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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  FORM 10-K
 (Mark One)[X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 27, 2004
 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
 
 Commission File No. 001-31353 EMULEX CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
    
    51-0300558(State or other jurisdiction
    
    (I.R.S Employerof incorporation or organization)
    
    Identification No.)3333 Susan StreetCosta Mesa, California
    
    92626(Address of principal executive offices)
    
    (Zip Code)
 (714) 662-5600(Registrants telephone number, including area code) 
  Common Stock, Par Value $0.10 Per Share
Preferred Stock Purchase Rights(Title of class) Securities registered pursuant to Section 12(g) of the Act: NONE
_________________________ Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Exchange Act)
Yes [X] No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [   ] The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the New York Stock Exchange on
December 26, 2003, which was the last trading day of the second quarter of
fiscal 2004, of $26.68, was $2,177,952,752.16. As of September 3, 2004, the registrant had 82,586,224 shares of common stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (items 10, 11, 12, 13 and 14) is
incorporated by reference to portions of the registrants definitive proxy
statement for the 2004 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
fiscal year ended June 27, 2004.




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TABLE OF CONTENTS  PART IItem I. Business.Item 2. Properties.Item 3. Legal Proceedings.Item 4. Submission of Matters to a Vote of Security Holders.PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Consolidated Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Qualitative and Quantitative Disclosures about Market Risk.Item 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Item 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the Registrant.Item 11. Executive Compensation.Item 12. Security Ownership of Certain Beneficial Owners and Management.Item 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.Index to Consolidated Financial Statements and ScheduleConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsValuation and Qualifying Accounts and ReservesSIGNATURESEXHIBIT INDEXEXHIBIT 10.15EXHIBIT 21EXHIBIT 23EXHIBIT 31.AEXHIBIT 31.BEXHIBIT 32    Table of Contents  
 PART I All references to years refer to our fiscal years ended June 27, 2004, June 29,
2003, and June 30, 2002, as applicable, unless the calendar year is specified.
References to dollar amounts are in thousands, except share and per-share data,
unless otherwise specified. References contained in this Annual Report to
Emulex, the Company, the Registrant, we, our and us, refer to
Emulex Corporation and its subsidiaries. 
 Item I. Business. Introduction and Company History Emulex Corporation is the world leader in Fibre Channel host bus adapters, or
HBAs, and delivers a broad range of intelligent building blocks, including
embedded storage switches and Input/Output, or I/0, controllers for next
generation storage networking systems. HBAs are the data communication
products that enable servers to connect to storage networks by offloading
communication-processing tasks as information is delivered and sent to the
storage network. Embedded storage switches and I/0 controllers are deployed
inside storage arrays, tape libraries and other storage appliances, delivering
improved performance and reliability and storage connectivity. Emulexs
architecture offers customers a stable applications program interface, or API,
that has been preserved across multiple generations of storage networking
solutions and to which many of the worlds leading OEMs have customized
software for mission-critical server and storage system applications. Emulex Corporations corporate headquarters are located at 3333 Susan Street,
Costa Mesa, California 92626, and our telephone number is (714) 662-5600. Our
Internet address is www.emulex.com. 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 as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the Securities and Exchange
Commission. Emulex was organized as a California corporation in 1979. Emulexs initial
public offering was in 1981. In 1987, Emulex changed its state of
incorporation from California to Delaware by the formation of a Delaware
corporation, which acquired all of the stock of the California corporation.
The California corporation continues to operate as a wholly owned subsidiary of
a subsidiary of the Delaware corporation. In 1983 and 1999 Emulex completed
secondary offerings of our common stock. In 2002 and 2004, Emulex completed
private placements of convertible subordinated notes. See note 9 of the
Consolidated Financial Statements for a more complete discussion of the
convertible subordinated notes. Substantially all of our revenues during 2004 were comprised of products based
on Fibre Channel technology. Our Fibre Channel development efforts began in
1992 and we shipped our first Fibre Channel product in volume in 1996.
According to IDC and Gartner Dataquest, in calendar 2003 we were the worlds
largest provider of Fibre Channel host bus adapters, in terms of revenue and
units shipped. Many of the worlds leading server and storage providers rely
on Emulex HBAs, embedded storage switching and I/O controller products to build
reliable, scalable and high performance storage solutions. The Emulex award
winning product families, including our LightPulse HBAs and InSpeed
embedded storage switching products, are based on internally developed ASIC,
firmware and software technologies, and offer customers high performance,
scalability, flexibility and reduced total cost of ownership. Emulexs
products have been selected by many of the worlds leading server and storage
providers, including Dell, EMC, Fujitsu Ltd., Fujitsu-Siemens, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance, Quantum
Corp., StorageTek, Sun Microsystems, Unisys and Xyratex. In addition, we
include industry leaders Brocade, Computer Associates, Intel, McDATA, Microsoft
and VERITAS among our strategic partners. We market to OEMs and end users
through our own worldwide selling organization as well as our two tier
distribution partners, including ACAL, Avnet, Bell Microproducts, Info-X,
Netmarks, Tech Data, Tidalwire and Tokyo Electron. Industry Background In recent years, due to the deployment of data-intensive applications such as
online transaction processing, data mining, data warehousing, multimedia and
Internet applications, the volume of stored electronic data in enterprises has
expanded and both the capacity and number of storage devices in business
enterprises have increased. Furthermore, with the reliance on mission-critical
applications such as e-commerce and distributed enterprise software
applications, the real-time availability of electronic data is important to the
daily operations of enterprises. As a result, enterprises face requirements
for data storage solutions that enable improved access to, and management of,
shared data, including solutions that offer increased connectivity
capabilities, higher performance and greater reliability. 1




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Enterprises currently access, share and manage the rapidly expanding volume of
data utilizing two major data communications technologies: local area network,
or LAN, and input/output, or I/O. LAN technologies enable communications among
servers and client computers, while I/O technologies enable communications
between host computers and their attached high-speed peripherals. The
emergence of LAN architectures in the mid-1980s brought multiple benefits to
client-server data communications, including faster transmission speeds, shared
access to multiple servers and greater connectivity capabilities in terms of
the number of connected devices, as well as distance between devices. These
benefits, and the applications that leverage LAN technologies, drove the rapid
adoption of LAN architectures in the corporate enterprise during the 1990s.
As a result, the data communications pathway between servers and client
computers became largely networked with LAN technologies. Today, I/O communications are migrating to the same networked architecture.
Legacy I/O architectures are server-centric, utilizing a point-to-multipoint
architecture, which requires that each storage subsystem in the corporate
enterprise be attached to a single server through which all requested data must
pass. With this traditional server-centric storage architecture, also known as
Direct Attached Storage, or DAS, dedicated storage is attached to each server
using I/O technologies such as Small Computer Systems Interface, or SCSI.
Remote storage systems are accessed through LAN-attached file servers. Because
data requests must traverse the LAN and pass through the file server associated
with the specific storage device, the DAS model results in islands of storage
behind each server. This circuitous method of accessing data degrades network
performance, increases latency, or delays, for network users, drains server
processing power and is difficult to scale, particularly from a storage
management perspective. The Emergence of Networked Storage In the late 1990s, in response to the increasing need for storage scalability,
manageability and reliability, enterprises began to deploy storage area
networks, or SANs. In this new model, where the SAN exists as a complementary
network to the LAN, I/O-intensive traffic is offloaded from the LAN, enabling a
more fail-safe I/O channel, eliminating the bottlenecks that degrade I/O
performance and creating a platform for centralized storage management.
Furthermore, like nodes on a LAN, attached storage peripherals in a SAN can be
managed and diagnosed to detect errors, and traffic can be rerouted accordingly
in the event of a failure. A SAN essentially transforms dedicated servers and
storage devices into network resources, greatly improving the performance and
scalability of enterprise storage. By providing shared server access, the cost
of expensive enterprise storage can be spread across entire organizations. SANs
are being deployed to support an increasingly wide range of applications such
as LAN-free and serverless back-up, storage virtualization and disaster
recovery. More recently, NAS appliances have gained acceptance in the storage
marketplace. In most cases, data is stored in block format in storage devices,
but must be converted to files before being used by operating systems and
applications. While SANs deliver block data to servers, NAS appliances
internally convert block data to files before delivering these files over a LAN
to servers or PCs. Although this configuration requires stored data to move
first to the NAS server before moving on to its ultimate destination, the NAS
architecture offers an easily deployable and scalable storage solution. In
high-end environments characterized by NAS file delivery to servers, a SAN may
be deployed behind a NAS, making NAS and SAN solutions complementary.
Furthermore, next-generation appliances that can deliver both block and file
data are beginning to emerge, further blurring the distinction between NAS and
SAN solutions. The majority of SAN and NAS solutions installed today are
delivered to end users via integrated systems solutions offered by storage and
computer system OEMs. Fibre Channel In order to implement storage area networks, a new I/O networking technology
capable of interconnecting multiple host servers and storage devices was
required. Fibre Channel, an American National Standards Institute, or ANSI,
standard communications technology, was introduced in 1994 to address
traditional I/O limitations and emerged as the first storage networking
technology to be widely adopted by the worlds leading server and storage
systems manufacturers. Fibre Channel, now available in one and two gigabit per
second solutions (with four gigabit per second expected in the near future),
offers the connectivity, distance and access benefits of networking
architectures combined with the high performance and low latency needed for I/O
applications. Fibre Channels advanced capabilities enabled new architectures
such as SANs that rely upon Fibre Channels ability to connect multiple host
computers to multiple storage systems, or storage arrays. Additionally, in
order to enable longer distance or higher performance connectivity than what
could be provided by SCSI, Fibre Channel has also been deployed in traditional
DAS applications such as RAID storage. In such implementations, RAID storage
provides for fault-tolerant direct-attached storage through the duplication of
data over multiple interconnected disk drives. As a result, Fibre Channel
solutions are implemented in both legacy DAS and emerging networked storage
environments. 2




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iSCSI Although Gartner Dataquest expects that Fibre Channel will remain the dominant
storage networking interconnect through the 2007 time frame, a new storage
networking standard known as iSCSI has emerged that delivers the SCSI storage
protocol over the familiar IP, or Internet Protocol, and Ethernet transports
commonly deployed in LANs and WANs. The range of iSCSI connectivity solutions
spans simple Network Interface Cards, or NICs, that are commonly used for
Ethernet LAN applications, up to high performance iSCSI HBAs that offer full
protocol processing offload from the host computer. While this technology is
expected to remain in the early stages of deployment for the next several
years, iSCSI is starting to be utilized in smaller organizations or low
performance applications. Disk Interface Technologies and the Transition to Serial Storage I/O Traditionally, the hard disk drive industry has primarily utilized parallel I/O
interconnects such as SCSI and ATA for the drive I/O interface. Parallel I/O
technologies utilize multiple wires, as they require separate channels for
control information and actual data, whereas serial I/O technologies, such as
Fibre Channel, utilize a single wire over which all control and user data
passes. Because of the reduced complexity and higher reliability of serial
interfaces, the disk drive industry has begun a transition from parallel to
serial I/O. According to Gartner Dataquest, as legacy parallel technologies
such as SCSI fade, disk drives utilizing serial I/O are projected to quickly
grow from just 13 percent of the multi-user disk storage market in 2002 to a 98
percent share by 2007. The chief serial I/O technologies expected to dominate
hard disk drive shipments in the future are Fibre Channel; Serial ATA, or SATA;
and Serial Attached SCSI, or SAS, while legacy parallel technologies such as
SCSI and ATA are expected to play a diminishing role. At the same time, enterprise storage arrays are becoming larger, embedding more
hard disk drives behind the storage controller where the arrays storage
intelligence resides. As the number of drives inside each array has grown,
connectivity requirements to the storage controller have expanded, in turn
creating performance bottlenecks. This has pressured traditional shared bus
architectures, which are typically served by Port Bypass Circuits, or PBCs,
which enterprise storage array vendors have historically used to interconnect
hard disk drives. In addition, this legacy architecture, which requires that a
read request hop from one drive to the next rather than traveling directly to
the destination drive, has resulted in reliability, availability and
serviceability, or RAS, challenges due to the difficulty of isolating a faulty
drive. Similar challenges are emerging in other storage appliances as well,
including NAS appliances and tape libraries. Consequently, embedded switched
storage architectures have emerged to address those performance and RAS
challenges. Embedded Fibre Channel Solutions In recent years, most enterprise storage arrays began to transition from
parallel SCSI to serial I/O-based internal architectures, led by Fibre Channel
implementations. This has created a requirement for embedded Fibre Channel
solutions that are incorporated by storage OEMs inside of storage arrays and
appliances. The storage systems, or arrays, that are deployed in external multi-user
storage applications such as SANs typically require multiple embedded I/O
controllers, or IOCs, both to provide an external storage I/O interface to
servers and to internally connect the disks inside the storage array to a
storage controller that provides the arrays intelligence. In the past, many
enterprise storage arrays utilized legacy SCSI disks and I/O protocol chips
internally, but connected externally to the SAN via an embedded Fibre Channel
IOC. With the transition to Fibre Channel disk drives in enterprise storage
arrays, Fibre Channel IOCs are now being utilized by storage OEMs for both
embedded applications. With the growing number of hard disk drives embedded in each storage array,
embedded Fibre Channel storage switches have emerged to address performance and
RAS challenges. The disk drives that store the data in an array are typically
arranged in shelves populated by multiple drives. By installing an embedded
switch on a chip, or SOC, on the drive shelf, a read request is able to travel
directly to the destination drive without touching the other drives on the
shelf. This switched architecture, also known as a switched bunch of disks, or
SBOD, architecture, delivers higher performance and a more reliable solution
for storage arrays. Compared to legacy shared bus architectures where read
requests must hop from one drive to the next, the SBOD delivers a direct
connection to each drive, improving performance, and offering the ability to
identify and isolate faulty drives. In order to deliver larger storage arrays, OEMs are also seeking to connect
multiple drive shelves to the storage array controller. This has resulted in
similar architectural challenges, generating a requirement for another layer of
switching in array architectures known as a root switch. The root switch,
typically a box-level subsystem, is embedded in the array to provide a direct
connection to all the drive shelves from the RAID controller. This switch
improves performance, enabling the array to scale capacity without sustaining
performance degradation typical of loop based architectures. In addition, root 3




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switches provide the ability to identify and isolate faulty drive shelves,
enabling OEM service technicians to quickly pull faulty array components and
add additional storage shelves on customer premises, cutting service time and
providing for improved system uptime and reduced service costs. Our Products We are a leading designer, developer and supplier of Fibre Channel host bus
adapters, embedded storage switches, I/O ASICs, SOC ASICs and embedded firmware
and software products that enhance access to, and storage of, electronic data
and applications. According to DellOro Group, IDC and Gartner Dataquest, in
calendar 2003 we were the worlds largest provider of Fibre Channel HBAs, in
terms of revenue and units shipped. In fiscal 2004, after our acquisition of
Vixel, we entered the market for embedded storage switches. We are also a
supplier of Fibre Channel hubs, traditional networking products and cLAN
adapters, which entered end-of-life status in previous years. Fibre Channel HBAs Our HBAs constitute key components for comprehensive Fibre Channel SANs that
typically include host adapters, ASICs, firmware, software and switches. We
time our Fibre Channel introductions to address the growing demands of
enterprise customers, as well as the evolving speed and capacity capabilities
of complementary products. Leveraging our expertise and experience in networking and I/O technology, we
have approached the storage problem with a networking perspective to maximize
the performance and management capabilities of our Fibre Channel solutions. We
believe the performance results of our HBA products are among the highest in
the industry, sustaining speeds in excess of 780 MB/sec and 135,000 I/O
transactions per second from a single chip HBA solution. Furthermore, our
products support high-performance connectivity features such as concurrent
multiprotocol data transmission, context cache for superior performance in
complex environments, end-to-end parity protection and other features to
enhance data integrity. Lastly, our products offer investment protection for
our OEM customers, who often develop specialized software to interface to our
adapters, because we have maintained a stable API since our first generation of
HBAs was introduced in 1996. More recently, we have expanded our software
functionally embedded in our HBAs to deliver high availability and remote
centralized management functionality that may be embedded in OEM and
independent software vendor, or ISV, SAN management products. Fibre Channel HBAs connect host computers to a Fibre Channel network. Our
adapters support a wide range of operating systems and host computer system
interfaces, including both PCI-based and PCI Express-based Intel platforms and
SBus-based Sun Microsystems platforms. Our Fibre Channel host bus adapter
line, which has evolved from the LP6000 to the LP10000 in the high end, also
encompasses adapters such as the LP850, LP952, LP982, LP1050, which are
targeted at midrange, open system environments, and our entry level LP101
adapter, which targets small to medium sized business users, or the SMB market,
and remote enterprise offices,. Our high-end HBAs target enterprise systems
that require customized software or special features, while our midrange HBAs
offer highly featured solutions for standard operating environments, and our
entry level HBAs offer simplified features at low cost. All of our adapter
products share the same core ASIC architecture and embedded software and
firmware. Our high-end adapters have always been designed to support a broad
implementation of the Fibre Channel specification, encompassing multiple
classes of service and all topologies, including full fabric support. Our high
end family of adapters support SBus, PCI, PCI-X and PCI Express system
interfaces operating at up to 133MHz, single and dual-channel form factors, the
Compact PCI form factor, the Low Profile form factor and auto-negotiated one
and two gigabit per second transmission speeds. In addition, our enterprise
applications strategy has led us to offer a variety of other features in our
high-end adapters, including additional context cache to enable high-speed
throughput in complex fabric installations, and support for the FICON protocol,
a standard for IBM mainframe storage over Fibre Channel SANs. Our high-end
HBAs also provide the widest range of physical interface options available,
including copper, short-wave optical and long-wave optical, as well as added
buffer memory to enable connectivity distances up to 100 kilometers. A broad
range of operating systems, including AIX, HP-UX, Linux, Netware, Solaris and
Windows, are supported as well. Our service level interface, or SLI, which is
included with our high-end adapters, is an API that allows our OEM customers to
develop highly differentiated products, while maintaining complete software
compatibility across product generations, enabling customers to leverage
software investments. Our mid-range adapters support a standard open systems environment based on
Windows, Linux or NetWare, and are available in single and dual-channel form
factors. These open systems host adapters include our LP952, LP982, LP1050 and
LP1050DC. Based on the same ASIC architecture as our high-end adapters, our
mid range adapters provide similar throughput, and I/Os per second and many of
the same features as our high-end enterprise adapters but offer a cost- 4




