to be similarly derived
from a limited number of customers. As a result, to the extent that sales to any of our
significant customers do not increase in accordance with our expectations or are reduced or
delayed, our business, results of operations and financial condition could be materially adversely
affected. As is common in the technology industry, our agreements with OEMs and distributors are typically
non-exclusive, have no volume commitments, and often may be terminated by either party without
cause. It is increasingly commonplace for our OEM and distributor customers to utilize or carry
competing product lines. If we were to lose business from one or more significant OEM or
distributor customers to a competitor, our business, results of operations and financial condition
could be materially adversely affected. In addition, our OEMs may elect to change their business
practices in ways that affect the timing of our revenues, which may materially adversely affect our
business, results of operations and financial condition. Our markets are highly competitive and our business and results of operations may be adversely
affected by entry of new competitors into the markets, aggressive pricing and the introduction or
expansion of competitive products and technologies. The markets for our products are highly competitive and are characterized by rapid technological
advances, price erosion, frequent new product introductions and evolving industry standards. We
expect that our markets will continue to attract new competition. Our current and potential
competition consists of major domestic and international companies, some of which have
substantially greater financial, technical, marketing and distribution resources than we have.
Additional companies, including but not limited to our suppliers, strategic partners, OEM customers
and emerging companies, may enter the markets for our storage networking products and new or
stronger competitors may emerge as a result of consolidation movements in the marketplace.
Additionally, our existing competitors continue to introduce products with improved

price/performance characteristics, and we have to do the same to remain competitive. Furthermore,
competitors may introduce new products to the market before we do, and thus obtain a first to
market advantage over us. Increased competition could result in increased price competition,
reduced revenues, lower profit margins or loss of market share, any of which could have a material
adverse effect on our business, results of operations and financial condition. Alternative legacy technologies such as SCSI and port bypass circuits compete with our Fibre
Channel I/O and embedded switch products, respectively, for customers. Our success depends in part
on our own ability and on the ability of our OEM customers to develop storage networking solutions
that are competitive with these alternative legacy technologies. Additionally, in the future other
technologies that we are not currently developing may evolve to address the storage networking
applications currently served by our Fibre Channel product line today, reducing our market
opportunity. Our operating results are difficult to forecast and could be adversely affected by many factors,
and our stock price may decline if our results fail to meet expectations. Our revenues and results of operations have varied on a quarterly basis in the past and may vary
significantly in the future. Accordingly, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful, and you should not rely on such comparisons
as indications of our future performance. We may be unable to maintain our current levels of
growth or profitability in the future. Our revenues and results of operations are difficult to
forecast and could be adversely affected by many factors, including, among others:  
    changes in the size, mix, timing and terms of OEM and other customer orders; 27




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
    changes in the sales and deployment cycles for our products and/or desired inventory
levels for our products;
    acquisitions or strategic investments by our customers, competitors or us;
    the timing and market acceptance of new or enhanced product introductions by us, our OEM
customers and our competitors;
    market share losses or difficulty in gaining incremental market share growth;
    fluctuations in product development, procurement, resource utilization and other operating expenses;
    component shortages experienced by us;
    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, or EMS, providers to produce and
distribute our products in a timely fashion;
    difficulties with updates, changes or additions to our information technology systems;
    breaches of our network security, including viruses;
    changes in general social and economic conditions, including but not limited to natural
disasters, terrorism, public health and slower than expected market growth, with resulting
changes in customer technology budgeting and spending;
    changes in technology, industry standards or consumer preferences;
    seasonality; and/or
    changes in our accounting or other policies resulting from the adoption of new laws,
regulations or pronouncements. As a result of these and other unexpected factors or developments, we expect that in the future
operating results will be from time to time below the expectations of investors or market analysts,
which would have a material adverse effect on our stock price. Our relatively small backlog of unfilled orders, possible customer delays or deferrals and our
tendency to generate a large percentage of our quarterly sales near the end of the quarter
contribute to possible fluctuations in our operating results that could have an adverse impact on
our results of operations and stock price. Historically, we have generally shipped products quickly after we receive orders, meaning that we
do not always have a significant backlog of unfilled orders. As a result, our revenues in a given
quarter may depend substantially on orders booked during that quarter. Alternatively, orders
already in backlog may be deferred or cancelled. Also, we have typically generated a large
percentage of our quarterly revenues in the last month of the quarter. Because our expense levels
are largely based on our expectations of future sales, in the event we experience unexpected
decreases in sales, our expenses may be disproportionately large relative to our revenues and we
may be unable to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. A material shortfall in sales in relation to our quarterly expectations or any delay,
deferral or cancellation of customer orders would likely have an immediate and adverse impact on
our results of operations and may adversely affect our stock price. Our industry is subject to rapid technological change, and we must keep pace with the changes to
successfully compete. The markets for our products are characterized by rapidly changing technology, evolving industry
standards and the frequent introduction of new products and enhancements. Our future success
depends in large part on our ability to enhance our existing products and to introduce new products
on a timely basis to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as four, eight and ten 28