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optimized, standardized solution for the open systems market. We offer our
midrange adapters with fully certified drivers for Windows, Linux and NetWare,
as well as basic input/output system, or BIOS, and configuration utilities. Our entry-level adapters were introduced in fiscal 2004 to deliver affordable
Fibre Channel SAN connectivity for the entry-level servers installed by SMB
users. To ensure simplified installation, configuration and management, the
Emulex LP101 HBA also offers an AutoPilot suite with an intuitive, graphical
user interface created specifically for SMB end users. The LP101 leverages
Emulexs widely used drivers for Windows Server 2003, Windows 2000, Linux, and
Netware. Fibre Channel IOCs Emulex HBAs are based upon our internally-developed Fibre Channel I/O ASICs, or
IOCs. These IOCs can be utilized not only in HBAs, but in embedded I/O
environments as well, such as storage arrays and storage appliances. In
addition, these ASICs may also be embedded on computer motherboards where
requirements for Fibre Channel connectivity are well defined, including bladed
configurations such as blade servers. While our embedded IOC revenue remains relatively small, growing IOC-unit
volumes deliver incremental economies of scale for our HBA business. The Intel Joint Development Agreement In April 2003, Emulex and Intel Corporation announced an agreement to develop
next-generation storage processors that combine SATA, SAS and Fibre Channel I/O
technologies within a single multiprotocol architecture. These new serial
storage processors are intended to enable OEMs to utilize common hardware and
software components across their entire family of SATA, SAS and Fibre Channel
storage products, extending the value of OEM hardware and software investments.
Under the agreement, Emulex is developing the protocol controller hardware,
firmware and drivers. Intel is contributing its expertise in storage processor
technology development and will integrate its high-performance Intel® XScale
microarchitecture as the core technology for the new processors. Intel also
will manufacture the processors utilizing its 90-nanometer (nm) process
technology. We expect this multiprotocol serial storage architecture to be
applicable to our traditional HBA market as well as new embedded markets,
including blade server, storage array and storage appliance applications. Fibre Channel Storage Switches The continued demands for increased storage array capacity and system
scalability and the resulting performance and reliability deterioration
resulting from such demand have emerged as significant issues facing the
storage industry. With the acquisition of Vixel in November 2003, we added
InSpeed Embedded Storage Switch products to our product line, which are
designed to cost effectively address these issues. In traditional storage arrays, a shared-bus architecture is used to connect the
storage controller to the drawers containing the storage disk drives and to
connect each of the storage disk drives within the shelves. This shared bus
architecture requires the stored data to pass through several hops between
shelves and between disks before being delivered to the user. Several
performance and reliability issues within storage arrays are created by a loop
architecture, including the difficulty of isolating errors as well as
limitations regarding the speed at which it operates and the amount of storage
capacity that can be connected to a single storage controller. To help storage system manufacturers address the issues related to shared bus
architectures, we have developed a highly integrated switch-on-a-chip, or SOC,
that incorporates our InSpeed technology. InSpeed is an advanced switching
architecture that results in a single chip capable of handling multiple Fibre
Channel devices operating at one, two or four gigabit per second, or Gbps,
speed. The SOC can be sold in chip form or integrated into full Fibre Channel
switch boxes and modules, or blades, for embedding by OEMs in their storage
solutions. Our InSpeed Embedded Storage Switch Family is available in SOC,
blade and box physical formats. InSpeed embedded storage switch products replace todays shared bus
architectures with a switched architecture. InSpeed products provide new
diagnostic capabilities and eliminate single point of failure designs that are
typically found in the back-end of storage arrays. These embedded products can
be used in two ways inside a storage array. One way is to use an embedded
switch box or blade as a root switch. A root switch provides direct access from
the storage controller to each shelf in the storage array. The second way is to
use a chip or blade to provide a direct path to each storage disk in a shelf.
We refer to this as an SBOD, or switched bunch of disks. Combining both a
root switch and an SBOD within a storage 5




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array results in a complete switched architecture that increases the storage
systems reliability, accessibility, scalability and serviceability. Our latest generation SOCs incorporate a number of new features such as
trunking, fairness and interswitch communications to further enhance back-end
switching capabilities, as well as enhanced management capabilities including
port diagnostics and device performance and health monitoring. SAN Interconnect Solutions and Products Our traditional SAN switches, addressed by our 9000 series of Fibre Channel
Fabric Switches, were focused primarily on the rich media segments of the
overall SAN market. The rich media market, which includes film and video
editing, broadcast, and medical imaging applications, requires large amounts of
data to be accessed simultaneously by numerous users. Our Fibre Channel fabric
switches provide the bandwidth and speed to meet the needs of these
environments. The entry-level SAN market requires simple to use networks and low prices. Our
new InSpeed-based SAN Storage switches can be used for high-speed connections
between multiple computers and storage devices to create efficient, easy to
use, cost effective SAN solutions. These entry-level SANs are ideal for small
to mid-size companies or departments within a large enterprise. For these
solutions, the single chip design and features of our InSpeed-based SAN
products do away with the complex and unnecessary features found in fabric
switches designed for large enterprise environments. Other Products Our Fibre Channel hubs provide centralized wiring connection, improved network
reliability and a monitoring point in Fibre Channel arbitrated loop
environments. In 1996, we became the first company to provide Fibre Channel
hubs to the market when we introduced our hub product line. In December 1998,
we introduced a line of digital Fibre Channel hubs that complemented our
earlier line of analog Fibre Channel hubs. With the growing popularity of
Fibre Channel switches, in 2002 we focused our Fibre channel efforts in the HBA
sector. As part of the VI product family acquired with the Giganet operation, Emulex
offered the cLAN family of VI-enabled adapters and switches. Our GN9000/VI HBA
is a VI-enabled intelligent Ethernet adapter. Our GN9000/SI adapter is a one
gigabit per second prototype iSCSI HBA that became available in limited
quantities for OEM evaluation during 2002. These products entered end-of-life
status in previous years. Our traditional networking products included printer servers and network access
products. We supplied both external and embedded printer servers, which
provide LAN connectivity for printers. Our network access products were
comprised of a variety of products that provided connectivity between computing
resources across both LANs and WANs. These networking products contain a set
of core technologies that includes drivers supporting a broad array of
operating systems and network interface technologies that span many LAN and WAN
specifications. We have eliminated resources dedicated to these traditional
networking products, and during 2000 we issued last time buy notifications to
customers for our traditional networking products. Our Fibre channel Hubs, VI and iSCSI products and our traditional networking
products contributed immaterial revenue during fiscal 2004. Intellectual Property Our ability to compete depends in part upon our ability to protect our
proprietary information through various means, including ownership of patents,
copyrights, trademarks and trade secrets, as well as through contractual
provisions. We have a number of issued patents and pending patent applications in the U.S
and abroad. Most of our issued patents and pending patent applications relate
to our Fibre Channel technology or products. We maintain an active program of
obtaining patent protection for our inventions as development occurs and as new
products are introduced. Because of the rate of change of technology in our
industry, we believe that the duration of the patent protection available to us
for our products is adequate to cover the expected market duration for such
products. All of our software products, which are embedded within or provided for use
with our hardware products, are marked with copyright notices listing our
company as the copyright owner. We have been granted a number of registrations
of trademarks in the U.S. and abroad. We also have a number of pending
trademark registrations in the U.S. and abroad. We maintain an active practice
of marking our products with trademark notices. We have an active program of
renewing 6




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trademarks so that the duration of trademark protection is maintained for as
long as needed. Additionally, we rely on trade secret law and contractual
provisions to protect unique intellectual property we possess which we have
determined unnecessary or uneconomical to patent or copyright, or which is not
otherwise capable of more formal protection. Please also see the information
under Part I - Item 1 - Competition and Part I  Item 3 - Legal Proceedings
of this Form 10-K. Engineering and Development At June 27, 2004, we employed 315 engineers, other technicians and support
personnel engaged in the development of new products and the improvement of
existing products. Engineering and development expenses were $73.2 million,
$61.3 million and $47.6 million in 2004, 2003 and 2002, respectively. Selling and Marketing We sell our products worldwide to OEMs; end users; and through other
distribution channels including value-added resellers, or VARs, systems
integrators, industrial distributors and resellers. Because the Fibre Channel
market has been dominated by OEMs, our focus is to use Fibre Channel sales
specialists to expand opportunities with our existing OEMs, as well as to
develop new OEM relationships. However, we are also expanding our distribution
efforts, leveraging worldwide distribution channels through technical
distributors such as VARs and systems integrators, to complement our core OEM
relationships. In some cases, OEM partners leverage the distribution channel to
deliver solutions to end-users, making our distribution efforts complementary
with our OEM-focused strategy. Order Backlog Due to an industry practice that allows customers to cancel or change orders
with limited advance notice prior to shipment, we do not believe that backlog
is a reliable indicator of future revenue levels. Furthermore, purchase order
release lead times depend upon the scheduling practices of the individual
customer, and the rate of booking new orders fluctuates from month to month.
Therefore, the level of backlog at any one time is not necessarily indicative
of trends in our business. At June 27, 2004, we had unshipped product orders
of approximately $78.3 million compared with approximately $77.6 million at
June 29, 2003. At year-end, all orders included in backlog were scheduled for
delivery within six months or less. Seasonality Our business fluctuates based on economic conditions and industry demand and we
do not believe that seasonality is a significant factor in our business. Concentration of Customers, Revenue by Product Families and Geographic Area See note 14 to our Consolidated Financial Statements included in Part IV, Item
14(a) of this Annual Report on Form 10-K for information regarding
concentration of our customers as well as information regarding our revenue by
product family and geographic area. See also Risk Factors contained
elsewhere within Part I, Item 1 of this Annual Report on Form 10-K for
discussion of the risks associated with the concentration of our customers, as
well as the risks associated with our revenue by product family and geographic
area. Competition The market for HBAs is intensely competitive and is characterized by frequent
new product introductions, changing customer preferences and evolving
technology and industry standards. Our competition for Fibre Channel host bus adapter products consists primarily
of AMCC, Agilent and QLogic. We may also compete indirectly with Fibre Channel
HBAs made internally by major systems providers, notably Hewlett-Packard. In
the emerging iSCSI marketplace, we expect to face competition from established
Fibre Channel competitors as well as new entrants, including established
Ethernet suppliers such as Broadcom and Intel and established SCSI vendors such
as Adaptec. Across all storage networking technologies, we face the threat of
potential competition from new entrants into the storage networking market,
including large technology companies that may develop or acquire
differentiating technology and then apply their resources, including
established distribution channels and brand recognition, to obtain significant
market share. We believe that the principal basis of storage networking HBA competition
presently includes interoperability, reliability, scalability, price, silicon
integration, performance, technical support and API stability. We believe that
we compete 7




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favorably with respect to these factors. We also believe that we have a
competitive strength in the alliances we have built with customers,
particularly our close relationships with OEM customers. We believe that our
experience with distribution channels will provide competitive benefits as the
storage networking market matures. Some of our other competitive advantages
include our early entry into Fibre Channel technology, our workforce of highly
experienced researchers and designers, our intellectual property and our
technical alliances with strategic partners such as Brocade, Cisco, Computer
Associates, Intel, McDATA, Microsoft and VERITAS. Our Fibre Channel products may also compete at the end-user level with other
technology alternatives, such as SCSI, which are available from companies such
as Adaptec, LSI Logic and QLogic, as well as a number of smaller companies. In
the future, other technologies that we are not currently developing may evolve
to address the applications served by Fibre Channel today. Manufacturing and Suppliers Our products consist primarily of electronic component parts assembled on
internally designed printed circuit boards that are sold as board-level
products. Most component parts can be purchased from two or more sources.
However, some key components that we use in our products may only be available
from single sources with which we do not have contracts. In addition, we
design our own ASICs that are embedded in our products. These ASICs are also
sole sourced and manufactured by third-party semiconductor foundries. In
addition to hardware, we design software, which is provided as embedded
programs within our hardware products to provide functionality to our hardware
products. In 1998, we began outsourcing the manufacturing of our product lines to an
electronics manufacturing service provider, or EMS, provider. This decision
resulted in, among other things, the closing of our Puerto Rico manufacturing
facility, streamlining the product offerings of some of our more mature, lower
volume products (primarily for our traditional networking products) and closing
selected sales offices. Celestica, Inc. completed their acquisition of
Manufacturers Services Limited, one of our primary EMS providers in March 2003
and manufactures for us in both the United States and in Spain. In June 2003,
we selected Benchmark Electronics, Inc., or Benchmark, as an additional EMS
provider and have begun shipping product from Benchmarks facility in
Guadalajara, Mexico. Suntron Corporation (formerly known as K*Tec Electronics)
manufactures switch products for us within the United States. Additionally, we
use other EMS providers periodically. The assembly operations required by our products are typical of the electronics
industry, and no unusual methods, procedures or equipment are required. The
sophisticated nature of the products, in most cases, requires extensive testing
by specialized test devices operated by skilled personnel. Our EMS providers
provide this testing. However, we also maintain an internal test-engineering
group for continuing support of test operations. At June 27, 2004, we had a
total of 50 regular full-time manufacturing support employees located at our
facilities in Costa Mesa, California; Bolton, Massachusetts and Bothell,
Washington. Employees At June 27, 2004, we employed 522 employees as follows: 315 in engineering and
development, 78 in selling and marketing, 79 in general and administrative and
50 in manufacturing support operations. None of our employees is represented
by a labor union, and we believe our employee relations are good. Risk Factors A downturn in information technology spending in general or spending on
computer and storage systems in particular could adversely affect our revenues
and results of operations. The demand for our Fibre Channel products, which represented approximately
substantially all of our net revenues for the year ended June 27, 2004, has
been driven by the demand for high-performance storage networking products and
solutions that support enterprise computing applications, including on-line
transaction processing, data mining, data warehousing, multimedia and Internet
applications. Any significant downturn in demand for such products, solutions
and applications, such as the slowdown experienced beginning in early 2001 and
tepid demand experienced in the fourth fiscal quarter of 2004 from two of our
customers, could adversely affect our business, results of operations and
financial condition. The adverse effects of any sustained downturn in
information technology spending on our operating results may be exacerbated by
our research and development investments, strategic investments and merger and
acquisition activity, as well as customer service and support, which are
expected to continue despite any such downturn. 8




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Our business depends upon the continued growth of the Fibre Channel storage
networking market, and our business will be adversely affected if such growth
does not occur or occurs more slowly than we anticipate. The size of our potential market is largely dependent upon the broadening
acceptance of our Fibre Channel storage networking technologies, as well as the
overall demand for storage. We believe that our investment in the Fibre
Channel storage networking market represents our greatest opportunity for
revenue growth and profitability for the foreseeable future. However, the
market for Fibre Channel storage networking products may not gain broader
acceptance and customers may choose alternative technologies and/or products
supplied by other companies. Recently, interest has re-emerged for iSCSI
storage networking solutions, which may satisfy some I/0 connectivity
requirements through standard Ethernet adapters and software at little to no
incremental cost to end users. Such iSCSI solutions are likely to compete with
Fibre Channel solutions, particularly in the low end of the market.
Additionally, since our products are sold as parts of integrated systems,
demand for our products is driven by the demand for these integrated systems,
including other companies complementary products. A lack of demand for the
integrated systems or a lack of complementary products required for these
integrated systems could have a material adverse effect on our business,
results of operations and financial condition. If the Fibre Channel storage
networking market does not grow, or grows more slowly than we anticipate,
attracts more competitors than we expect, as discussed below, or if our
products do not achieve continued market acceptance, our business, results of
operations and financial condition could be materially adversely affected. Because a significant portion of our revenues are generated from sales to a
limited number of customers, none of which are the subject of exclusive or
long-term contracts, the loss of one or more of these customers, or our
customers failure to make timely payments to us, could adversely affect our
business. We rely almost exclusively on original equipment manufacturers, or OEMs, and
sales through distribution channels for our revenue. For the year ended June
27, 2004, we derived approximately 64 percent of our net revenues from OEMs and
36 percent from sales through distribution. Furthermore, because the majority
of our sales through distribution channels consists of OEM products, OEM
customers effectively generated more than 87 percent of our revenue for the
year ended June 27, 2004. We may be unable to retain our current OEM and
distributor customers or to recruit additional or replacement customers. Although we have attempted to expand our base of customers, including customers
for embedded switching products, we believe our revenues in the future will
continue to be similarly derived from a limited number of customers, especially
in light of the continuing consolidation the industry has experienced. As a
result, to the extent that sales to any of our significant customers do not
increase in accordance with our expectations or are reduced or delayed, as
occurred with two of our OEM customers during the fourth fiscal quarter of
2004, our business, results of operations and financial condition could be
materially adversely affected. As is common in the technology industry, our agreements with OEMs and
distributors are typically non-exclusive, have no volume commitments, and often
may be terminated by either party without cause. It is increasingly commonplace
for our OEM and distributor customers to utilize or carry competing product
lines. If we were to lose business from one or more significant OEM or
distributor customers to a competitor, our business, results of operations and
financial condition could be materially adversely affected. In addition, our
OEMs may elect to change their business practices in ways that affect the
timing of our revenues, which may materially adversely affect our business,
results of operations and financial condition. Our markets are highly competitive and our business and results of operations
may be adversely affected by entry of new competitors into the markets,
aggressive pricing and the introduction or expansion of competitive products
and technologies. The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. We expect that our markets will continue to
attract new competition. Our current and potential competition consists of
major domestic and international companies, some of which have substantially
greater financial, technical, marketing and distribution resources than we
have. Additional companies, including but not limited to our suppliers,
strategic partners, OEM customers and emerging companies, may enter the markets
for our storage networking products and new or stronger competitors may emerge
as a result of consolidation movements in the marketplace. Additionally, our
existing competitors continue to introduce products with improved
price/performance characteristics, and we have to do the same to remain
competitive. Increased competition could result in increased price
competition, reduced revenues, lower profit margins or loss of market share,
any of which could have a material adverse effect on our business, results of
operations and financial condition. 9




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Alternative legacy technologies such as SCSI and port bypass circuits compete
with our Fibre Channel I/O and embedded switch products, respectively, for
customers. Our success depends in part on our own ability and on the ability of
our OEM customers to develop storage networking solutions that are competitive
with these alternative legacy technologies. Additionally, in the future other
technologies that we are not currently developing may evolve to address the
storage networking applications currently served by our Fibre Channel product
line today, reducing our market opportunity. Our operating results are difficult to forecast and could be adversely affected
by many factors, and our stock price may decline if our results fail to meet
expectations. Our revenues and results of operations have varied on a quarterly basis in the
past and may vary significantly in the future. Accordingly, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful, and you should not rely on such comparisons as indications of our
future performance. We may be unable to maintain our current levels of growth
or profitability in the future. Our revenues and results of operations are
difficult to forecast and could be adversely affected by many factors,
including, among others:  
    
    changes in the size, mix, timing and terms of OEM and other customer
orders, such as those experienced with tepid demand from two OEM
customers in the fourth fiscal quarter of 2004;
    
    changes in the sales and deployment cycles for our products and/or desired inventory levels for our products;
    
    acquisitions or strategic investments by our customers, competitors or us;
    
    the timing and market acceptance of new or enhanced product
introductions by us, our OEM customers and our competitors;
    
    market share losses or difficulty in gaining incremental market share growth;
    
    fluctuations in product development, procurement, resource utilization and other operating expenses;
    
    component shortages experienced by us, or reduced demand from our
customers if our customers are unable to acquire components used in
conjunction with our products in their deployments;
    
    the inability of our electronics manufacturing service providers to
produce and distribute our products in a timely fashion;
    
    difficulties with updates, changes or additions to our information
technology systems;
    
    changes in general social and economic conditions, including but not
limited to terrorism, public health and slower than expected market
growth, with resulting changes in customer technology budgeting and
spending;
    
    changes in technology, industry standards or consumer preferences;
    
    seasonality; 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 10




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generated a large percentage of our quarterly revenues in the last month of the
quarter. Because our expense levels are largely based on our expectations of
future sales, in the event we experience unexpected decreases in sales, our
expenses may be disproportionately large relative to our revenues and we may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. A material shortfall in sales in relation to our quarterly
expectations or any delay, deferral or cancellation of customer orders would
likely have an immediate and adverse impact on our results of operations and
may adversely affect our stock price. Our industry is subject to rapid technological change, and we must keep pace
with the changes to successfully compete. The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in large part on our ability to
enhance our existing products and to introduce new products on a timely basis
to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as four, eight and ten gigabit
per second, or Gbps, Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI
Express; iSCSI; Serial ATA, or SATA; Serial Attached SCSI, or SAS; and Remote
Direct Memory Access, or RDMA; are in development by many companies and their
ultimate acceptance and deployment in the market is uncertain. We are
developing some, but not all of these technologies, and we cannot be sure that
the technologies we chose to develop will achieve market acceptance, or that
technologies that we chose not to develop will be available to purchase or
license from third parties or will be immaterial to our business. Furthermore,
if our products are not available in time for the qualification cycle at an OEM
it may be up to three years, if ever, before another qualification cycle is
available to us. If we are unable, for technological or other reasons, to
develop new products, enhance or sell existing products, or consume existing
products in a timely and cost-effective manner in response to technological and
market changes, our business, results of operations and financial condition may
be materially adversely affected. We have experienced losses in our history and may experience losses in our
future that may adversely affect our stock price and financial condition. We have experienced losses in our history. Any losses, including losses caused
by impairment of goodwill, may adversely affect the perception of our business
by analysts and investors, which could adversely affect our stock price. 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. 11




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If customers elect to utilize lower-end HBAs in higher-end environments or
applications, our business could be negatively affected. We supply three families of HBAs that target separate high-end, mid-range and
small and medium-sized business, or SMB, markets. Historically, the majority
of our Fibre Channel revenue has come from our high-end server and storage
solutions. In recent quarters, an increasing percentage of revenue has come
from midrange server and storage solutions, which typically have lower average
selling prices than our high-end server and storage solutions. In the future,
increased revenues are expected to come from SMB server and storage solutions,
which also have lower average selling prices. If customers elect to utilize
lower-end HBAs in higher-end environments or applications, our business could
be negatively affected. A decrease in the average unit selling prices and/or an increase in the
manufactured cost of our products could adversely affect our revenue, gross
margins and financial performance. In the past, we have experienced downward pressure on their average unit
selling prices. We may provide pricing discounts to customers based upon volume
purchase criteria, and achievement of such discounts may reduce our average
unit selling prices. To the extent that growth in unit demand fails to offset
decreases in average unit selling prices, our revenues and financial
performance could be materially adversely affected. Although historically we
have achieved offsetting cost reductions, to the extent that average unit
selling prices of our 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 joint development activities may result in products that are not
commercially successful or that are not available in a timely fashion. We have engaged in joint development projects with third parties in the past
and we expect to continue doing so in the future. Joint development can magnify
several risks for us, including the loss of control over development of aspects
of the jointly developed products and over the timing of product availability.
Accordingly, we face increased risk that joint development activities will
result in products that are not commercially successful or that are not
available in a timely fashion. During April 2003 we announced a joint development activity with Intel
Corporation relating to storage processors that integrate SATA, SAS and Fibre
Channel interfaces within a single architecture. Under the agreement, we will
develop the protocol controller hardware, firmware and drivers. Intel will
integrate its Intel(R) Xscale(TM) microarchitecture as the core technology for
the new processors and will manufacture the processors on its 90-nanometer
process technology. This 12




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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 electronics manufacturing service, or 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 elsewhere herein. We cannot be certain that the steps we take to protect our intellectual
property will adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or superior technology,
or that we can maintain such technology as trade secrets. In addition, the laws
of some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all.
Furthermore, we enter into various development projects and arrangements with
other companies. In some cases, these arrangements allow for the sharing or use
of our intellectual property. Our failure to protect 13




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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 I, Item 3. Ongoing lawsuits present risks inherent in disputes of this type, any of which
could have a material adverse effect on our business, financial condition or
results of operations. Such potential risks include the continuing expenses of
litigation, the risk of loss of patent rights, the risk of injunction against
the sale of products incorporating the technology in question, counterclaims
and attorneys fee liability. Third-party claims of intellectual property infringement could adversely affect
our business. We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing
agreements, which may or may not be available. However, we have in the past
obtained, and may be required in the future to obtain, licenses of technology
owned by other parties. We cannot be certain that the necessary licenses will
be available or that they can be obtained on commercially reasonable terms. If
we were to fail to obtain such royalty or licensing agreements in a timely
manner and on reasonable terms, our business, results of operations and
financial condition would be materially adversely affected. The inability to attract, or the loss of or increased cost of key managerial
and technical personnel could adversely affect our business. Our success depends to a significant degree upon the performance and continued
service of key managers as well as engineers involved in the development of our
storage networking technologies and technical support of our storage networking
products and customers. Competition for such highly skilled employees in the
communities in which we operate, as well as our industry is intense, and we
cannot be certain that we will be successful in recruiting, training and
retaining such personnel. In addition, employees may leave our company and
subsequently compete against us. Also, many of these key managerial and
technical personnel receive stock options. New regulations, volatility in the
stock market and other factors could diminish the value of our stock options,
putting us at a competitive disadvantage and forcing us to use more cash
compensation. If we are unable to attract new managerial and technical
employees, or are unable to retain our current key managerial and technical
employees, or are forced to use more cash compensation to retain 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 year ended June 27, 2004, sales in the United States accounted for 56
percent of our total net revenues, sales in Europe accounted for 34 percent of
our total net revenues, and sales in the Pacific Rim countries accounted for 10
percent of our total net revenues. We expect that 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
Valencia, Spain and Guadalajara, Mexico. In the future, product will also be
produced in Malaysia. As a result, we are subject to the risks inherent in
international operations. Our international business activities could be
affected, limited or disrupted by a variety of factors, including:  
    
    the imposition of or changes in governmental controls, taxes,
tariffs, trade restrictions and regulatory requirements;  
    
    the costs and risks of localizing products for foreign countries;  
    
    longer accounts receivable payment cycles;  
    
    changes in the value of local currencies relative to our functional currency;  
    
    import and export restrictions;  
    
    loss of tax benefits due to international production; 14




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
    
    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 is not adopted by customers in the way or the time frame we anticipated;  
    
    the diversion of managements attention from other business concerns;  
    
    risks of entering markets in which we have no or limited prior experience;  
    
    A strategic investment could result in a minority interest in a company that could have an impact on our results;  
    
    risks related to the effect that the acquired companys internal
control processes might have on our financial reporting and managements
report on our internal controls over financial reporting; and/or  
    
    the potential loss of key employees of the acquired company. In the event that an acquisition or strategic investment does occur and we are
unable to obtain anticipated profits or successfully integrate operations,
technologies, products or personnel that we acquire, our business, results of
operations and financial condition could be materially adversely affected. Our stock price is volatile, which has and may result in lawsuits against us
and our officers and directors. The stock market in general and the stock prices in technology-based companies
in particular have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in
the future as well. For example, during the first eight months of calendar year
2004 the sales price of our common stock ranged from a low of $9.26 per share
to a high of $31.30 per share. Factors that could have a significant impact on
the market price of our common stock include, but are not limited to, the
following:  
    
    quarterly variations in customer demand and operating results;  
    
    announcements of new products by us or our competitors;  
    
    the gain or loss of significant customers or design wins;  
    
    changes in analysts earnings estimates; 15




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##### Table of Contents




    
    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 Item 3. 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 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 elsewhere herein, our certificate of incorporation and
Delaware law for more information on the anti-takeover effects of provisions of
our shareholder rights plan. Changes in laws, regulations and financial accounting standards may affect our
reported results of operations. New pronouncements, including significant changes like the Sarbanes-Oxley Act
of 2002, have occurred in the past and are likely to occur in the future as a
result of recent Congressional and regulatory actions. New laws, regulations
and accounting standards, as well as changes to 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. Proposals have been made concerning the expensing of
stock options and the treatment of contingently convertible 16




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##### Table of Contents



subordinated notes as common stock equivalents that could result in rules or
laws that may materially adversely affect our reported financial results and
our stock price. The final determination of our income tax liability may be materially different
from our income tax provisions and accruals. We are subject to income taxes in both the United States and international
jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes. In the ordinary course of our business, there are
many transactions where the ultimate tax determination is uncertain.
Additionally, our calculations of income taxes are based on our interpretations
of applicable tax laws in the jurisdictions in which we file. Although we
believe our tax estimates are reasonable, there is no assurance that the final
determination of our income tax liability will not be materially different than
what is reflected in our income tax provisions and accruals. Should additional
taxes be assessed as a result of new legislation, an audit or litigation, if
our effective tax rate should change as a result of changes in federal,
international or state and local tax laws, or if we were to change the
locations where we operate, there could be a material effect on our income tax
provision and net income in the period or periods in which that determination
is made. We may need additional capital in the future and such additional financing may
not be available on favorable terms. While we believe we have adequate working capital to meet our expected cash
requirements for the immediate future, we may need to raise additional funds
through public or private debt or equity financings in order to:  
    
    take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;  
    
    develop new products or services;  
    
    repay outstanding indebtedness; and/or  
    
    respond to unanticipated competitive pressures. Any additional financing we may need may not be available on terms favorable to
us, or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of business
opportunities, develop new products or services or otherwise respond to
unanticipated competitive pressures. In any such case, our business, results of
operations and financial condition could be materially adversely affected. In January 2002, we completed a $345.0 million private placement of 1.75
percent convertible subordinated notes, which are due February 1, 2007.
Subsequently, we repurchased and cancelled at a discount to face value
approximately an aggregate of $328.0 million in face value of such notes,
leaving approximately $17.0 million still outstanding as of June 27, 2004. In
fiscal 2004, we completed a $517.5 million private placement of 0.25 percent
convertible subordinated notes due 2023. The holders of the 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 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. 17




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##### Table of Contents



Executive Officers of the Registrant The executive and certain other officers of the Company or its principal
operating subsidiaries are as follows: Name
    
    Position
    
    AgePaul F. Folino
    
    Chairman of the Board and Chief Executive Officer
    
    
    59James M. McCluney
    
    President and Chief Operating Officer
    
    
    53Kirk D. Roller (1) (2)
    
    President, Worldwide Sales
    
    
    42Ronald P. Quagliara (1) (3)
    
    Chief Technology Officer
    
    
    55William F. Gill (1)
    
    Executive Vice President, Worldwide Sales
    
    
    47Sadie A. Herrera (1)
    
    Executive Vice President, Human Resources and Facilities
    
    
    55Karen Mulvany (1)
    
    Executive Vice President, Business Planning and Development
    
    
    47Michael J. Rockenbach
    
    Executive Vice President, Chief Financial Officer, Secretary
and Treasurer
    
    
    43Michael E. Smith (1)
    
    Executive Vice President, Worldwide Marketing
    
    
    43Randall G. Wick (1)
    
    Vice President, General Counsel
    
    
    51
   (1)
    
    These persons serve in the indicated capacities as officers of the
Registrants principal operating subsidiaries;
they are not officers of the Registrant.(2)
    
    Mr. Roller will retire from the Company, effective July 1, 2005.(3)
    
    Mr. Quagliara retired from the Company, effective April 1, 2004. Mr. Folinojoined the Company in May 1993 as president and chief executive
officer and as a director, and in July 2002 was promoted to chairman of the
board and chief executive officer. From January 1991 to May 1993, Mr. Folino
was president and chief operating officer of Thomas-Conrad Corporation, a
manufacturer of local area networking products. Mr. McCluneyjoined the Company in November 2003 as president and chief
operating officer. Prior to Emulexs acquisition of Vixel Corporation in
November 2003, Mr. McCluney had served as Vixels president, chief executive
officer and as a director from April 1999 and the chairman of the board from
January 2000. From October 1997 to January 1999, he served as president and
chief executive officer of Crag Technologies, formerly Ridge Technologies, a
storage system manufacturer. From October 1994 to September 1997, Mr. McCluney
served in various positions at Apple Computer, including senior vice president
of worldwide operations and vice president of European operations. Mr. Rollerjoined the Company in April 1998 as vice president, worldwide sales.
Mr. Roller was promoted to chief operating officer in December 2000, and to
president and chief operating officer in July 2002. In November 2003, he
became president, worldwide sales. Prior to joining the Company, Mr. Roller
spent three years with Compaq Computer Corporations Networking Product
Division, most recently as director and general manager of their NIC Business
Unit. Prior to that, Mr. Roller spent two years as director of sales and
marketing for InterConnections, Inc., a subsidiary of the Company. Mr. Quagliarajoined the Company in March 1995 as vice president, research and
development. Mr. Quagliara was promoted to president, IP storage networking
group in December 2000, and to chief technology officer in July 2002. In April
2004, Mr. Quagliara retired from the Company. Prior to joining the Company,
Mr. Quagliara spent five years with Ascom Timeplex, Inc., a manufacturer of
router bridges and other networking equipment. Most recently he was vice
president and general manager of Ascoms LAN Interworking Business Unit. Mr. Gilljoined the Company in January 2000 as vice president, OEM sales and in
December 2000, was promoted to executive vice president worldwide sales. The
year before joining the Company, Mr. Gill was director, business development
for Pinnacle Multimedia, a developer of training management software. From
1994 to 1999, he held various senior sales positions with 3Com and U.S.
Robotics. Ms. Herrerajoined the Company in 1988 as benefits administrator, and was
promoted to vice president, human resources in May 1995 and executive vice
president, human resources and facilities in December 2000. Ms. Herrera had
over 15 years of human resource management experience with the Remex Division
of Ex-Cell-O/Textron Corporation and other companies prior to joining the
Company. 18




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##### Table of Contents



Ms. Mulvanyjoined the Company as vice president, business planning and
development in March 2000 and was promoted to executive vice president,
business planning and development in December 2000. Prior to joining the
Company, Ms. Mulvany consulted for the Company and various other technology
companies since 1991 in the areas of investor relations, mergers and
acquisitions, strategic planning and corporate finance. Mr. Rockenbachjoined the Company in 1991 and has served as the Companys
executive vice president and chief financial officer since December 2000.
Prior to that, he was vice president and chief financial officer. From 1991 to
1996, Mr. Rockenbach served in senior finance and accounting positions with the
Company. From 1987 until joining the Company, Mr. Rockenbach served in various
manufacturing finance and financial planning positions at Western Digital
Corporation. Most recently he was manager of financial planning for the
microcomputer products division. Mr. Smithjoined the Company in October 1998 as senior director of Fibre
Channel marketing and was promoted to vice president, Fibre Channel marketing
in June 1999, then to vice president, worldwide marketing in August 1999 and
subsequently to executive vice president worldwide marketing in December 2000.
Prior to joining the company, Mr. Smith spent 2 -1/2 years with Adaptec, Inc.
as marketing manager of peripheral technologies solutions and most recently as
marketing manager, Fibre Channel products. From 1986 to 1996, Mr. Smith held
various engineering and marketing positions with Western Digital Corporation,
most recently as director of marketing, I/O products. Mr. Wickjoined the Company in June 2002 as vice president and general counsel.
Prior to joining the Company, Mr. Wick served as vice president, chief
operating officer and general counsel of TelOptics Corporation, a high-tech
privately-held company from November 2000. The prior year he served as a legal
consultant for his own firm. Previously, Mr. Wick held the positions of vice
president and general counsel for Samsung Electronics America, Inc. from 1998
to 1999 and AST Research, Inc. from 1990 to 1998. From 1986 to 1990, he served
as counsel to the Company and is admitted to practice law in California. None of the executive officers of the parent Company or officers of its
principal operating subsidiaries has any family relationship with any other
executive officer of the Company, other officer of its principal operating
subsidiaries or director of the Company. 
 Item 2. Properties. Our corporate offices and principal product development facilities, which were
purchased in 2004, are currently located in approximately 180,000 square feet
of buildings in Costa Mesa, California. We lease facilities in Colorado,
Massachusetts and Washington primarily for engineering and development and
approximately 18 other remote offices, primarily for sales, throughout the
world. Our future facilities requirements will depend upon our business, but we
believe additional space, if required, may be obtained on reasonable terms. 
 Item 3. Legal Proceedings. On February 28, 2003, Vixel Corporation, prior to the our acquisition of it,
filed a patent infringement action against QLogic Corporation in the United
States District Court for the District of Delaware. The complaint states that
QLogic is infringing U.S. Patent No. 6,118,776, entitled Methods and Apparatus
for Fibre Channel Interconnection of Private Loop Devices, through the
unauthorized manufacture, use, sale and offering for sale of various storage
area network switching products, including but not limited to, QLogics SANBox2
series of products. On March 28, 2003, Vixel filed a first amended complaint
stating that QLogic is also infringing U.S. Patent No. 6,185,203, entitled
Fibre Channel Switching Fabric and U.S. Patent No. 6,470,007, entitled
Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop
Devices through the unauthorized manufacture, use, sale and offering for sale
of various storage area network switching products, including but not limited
to, QLogics SANBox2 series of products. QLogic denied infringement and
challenged the validity of the patents referenced. On December 8, 2003, QLogic filed a complaint against Emulex in the United
States District Court for the Central District of California alleging that one
of Vixels products, the 7200 Fibre Channel Switch, infringes U.S. Patent No.
4,821,034, entitled Digital Exchange Switch Element and Network. The suit
seeks unspecified monetary damages as well as injunctive relief. On February 27, 2004, Emulex Design & Manufacturing Corporation filed a
complaint against QLogic in the United States District Court for the District
of Delaware asserting the validity and enforceability of a December 15, 2003
tentative settlement and seeking a declaration that the U.S. Patent No.
4,821,034 is invalid and is not infringed. On March 18, 2004, 19