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gigabit per second, or Gbps, Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI Express; PCI
Express Advanced Switching; iSCSI; Serial ATA, or SATA; Serial Attached SCSI, or SAS; and Remote
Direct Memory Access, or RDMA; are in development by many companies and their ultimate acceptance
and deployment in the market is uncertain. We are developing some, but not all of these
technologies, and we cannot be sure that the technologies we chose to develop will achieve market
acceptance, or that technologies that we chose not to develop will be available to purchase or
license from third parties or will be immaterial to our business. Furthermore, if our products are
not available in time for the qualification cycle at an OEM it may be up to three years, if ever,
before another qualification cycle is available to us. In addition,
new products and enhancements developed by us may not be backwards
compatible to existing equipment already installed in the market. If we are unable, for technological or
other reasons, to develop new products, enhance or sell existing products, or consume existing
products in a timely and cost-effective manner in response to technological and market changes, our
business, results of operations and financial condition may be materially adversely affected. We have experienced losses in our history and may experience losses in our future that may
adversely affect our stock price and financial condition. We have experienced losses in our history, including a loss of $532.3 million in fiscal 2004. Any
losses, including losses caused by impairment of long-lived assets or goodwill, may adversely
affect the perception of our business by analysts and investors, which could adversely affect our
stock price. To the extent that we are unable to generate positive operating profits and positive
cash flow from operations, our financial condition may be materially adversely affected. The migration of our customers toward newer product platforms may have a significant adverse
effect. As our customers migrate from one platform to the enhanced price/performance of the next platform,
we may experience reduced revenue, gross profit or gross margin levels associated with lower
average selling prices or higher relative product costs associated with improved performance.
While we regularly compare forecasted demand for our products against inventory on hand and open
purchase commitments, to the extent that customers migrate more quickly than anticipated, the
corresponding reduction in demand for older product platforms may result in obsolete inventory and
related charges which could have a material adverse effect on our financial condition and results
of operations. Any failure of our OEM customers to keep up with rapid technological change and successfully market
and sell systems that incorporate new technologies could adversely affect our business. Our revenues depend significantly upon the ability and willingness of our OEM customers to commit
significant resources to develop, promote and deliver products that incorporate our technology. In
addition, if our customers products are not commercially successful, it would have a material
adverse effect on our business, results of operations and financial condition. Rapid changes in the evolution of technology, including the unexpected extent or timing of the
transition from HBA solutions or embedded switch box solutions to lower-priced ASIC solutions,
could adversely affect our business. Historically, the electronics industry has developed higher performance ASICs that create chip
level solutions that replace selected board level or box level solutions at a significantly lower
average selling price. We have previously experienced this trend and expect it to continue in the
future. If this transition is more abrupt or is more widespread than anticipated, there can be no
assurance that we will be able to modify our business model in a timely manner, if at all, in order
to mitigate the effects of this transition on our business, results of operations and financial
position. If customers elect to utilize lower-end HBAs in higher-end environments or applications, our
business could be negatively affected. We supply three families of HBAs that target separate high-end, mid-range and small and
medium-sized business, or SMB, markets. Historically, the majority of our Fibre Channel revenue
has come from our high-end server and storage solutions. In the future, increased revenues are
expected to come from SMB and midrange server and storage solutions, which have lower average
selling prices. If customers elect to utilize lower-end HBAs in higher-end environments or
applications, our business could be negatively affected. A decrease in the average unit selling prices and/or an increase in the manufactured cost of our
products could adversely affect our revenue, gross margins and financial performance. 29




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In the past, we have experienced downward pressure on the average unit selling prices of our
products. Furthermore, we may provide pricing discounts to customers based upon volume purchase
criteria, and achievement of such discounts may reduce our average unit selling prices. To the
extent that growth in unit demand fails to offset decreases in average unit selling prices, our
revenues and financial performance could be materially adversely affected. Although historically
we have achieved offsetting cost reductions, to the extent that average unit selling prices of our
products decrease without a corresponding decrease in the costs of such products, our gross margins
and financial performance could be materially adversely affected. Furthermore, if the manufactured
cost of our products were to increase due to inflation or other factors, our gross margins and
financial performance could be materially adversely affected. Delays in product development could adversely affect our business. We have experienced delays in product development in the past and may experience similar delays in
the future. Prior delays have resulted from numerous factors, such as:  
    difficulties in hiring and retaining necessary employees and independent contractors;
    difficulties in reallocating engineering resources and other resource limitations;
    unanticipated engineering or manufacturing complexity, including from third-party
suppliers of intellectual property including foundries of our ASICs;
    undetected errors or failures in software and hardware;
    changing OEM product specifications;
    delays in the acceptance or shipment of products by OEM customers; and/or
    changing market or competitive product requirements. Given the short product life cycles in the markets for our products and the relatively long product
development cycles, any delay or unanticipated difficulty associated with new product introductions
or product enhancements could have a material adverse effect on our business, results of operations
and financial condition. Our products are complex and may contain undetected hardware or software defects or bugs that could
increase our costs, reduce our net revenues or damage our reputation. Our products are complex and may contain undetected hardware or software defects or bugs when first
introduced or as newer versions are released. We are also exposed to risks associated with latent
defects in existing products. From time to time, we have found errors in existing, new or enhanced
products. If any of our products contains defects or bugs, or has reliability, quality or
compatibility problems, our reputation may be damaged and customers may be reluctant to buy our
products, which could materially and adversely affect our ability to retain existing customers and
attract new customers. In addition, these defects or bugs could interrupt or delay sales or
shipment of our products to our customers. Furthermore, if any of these problems are not found
until after we have commenced commercial shipment of a product, we may be required to incur
additional development costs and product recall, repair or replacement costs. These problems may
divert our technical and other resources from other development efforts and could result in
significant warranty and repair costs. Our joint development activities may result in products that are not commercially successful or
that are not available in a timely fashion. We have engaged in joint development projects with third parties in the past and we expect to
continue doing so in the future. Joint development can magnify several risks for us, including the
loss of control over development of aspects of the jointly developed products and over the timing
of product availability. Accordingly, we face increased risk that joint development activities
will result in products that are not commercially successful or that are not available in a timely
fashion. 30