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##### Table of Contents



QLogic filed an answer that included denials of our assertions concerning U.S.
Patent 4,821,034 and a denial that a valid and enforceable settlement had been
reached. On June 25, 2004, we entered into a Settlement Agreement with QLogic
dismissing each of the patent-related lawsuits and pursuant to which (a) QLogic
acknowledged the validity of the three Vixel patents asserted in the
litigation; (b) QLogic agreed to make an initial payment and to pay ongoing
royalties on certain future product sales; and (c) we and QLogic cross-licensed
each other for the patents asserted in the lawsuits. On May 23, 2003, Vixel filed a patent infringement action against Brocade
Communications Systems, Inc. in the United States District Court for the
Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for Fibre
Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching products,
including but not limited to, Brocades Silkworm switch products. 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. This litigation against
Brocade is ongoing. On November 15, 2001, prior to our acquisition of Vixel Corporation, a
securities class action was filed in the United States District Court in the
Southern District of New York against Vixel and two of its officers and
directors and certain underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleges violations under Section
10(b) of the Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock during the
period October 1, 1999 through December 6, 2000. In October 2002, the parties
agreed to toll the statute of limitations with respect to Vixels officers and
directors until September 30, 2003, and on the basis of this agreement, Vixels
officers and directors were dismissed from the lawsuit without prejudice.
During June 2003, Vixel and the other issuer defendants in the action reached a
tentative settlement with the plaintiffs that would, among other things, result
in the dismissal with prejudice of all claims against the defendants and their
officers and directors. In connection with the possible settlement, those
officers and directors who had entered tolling agreements with the plaintiffs
agreed to extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement proposal
in principle, it remains subject to a number of procedural conditions, as well
as formal approval by the court. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding for a $0.7 million settlement with the plaintiff in
the class action suit pursuant to which the parties have agreed to settle the
action, subject to court approval. 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. Beginning on or about February 20, 2001, we and certain of our officers and
directors were named as defendants in a number of securities class action
lawsuits filed in the United States District Court, Central District of
California. The plaintiffs in the actions represent purchasers of our common
stock during various periods ranging from January 18, 2001, through February 9,
2001. The complaints alleged that us and certain of our officers and directors
made misrepresentations and omissions in violation of sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended. The complaints generally
seek compensatory damages, costs and attorneys fees in an unspecified amount.
In addition, we have received inquiries about events giving rise to the
lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003, we
entered into two Memoranda of Understanding agreeing to terms of settlement for
both the class action and derivative litigation. The settlement was approved
and $39.5 million held in escrow was paid to the plaintiffs. We are currently
seeking to recover a portion of this amount from our insurance carriers. The
final amount collected for our receivable from our insurance carriers related
to the settlements of securities class action and derivative lawsuits may be
materially different from the receivable amount. We reached an agreement with
one of our insurers, under which we received $10.0 million less $2.0 million
previously paid by the insurer for the defense of the securities class action
lawsuits, resulting in a net payment to us of $8.0 million during the three
months ended March 28, 2004. In July 2004, we obtained an arbitration award
against two of our insurers, and the amount of the award exceeded our recorded
litigation settlements receivable of $5.1 million by approximately $4.0 to $5.0
million. 20




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##### Table of Contents



Ongoing lawsuits or arbitrations present risks inherent in disputes of this
type, any of which could have a material adverse effect on our business,
financial condition or results of operations. Such potential risks include the
continuing expenses of litigation, the risk of loss of patent rights, the risk
of injunction against the sale of products incorporating the technology in
question, counterclaims and attorneys fee liability. Additionally, we are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 2004. 21




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities. Principal Market and Prices The Companys common stock is traded on the New York Stock Exchange under the
symbol ELX. The following table sets forth the high and low per share sales
prices for our common stock for the indicated periods, as reported on the New
York Stock Exchange. High
    
    Low2004
    
    Fourth Quarter
    
    $
    22.80
    
    
    $
    14.90Third Quarter
    
    
    31.30
    
    
    
    20.35Second Quarter
    
    
    29.94
    
    
    
    23.85First Quarter
    
    
    28.00
    
    
    
    19.702003
    
    Fourth Quarter
    
    $
    26.50
    
    
    $
    18.67Third Quarter
    
    
    25.50
    
    
    
    16.81Second Quarter
    
    
    26.64
    
    
    
    7.85First Quarter
    
    
    26.25
    
    
    
    11.60
 Number of Common Stockholders The approximate number of holders of record of our common stock as of September
3, 2004, was 471. Dividends We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain our earnings for the development of our business. On January 19, 1989, the Board of Directors declared a dividend distribution of
one preferred stock purchase right for each outstanding share of common stock.
The rights were distributed on February 2, 1989, to stockholders of record on
the close of business on that date. 22




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##### Table of Contents



Issuer Purchases of Equity Securities As noted in the following table, we did not repurchase any equity securities
during the three months ended June 27, 2004. ISSUER PURCHASES OF EQUITY SECURITIES Total Number of
    
    Maximum Number (orTotal
    
    Average
    
    Shares Purchased as
    
    Approximate Dollar Value) ofNumber of
    
    Price
    
    Part of Publicly
    
    Shares that May Yet BeShares
    
    Paid per
    
    Announced Plans
    
    Purchased Under the Plans orPeriod
    
    Purchased
    
    Share
    
    or Programs
    
    ProgramsMarch 29, 2004
through April 25,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionApril 26, 2004
through May 23,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionMay 24, 2004
through June 27,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 millionTotal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5 million
 Our Board of Directors authorized the repurchase of up to four million shares
over the two years beginning in September 2001. The repurchase plan authorized
us to make purchases in the open market or through privately negotiated
transactions with the timing and terms of any purchase to be determined by
management based on market conditions. During the first quarter of fiscal
2002, we repurchased 1.0 million common shares and did not subsequently
repurchase any shares during fiscal 2002 and 2003. During the three months
ended September 28, 2003, our Board of Directors extended the repurchase
program to June 2005. We repurchased an aggregate of 1.5 million shares of
common stock at an average price of $27.00 per share during the three months
ended December 28, 2003. See Part III, Item 12 for information regarding securities authorized for
issuance under equity compensation plans. 23




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##### Table of Contents



Item 6. Selected Consolidated Financial Data. The following table summarizes certain selected consolidated financial data.
On March 1, 2001, we completed the acquisition of Giganet, Inc, and on November
13, 2003, we completed the acquisition of Vixel Corporation. For more detail
about the Vixel acquisition, see note 2 to the Consolidated Financial
Statements, Business Combination, contained elsewhere herein. Selected Consolidated Statement of Operations Data Year EndedJune 27,
    
    June 29,
    
    June 30,
    
    July 1,
    
    July 2,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share data)Net revenues:Fibre Channel
    
    $
    363,871
    
    
    $
    304,596
    
    
    $
    247,705
    
    
    $
    234,020
    
    
    $
    119,134IP networking
    
    
    529
    
    
    
    2,408
    
    
    
    4,242
    
    
    
    1,567
    
    
    
    Other
    
    
    22
    
    
    
    1,204
    
    
    
    2,794
    
    
    
    9,720
    
    
    
    20,638Total net revenues
    
    
    364,422
    
    
    
    308,208
    
    
    
    254,741
    
    
    
    245,307
    
    
    
    139,772Cost of sales
    
    
    131,803
    
    
    
    112,040
    
    
    
    122,871
    
    
    
    120,812
    
    
    
    73,346Gross profit
    
    
    232,619
    
    
    
    196,168
    
    
    
    131,870
    
    
    
    124,495
    
    
    
    66,426Operating expenses:Engineering and development
    
    
    73,211
    
    
    
    61,257
    
    
    
    47,560
    
    
    
    27,002
    
    
    
    14,727Selling and marketing
    
    
    28,035
    
    
    
    18,994
    
    
    
    19,462
    
    
    
    16,734
    
    
    
    10,077General and administrative
    
    
    18,815
    
    
    
    40,291
    
    
    
    12,983
    
    
    
    12,111
    
    
    
    6,923Amortization of goodwill and other intangibles
    
    
    19,093
    
    
    
    5,807
    
    
    
    156,209
    
    
    
    52,085
    
    
    
    Impairment of goodwill
    
    
    583,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    In-process research and development
    
    
    11,400
    
    
    
    
    
    
    
    
    
    
    
    22,280
    
    
    
    Total operating expenses
    
    
    734,053
    
    
    
    126,349
    
    
    
    236,214
    
    
    
    130,212
    
    
    
    31,727Operating income (loss)
    
    
    (501,434
    )
    
    
    69,819
    
    
    
    (104,344
    )
    
    
    (5,717
    )
    
    
    34,699Nonoperating income:Interest income
    
    
    9,149
    
    
    
    12,991
    
    
    
    11,239
    
    
    
    12,539
    
    
    
    9,325Interest expense
    
    
    (4,754
    )
    
    
    (5,510
    )
    
    
    (3,396
    )
    
    
    (1
    )
    
    
    (32
    )Gain on repurchase of convertible
subordinated notes
    
    
    2,670
    
    
    
    28,729
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    109
    
    
    
    (78
    )
    
    
    (26
    )
    
    
    1,763
    
    
    
    (162
    )Total nonoperating income
    
    
    7,174
    
    
    
    36,132
    
    
    
    7,817
    
    
    
    14,301
    
    
    
    9,131Income (loss) before income taxes
    
    
    (494,260
    )
    
    
    105,951
    
    
    
    (96,527
    )
    
    
    8,584
    
    
    
    43,830Income tax provision (benefit)
    
    
    38,062
    
    
    
    40,262
    
    
    
    (293
    )
    
    
    32,187
    
    
    
    11,016Net income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )
    
    $
    (23,603
    )
    
    $
    32,814Net income (loss) per share:Basic
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    (1.18
    )
    
    $
    (0.31
    )
    
    $
    0.46Diluted
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    (1.18
    )
    
    $
    (0.31
    )
    
    $
    0.43Number of shares used in per share computations:Basic
    
    $
    82,293
    
    
    
    82,051
    
    
    
    81,487
    
    
    
    76,122
    
    
    
    70,823Diluted
    
    $
    82,293
    
    
    
    87,914
    
    
    
    81,487
    
    
    
    76,122
    
    
    
    76,452
 24




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##### Table of Contents



Selected Consolidated Balance Sheet Data Year EndedJune 27,
    
    June 29,
    
    June 30,
    
    July 1,
    
    July 2,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Total current assets
    
    $
    541,326
    
    
    $
    498,232
    
    
    $
    597,566
    
    
    $
    267,636
    
    
    $
    190,146Total current liabilities
    
    
    54,496
    
    
    
    75,061
    
    
    
    39,360
    
    
    
    41,302
    
    
    
    24,544Working capital
    
    
    486,830
    
    
    
    423,171
    
    
    
    558,206
    
    
    
    226,334
    
    
    
    165,602Total assets
    
    
    972,981
    
    
    
    1,189,769
    
    
    
    1,207,364
    
    
    
    918,014
    
    
    
    229,995Convertible subordinated notes
    
    
    524,845
    
    
    
    208,518
    
    
    
    345,000
    
    
    
    
    
    
    
    Retained earnings (accumulated deficit)
    
    
    (543,456
    )
    
    
    (11,134
    )
    
    
    (76,823
    )
    
    
    19,411
    
    
    
    43,014Total stockholders equity
    
    
    393,154
    
    
    
    901,930
    
    
    
    823,004
    
    
    
    876,686
    
    
    
    205,451
 
 Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations. Forward-Looking Statements Certain statements contained in this Form 10-K 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 in Part I, Item 1 of the Form 10-K elsewhere herein.
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 and resulting political or economic instability; the
highly competitive nature of the markets for our products as well as pricing
pressures that may result from such competitive conditions; our ability and the
ability of our OEM customers to keep pace with the rapid technological changes
in our industry and gain market acceptance for new products and technologies;
the effect of rapid migration of customers towards newer product platforms;
possible transitions from board or box level to application specific integrated
circuit, or ASIC, solutions for selected applications; a shift in unit product
mix from high-end to mid-range 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; our ability
to attract and retain key technical personnel; our dependence on foreign sales
and foreign-produced products; the effect of acquisitions; impairment charges;
and changes in tax rates or changes in accounting standards, including changes
in the accounting treatment of employee stock options and contingent
convertible debt. Readers should carefully review these cautionary statements since they identify
certain important factors that could cause actual results to differ materially
from those in the forward-looking statements and from historical trends and are
in addition to other factors discussed elsewhere in this Form 10-K, 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 25




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##### Table of Contents



exhaustive. We expressly disclaim any obligation or undertaking to release
publicly any updates or changes to these forward-looking statements that may be
made to reflect any future events or circumstances. Executive Overview Emulex Corporation is the world leader in Fibre Channel HBAs and delivers a
broad range of intelligent building blocks, including embedded storage switches
and Input/Output, or I/0, controllers for next generation storage networking
systems. HBAs are the data communication products that enable servers to
connect to storage networks by offloading communication-processing tasks as
information is delivered and sent to the storage network. Embedded storage
switches and I/0 controllers are deployed inside storage arrays, tape libraries
and other storage appliances, delivering improved performance and reliability
and storage connectivity. The demand for our Fibre Channel products has been
driven by the demand for high-performance storage networking products and
solutions that support enterprise-computing applications. We rely almost
exclusively on OEMs and sales through distribution channels for our revenue.
The market for storage networking products is concentrated among large OEMs
and, as such, a significant portion of our revenues is generated from sales to
a limited number of customers. We have achieved growing revenue in the last three fiscal years by expanding
existing products into new markets, such as mid-range products, and by
diversifying our product offerings with our fiscal 2004 acquisition of Vixel
Corporation. Subsequent to out annual goodwill impairment testing, tepid
demand experienced in the fourth fiscal quarter of 2004 from two of our
customers, resulted in sequentially lower revenue in the fourth fiscal quarter
of 2004 as compared to the third fiscal quarter of 2004 and is expected to
result in lower sequential quarterly revenue in the first quarter of fiscal
2005. Therefore, we may not experience revenue growth in fiscal 2005 as
compared to fiscal 2004. Events and circumstances at the end of June indicated
that a potential impairment of goodwill had incurred. As a result, Emulex
conducted a Financial Accounting Standard, or 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 result of the FAS 144 analysis indicated that
none of our long-lived assets had been impaired. However, the FAS 142 analysis
indicated that all $583.5 million of our goodwill had been impaired. This
non-cash impairment charge was recorded during the fourth fiscal quarter of
2004. See Fiscal 2004 versus Fiscal 2003 Impairment of Goodwill below. Despite the downturn in information technology spending in general and the
computer and storage systems in particular, we believe that our investment in
the storage networking market represents our greatest opportunity for revenue
growth and profitability for the foreseeable future. We continue to, and
currently plan to invest in capital equipment and increase research and
development spending to deliver leading-edge products to our customers. We
focus on on-time development of leading-edge next-generation products and
on-time deliveries of current products to our customers and high-quality,
cost-effective manufacturing to ensure that we continue having the gross margin
and operating margins necessary to sustain profitability and cash flow from
operations to fund our future business needs. Business Combination On November 13, 2003, we completed the cash tender offer by Aviary Acquisition
Corporation, our wholly owned subsidiary, to acquire all outstanding shares of
Vixel Corporation for $10.00 net per share, without interest. Approximately
23.9 million shares (including the associated preferred stock purchase and
other rights) of Vixels common stock representing approximately 91.6 percent
of Vixels outstanding common stock, and 2.9 million shares of Vixels Series B
convertible preferred stock, representing all of Vixels outstanding preferred
stock, were tendered in the offer. Through our wholly owned subsidiary, we
accepted all validly tendered shares. On November 17, 2003, we completed our
acquisition of Vixel by means of a short-form merger of Aviary Acquisition
Corporation, with and into Vixel. We acquired Vixel to expand our Fibre Channel product line and paid $298.4
million in cash for all outstanding common stock, preferred stock and warrants
of Vixel Corporation. We also incurred acquisition-related expenses of $6.7
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 will be included within the
Companys one operating segment, networking products. We accounted for the acquisition of Vixel under the purchase method of
accounting and recorded an expense of $11.4 million for purchased in-process
research and development, or IPR&D, during the three months ended December 28,
2003. The values assigned to these projects were determined by identifying
projects that have economic value but that had not yet reached technological
feasibility and that have no alternative future use. The features of the
related products had not been 26




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##### Table of Contents



released to the market as of the date of the acquisition, but the features and
functionality of the products had been defined. For more information regarding
in-process research and development see note 2 to the consolidated financial
statements. Convertible Subordinated Notes Offering In fiscal 2004, we completed a $517.5 million private placement of 0.25 percent
convertible subordinated notes due 2023. Interest is payable in cash on June
15th and December 15th of each year beginning June 15, 2004. Under the terms
of the offering, the notes will be convertible, at the option of the holder and
subject to the satisfaction of certain conditions detailed in note 9 to the
Consolidated Financial Statement contained herein, into shares of Emulex common
stock at a price of $43.20 per share.We incurred total associated bankers
fees of $11.6 million, which were recorded as a reduction to the proceeds from
the issuance of the notes and will be accreted over the effective life of the
notes, as well as approximately $0.7 million of other associated debt issuance
costs, which have been recorded as an asset and will be amortized over the
effective life of the notes. Holders of the notes may require the Company to
purchase the notes for cash by giving written notice within the 20 business
days prior to each of December 15, 2006, December 15, 2008, December 15, 2013,
or December 15, 2018 or upon a change in control. The effective life of our
0.25 percent convertible subordinated notes due 2023 is three years, which is
the period up to the first date that the holders can require us to repurchase
the notes. Results of Operations for Emulex Corporation and Subsidiaries The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and our Consolidated Financial
Statements and notes thereto included elsewhere in this Form 10-K. All
references to years refer to our fiscal years ended June 27, 2004, June 29,
2003, and June 30, 2002, as applicable, unless the calendar year is specified.
The following table sets forth certain financial data for the years indicated
as a percentage of revenues. Percentage of Net Revenues2004
    
    2003
    
    2002Net revenues:Fibre Channel
    
    
    99.9
    %
    
    
    98.8
    %
    
    
    97.2
    %IP networking
    
    
    0.1
    
    
    
    0.8
    
    
    
    1.7Other
    
    
    0.0
    
    
    
    0.4
    
    
    
    1.1Total net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    36.2
    
    
    
    36.4
    
    
    
    48.2Gross profit
    
    
    63.8
    
    
    
    63.6
    
    
    
    51.8Operating expenses:Engineering and development
    
    
    20.1
    
    
    
    19.9
    
    
    
    18.7Selling and marketing
    
    
    7.7
    
    
    
    6.1
    
    
    
    7.7General and administrative
    
    
    5.2
    
    
    
    13.0
    
    
    
    5.1Amortization of goodwill and other intangibles
    
    
    5.2
    
    
    
    1.9
    
    
    
    61.3Impairment of goodwill
    
    
    160.1
    
    
    
    
    
    
    
    In-process research and development
    
    
    3.1
    
    
    
    
    
    
    
    Total operating expenses
    
    
    201.4
    
    
    
    40.9
    
    
    
    92.8Operating income (loss)
    
    
    (137.6
    )
    
    
    22.7
    
    
    
    (41.0
    )Nonoperating income:Interest income
    
    
    2.5
    
    
    
    4.2
    
    
    
    4.4Interest expense
    
    
    (1.3
    )
    
    
    (1.8
    )
    
    
    (1.3
    )Gain on repurchase of convertible subordinated notes
    
    
    0.7
    
    
    
    9.3
    
    
    
    Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    Total non-operating income
    
    
    1.9
    
    
    
    11.7
    
    
    
    3.1Income (loss) before income taxes
    
    
    (135.7
    )
    
    
    34.4
    
    
    
    (37.9
    )Income tax provision (benefit)
    
    
    10.4
    
    
    
    13.1
    
    
    
    (0.1
    )Net income (loss)
    
    
    (146.1
    )%
    
    
    21.3
    %
    
    
    (37.8
    )%
 27




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##### Table of Contents



Fiscal 2004 versus Fiscal 2003 Net Revenues.Net revenues for fiscal 2004 increased $56.2 million, or 18
percent, to $364.4 million, compared to fiscal 2003. From a product line perspective, net revenues generated from our Fibre Channel
products in 2004 were $363.9 million, an increase of $59.3 million, or 19
percent, compared to 2003, and represented substantially all of our net
revenues. The following chart details our net revenues by product line in 2004
and 2003. Net Revenues by Product Line Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeFibre Channel
    
    $
    363,871
    
    
    
    100
    %
    
    $
    304,596
    
    
    
    99
    %
    
    $
    59,275
    
    
    
    19
    %IP networking
    
    
    529
    
    
    
    
    
    
    
    2,408
    
    
    
    1
    %
    
    
    (1,879
    )
    
    
    (78
    %)Other
    
    
    22
    
    
    
    
    
    
    
    1,204
    
    
    
    
    
    
    
    (1,182
    )
    
    
    (98
    %)Total net revenues
    
    $
    364,422
    
    
    
    100
    %
    
    $
    308,208
    
    
    
    100
    %
    
    $
    56,214
    
    
    
    18
    %
 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)2004
    
    2003
    
    2004
    
    2003Net revenue percentage (1)EMC
    
    
    
    
    
    
    
    
    
    
    24
    %
    
    
    22
    %Hewlett-Packard
    
    
    18
    %
    
    
    23
    %
    
    
    20
    %
    
    
    23
    %IBM
    
    
    24
    %
    
    
    23
    %
    
    
    24
    %
    

    
    26
    %Info-X
    
    
    12
    %
    
    
    
    
    
    
    
    
    
    
    
  (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 68 percent of total net
revenues in 2004 and 2003, and we expect to be similarly concentrated in the
future. Our net revenues from our customers can be significantly impacted by
changes in the business models of our customers. Our EMC-specific models are
sold both directly to EMC and indirectly through distributors such as Info-X.
As a result, direct revenues attributable to EMC were less than 10 percent but
direct and indirect revenues attributable to EMC were greater than 10 percent
of total net revenues. From a sales channel perspective, net revenues generated from OEM customers
were 64 percent of net revenues and sales through distribution were 36 percent
in 2004 compared to net revenues from OEM customers of 66 percent and sales
through distribution of 34 percent in 2003. The following chart details our
net revenues by sales channel in 2004 and 2003: Net Revenues by Sales Channel Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    232,739
    
    
    
    64
    %
    
    $
    204,317
    
    
    
    66
    %
    
    $
    28,422
    
    
    
    14
    %Distribution
    
    
    131,573
    
    
    
    36
    %
    
    
    103,719
    
    
    
    34
    %
    
    
    27,854
    
    
    
    27
    %Other
    
    
    110
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    (62
    )
    
    
    (36
    %)Total net revenues
    
    $
    364,422
    
    
    
    100
    %
    
    $
    308,208
    
    
    
    100
    %
    
    $
    56,214
    
    
    
    18
    %
 28




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##### Table of Contents



We believe that our net revenues are being generated primarily as a result of
product certifications and qualifications with our OEM customers, which take
product both directly and through distribution. In 2004, domestic net revenues increased by $20.2 million, or 11 percent, and
international net revenues increased by $36.0 million, or 29 percent, compared
to 2003. The following chart details our net domestic and international
revenues based on billed-to location for the nine months ended June 27, 2004,
and June 29, 2003: Net Domestic and International Revenues Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2004
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    205,390
    
    
    
    56
    %
    
    $
    185,195
    
    
    
    60
    %
    
    $
    20,195
    
    
    
    11
    %Europe
    
    
    122,773
    
    
    
    34
    %
    
    
    101,476
    
    
    
    33
    %
    
    
    21,297
    
    
    
    21
    %Pacific Rim
    
    
    36,259
    
    
    
    10
    %
    
    
    21,537
    
    
    
    7
    %
    
    
    14,722
    
    
    
    68
    %Total net revenues
    
    $
    364,422
    
    
    
    100
    %
    
    $
    308,208
    
    
    
    100
    %
    
    $
    56,214
    
    
    
    18
    %
 We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products. We
believe the increase in international net revenues at a higher rate than
domestic net revenues is due to the continued increase in market acceptance of
Fibre Channel products outside of the United States. However, because we sell
to OEMs and distributors who ultimately resell our products to their customers,
the geographic mix of our net revenues may not be reflective of the geographic
mix of end-user demand or installations. Gross Profit.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 2004, gross profit
increased $36.5 million, or 19 percent, to $232.6 million from $196.2 million
in 2003. The increase in gross profit in 2004 compared to 2003 was primarily
due to higher net revenues and volumes. In 2004, cost of sales included $0.9
million of retention bonuses for terminated employees related to the Vixel
acquisition and amortized deferred stock-based compensation expenses. In 2003,
cost of sales included $0.1 million of amortized deferred stock-based
compensation expenses. Gross margin stayed relatively flat at 64 percent in
both 2004 and 2003. We have recorded reductions related to our one gigabit
per second, or Gbps, inventory reserve, as previously-reserved inventory was
sold. In 2004 and 2003, the reductions, and the corresponding benefit to cost
of sales, were $2.0 million and $3.3 million, respectively. This reserve was
initially recorded during the first quarter of fiscal 2002. Engineering and Development.Engineering and development expenses consisted
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of our products. These expenses included
third-party fees paid to consultants, prototype development expenses and
computer services costs related to supporting computer tools used in the
engineering and design process. Engineering and development expenses were
$73.2 million and $61.3 million in 2004 and 2003, representing 20 percent of
net revenues in each year. Engineering and development expenses increased by
$12.0 million, or 20 percent, in 2004 compared to 2003. This increase was
primarily due to the inclusion of the engineering and development expenses
associated with our acquisition of Vixel, driven in part by the addition of 60
employees and their associated expenses. Since we completed our integration of
Vixels day-to-day operations during the three months ended March 28, 2004, we
no longer separately track former-Vixel operations. However, the expenses
associated with the former-Vixel operations are estimated to account for
approximately $8.0 million, or approximately 67 percent of the overall $12.0
million increase. The remaining increase was due to our continued investment
in Fibre Channel and IP engineering and development, which represented
substantially all of our engineering and development efforts and expenses prior
to the acquisition of Vixel. Engineering and development expenses included
$2.4 million and $2.5 million of amortized deferred stock-based compensation
expenses in 2004 and 2003, respectively. 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 $28.0 million and $19.0 million in 2004 and
2003, representing eight percent and six percent of net revenues, respectively.
Selling and marketing expenses increased by $9.0 million, or 48 percent, in
2004, compared to 2003. This increase was primarily due to the inclusion of
the selling and marketing expenses associated with our acquisition of Vixel,
driven in part by the addition of 22 employees and their associated expenses.
Similar to engineering and development expenses, we no longer track
former-Vixel operations separately. However, the expenses associated with the
former-Vixel operations are estimated to account for approximately 29




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$5.8 million, or approximately 65 percent of the overall $9.0 million increase.
The remaining increases in selling and marketing expenses were due primarily
to increased customer promotions and channel support programs of $1.4 million
and additional travel and related expenses of $1.0 million. In 2004, selling
and marketing expenses included $2.3 million of retention bonuses for
terminated employees related to the Vixel acquisition and amortized deferred
stock-based compensation expenses. In 2003, selling and marketing expenses
included $1.3 million of amortized deferred stock-based compensation expenses.
The $1.0 million increase in amortized deferred stock-based compensation is due
primarily to the acquisition of Vixel. As a portion of selling and marketing
expenses, such as selling and marketing employees base compensation and
amortized deferred stock-based compensation expense, is not driven directly by
net revenue increases, the expenses have not expanded at the same rate as our
net revenues. General and Administrative.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 $18.8 million and $40.3 million in 2004 and 2003, representing five
percent and 13 percent of net revenues in each period, respectively. General
and administrative expenses decreased by $21.5 million, or 53 percent, in 2004,
compared to 2003. This decrease was primarily due to the net $27.0 million
charge associated with the settlements of securities class action and
derivative lawsuits in 2003. The decrease was partially offset by the
inclusion of the general and administrative expenses associated with our
acquisition of Vixel, driven in part by the addition of 15 employees and their
associated expenses. Similar to other operating expenses, we no longer track
former-Vixel operations separately. However, the expenses associated with the
former-Vixel operations are estimated to offset approximately $5.2 million of
the overall decrease in general and administrative expenses. In 2004, general
and administrative expenses included $1.9 million of retention bonuses for
terminated employees related to the Vixel acquisition and amortized deferred
stock-based compensation expenses. Additionally, expenses in 2004, included
$0.7 million for the settlement of shareholder litigation related to the Vixel
acquisition, based on a memo of understanding with the plaintiff in the case.
In 2003, general and administrative expenses included $0.3 million of amortized
deferred stock-based compensation expenses. Amortization of Other Intangibles.Amortization of other intangibles included
the amortization of intangible assets with estimable lives. In 2004,
amortization is for intangible assets related to the purchase of Vixel and the
purchase of the technology assets of Trebia Corporation, which were both
completed during 2004, and the purchase of Giganet, completed during fiscal
2001. In 2003, amortization is for intangible assets related to the purchase
of Giganet only. The $13.3 million increase in amortization of other
intangibles to $19.1 million in 2004, from $5.8 million in 2003 was due to the
addition of amortization related to the Vixel acquisition and the purchase of
the technology assets of Trebia Corporation. Amortization of other intangibles
represented five and two percent of net revenues in 2004 and 2003,
respectively. Impairment of Goodwill.The impairment of goodwill expense of $583.5 million
in 2004 is a full impairment of our goodwill, which originally resulted from
our acquisition of Vixel in November 2004 and Giganet in March 2001. Our
annual impairment test occurred in the fourth quarter of fiscal 2004, and the
initial test indicated that no impairment existed. However, 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 is 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 the Companys stock price, which
indicated a potential impairment might have occurred. As a result, the Company
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 the Companys long-lived assets
were not impaired. However, the FAS 142 analysis indicated that goodwill was
impaired. This determination is made at the reporting unit level and consists
of two steps. First, the fair value of Emulexs 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, the Company 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 the Companys balance
sheet as of June 27, 2004. The Company does not believe that such impairment
charges will result in any future cash expenditures. See note 7 to our
Consolidated Financial Statements included in Part IV, Item 14 (a) of this
Annual Report on Form 10-K for additional information regarding impairment of
goodwill. In-Process Research and Development Expense.The in-process research and
development expense of $11.4 million was related to our acquisition of Vixel
during 2004, and represented three percent of our net revenues. There were no
in-process research and development expenses in 2003. 30




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Nonoperating Income.Nonoperating income consisted primarily of interest
income, interest expense and other non-operating income and expense items such
as the gain on the repurchase of convertible subordinated notes. In 2004, our
nonoperating income decreased by $29.0 million to $7.2 million, from
nonoperating income of $36.1 million in 2003. The decrease was due primarily
to a decrease in the net overall gain on the repurchase of convertible
subordinated notes by $26.1 million to $2.7 million in 2004, from $28.7 million
in 2003. Additionally, interest income decreased by $3.8 million to $9.1
million in 2004 from $13.0 million in 2003, primarily due to lower interest
yields during 2004. The lower amount of 1.75 percent convertible subordinated
notes outstanding during 2004, compared to 2003, as well as the issuance of
0.25 percent convertible subordinated notes during 2004, partially offset the
other decreases to nonoperating income by causing interest expense to decrease
by $0.8 million to $4.8 million in 2004, from $5.5 million in 2003. Income taxes. In 2004, we recorded a net loss before income taxes of $494.3
million, which includes goodwill impairment and in-process research and
development charges of $583.5 million and $11.4 million, respectively. Even
though we have a loss before income taxes, we have recorded income tax expense
of $38.1 million in 2004, as the goodwill impairment and in-process research
and development charges are not deductible for tax purposes. In 2003, we
recorded a tax provision in the amount of $40.3 million, or approximately 38
percent of our income before income taxes. Fiscal 2003 versus Fiscal 2002 Net Revenues.Net revenues for 2003 increased $53.5 million, or 21 percent, to
$308.2 million, compared to 2002. From a product line perspective, net revenues generated from our Fibre Channel
products for 2003 were $304.6 million, an increase of $56.9 million, or 23
percent, compared to 2002, and represented 99 percent of total net revenues for
2003. We continue to 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 take product both
directly and through distribution channels. Net Revenues by Product Line Percentage of Net
    
    
    
    
    
    Percentage of Net
    
    
    
    
    
    Percentage(in thousands)
    
    2003
    
    Revenues
    
    2002
    
    Revenues
    
    Increase/(Decrease)
    
    ChangeFibre Channel
    
    $
    304,596
    
    
    
    99
    %
    
    $
    247,705
    
    
    
    97
    %
    
    $
    56,891
    
    
    
    23
    %IP networking
    
    
    2,408
    
    
    
    1
    %
    
    
    4,242
    
    
    
    2
    %
    
    
    (1,834
    )
    
    
    (43
    %)Other
    
    
    1,204
    
    
    
    
    
    
    
    2,794
    
    
    
    1
    %
    
    
    (1,590
    )
    
    
    (57
    %)Total net revenues
    
    $
    308,208
    
    
    
    100
    %
    
    $
    254,741
    
    
    
    100
    %
    
    $
    53,467
    
    
    
    21
    %
 Our IP Networking products consist of both our iSCSI products, which are
currently in development, and VI products; as well as legacy 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. Although we continue to devote resources to iSCSI product
development, the market remains in an early stage of development and we do not
expect material revenue from these 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 with direct revenues only or total direct and indirect
revenues, including customer-specific models purchased or marketed indirectly
through distributors, resellers, and other third parties, of more than 10
percent were as follows: Net Revenues by Major Customers Direct Revenues
    
    Total Direct and Indirect Revenues2003
    
    2002
    
    2003
    
    2002Net revenue percentage (1)Hewlett-Packard (2)
    
    
    23
    %
    
    
    25
    %
    
    
    23
    %
    
    
    25
    %IBM
    
    
    23
    %
    
    
    20
    %
    
    
    26
    %
    
    
    27
    %EMC
    
    
    
    
    
    
    
    
    
    
    22
    %
    
    
    22
    %
  (1)
    
    Amounts less than 10 percent are not presented(2)
    
    Fiscal 2002 Hewlett-Packard percentages represent the combined revenues of Hewlett-Packard and Compaq 31




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Direct sales to our top five customers accounted for 68 percent of total net
revenues in 2003 compared to 65 percent in 2002 and we expect to be similarly
concentrated in the future. Our net revenues from our customers can be
significantly impacted by changes in the business models of our customers.
Beginning in late 2002, EMC began sourcing more product through distribution
rather than purchasing it directly. Consequently, direct sales to EMC have
been impacted. Additionally, EMC has formed an alliance with Dell and entered
into a worldwide manufacturing agreement with Dell. Consequently, some of our
models previously sold under EMC-specific model numbers are now being sold
under Dell-specific model numbers, and some net revenues for EMC, including
direct sales to EMC and their customer-specific models purchased indirectly
through other distribution channels, have been shifted as a result of this Dell
alliance. From a distribution channel perspective, net revenues generated from OEM
customers were 66 percent of net revenues and sales through distribution were
34 percent in 2003. Our OEM customers may take products both directly and
through distribution channels. Net Revenues by Distribution Channel Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2003
    
    Revenues
    
    2002
    
    Revenues
    
    (Decrease)
    
    ChangeOEM
    
    $
    204,317
    
    
    
    66
    %
    
    $
    192,123
    
    
    
    75
    %
    
    $
    12,194
    
    
    
    6
    %Distribution
    
    
    103,719
    
    
    
    34
    %
    
    
    62,217
    
    
    
    25
    %
    
    
    41,502
    
    
    
    67
    %End-User
    
    
    172
    
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    (229
    )
    
    
    (57
    %)Total net revenues
    
    $
    308,208
    
    
    
    100
    %
    
    $
    254,741
    
    
    
    100
    %
    
    $
    53,467
    
    
    
    21
    %
 A major factor in the increased distribution net revenues is that beginning in
2002, one of our larger OEM customers, EMC, began sourcing more product through
distribution rather than purchasing it directly. In 2003 direct sales to EMC
decreased $10.9 million while total direct and indirect sales to EMC increased
by $11.0 million in 2003 compared to 2002. In 2003 domestic net revenues increased by $32.6 million, or 21 percent, and
international net revenues increased by $20.9 million, or 20 percent, compared
to 2002. Net Domestic and International Revenues Percentage
    
    
    
    
    
    Percentageof Net
    
    
    
    
    
    of Net
    
    Increase/
    
    Percentage(in thousands)
    
    2003
    
    Revenues
    
    2002
    
    Revenues
    
    (Decrease)
    
    ChangeDomestic
    
    $
    185,195
    
    
    
    60
    %
    
    $
    152,638
    
    
    
    60
    %
    
    $
    32,557
    
    
    
    21
    %Europe
    
    
    101,476
    
    
    
    33
    %
    
    
    90,130
    
    
    
    35
    %
    
    
    11,346
    
    
    
    13
    %Pacific Rim
    
    
    21,537
    
    
    
    7
    %
    
    
    11,973
    
    
    
    5
    %
    
    
    9,564
    
    
    
    80
    %Total net revenues
    
    $
    308,208
    
    
    
    100
    %
    
    $
    254,741
    
    
    