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During April 2003 we announced a joint development activity with Intel Corporation relating to
storage processors that integrate SATA, SAS and Fibre Channel interfaces within a single
architecture. Under the agreement, we will develop the protocol controller hardware, firmware and
drivers. Intel will integrate its Intel® Xscale microarchitecture as the core technology for
the new processors and will manufacture the processors on its 90-nanometer process technology.
This activity has risks resulting from unproven new-generation manufacturing technology, from the
licensing of technology to Intel and from increased development costs. A change in our business relationships with our third-party suppliers or our electronics
manufacturing service providers could adversely affect our business. We rely on third-party suppliers for components and the manufacture of our products, and we have
experienced delays or difficulty in securing components and finished goods in the past. Delays or
difficulty in securing components or finished goods may be caused by numerous factors including,
but not limited to:  
    discontinued production by a supplier;
    required long-term purchase commitments;
    undetected errors, failures or production quality issues;
    timeliness of product delivery;
    sole sourcing;
    financial stability and viability of our suppliers and EMS providers;
    changes in business strategies of our suppliers and EMS providers;
    increases in manufacturing costs due to lower volumes or more complex manufacturing
process than anticipated;
    disruption in shipping channels;
    natural disasters;
    inability or unwillingness of our suppliers or EMS providers to continue their business with us;
    environmental, tax or legislative changes in the location where our products are produced;
    difficulties associated with foreign operations; and/or
    market shortages. There is a risk that we will not be able to retain our current suppliers or change to alternative
suppliers. An interruption in supply, the cost of shifting to a new supplier or EMS providers or
the cost associated with a long-term purchase commitment could have a material adverse effect on
our business, results of operations and financial condition. If our intellectual property protections are inadequate, it could adversely affect our business. We believe that our continued success depends primarily on continuing innovation, marketing and
technical expertise, as well as the quality of product support and customer relations. At the same
time, our success is partially dependent on the proprietary technology contained in our products.
We currently rely on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect our intellectual property rights in our products.
For a more complete description of our intellectual property, you should read Business 
Intellectual Property contained within our 2004 Annual Report on Form 10-K. We cannot be certain that the steps we take to protect our intellectual property will adequately
protect our proprietary rights, that others will not independently develop or otherwise acquire
equivalent or superior technology, or that we 31




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can maintain such technology as trade secrets. In addition, the laws of some of the countries in
which our products are or may be developed, manufactured or sold may not protect our products and
intellectual property rights to the same extent as the laws of the United States or at all.
Furthermore, we enter into various development projects and arrangements with other companies. In
some cases, these arrangements allow for the sharing or use of our intellectual property. Our
failure to protect our intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition. For more information on legal proceedings related to Emulex, see Part II, Item 1, Legal
Proceedings. Ongoing lawsuits present inherent risks, any of which could have a material adverse effect on our
business, financial condition or results of operations. Such potential risks include the
continuing expenses of litigation, the risk of loss of patent rights, the risk of injunction
against the sale of products incorporating the technology in question, counterclaims and attorneys
fee liability. Third-party claims of intellectual property infringement could adversely affect our business. We believe that our products and technology do not infringe on the intellectual property rights of
others or upon intellectual property rights that may be granted in the future pursuant to pending
applications. We occasionally receive communications from third parties alleging patent
infringement, and there is always the chance that third parties may assert infringement claims
against us. Any such claims, with or without merit, could result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing agreements, which may or
may not be available. Furthermore, we have in the past obtained, and may be required in the future
to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary
licenses will be available or that they can be obtained on commercially reasonable terms. If we
were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable
terms, our business, results of operations and financial condition would be materially adversely
affected. The inability or increased cost of attracting, motivating or retaining key managerial and technical
personnel could adversely affect our business. Our success depends to a significant degree upon the performance and continued service of key
managers, as well as engineers involved in the development of our storage networking technologies
and technical support of our storage networking products and customers. Competition for such
highly skilled employees in the communities in which we operate, as well as our industry, is
intense, and we cannot be certain that we will be successful in recruiting, training and retaining
such personnel. In addition, employees may leave our company and subsequently compete against us.
Also, many of these key managerial and technical personnel receive stock options as part of our
employee retention initiatives. New regulations, volatility in the stock market and other factors
could diminish the value of our stock options, putting us at a competitive disadvantage and forcing
us to use more cash compensation. If we are unable to attract new managerial and technical
employees, or are unable to retain and motivate our current key managerial and technical employees,
or are forced to use more cash compensation to retain and motivate key personnel, our business,
results of operations and financial condition could be materially adversely affected. Our international business activities subject us to risks that could adversely affect our business. For the three months ended December 26, 2004, sales in the United States accounted for 55 percent
of our total net revenues, sales in the Pacific Rim countries accounted for 14 percent of our total
net revenues, and sales in Europe and the rest of the world accounted for 31 percent of our total
net revenues. We expect that our sales will be similarly distributed for the foreseeable future.
All of our sales are currently denominated in U.S. dollars. As a result, if the value of the U.S.
dollar increases relative to foreign currencies, our products could become less competitive in
international markets. Additionally, a significant portion of our products is produced at our EMS
providers production facilities in Spain, Mexico and Malaysia. As a result, we are subject to the
risks inherent in international operations. Our international business activities could be
affected, limited or disrupted by a variety of factors, including:  
    the imposition of or changes in governmental controls, taxes, tariffs, trade
restrictions and regulatory requirements;
    the costs and risks of localizing products for foreign countries; 32