    100
    %
    
    $
    53,467
    
    
    
    21
    %
 We believe the increases in domestic and international net revenues were
principally a function of the overall size of the market for Fibre Channel
products and increased market acceptance of our Fibre Channel products.
However, because we sell to OEMs and distributors who ultimately resell our
products to their customers, the geographic mix of our net revenues may not be
reflective of the geographic mix of end-user demand or installations. Gross Profit. In 2003, gross profit increased $64.3 million, or 49 percent, to
$196.2 million, from $131.9 million in 2002. Gross margin increased to 64
percent in 2003, compared to 52 percent in 2002. 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 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 the one Gbps reserve during the first quarter of fiscal
2002, we have subsequently reduced this reserve by a total of $6.9 million
through June 29, 2003, 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 32




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product, we have also scrapped $3.3 million of this reserved inventory and
negotiated and paid cancellation charges of $0.2 million through June 29, 2003,
related to this excess and obsolete inventory charge since it was initially
recorded. In 2003 and 2002, the reduction related to our one Gbps reserve was
$3.3 million and $3.6 million, respectively. Excluding the reduction of the
excess and obsolete inventory reserve of $3.3 million in 2003, and the net
excess and obsolete inventory charge of $10.1 million in 2002, gross profit
would have been $192.9 million and $141.9 million, respectively, and gross
margin would have been 63 percent and 56 percent, respectively. The increase
in gross profit and gross margin in 2003 compared to 2002 was also due to cost
reductions for Fibre Channel products, higher Fibre Channel net revenues and
volumes and changes in product mix. Also, cost of sales included $0.1 million
and $48 thousand of amortized deferred stock-based compensation expense for
2003 and 2002, respectively. Engineering and Development. Engineering and development expenses were $61.3
million and $47.6 million for 2003 and 2002, representing 20 and 19 percent of
net revenues, respectively. Engineering and development expenses increased by
$13.7 million, or 29 percent, in 2003 compared to 2002. This increase was due
to our increased investment in Fibre Channel and IP engineering and
development, which represented substantially all of our engineering and
development efforts and expenses. Engineering expenses included $2.5 million
and $2.1 million of amortized deferred stock-based compensation for 2003 and
2002, respectively. Selling and Marketing.Selling and marketing expenses were $19.0 million and
$19.5 million for 2003 and 2002, representing six and eight percent of net
revenues, respectively. Selling and marketing expenses decreased by $0.5
million, or two percent, in 2003 compared to 2002. This decrease was primarily
due to a reduction in travel-related expenses of $0.3 million. Selling and
marketing expenses included $1.3 million and $1.4 million of amortized deferred
stock-based compensation expenses for 2003 and 2002, respectively. As a
portion of selling and marketing expenses is fixed, the expenses have not
expanded at the same rate as our net revenues. General and Administrative.General and administrative expenses were $40.3
million and $13.0 million for 2003 and 2002 representing 13 and five percent of
net revenues, respectively. General and administrative expenses increased by
$27.3 million, or 210 percent, in 2003 compared to 2002. This increase was
primarily due to a net charge of $27.0 million associated with the tentative
settlements of securities class action and derivative lawsuits. Excluding the
net charge of $27.0 million, general and administrative expenses were
relatively flat as a portion of general and administrative expenses is fixed
and the expenses have not expanded at the same rate as our net revenues.
General and administrative expenses included $0.3 million and $0.2 million of
amortized deferred stock-based compensation expenses for 2003 and 2002,
respectively. Amortization of Goodwill and Other Intangibles.The amortization of
intangibles was $5.8 million in 2003 and amortization of goodwill and other
intangibles was $156.2 million in 2002, representing two and 61 percent of net
revenues, respectively. In 2003, the amortization consisted of amortization
for core technology and patents of $5.8 million and $7 thousand for completed
technology. In 2002, the amortization consisted of $149.7 million for goodwill
and $0.7 million for assembled workforce, as well as $5.8 million for core
technology and patents and $9 thousand for completed technology. We completed
our transitional goodwill impairment analysis under Statement 142 during the
first quarter of fiscal 2003 with no impairment charges resulting. Our annual
impairment test occurred in the fourth quarter of fiscal 2003 with no
impairment charges resulting. All intangible assets relate to the purchase of
Giganet, completed during fiscal 2001. Nonoperating Income.Our nonoperating income increased by $28.3 million to
$36.1 million in 2003, from $7.8 million in 2002. The increase is due
primarily to a $28.7 million gain on the repurchase of convertible subordinated
notes in 2003. Additionally, while lower interest rates caused lower interest
percentage yields, the increase in our invested funds caused an increase in
interest income to $13.0 million in 2003 from $11.2 million in 2002. The
increase in interest income is offset in 2003 by a $2.1 million increase in
interest expense due to us having convertible subordinated notes outstanding
for the entire year in 2003 versus only a portion of 2002. While the
repurchase of convertible subordinated notes with a face value of $136.5
million in the first quarter of fiscal 2003 had a proportionate reducing effect
on the amount of interest expense recognized in 2003, convertible subordinated
notes were only outstanding for approximately five months in 2002. In
addition, other expense included a loss of $0.2 million on the sale of a
strategic investment in 2002. Income Taxes.In 2003, we recorded a tax provision in the amount of $40.3
million, or approximately 38 percent of our income before income taxes. We
recorded a tax rate other than the statutory federal tax rate in 2003
principally due to state taxes in the United States. In 2002, we recorded a tax
benefit in the amount of $0.3 million. We recorded a tax benefit at a rate
other than the statutory federal tax rate in 2002 principally due to the
non-deductibility of goodwill amortization, and offset by the benefits related
primarily to the release of the valuation allowance associated with deferred
tax assets. The release of the valuation allowance in 2002 resulted in an
income tax benefit of $17.9 million. Our valuation allowance was released as
it was determined that it was more likely than not that the deferred tax asset
(related primarily to the net 33




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operating loss carryforwards and research credit carryforwards) would be
realized due to our projected future taxable income. We expect to have a tax
provision of approximately 38 percent in future periods. Critical Accounting Policies The preparation of the financial statements requires estimation and judgment
that affect the reported amounts of net revenues, expenses, assets and
liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could potentially
result in materially different results under different assumptions and
conditions. If these estimates differ significantly from actual results, the
impact to the financial statements may be material. We have identified the following as critical accounting policies: revenue
recognition; allowance for doubtful accounts; goodwill, other intangibles and
long-lived assets; inventories; income taxes and stock-based compensation. Revenue Recognition. We recognize revenue at the time of shipment when title
and risk of loss have passed, evidence of an arrangement has been obtained and
collectibility has been reasonably assured. We make certain sales through
two-tier distribution channels and have various distribution agreements with
selected distributors and Master Value Added Resellers, or collectively the
Distributors. These distribution agreements may be terminated upon written
notice by either party. Additionally, these Distributors are generally given
privileges to return a portion of inventory and to participate in price
protection and cooperative marketing programs. Therefore, we recognize revenue
on our standard products sold to our Distributors based on data received from
the Distributors and managements estimates to approximate the point that these
products have been resold by the Distributors. As OEM-specific models sold to
our Distributors are governed under the related OEM agreements rather than
under these distribution agreements, we recognize revenue at the time of
shipment to the Distributors when title and risk of loss have passed, evidence
of an arrangement has been obtained and collectibility has been reasonably
assured. Additionally, we maintain accruals and allowances for price
protection and cooperative marketing programs. Furthermore, we provide a warranty of between one and three years on our I/O
Fibre Channel and Internet Protocol products and provide a warranty of between
one and five years on our Fibre Channel switching and traditional networking
products. We record a provision for estimated warranty-related costs based on historical product return rates and managements
estimates of expected future costs to fulfill warranty obligations. Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts based upon historical write-offs as a percentage of net revenues.
Although we have not experienced significant losses on accounts receivable
historically, our accounts receivable are concentrated with a small number of
customers. Consequently, any write-off associated with one of these customers
could have a significant impact on our allowance for doubtful accounts and
results of operations. Goodwill, Other Intangibles and Long-Lived Assets.Goodwill and other
intangibles resulting from the acquisitions of Vixel and Giganet and the
purchase of the technology assets of Trebia Corporation are carried at cost
less accumulated amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the estimated
economic lives of the respective intangible assets, ranging from two to seven
years. In accordance with Statement 142, goodwill and other intangibles that
have indeterminate lives will be tested for impairment based on discounted cash
flows and market capitalization at least annually, but also on an interim basis
if an event or circumstance indicates that it is more likely than not that an
impairment loss has been incurred. Our annual impairment test occurs during
our fourth fiscal quarter each year and this initial test in fiscal 2004
indicated no impairment existed. Additionally, Statement 144, under which the recoverability of long-lived
assets is assessed by determining whether the carrying value of an asset can be
recovered through projected undiscounted future operating cash flows over its
remaining life whenever events or changes in circumstances indicate that we may
not be able to recover the assets carrying value, such as when tepid fiscal
fourth quarter of 2004 demand from two of our customers and a subsequent drop
in our stock price resulted in an indication of impairment to our goodwill and
other intangible assets. The amount of impairment, if any, is measured based
on fair value, which is determined using projected discounted future operating
cash flows. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. At the end of June 2004, coupled with tepid fiscal fourth quarter of 2004
demand from two of our customers and a subsequent drop in our stock price,
events and circumstances indicated that a potential impairment of goodwill
existed. 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 result of 34




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the FAS 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 FAS 142 analysis
indicated that all $583.5 million of our goodwill was impaired. Inventories.Inventories are stated at the lower of cost or net realizable
value on a first-in, first-out basis. We use a standard cost system for
purposes of determining cost. The standards are adjusted periodically to
ensure they represent actual cost. We regularly compare forecasted demand and
the composition of the forecast against inventory on hand and open purchase
commitments in an effort to ensure the carrying value of inventory does not
exceed net realizable value. Accordingly, we may have to record reductions to
the carrying value of excess and obsolete inventory if forecasted demand
decreases. We have previously recorded reductions to the carrying value of
excess and obsolete inventory, as described in the Gross Profit section of the
Results of Operations for the year ended June 29, 2003, compared to the year
ended June 30, 2002. 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 Consolidated
Financial Statements for more information. We have no plans to adopt the fair
value provisions of Statement 123 until required to under new accounting
standards, such as those being considered under the FASBs Exposure Draft for
Share-Based Payment, for all stock awards. If we were required to account for
all stock-based awards based on the fair value method, it would have a material
non-cash impact on our results of operations. Liquidity and Capital Resources For the three fiscal years ended June 27, 2004, we have primarily funded our
cash needs from operations. Additionally we issued convertible subordinated
notes in 2002 and 2004. As part of our commitment to storage networking
product development, including Fibre Channel, which includes our recent
acquisition of Vixel Corporation, and IP Networking, we expect to continue our
investments in property and equipment, most notably for additional engineering
equipment, and continued enhancement of our global IT infrastructure. We
believe that our existing cash and cash equivalents balances, facilities and
equipment leases, investments and anticipated cash flows from operating
activities will be sufficient to support our working capital needs and capital
expenditure requirements for at least the next 12 months and will enable us to
repay our outstanding convertible notes, $517.5 million of which we may be
required to purchase for cash from the holders as early as December 2006. 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. At June 29, 2003, we had $423.2 million in working
capital and $620.5 million in cash and cash equivalents, restricted cash,
current investments and long-term investments. Our cash and cash equivalents
increased by $55.2 million to $192.1 million as of June 27, 2004, from $137.0
million as of June 29, 2003. The increase in cash and cash equivalents was due
to our financing and operating activities, which provided $291.9 million and
$78.6 million of cash and cash equivalents, respectively. The cash and cash
equivalents provided by financing and operating activities were partially
offset by our investing activities, which used $315.3 million of cash and cash
equivalents. In 2004, operating activities provided $78.6 million of cash and cash
equivalents. The primary reason for the increase in cash provided by
operating activities was a net loss of $532.3 million adjusted for non-cash
reconciling items, the most significant of which were impairment of goodwill,
amortization of other intangibles, deferred income taxes, depreciation and
amortization of property and equipment, in-process research and development,
and the tax benefit from exercise of stock options. The remaining items most
significantly impacting cash provided by operating activities were increased
accounts payable offset by increased inventories, increased accounts and other
receivables and the payment of the litigation settlement. The cash provided
by operating activities in 2003 was primarily from net income adjusted for
non-cash reconciling items, the most significant of which were the gain on
repurchase of convertible subordinated notes, deferred income taxes,
depreciation and amortization of property and equipment, amortization of other
intangibles, stock-based 35




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compensation, and the tax benefit from the exercise of stock options, as well
as the litigation settlements accrual and changes in other working capital
balances. In 2004, cash used in investing activities was $315.3 million. The primary use
of cash was payments for the purchase of Vixel of $294.7 million, net of cash
acquired. Additional uses of cash were for purchases of investments of $402.1
million; additions to property and equipment of $48.4 million and payments for
the technology assets of Trebia Networks of $2.1 million, offset by maturities
of investments of $422.7 million and a decrease in restricted cash related to
the construction escrow account of $9.3 million. In 2003, investing activities
used $153.5 million of cash and cash equivalents due primarily to purchases of
investments, additions to property and equipment and an increase in restricted
cash related to the construction escrow account, offset by maturities of
investments. Financing activities provided $291.9 million of cash and cash equivalents in
2004. This increase in cash and cash equivalents was primarily due to our net
proceeds from the issuance of 0.25 percent convertible subordinated notes of
$505.2 million offset by the repurchase of $191.6 million in face value of 1.75
percent convertible subordinated notes at a net discount to face value,
spending $185.6 million, the repurchase of 1.5 million shares of common stock
for $40.5 million and net payments for short term indebtedness related to the
Vixel acquisition, notes payable and capital leases of $1.3 million.
Additionally, the proceeds from the issuance of common stock under stock option
and employee stock purchase plans provided $14.1 million. In 2003, financing
activities used $99.2 million of cash and cash equivalents due primarily to our
repurchase of 1.75 percent convertible subordinated notes partially offset by
cash and cash equivalents provided by the issuance of common stock under stock
option plans and under the employee stock purchase plan. On January 29, 2002, we completed a $345.0 million private placement of 1.75
percent convertible subordinated notes due February 1, 2007. During the three
months ended September 29, 2002, we bought back at a discount to face value
approximately $136.5 million in face value of our 1.75 percent convertible
subordinated notes for $104.2 million. The resulting net pre-tax gain of
approximately $28.7 million was recorded for the three months ended September
29, 2002. In 2004, we bought back approximately $191.6 million in face value of our 1.75
percent convertible subordinated notes at a discount to face value for
approximately $185.6 million. The resulting net pre-tax gain of approximately
$2.7 million was recorded in 2004. The repurchased notes were cancelled,
leaving 1.75 percent convertible subordinated notes outstanding with a face
value of approximately $17.0 million that, if converted, would result in the
issuance of approximately 0.3 million shares. Also during 2004, we
repurchased 1.5 million common shares for $40.5 million. As of June 27, 2004,
we are authorized by our Board of Directors to repurchase an additional 1.5
million shares and the entire $17.0 million face amount of the outstanding
1.75 percent convertible subordinated notes. On December 12, 2003, we completed a $517.5 million private placement of 0.25
percent contingent convertible subordinated notes due 2023. Interest is
payable in cash on June 15th and December 15th of each year beginning June 15,
2004. Under the terms of the offering, the notes will be convertible, at the
option of the holder and subject to the satisfaction of certain conditions
detailed in note 9 to the Consolidated Financial Statements contained herein,
into shares of Emulex common stock at a price of $43.20 per share.Holders of
the notes may require us to purchase the notes for cash by giving written
notice within the 20 business days prior to each of December 15, 2006, December
15, 2008, December 15, 2013, or December 15, 2018 or upon a change in control.
We incurred total associated bankers fees of approximately $11.6 million,
which were recorded as a reduction to the proceeds from the issuance of the
notes and will be accreted over the three-year effective life of the notes, as
well as $0.7 million of other associated debt issuance costs, which have been
recorded as an asset and will also be amortized over the effective life of the
notes. The effective life of the 0.25 percent convertible subordinated notes
due 2023 is three years, which is the period up to the first date that the
holders can require us to repurchase the notes. We were required to enter into purchase agreements for seven key inventory
components, and as of June 27, 2004, our remaining purchase obligation for the
seven components was $5.3 million. On October 9, 2003, before our acquisition of Vixel, a purported class action
lawsuit was filed in King County Superior Court of the State of Washington
against Vixel and each of Vixels directors and certain unnamed individuals
(the Vixel Parties), entitled Russell Fink v. Vixel Corporation, et al., Case
No. 03-2-37226-9SEA. The complaint made general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger with Emulex and sought to enjoin
the tender offer and have the merger agreement declared unlawful, among other
forms of relief. On November 7, 2003, the Vixel Parties entered into a
memorandum of understanding with the plaintiff in the class action suit
pursuant to which the parties have agreed to settle the action, subject to
court approval. Formal settlement documents were signed on May 5, 2004, and
the plaintiff has completed discovery as 36




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##### Table of Contents



agreed to by the parties. On August 9, 2004, final
court approval was obtained for the settlement of the Fink v. Vixel litigation.
We expect to pay the settlement amount of $0.7 million during fiscal 2005. We reached an agreement with one of our three insurers under which we received
$10.0 million less $2.0 million previously paid by the insurer, resulting in a
net payment to us of $8.0 million, for the defense of previous securities
class action lawsuits for which we paid $39.5 million to the plaintiffs during
fiscal 2004. The $39.5 million was previously held in escrow. In July 2004,
we obtained an arbitration award against two of our insurers, and the amount
of the award exceeded our recorded litigation settlements receivable of $5.1
million by $4.0 to $5.0 million. In 2004, we exercised our option to complete the purchase of the land and
building for our headquarters property and began depreciating the building.
In 2004, we spent $38.2 million related to the land and building for our
headquarters property, for a total of $45.4 million through June 27, 2004. In
addition, we have a $1.0 million letter of credit in place in lieu of a rental
deposit on one of our other facilities. As described above, the following summarizes our contractual obligations at
June 27, 2004, and the effect such obligations are expected to have on our
liquidity and cash flow in future periods: Payments Due by Period(in thousands)Less than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 Year (2)
    
    Years (3)
    
    Years (4)
    
    YearsConvertible subordinated
notes and interest (1)
    
    $
    538,594
    
    
    $
    1,591
    
    
    $
    537,003
    
    
    $
    
    
    
    $
    Leases
    
    
    3,493
    
    
    
    2,344
    
    
    
    1,111
    
    
    
    38
    
    
    
    Inventory purchase commitments
    
    
    20,962
    
    
    
    20,962
    
    
    
    
    
    
    
    
    
    
    