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
    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/or
    political instability, war or terrorism. All of these factors could harm future sales of our products to international customers or future
production outside of the United States of our products, and have a material adverse effect on our
business, results of operations and financial condition. Potential acquisitions or strategic investments may be more costly or less profitable than
anticipated and may adversely affect the price of our company stock. We may pursue acquisitions or strategic investments that could provide new technologies, products
or service offerings. Future acquisitions or strategic investments may negatively impact our
results of operations as a result of operating losses incurred by the acquired entity, the use of
significant amounts of cash, potentially dilutive issuances of equity or equity-linked securities,
incurrence of debt or amortization of intangible assets with determinable lives. Furthermore, we
may incur significant expenses pursuing acquisitions or strategic investments that ultimately may
not be completed. Moreover, to the extent that any proposed acquisition or strategic investment is
not favorably received by stockholders, analysts and others in the investment community, the price
of our common stock could be adversely affected. In addition, acquisitions or strategic
investments involve numerous risks, including:  
    difficulties in the assimilation of the operations, technologies, products and personnel
of the acquired company;
    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 no or limited prior experience;
    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; and/or
    the potential loss of key employees of the acquired company. In the event that an acquisition or strategic investment does occur and we are unable to obtain
anticipated profits or successfully integrate operations, technologies, products or personnel that
we acquire, our business, results of operations and financial condition could be materially
adversely affected. Our stock price is volatile, which has and may result in lawsuits against us and our officers and
directors. The stock market in general and the stock prices in technology-based companies in particular have
experienced extreme volatility that often has been unrelated to the operating performance of any
specific public company. The market price of our common stock has fluctuated in the past and is
likely to fluctuate in the future as well. For example, during the calendar year 2004 the market
price of our common stock ranged from a low of $9.26 per share to a high of $31.30 per share.
Factors that could have a significant impact on the market price of our common stock include, but
are not limited to, the following: 33




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
    quarterly variations in customer demand and operating results;
    announcements of new products by us or our competitors;
    the gain or loss of significant customers or design wins;
    changes in analysts earnings estimates;
    changes in analyst recommendations, price targets or other parameters that may not be
related to earnings estimates;
    rumors or dissemination of false information;
    pricing pressures;
    short selling of our common stock;
    dilution resulting from conversion of outstanding convertible subordinated notes into shares of our common stock;
    general conditions in the computer, storage or communications markets; and/or
    events affecting other companies that investors deem to be comparable to us. In the past, companies, including us, that have experienced volatility in the market price of their
stock have been the objects of securities class action litigation. If we were to be the subject of
similar litigation in the future or experience unfavorable outcomes in any of our pending
litigation, as discussed in Part II, Item 1, Legal Proceedings, contained elsewhere herein, it
could have a material adverse effect on our results of operations and financial condition. 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 34




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provisions may also discourage acquisition proposals or delay or prevent a change in control, which
could harm our stock price. For more information, please read note 12 to the Consolidated
Financial Statements contained in our 2004 Annual Report on Form 10-K, our certificate of
incorporation and Delaware law for more information on the anti-takeover effects of provisions of
our shareholder rights plan. Our system of internal controls may be inadequate. We maintain a system of internal controls in order to ensure we are able to collect, process,
summarize and disclose the information required by the Securities and Exchange Commission within
the time periods specified. Any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Additionally, public companies in the
United States are required to review their internal controls under the Sarbanes-Oxley Act of 2002.
If the internal controls put in place by us are not adequate or in conformity with the requirements
of the Sarbanes-Oxley Act of 2002, and the rules and regulations of the Securities and Exchange
Commission, we may be required to restate our financial statements, receive an adverse audit
opinion, and/or take other actions which will divert significant financial and managerial
resources, as well as be subject to fines and/or other government enforcement actions.
Furthermore, the price of our common stock could be adversely affected. Changes in laws, regulations and financial accounting standards may affect our reported results of
operations. New laws, regulations and accounting standards, as well as changes to and varying interpretations
of currently accepted accounting practices in the technology industry might adversely affect our
reported financial results, which could have an adverse effect on our stock price. Furthermore,
new guidance related to the expensing of stock options in SFAS 123R will materially adversely
affect our reported financial results when adopted, and may affect our stock price. SFAS 123R is
effective for periods beginning after June 15, 2005; however earlier adoption is permitted. 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, and potentially to future periods as well. 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. 35




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Any additional financing we may need may not be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, we may not be able to
take advantage of business opportunities, develop new products or services or otherwise respond to
unanticipated competitive pressures. In any such case, our business, results of operations and
financial condition could be materially adversely affected. In January 2002, we completed a $345.0 million private placement of 1.75 percent convertible
subordinated notes, which are due February 1, 2007. Subsequently, we repurchased and cancelled an
aggregate of $328.0 million in face value of our 1.75 percent notes, leaving approximately $17.0
million still outstanding as of December 26, 2004. On January 27, 2005 we announced the redemption
of all our 1.75 percent convertible notes effective February 22, 2005 for an estimated aggregate
redemption price of $17.0 million plus accrued interest. In fiscal 2004, we completed a $517.5 million private placement of 0.25 percent contingent
convertible subordinated notes due 2023. During the three months ended September 26, 2004, we
repurchased and cancelled $153.0 million in face value of these 0.25 percent notes, leaving
approximately $364.5 million still outstanding as of December 26, 2004. The holders of our 0.25
percent notes may require us to purchase the notes for cash as early as December 2006. If we have
insufficient liquidity and capital resources to repay the principal amounts of our outstanding
convertible notes and the notes offered hereby when due, we may be forced to raise additional funds
through public or private debt or equity financings, which may not be available on favorable terms,
if at all. If such financings were not available on favorable terms, our business, results of
operations and financial condition could be materially adversely affected. Conversion of our outstanding notes would dilute the ownership interest of existing stockholders. The conversion of our notes into shares of our common stock would dilute the ownership interests of
existing stockholders. Any sales in the public market of the common stock issuable upon conversion
of the notes could adversely affect prevailing market prices of our common stock. In addition, the
existence of the notes may encourage short selling by market participants due to this dilution or
to facilitate trading strategies involving notes and common stock. See the Risk Factor Changes in
laws, regulations and financial accounting standards may affect our reported results of operations
above. 36




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Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Sensitivity At December 26, 2004, our investment portfolio of $472.8 million consisted primarily of fixed
income securities, excluding those classified as cash and cash equivalents. 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 December 26, 2004, the decline in the fair value of the portfolio would not be
material to our financial position, results of operations and cash flows. However, if interest
rates decreased and securities within our portfolio matured and were re-invested in securities with
lower interest rates, interest income would decrease in the future. As of December 26, 2004, we had $364.5 million face value 0.25 percent contingent convertible
subordinated notes and $17.0 million face value 1.75 percent convertible subordinated notes issued
and outstanding. The fair value, based on quoted market prices, of our 0.25 percent and 1.75
percent convertible subordinated notes at December 26, 2004, was $339.9 million and $16.8 million,
respectively. The fair value of these notes may increase or decrease due to various factors,
including fluctuations in the market price of our common stock, fluctuations in market interest
rates and fluctuations in general economic conditions. Foreign Currency We have executed and will continue to execute transactions in foreign currencies. As a result, we
may be exposed to financial market risk resulting from fluctuations in foreign currency rates,
particularly the British Pound and the Euro. Given the relatively small number of foreign
currency transactions, we do not believe that our potential exposure to fluctuations in foreign
currency rates is significant. 
 Item 4.Controls and Procedures We maintain disclosure controls and procedures designed to ensure that we are able to collect the
information we are required to disclose in the reports we file with the Securities and Exchange
Commission, or SEC, and to process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on their evaluation of our disclosure controls and
procedures, our management, with the participation of the Chief Executive and Chief Financial
Officers, has concluded that, as of the end of the period covered by this Quarterly Report on Form
10-Q, these disclosure controls and procedures were effective to ensure that we are able to record,
process, summarize and report the information we are required to disclose in the reports we file
with the SEC within the required time periods. There were no changes in our internal controls over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. 37