    Litigation settlements
    
    
    698
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    Letter of credit
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Other commitments
    
    
    2,100
    
    
    
    2,100
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    566,847
    
    
    $
    28,695
    
    
    $
    538,114
    
    
    $
    38
    
    
    $
    
 (1) The principal payment related to the 0.25 percent private placement of
$517.5 million is shown as a payment in the period for the two fiscal years
ending June 2008 above as holders of these 20-year notes may require us to
purchase the notes for cash by giving us written notice as early as 20 business
days prior to each of December 15, 2006, December 15, 2008, December 15, 2013,
and December 15, 2018. (2) Fiscal year ending 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. 
 Item 7A. Qualitative and Quantitative Disclosures about Market Risk. Interest Rate Sensitivity At June 27, 2004, our investment portfolio consisted primarily of fixed income
securities, excluding those classified as cash, cash equivalents and restricted
cash, of $463.2 million (see note 3 of the Consolidated Financial Statements).
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 June 27, 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 June 27, 2004, we have $517.5 million face value 0.25 percent 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 June 27,
2004, was $457.3
and $17.0 million, respectively. The fair value of these notes may increase
or decrease due to various factors, including fluctuations in the market price
of our common stock, fluctuations in market interest rates and fluctuations in
general economic conditions. 37




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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 8. Financial Statements and Supplementary Data. The information required by this Item is included herein as part of Item 15(a)
of Part IV of this annual report. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. 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 Annual Report on Form 10-K, 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 Annual Report on Form 10-K that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 38




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PART III 
 Item 10. Directors and Executive Officers of the Registrant. There is incorporated herein by reference the information required by this Item
in the Companys definitive proxy statement for the 2004 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the year ended June 27, 2004. See
Part I, Item 1  Executive Officers of the Registrant for information
regarding the executive and certain other officers of the Company or its
principal operating subsidiaries. We have adopted the Emulex Corporation Business Ethics and Confidentiality
Policy (the code of ethics), a code of ethics that applies to all of our
directors and officers, including our Chief Executive Officer, President, Chief
Financial Officer, Corporate Controller and other finance organization
employees. The finance code of ethics is publicly available on our website at
www.emulex.com. If we make any substantive amendments to the code of ethics or
grant any waiver, including any implicit waiver, from a provision of the code
to our Chief Executive Officer, President, Chief Financial Officer or Corporate
Controller, we will disclose the nature of such amendment or waiver on that
website or in a report on Form 8-K. 
 Item 11. Executive Compensation. There is incorporated herein by reference the information required by this Item
in our definitive proxy statement for the 2004 Annual Meeting of Stockholders
that will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended June 27, 2004. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. There is incorporated herein by reference the information required by this Item
in our definitive proxy statement for the 2004 Annual Meeting of Stockholders
that will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended June 27, 2004. Securities Authorized for Issuance Under Equity Compensation Plans The following table gives information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our equity
compensation plans as of June 27, 2004. The table includes the following plans:
The Emulex Corporation Employee Stock Option Plan; The Emulex Corporation 1997
Stock Option Plan for Non-Employee Directors; and The Emulex Corporation
Employee Stock Purchase Plan. Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    future issuance under equityto be issued upon
    
    Weighted-average exercise
    
    compensation plansexercise of outstanding
    
    price of outstanding options,
    
    (excluding securities relatedPlan Category
    
    options, warrants and rights
    
    warrants and rights
    
    in column (a))(a)
    
    (b)
    
    (c)Equity compensations plans
approved by security holders (1)
    
    
    10,661,526
    
    
    $
    26.67
    
    
    
    2,791,028Employee stock purchase plan
approved by security holders
    
    
    
    (2)
    
    
    
    (2)
    
    
    485,927Equity compensations plans not
approved by security holders (3)
    
    
    1,711,044
    
    
    $
    10.29
    
    
    
    Total
    
    
    12,372,570
    
    
    $
    24.41
    
    
    
    3,276,955
 (1) Consists of The Emulex Corporation Employee Stock Option Plan and The
Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors. (2) The Emulex Employee Stock Purchase Plan enables employees to purchase our
common stock at a 15 percent discount to the lower of market value at the
beginning or end of each six month offering period. As such, the number of
shares that may be issued during a given six month period and the purchase
price of such shares cannot be determined in advance. See note 12 to our
Consolidated Financial Statements. (3) Consists of the Giganet, Inc. 1995 Stock Option Plan, the Vixel
Corporation Amended and Restated 1995 Stock Option Plan, the Vixel Corporation
1999 Equity Incentive Plan, and the Vixel Corporation 2000 Non-Officer Equity
Incentive Plan. Options issued under these plans were converted into options
to purchase Emulex common stock as a result of the acquisitions of Giganet and
Vixel. 39




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions. There is incorporated herein by reference the information required by this Item
in our definitive proxy statement for the 2004 Annual Meeting of Stockholders
that will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended June 27, 2004. 
 Item 14. Principal Accountant Fees and Services There is incorporated herein by reference the information required by this Item
in our definitive proxy statement for the 2004 Annual Meeting of Stockholders
that will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended June 27, 2004, for information about
audit and non-audit fees of our principal accountant, for information on the
audit committees pre-approval policies and procedures, and for information on
the audit committees approval of certain services under the heading Principal
Accountants Fees. 40




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.  (a)
    
    Documents Filed with Report  1. Consolidated Financial StatementsThe consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements and Schedule are filed as
part of this report.2. Financial Statement ScheduleThe financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of
this report.3. ExhibitsThe exhibits listed in the accompanying Index to Exhibits are filed
as part of this report.  (b)
    
    Reports on Form 8-K  1.
    
    The Registrant filed Form 8-K on April 22, 2004,
furnishing a press release announcing the Registrants
financial results for the three and nine months ended March 28,
2004.2.
    
    This Registrant filed Form 8-K on May 21, 2004, and
attached thereto Exhibit 99.1 to incorporate by reference
therein Emulexs Unaudited Pro Forma Combined Consolidated
Statement of Operations for the nine months ended March 28,
2004. 41




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES Annual Report  Form 10-K
Items 8, 15(a)(1) and 15(a)(2) 
 
 Consolidated Financial Statements
    
    Page NumberReport of Independent Registered Public Accounting Firm
    
    
    43Consolidated Balance Sheets  June 27, 2004, and June 29, 2003
    
    
    44Consolidated Statements of Operations  Years ended
June 27, 2004, June 29, 2003, and June 30, 2002
    
    
    45Consolidated Statements of Stockholders Equity  Years ended
June 27, 2004, June 29, 2003, and June 30, 2002
    
    
    46Consolidated Statements of Cash Flows  Years ended
June 27, 2004, June 29, 2003, and June 30, 2002
    
    
    47Notes to Consolidated Financial Statements
    
    
    48ScheduleSchedule II   Valuation and Qualifying Accounts and Reserves
    
    
    73
 All other schedules are omitted because the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto. 42




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##### Table of Contents



Report Of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Emulex Corporation: We have audited the consolidated financial statements of Emulex Corporation and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emulex Corporation
and subsidiaries as of June 27, 2004, and June 29, 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 27, 2004, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein. As discussed in note 1 to the consolidated financial statements, effective July
1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. /s/ KPMG LLP Costa Mesa, California
August 5, 2004, except as to notes 7 and 17, which are as of September 9, 2004 43




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EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 27, 2004, and June 29, 2003
(in thousands, except share data) 2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    192,137
    
    
    $
    136,971Restricted cash
    
    
    23
    
    
    
    9,342Investments
    
    
    220,114
    
    
    
    239,302Accounts and other receivables, less allowance for
doubtful accounts of $2,081 in 2004 and $1,844 in 2003
    
    
    61,720
    
    
    
    46,678Litigation settlements receivable
    
    
    5,101
    
    
    
    13,095Inventories, net
    
    
    31,835
    
    
    
    10,998Prepaid expenses
    
    
    3,572
    
    
    
    5,516Deferred income taxes
    
    
    26,824
    
    
    
    36,330Total current assets
    
    
    541,326
    
    
    
    498,232Property and equipment, net
    
    
    64,570
    
    
    
    26,585Investments
    
    
    243,125
    
    
    
    234,847Goodwill
    
    
    
    
    
    
    397,256Other intangibles, net
    
    
    122,667
    
    
    
    27,067Other assets
    
    
    1,293
    
    
    
    5,782$
    972,981
    
    
    $
    1,189,769Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    21,747
    
    
    $
    11,298Accrued liabilities
    
    
    22,839
    
    
    
    18,806Accrued litigation settlements
    
    
    
    
    
    
    39,500Income taxes payable
    
    
    9,910
    
    
    
    5,457Total current liabilities
    
    
    54,496
    
    
    
    75,061Convertible subordinated notes
    
    
    524,845
    
    
    
    208,518Deferred income taxes and other
    
    
    486
    
    
    
    4,260Total liabilities
    
    
    579,827
    
    
    
    287,839Commitments and contingencies (notes 11 and 13)Supsequent event (note 17)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;
82,413,845 and 82,465,813 issued and outstanding in 2004
and 2003, respectively
    
    
    8,241
    
    
    
    8,247Additional paid-in capital
    
    
    936,123
    
    
    
    907,976Deferred compensation
    
    
    (7,754
    )
    
    
    (3,159
    )Accumulated deficit
    
    
    (543,456
    )
    
    
    (11,134
    )Total stockholders equity
    
    
    393,154
    
    
    
    901,930$
    972,981
    
    
    $
    1,189,769
 See accompanying notes to consolidated financial statements. 44




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EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 27, 2004, June 29, 2003, and June 30, 2002
(in thousands, except per share data) 2004
    
    2003
    
    2002Net revenues
    
    $
    364,422
    
    
    $
    308,208
    
    
    $
    254,741Cost of sales
    
    
    131,803
    
    
    
    112,040
    
    
    
    122,871Gross profit
    
    
    232,619
    
    
    
    196,168
    
    
    
    131,870Operating expenses:Engineering and development
    
    
    73,211
    
    
    
    61,257
    
    
    
    47,560Selling and marketing
    
    
    28,035
    
    
    
    18,994
    
    
    
    19,462General and administrative
    
    
    18,815
    
    
    
    40,291
    
    
    
    12,983Amortization of goodwill and other intangibles
    
    
    19,093
    
    
    
    5,807
    
    
    
    156,209Impairment of goodwill
    
    
    583,499
    
    
    
    
    
    
    
    In-process research and development
    
    
    11,400
    
    
    
    
    
    
    
    Total operating expenses
    
    
    734,053
    
    
    
    126,349
    
    
    
    236,214Operating income (loss)
    
    
    (501,434
    )
    
    
    69,819
    
    
    
    (104,344
    )Nonoperating income:Interest income
    
    
    9,149
    
    
    
    12,991
    
    
    
    11,239Interest expense
    
    
    (4,754
    )
    
    
    (5,510
    )
    
    
    (3,396
    )Gain on repurchase of convertible subordinated notes
    
    
    2,670
    
    
    
    28,729
    
    
    
    Other income (expense), net
    
    
    109
    
    
    
    (78
    )
    
    
    (26
    )Total nonoperating income
    
    
    7,174
    
    
    
    36,132
    
    
    
    7,817Income (loss) before income taxes
    
    
    (494,260
    )
    
    
    105,951
    
    
    
    (96,527
    )Income tax provision (benefit)
    
    
    38,062
    
    
    
    40,262
    
    
    
    (293
    )Net income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )Net income (loss) per share:Basic
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    (1.18
    )Diluted
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    (1.18
    )Number of shares used in per share computations:Basic
    
    
    82,293
    
    
    
    82,051
    
    
    
    81,487Diluted
    
    
    82,293
    
    
    
    87,914
    
    
    
    81,487
 See accompanying notes to consolidated financial statements. 45




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EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended June 27, 2004, June 29, 2003, and June 30, 2002
(in thousands, except share data) RetainedEarnings
    
    TotalCommon Stock
    
    Additional
    
    Deferred
    
    (Accumu-
    
    Stock-Paid-In
    
    Com-
    
    lated
    
    holdersShares
    
    Amount
    
    Capital
    
    pensation
    
    Deficit)
    
    EquityBalance at July 1, 2001
    
    
    81,799,322
    
    
    $
    8,180
    
    
    $
    861,461
    
    
    $
    (12,366
    )
    
    $
    19,411
    
    
    $
    876,686Valuation allowance adjustment
    
    
    
    
    
    
    
    
    
    
    39,528
    
    
    
    
    
    
    
    
    
    
    
    39,528Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,742
    
    
    
    
    
    
    
    3,742Reversal of deferred stock-based compensation due to employee terminations
    
    
    
    
    
    
    
    
    
    
    (1,468
    )
    
    
    1,468
    
    
    
    
    
    
    
    Exercise of stock options, net of 56 shares
retired
    
    
    847,338
    
    
    
    85
    
    
    
    4,145
    
    
    
    
    
    
    
    
    
    
    
    4,230Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    4,326
    
    
    
    
    
    
    
    
    
    
    
    4,326Repurchase of common stock
    
    
    (1,000,000
    )
    
    
    (100
    )
    
    
    (10,439
    )
    
    
    
    
    
    
    
    
    
    
    (10,539
    )Issuance of common stock under employee
stock purchase plan
    
    
    154,249
    
    
    
    15
    
    
    
    1,212
    
    
    
    
    
    
    
    
    
    
    
    1,227Other stock-based compensation
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,234
    )
    
    
    (96,234
    )Balance at June 30, 2002
    
    
    81,800,909
    
    
    $
    8,180
    
    
    $
    898,803
    
    
    $
    (7,156
    )
    
    $
    (76,823
    )
    
    $
    823,004Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,205
    
    
    
    
    
    
    
    4,205Reversal of deferred stock-based compensation due to employee terminations
    
    
    
    
    
    
    
    
    
    
    (790
    )
    
    
    790
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    518,358
    
    
    
    52
    
    
    
    3,554
    
    
    
    
    
    
    
    
    
    
    
    3,606Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    4,054
    
    
    
    
    
    
    
    
    
    
    
    4,054Deferred stock-based compensation for
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    998
    
    
    
    (998
    )
    
    
    
    
    
    
    Issuance of common stock under
employee stock purchase plan
    
    
    146,546
    
    
    
    15
    
    
    
    1,357
    
    
    
    
    
    
    
    
    
    
    
    1,372Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,689
    
    
    
    65,689Balance at June 29, 2003
    
    
    82,465,813
    
    
    $
    8,247
    
    
    $
    907,976
    
    
    $
    (3,159
    )
    
    $
    (11,134
    )
    
    $
    901,930Options issued and deferred stock-based
compensation related to purchase of
Vixel Corporation
    
    
    
    
    
    
    
    
    
    
    47,538
    
    
    
    (13,926
    )
    
    
    
    
    
    
    33,612Amortization of deferred stock-based
Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,822
    
    
    
    
    
    
    
    6,822Reversal of deferred stock-based
compensation due to employee terminations
    
    
    
    
    
    
    
    
    
    
    (2,509
    )
    
    
    2,509
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    1,284,754
    
    
    
    128
    
    
    
    11,096
    
    
    
    
    
    
    
    
    
    
    
    11,224Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    9,529
    
    
    
    
    
    
    
    
    
    
    
    9,529Repurchase of common stock
    
    
    (1,500,000
    )
    
    
    (150
    )
    
    
    (40,350
    )
    
    
    
    
    
    
    
    
    
    
    (40,500
    )Issuance of common stock under employee
stock purchase plan
    
    
    163,278
    
    
    
    16
    
    
    
    2,843
    
    
    
    
    
    
    
    
    
    
    
    2,859Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (532,322
    )
    
    
    (532,322
    )Balance at June 27, 2004
    
    
    82,413,845
    
    
    $
    8,241
    
    
    $
    936,123
    
    
    $
    (7,754
    )
    
    $
    (543,456
    )
    
    $
    393,154
 See accompanying notes to consolidated financial statements. 46




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 27, 2004, June 29, 2003, and June 30, 2002
(in thousands) 2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    12,442
    
    
    
    11,049
    
    
    
    9,108Amortization of discount on 0.25% convertible subordinated notes
    
    
    2,024
    
    
    
    
    
    
    
    Loss on sale of a strategic investment
    
    
    
    
    
    
    
    
    
    
    248Gain on repurchase of convertible subordinated notes
    
    
    (2,670
    )
    
    
    (28,729
    )
    
    
    Litigation settlements, net of estimated insurance recoveries
    
    
    698
    
    
    
    27,007
    
    
    
    Deferred stock-based compensation
    
    
    6,822
    
    
    
    4,205
    
    
    
    3,780Amortization of goodwill and other intangibles
    
    
    19,093
    
    
    
    5,807
    
    
    
    156,209Impairment of goodwill
    
    
    583,499
    
    
    
    
    
    
    
    In-process research and development
    
    
    11,400
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    83
    
    
    
    147
    
    
    
    435Deferred income taxes
    
    
    15,820
    
    
    
    27,520
    
    
    
    (11,855
    )Tax benefit from exercise of stock options
    
    
    9,529
    
    
    
    4,054
    
    
    
    4,326Allowance for doubtful accounts
    
    
    141
    
    
    
    248
    
    
    
    510Changes in assets and liabilities:Accounts and other receivables
    
    
    (8,809
    )
    
    
    (10,667
    )
    
    
    3,470Inventories
    
    
    (19,436
    )
    
    
    3,835
    
    
    
    23,783Prepaid expenses and other assets
    
    
    4,791
    
    
    
    1,577
    
    
    
    (2,725
    )Accounts payable
    
    
    7,972
    
    
    
    (1,365
    )
    
    
    (16,427
    )Accrued liabilities
    
    
    (4,951
    )
    
    
    (1,746
    )
    
    
    7,884Payment of litigation settlements, net of insurance recovery
    
    
    (31,506
    )
    
    
    
    
    
    
    Income taxes payable
    
    
    3,976
    
    
    
    (1,563
    )
    
    
    6,738Net cash provided by operating activities
    
    
    78,596
    
    
    
    107,068
    
    
    
    89,250Cash flows from investing activities:Proceeds from sale of property, equipment and a strategic investment
    
    
    53
    
    
    
    11
    
    
    
    152Additions to property and equipment
    
    
    (48,418
    )
    
    
    (19,218
    )
    
    
    (9,738
    )Net increase in restricted cash related to construction escrow account
    
    
    9,319
    
    
    
    (7,318
    )
    
    
    (2,024
    )Payments for purchase of Giganet, Inc., net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (24
    )Payments for purchase of Vixel Corporation, net of cash acquired
    
    
    (294,729
    )
    
    
    
    
    
    
    Payments for purchase of the technology assets of Trebia Networks, Inc.
    