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PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings Litigation On May 23, 2003, Vixel filed a patent infringement action against Brocade Communications Systems,
Inc. in the United States District Court for the Northern District of California, Civil Action No.
C-030-02446. The complaint states that Brocade is infringing U.S. Patent No. 6,185,203, entitled
Fibre Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for
Fibre Channel Interconnection of Private Loop Devices, and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop Devices, through
the unauthorized manufacture, use, sale and offering for sale of various storage area network
switching products, including but not limited to, Brocades Silkworm switch products. Brocade
denied infringement and challenged the validity of the patents referenced. Brocade also
challenged the enforceability of those patents. In the suit against Brocade, Vixel was seeking
unspecified past damages, potential future royalties, or, alternatively, injunctive relief. On September 24, 2004, Emulex Corporation and Brocade Communications Systems, Inc. entered into a
settlement including a litigation standstill agreement whereby Emulex and Brocade agreed to
dismiss without prejudice their claims and counterclaims against each other in the pending patent
infringement case in the United States District Court for the Northern District of California
entitled Vixel Corporation. v. Brocade Communications Systems, Inc., Civil Action No. C-030-02446.
The settlement included the formation of a strategic relationship under which the parties are to
work together to pursue mutual objectives. Under the litigation standstill agreement both parties
preserved their respective rights, no restrictions of any kind were imposed on either partys
ability to sell products, no licenses were granted by either party, no money was exchanged, and
they agreed to a three year standstill during which neither party may initiate litigation against
the other party with respect to certain of their respective patents. On November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities class
action was filed in the United States District Court in the Southern District of New York as Case
No. 01 CIV. 10053(SAS), Master File No. 21 MC92 (SAS) against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public offering in late
1999. The amended complaint alleges violations under Section 10(b) of the Exchange Act and
Section 11 of the Securities Act and seeks unspecified damages on behalf of persons who purchased
Vixel stock during the period October 1, 1999 through December 6, 2000. In October 2002, the
parties agreed to toll the statute of limitations with respect to Vixels officers and directors
until September 30, 2003, and on the basis of this agreement, Vixels officers and directors were
dismissed from the lawsuit without prejudice. During June 2003, Vixel and the other issuer
defendants in the action reached a tentative settlement with the plaintiffs that would, among
other things, result in the dismissal with prejudice of all claims against the defendants and
their officers and directors. In connection with the possible settlement, those officers and
directors who had entered tolling agreements with the plaintiffs agreed to extend those agreements
so that they would not expire prior to any settlement being finalized. Although Vixel approved
this settlement proposal in principle, it remains subject to a number of procedural conditions, as
well as formal approval by the court. On October 9, 2003, before the Companys acquisition of Vixel, a purported class action lawsuit
was filed in King County Superior Court of the State of Washington against Vixel and each of
Vixels directors and certain unnamed individuals (the Vixel Parties), entitled Russell Fink v.
Vixel Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made general allegations that,
among other things, Vixels directors breached their fiduciary duties to Vixel stockholders in
connection with the approval of the merger with Emulex and sought to enjoin the tender offer and
have the merger agreement declared unlawful, among other forms of relief. On November 7, 2003, the
Vixel Parties entered into a memorandum of understanding for a $0.7 million settlement with the
plaintiff in the class action suit pursuant to which the parties have agreed to settle the action,
subject to court approval. The $0.7 million was recorded as general and administrative expense
during the three months ended December 28, 2003. Formal settlement documents were signed on May
5, 2004 and the plaintiff has completed discovery as agreed to by the parties. In August 2004,
final court approval was obtained for the settlement of the Fink v. Vixel litigation, and the
Company paid the $0.7 million settlement. During the three months ended December 26, 2004, the
Company received a $0.3 million reimbursement from its insurer relating to the Fink v. Vixel
litigation. Beginning on or about February 20, 2001, the Company and certain of its officers and directors
were named as defendants in a number of securities class action lawsuits filed in the United
States District Court, Central District of California, Case No. SACV-01-219 GLT (ANx). The
plaintiffs in the actions represent purchasers of the 38




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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 by the Company into the settlement fund during the six months ended December 28,
2003. Gateway Partners filed a challenge to the allocation of settlement funds, among the
plaintiffs and adequacy of the settlement notice, and the district court ruled against such
challenge on November 23, 2004. On December 13, 2004, Gateway Partners filed an appeal and a
motion to stop distribution from the settlement fund; both of which were filed with the United
States Court of Appeals for the Ninth Circuit (Index No. 04-57123). On January 12, 2005,
attorneys for Gateway Partners sent a letter to the appeals court stating that a stipulation would
be filed confirming that no proceeds of the settlement fund would be distributed until the appeal
is resolved, and that Gateway Partners would not have to post a bond. Related to the Companys
insurance coverage, during the three months ended March 28, 2004, the Company reached an agreement
with one of its insurers, under which the Company received $10.0 million less $2.0 million
previously paid by the insurer for the defense of the securities class action lawsuits, resulting
in a net payment to the Company of $8.0 million. In July 2004, the Company obtained an
arbitration award against two of its insurers, and subsequently collected a total of $9.5 million
plus $0.3 million in interest. As the amounts received exceeded the $5.1 million receivable
reflected on the Companys books, the Company recorded a reduction in general and administrative
expenses during the three months ended September 26, 2004, of $4.4 million, as well as interest
income of $0.3 million. Ongoing lawsuits present inherent risks, any of which could have a material adverse effect on the
Companys business, financial condition or results of operations. Such potential risks include the
continuing expenses of litigation, counterclaims and attorneys fee liability. Additionally, the Company is involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Companys consolidated financial position, results of
operations or liquidity. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds We did not repurchase any equity securities during the six months ended December 26, 2004. In
September 2001, our Board of Directors authorized the repurchase of up to four million shares of
our common stock. The repurchase plan authorized us to make purchases in the open market or
through privately negotiated transactions with the timing and terms of any purchase to be
determined by management based on market conditions. As of December 26, 2004, a total of 2.5
million shares had been repurchased and 1.5 million shares remain available for repurchase. 
 Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of stockholders of the Company was held on November 18, 2004. There were
82,722,449 shares of the Companys common stock issued, outstanding and entitled to vote at the
meeting as of October 1, 2004, the record date. Proxies representing 78,486,726 common shares were
received and tabulated. Six proposals were voted on at this meeting. First, the following members
were elected to the Companys Board of Directors to hold office for the ensuing year: Nominee
    
    In Favor
    
    
    WithheldFred. B. Cox
    
    
    76,886,743
    
    
    
    1,599,983Michael P. Downey
    
    
    77,025,077
    
    
    
    1,461,649Bruce C. Edwards
    
    
    66,443,224
    
    
    
    12,043,502Paul F. Folino
    
    
    77,002,518
    
    
    
    1,484,208Robert H. Goon
    
    
    76,818,763
    
    
    
    1,667,963Don M. Lyle
    
    
    66,524,672
    
    
    
    11,962,054
 39




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The second proposal submitted to the stockholders of the Company was to ratify and approve a
proposal to the authorize an exchange of certain outstanding employee stock options for a smaller
number of stock options with a new exercise price. The proposal was defeated with the following
votes: For
    
    
    23,477,898Against
    
    
    26,711,790Abstain
    
    
    157,737Broker Non-Vote
    
    
    28,139,301
 The third proposal submitted to the stockholders of the Company was to ratify and approve the
Companys 2004 Employee Stock Incentive Plan. The proposal was approved with the following votes: For
    
    
    39,522,180Against
    
    
    10,672,365Abstain
    
    
    152,880Broker Non-Vote
    
    
    28,139,301
 The fourth proposal submitted to the stockholders of the Company was to ratify and approve the
Companys 1997 Stock Option Plan for Non-Employee Directors, including amendments which (i)
increased the number of option automatically granted to each director eligible to participate under
the Plan on the date on which such director first becomes an eligible director from 30,000 to
60,000 and (ii) to increase the number of options granted on each yearly anniversary of the date of
grant of the initial option to each eligible director from 10,000 to 20,000. The proposal was
approved with the following votes: For
    
    
    38,781,760Against
    
    
    11,390,844Abstain
    
    
    174,821Broker Non-Vote
    
    
    28,139,301
 The fifth proposal submitted to the stockholders of the Company was to ratify and approve the
amendment of the Employee Stock Purchase Plan to increase the number of shares of common stock
reserved for issuance thereunder by 1,000,000 shares. The proposal was approved with the following
votes: For
    
    
    47,417,760Against
    
    
    2,787,284Abstain
    
    
    142,381Broker Non-Vote
    
    
    28,139,301
 The sixth proposal submitted to the stockholders of the Company was to ratify the selection of KPMG
LLP as the Companys independent auditors for fiscal year 2005. This proposal was approved with
the following votes: For
    
    
    77,592,473Against
    
    
    674,538Abstain
    
    
    219,715
 40




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Item 6. Exhibits Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Companys 1997 Annual Report on Form 10-K).Exhibit 3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000).Exhibit 3.3
    
    Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.3 to
the Companys quarterly report on form 10-Q for the quarterly period ended September
29, 2002).Exhibit 3.4
    
    Amendment to Bylaws of the Company adopted by the Board of Directors on March 2,
2001 (incorporated by reference to Exhibit 3.4 to the Companys 2002 Annual Report on
Form 10-K).Exhibit 3.5
    
    Certificate of Designations of Series A Junior Participating Preferred Stock
(incorporated by reference to Exhibit 4 to the Companys Current Report on Form 8-K
filed February 2, 1989).Exhibit 4.1
    
    Rights Agreement dated January 19, 1989, as amended (incorporated by reference
to Exhibit 4 to the Companys Current Report on Form 8-K filed February 2, 1989).Exhibit 4.2
    
    Certificate regarding extension of Final Expiration Date of Rights Agreement
dated January 18, 1999 (incorporated by reference to Exhibit 4.2 of Amendment No. 2 to
the Registration Statement on Form S-3, filed on May 17, 1999).Exhibit 4.3
    
    Form of 1.75% Convertible Subordinated Note due February 1, 2007 (incorporated
by reference to Exhibit 4.8 to the Registration Statement on Form S-3, amended on June
28, 2002).Exhibit 4.4
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated January 29, 2002, related to the
Companys 1.75% Convertible Subordinated Notes due February 1, 2007 (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3, amended on June 28,
2002).Exhibit 4.5
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated January 29, 2002, related to the Companys 1.75% Convertible
Subordinated Notes due February 1, 2007 (incorporated by reference to Exhibit 4.10 to
the Registration Statement on Form S-3, amended on June 28, 2002).Exhibit 4.6
    
    Form of 0.25% Convertible Subordinated Note due 2023 (incorporated by reference
to Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).Exhibit 4.7
    
    Indenture between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee, dated December 12, 2003, related to the
Companys 0.25% Convertible Subordinated Notes due 2023 (incorporated by reference to
Exhibit 4.7 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended December 28, 2003).Exhibit 4.8
    
    Registration Rights Agreement between the Company and Credit Suisse First Boston
Corporation dated December 12, 2003, related to the Companys 0.25% Convertible
Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.8 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003).Exhibit 10.1
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors, as
amended (incorporated by reference to Appendix C to the Companys Definitive Proxy
Statement for its Annual Meeting of Stockholders held on November 18, 2004).
 41




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##### Table of Contents



Exhibit 10.2
    
    Emulex Corporation Employee Stock Purchase Plan, as amended (incorporated by
reference to Appendix D to the Companys Definitive Proxy Statement for its Annual
Meeting of Stockholders held on November 18, 2004).Exhibit 10.3
    
    Vixel Corporation Amended and Restated 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.2 of Amendment No. 1 to the Registration Statement on Form S-1
of Vixel Corporation (File No. 333-81347), filed on August 16, 1999).Exhibit 10.4
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended) (incorporated by
reference to Exhibit 10.23 of Amendment No. 1 to the Registration Statement on Form S-1
of Vixel Corporation (File No. 333-81347), filed on August 16, 1999).Exhibit 10.5
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan (incorporate reference
to Exhibit 99.1 of the Registration Statement on Form S-8/S-3 of Vixel Corporation
(File No. 333-39000), filed on June 9, 2000).Exhibit 10.6
    
    Emulex Corporation 2004 Employee Stock Incentive Plan (incorporated by
reference to Appendix B to the Companys Definitive Proxy Statement for its Annual
Meeting of Stockholders held on November 18, 2004).Exhibit 10.7
    
    Key Employee Retention Agreement with Paul F. Folino.Exhibit 10.8
    
    Form of Key Employee Retention Agreement to which the following executive
officers of the Company are a party: James M. McCluney, Kirk D. Roller, William F.
Gill, Sadie A. Herrera, Marshall D. Lee, Karen Mulvany, Michael J. Rockenbach and
Michael E. Smith.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.
 42




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 4, 2005 EMULEX CORPORATIONBy:
    
    /s/ Paul F. FolinoPaul F. FolinoChairman of the Board and Chief Executive OfficerBy:
    
    /s/ Michael J. RockenbachMichael J. RockenbachExecutive Vice President andChief Financial Officer(Principal Financial and Chief Accounting Officer)
 43




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##### Table of Contents



EXHIBIT INDEX Exhibit 3.1
    
    Certificate of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to the Companys 1997 Annual Report on Form 10-K).Exhibit 3.2
    
    Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended December 31, 2000).Exhibit 3.3
    
    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
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors, as
amended (incorporated by reference to Appendix C to the Companys Definitive Proxy
Statement for its Annual Meeting of Stockholders held on November 18, 2004).




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Exhibit 10.2
    
    Emulex Corporation Employee Stock Purchase Plan, as amended (incorporated by
reference to Appendix D to the Companys Definitive Proxy Statement for its Annual
Meeting of Stockholders held on November 18, 2004).Exhibit 10.3
    
    Vixel Corporation Amended and Restated 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.2 of Amendment No. 1 to the Registration Statement on Form S-1
of Vixel Corporation (File No. 333-81347), filed on August 16, 1999).Exhibit 10.4
    
    Vixel Corporation 1999 Equity Incentive Plan (as amended) (incorporated by
reference to Exhibit 10.23 of Amendment No. 1 to the Registration Statement on Form S-1
of Vixel Corporation (File No. 333-81347), filed on August 16, 1999).Exhibit 10.5
    
    Vixel Corporation 2000 Non-Officer Equity Incentive Plan (incorporate reference
to Exhibit 99.1 of the Registration Statement on Form S-8/S-3 of Vixel Corporation
(File No. 333-39000), filed on June 9, 2000).Exhibit 10.6
    
    Emulex Corporation 2004 Employee Stock Incentive Plan (incorporated by
reference to Appendix B to the Companys Definitive Proxy Statement for its Annual
Meeting of Stockholders held on November 18, 2004).Exhibit 10.7
    
    Key Employee Retention Agreement with Paul F. Folino.Exhibit 10.8
    
    Form of Key Employee Retention Agreement to which the following executive
officers of the Company are a party: James M. McCluney, Kirk D. Roller, William F.
Gill, Sadie A. Herrera, Marshall D. Lee, Karen Mulvany, Michael J. Rockenbach and
Michael E. Smith.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.