    
    (2,094
    )
    
    
    
    
    
    
    Purchases of investments
    
    
    (402,118
    )
    
    
    (650,184
    )
    
    
    (732,088
    )Maturities of investments
    
    
    422,704
    
    
    
    523,242
    
    
    
    571,490Net cash used in investing activities
    
    
    (315,283
    )
    
    
    (153,467
    )
    
    
    (172,232
    )Cash flows from financing activities:Payments for short term indebtedness, notes payable and capital leases
    
    
    (175,300
    )
    
    
    
    
    
    
    Proceeds from short term indebtedness
    
    
    174,000
    
    
    
    
    
    
    
    Proceeds from issuance of common stock under stock option plans
    
    
    11,224
    
    
    
    3,606
    
    
    
    4,230Proceeds from issuance of common stock under employee
stock purchase plan
    
    
    2,859
    
    
    
    1,372
    
    
    
    1,227Repurchase of common stock
    
    
    (40,500
    )
    
    
    
    
    
    
    (10,539
    )Net proceeds from issuance of 0.25% convertible subordinated notes
    
    
    505,179
    
    
    
    
    
    
    
    334,154Repurchase of 1.75% convertible subordinated notes
    
    
    (185,609
    )
    
    
    (104,169
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    291,853
    
    
    
    (99,191
    )
    
    
    329,072Net increase (decrease) in cash and cash equivalents
    
    
    55,166
    
    
    
    (145,590
    )
    
    
    246,090Cash and cash equivalents at beginning of year
    
    
    136,971
    
    
    
    282,561
    
    
    
    36,471Cash and cash equivalents at end of year
    
    $
    192,137
    
    
    $
    136,971
    
    
    $
    282,561Supplemental disclosures:Noncash investing and financing activities:Fair value of assets acquired
    
    $
    20,849
    
    
    $
    
    
    
    $
    Fair value of liabilities assumed
    
    
    12,736
    
    
    
    
    
    
    
    (139
    )Stock options assumed for acquired business
    
    
    47,538
    
    
    
    
    
    
    
    Cash paid during the period for:Interest
    
    $
    2,888
    
    
    $
    4,878
    
    
    $
    7Income taxes
    
    
    9,387
    
    
    
    10,735
    
    
    
    497
 See accompanying notes to consolidated financial statements. 47




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 Note 1 Summary of Significant Accounting Policies  Principles of ConsolidationThe consolidated financial statements include the accounts of
Emulex Corporation, a Delaware corporation, and its wholly owned
subsidiaries (collectively, the Company or Emulex). All
significant intercompany balances and transactions have been
eliminated in consolidation.Fiscal YearThe Companys fiscal year ends on the Sunday nearest June 30.
Fiscal years 2004, 2003 and 2002 were each comprised of 52 weeks.Foreign Currency TranslationThe Company has designated the U.S. dollar as its functional
currency. Accordingly, monetary assets and liabilities denominated
in foreign currencies are remeasured into the U.S. dollar at the
exchange rates in effect at the balance sheet date. Non-monetary
assets and liabilities denominated in foreign currencies are
remeasured into the U.S. dollar at the appropriate historical
exchange rates. Income and expense amounts denominated in foreign
currencies are remeasured into the U.S. dollar at the average
exchange rates during the period, except for expense items related
to non-monetary accounts, which are remeasured at the appropriate
historical exchange rates. Gains and losses resulting from
remeasurement are included in other nonoperating income (expenses)
in the period incurred.Cash EquivalentsThe Company classifies all corporate bonds and commercial paper with
original maturities of three months or less as short-term
investments. All other highly liquid debt instruments with original
maturities of three months or less and deposits in money market funds
are considered to be cash equivalents.InvestmentsThe Company determines the appropriate balance sheet classification
of its investments in debt securities based on maturity date at the
time of purchase and evaluates the classification at each balance
sheet date. Debt securities are classified as held to maturity as
the Company has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at
amortized cost plus accrued interest. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of
discounts to maturity value. Such amortization and accretion are
included in interest income. The Companys investments in debt
securities are diversified among high credit quality securities in
accordance with the Companys investment policy.Accounts ReceivableAccounts receivable are recorded at the invoiced amount and do not
bear interest. The Company maintains an allowance for doubtful
accounts based upon historical write-offs as a percentage of net
revenues. Although the Company has not experienced significant
losses on accounts receivable historically, its 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 the Companys allowance for doubtful accounts.
The Company does not have off-balance sheet credit exposure
related to its customers.InventoriesInventories are stated at the lower of cost or market on a first-in, first-out basis. The Company uses a standard cost
system for purposes of determining cost. The standards are adjusted
periodically to ensure they represent actual cost. The Company
regularly compares forecasted demand and the composition of the
forecast for its products against inventory on hand and open purchase
commitments to ensure the carrying value of inventory does not exceed
net realizable value. Accordingly, the Company may have to record
reductions to the carrying value of excess and obsolete inventory if
forecasted demand decreases. 48




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Property and EquipmentProperty and equipment are stated at cost, and depreciation and
amortization are provided on the straight-line method over estimated
useful lives of up to 10 years for production and test equipment,
furniture and fixtures and leasehold improvements and 15 to 39 years
for assets related to the Companys corporate headquarters, which
were completed in 2004.Long-Lived AssetsThe Company applies Financial Accounting Standard, or FAS, 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,
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 the Company may not be able to recover the assets carrying
value. The amount of impairment, if any, is measured based on fair
value, which is determined using projected discounted future
operating cash flows. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.Software Development CostsCapitalized software development costs can consist of costs to
purchase software to be used within the Companys products and costs
to develop software internally. In accordance with FAS 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed, capitalization of purchased software occurs only
if technological feasibility has been established. The establishment
of technological feasibility and the ongoing assessment of
recoverability of any capitalized software development costs require
judgment by management with respect to certain external factors,
including but not limited to, anticipated future gross revenue,
estimated economic life and changes in software and hardware
technologies. Further, FAS 86 requires that at each balance
sheet date the unamortized costs of a computer software product be
compared to the net realizable value of that product. The amount by
which the unamortized costs exceeds the net realizable value of a
product is to be written off. No purchased or internally developed
software costs were capitalized in 2004, 2003 or 2002. As of June
27, 2004, and June 29, 2003, there were no unamortized costs of
capitalized purchased or internally developed software included in
intangible assets.Goodwill and Other IntangiblesGoodwill and other intangibles resulting from the acquisition of
Vixel Corporation and Giganet, Inc. and the purchase of the
technology assets of Trebia Corporation are carried at cost less
accumulated amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the
estimated economic lives of the respective intangible assets, ranging
from three months to seven years. The Company adopted FAS 142
effective July 1, 2002, and no longer amortizes goodwill and other
intangibles that have indeterminate useful lives. The Company
completed its transitional impairment analysis under FAS 142 and
found no impairment upon the adoption of FAS 142 as of July 1, 2002.
In accordance with FAS 142, goodwill and other intangibles that have
indeterminate lives will be tested for impairment at least annually,
but also on an interim basis if an event or circumstance indicates
that it is more likely than not that an impairment loss has been
incurred. The Companys annual impairment test occurred in the fourth
quarter of fiscal 2004, and the test indicated that no impairment
existed. However, coupled with tepid fiscal fourth quarter of 2004
demand from two of our customers and a subsequent drop in our stock
price, at the end of June there was an indication that a potential
impairment of goodwill had occurred. As a result, both FAS 144 and
FAS 142 analyses were performed, including a second step goodwill
impairment test. See note 7 for the results of these analyses. 49




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Revenue RecognitionThe Company recognizes 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. The Company
makes certain sales through two-tier distribution channels and has
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, the
Company recognizes revenue on its standard products sold to its
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
the Companys Distributors are governed under the related OEM
agreements rather than under these distribution agreements, the
Company recognizes revenue at the time of shipment to the
Distributors for these OEM-specific models when title and risk of
loss have passed, evidence of an arrangement has been obtained and
collectibility has been reasonably assured. Additionally, the
Company maintains accruals and allowances for price protection and
cooperative marketing programs.Furthermore, the Company provides a warranty of between one and three
years on its Fibre Channel and Internet Protocol products and
provides a warranty of between one and five years on its traditional
networking products. The Company records a provision for estimated
warranty-related costs at the time of sale based on historical
product return rates and managements estimates of expected future
costs of fulfilling warranty obligations.Research and DevelopmentResearch and development costs, including costs related to the
development of new products and process technology, are expensed as
incurred.Income TaxesThe Company accounts 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. The Company
regularly reviews historical and anticipated future pre-tax results
of operations to determine whether the Company will be able to
realize the benefit of its 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.Net Income (Loss) per ShareBasic net income (loss) per share includes no dilution and is
computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per share reflects
the potential dilution of securities that could share in the earnings
of an entity. Such shares are not included when there is a loss as
the effect would be anti-dilutive.Comprehensive IncomeThe Company had no transactions, other than consolidated net income
(loss), that would be considered other comprehensive income. 50




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Stock-Based CompensationThe Company accounts for its stock-based awards to employees using
the intrinsic value method under Accounting Principles Board (APB)
Opinion No. 25 and related Interpretations. Stock-based awards to
non-employees, if any, are recorded using the fair value method. Had the
Company determined compensation cost based on the fair value at the
grant date for all its stock options under FAS 123, the Companys
consolidated net income (loss) would have been the pro forma amounts
indicated below: 2004
    
    2003
    
    2002(in thousands, except per share data)Net income (loss) as reported
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )Add: Total employee stock-based compensation expense
included in net income (loss) as reported, net of
related tax
effects
    
    
    5,095
    
    
    
    4,205
    
    
    
    3,780Deduct: Total employee stock-based compensation expense
determined under fair value method for all awards, net of
related tax effects
    
    
    (35,872
    )
    
    
    (34,270
    )
    
    
    (57,869
    )Pro forma net income (loss)
    
    $
    (563,099
    )
    
    $
    35,624
    
    
    $
    (150,323
    )Pro forma net income (loss) per shareBasic  as reported
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    (1.18
    )Basic  pro forma
    
    $
    (6.84
    )
    
    $
    0.43
    
    
    $
    (1.84
    )Diluted  as reported
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    (1.18
    )Diluted  pro forma
    
    $
    (6.84
    )
    
    $
    0.43
    
    
    $
    (1.84
    )
  The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: 2004
    
    2003
    
    2002Risk-free interest rate
    
    
    1.0% - 3.3%
    
    
    
    1.2% - 2.3%
    
    
    
    3.7%Stock volatility
    
    
    40.6% - 117.7%
    
    
    
    97.7% - 99.1%
    
    
    
    97.8Dividend yield
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%Average expected lives (years)
    
    
    0.5 - 3.4
    
    
    
    0.5-3.7
    
    
    
    3.5Weighted-average fair value per option granted
    
    
    $4.92-$18.04
    
    
    
    $8.26-$16.42
    
    
    
    $14.99
  The Black-Scholes model, as well as other currently accepted option
valuation models, was 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.Fair Value of Financial InstrumentsManagement believes the fair values of certain of the Companys
financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, investments, accounts payable
and accrued liabilities, approximate carrying value. As of
June 27, 2004, the Company had $517.5 million face value
0.25 percent 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 June 27, 2004, was
$457.3 and $17.0 million, respectively. The fair value of these
notes may increase or decrease due to various factors, including
fluctuation in the market price of our common stock, fluctuations in
market interest rates and fluctuations in general economic
conditions.Business and Credit ConcentrationsFinancial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term and long-term investments and accounts
receivable. Cash, cash equivalents, and investments, both short-term
and long-term, are primarily maintained at five major financial
institutions in the United States. Deposits held with banks may
exceed the amount of insurance provided on such deposits, if any.
The Company principally invests in U.S. Government Agency securities
and corporate bonds and limits the amount of credit exposure to any
one entity. 51




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  The Company sells its products to Original Equipment Manufacturers
(OEMs) and distributors in the computer storage and server
industry. Consequently, the Companys net revenues and accounts
receivables are concentrated. Direct sales to the Companys top five
customers accounted for 68 percent, 68 percent and 65 percent of
total net revenues in 2004, 2003 and 2002, respectively. The level
of sales to any single customer may vary and the loss of any one of
these customers, or a decrease in the level of sales to any one of
these customers, could have a material adverse impact on the Company.
Furthermore, although the Company sells to customers throughout the
world, sales in the United States and Europe accounted for
approximately 90 percent of the Companys net revenues in 2004, and
the Company expects for the foreseeable future, these sales will
account for the substantial majority of the Companys revenues.
Sales to customers are denominated in U.S. dollars. Consequently,
the Company believes its foreign currency risk is minimal. The
Company performs ongoing credit evaluations of its customers
financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts.
Historically, the Company has not experienced significant losses on
accounts receivable.Additionally, the Company currently relies on single and limited
supply sources for several key components used in the manufacture of
its products. Additionally, the company relies on a total of five
sites from four Electronics Manufacturing Services (EMS) providers
for the production of its products. The inability or unwillingness
of any single and limited source suppliers or the inability or
unwillingness of any of the Companys EMS provider sites to fulfill
supply and production requirements, respectively, could materially
impact future operating results.Use of EstimatesThe preparation of the consolidated financial statements requires
management of the Company to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities
and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject
to such estimates and assumptions include the carrying amount of
property and equipment, intangibles and goodwill; valuation
allowances for receivables, inventories and deferred income tax
assets; and warranty, deferred income tax and environmental
liabilities. Actual results could differ from those estimates.Segment InformationThe Company applies FAS 131, Disclosures about Segments of an
Enterprise and Related Information. FAS 131 uses the management
approach to determine segments of an enterprise. The management
approach is based on the method by which management organizes its
operating segments within the enterprise. Operating segments, as
defined by FAS 131, are components of an enterprise for which
separate financial information is available and is evaluated
regularly by the Chief Operating Decision Maker in deciding how to
allocate resources and in assessing performance. FAS 131 also
requires disclosures about products and services, geographic areas,
and major customers. The Company operates in one operating segment,
networking products, for purposes of FAS 131.Recently Adopted Accounting StandardsThe Emerging Issues Task Force (EITF) reached a consensus
on its tentative conclusions for EITF 00-21, Revenue Arrangements
with Multiple Deliverables. EITF 00-21 provides accounting guidance
for customer solutions where delivery or performance of products,
services and/or performance may occur at different points in time or
over different periods of time. Companies are required to adopt this
consensus for fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the
Companys financial position, results of operations or liquidity. 52




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation 46, Consolidation of Variable Interest
Entities. In December 2003, the FASB issued Interpretation 46
(Revised) (FIN 46-R) to address certain Interpretation 46
implementation issues. FIN 46-R requires that the assets,
liabilities and results of activities of a Variable Interest Entity
(VIE) be consolidated into the financial statements of the
enterprise that has a controlling interest in the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other
significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation was effective no
later than the end of the first interim or reporting period ending
after March 15, 2004, except for those VIEs that are considered to
be special purpose entities, for which the effective date was no
later than the end of the first interim or annual reporting period
ending after December 15, 2003. For all entities acquired subsequent
to January 31, 2003, this interpretation was effective as of the
first interim or annual period ending after December 31, 2003. The
adoption of the interpretation did not have a
material impact on the Companys financial position, results of
operation or liquidity.In April 2003, the FASB issued FAS 149, an amendment of FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which
requires prospective application for contracts entered into or
modified after June 30, 2003, except for contracts that exist in
fiscal quarters that began prior to June 15, 2003, and for hedging
relationships designated after June 30, 2003. For existing contracts
in fiscal quarters that began prior to June 15, 2003, the provisions
of this Statement that relate to FAS 133 implementation issues should
continue to be applied in accordance with their respective effective
dates. FAS 149 requires that contracts with comparable
characteristics be accounted for similarly. The adoption of this
pronouncement did not have a material impact on the Companys
financial position, results of operations or liquidity.In May 2003, the FASB issued FAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. FAS 150 establishes standards for classifying and measuring
certain financial instruments with characteristics of both
liabilities and equity. FAS 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument
embodies an obligation of the issuer. FAS 150 was effective for
financial instruments entered into or modified after May 31, 2003,
and otherwise is effective for public companies during the first
interim period beginning after June 15, 2003. The adoption of this
pronouncement did not have a material impact on the Companys
financial position, results of operations or liquidity.In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB No. 104), which supercedes SAB No.
101 Revenue Recognition in Financial Statements. The primary
purpose of SAB No. 104 is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements that was
superceded as a result of the issuance of EITF 00-21. While the
wording of SAB No. 104 has changed to reflect the issuance of EITF
00-21, the revenue recognition principles of SAB No. 101 remain
largely unchanged by the issuance of SAB No. 104. The adoption of
SAB No. 104 did not have a material impact on the Companys financial
position, results of operations or liquidity. Note 2 Business Combination  On November 13, 2003, the Company completed the cash tender offer by
Aviary Acquisition Corporation, its wholly owned subsidiary, to
acquire all outstanding shares of Vixel Corporation for $10.00 net
per share, without interest. Approximately 23.9 million shares of
Vixels common stock (including the associated preferred stock
purchase and other rights), representing approximately 91.6 percent
of Vixels outstanding common stock, and 2.9 million shares of
Vixels Series B convertible preferred stock, representing all of
Vixels outstanding preferred stock, were tendered in the offer.
Through its wholly owned subsidiary, the Company accepted all validly
tendered shares. On November 17, 2003, the Company completed its
acquisition of Vixel by means of a short-form merger of Aviary
Acquisition Corp., with and into Vixel.The Company acquired Vixel to expand its Fibre Channel product line
and paid $298.4 million in cash for all outstanding common stock,
preferred stock and warrants of Vixel Corporation. The Company also
incurred acquisition-related expenses of $6.7 million in cash. In
addition, the Company issued 2.2 million 53




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  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 will be included within
the Companys one operating segment, networking products.The Company accounted for the acquisition of Vixel under the purchase
method of accounting and recorded $11.4 million for purchased
in-process research and development expense, or IPR&D, during 2004. The
values assigned to these projects were determined by identifying
projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use.
The features of the related products had not been released to the
market as of the date of the acquisition, but the features and
functionality of the products had been defined.The IPR&D related to two significant internal product development
efforts. The first project accounted for $7.4 million of the
expenses. The second project accounted for $4.0 million of the
expenses. Both projects are for embedded switching products.The first project was in development at the time of acquisition, but
had not yet completed the full design, development and testing
phases. Approximately 35 percent of the total expected time to be
spent on the first project was complete at the date of the
acquisition with the remaining activities of the design, development
and testing phases as well as the validation and readiness stages
still to occur. The original estimated costs to complete the first
project were $2.7 million. Due to some delays and difficulties, as
of June 27, 2004, the remaining estimated costs to complete the first
project are $3.2 million.The second project had completed design and development, and testing
had begun as of the acquisition date. Approximately 70 percent of
the total expected time to be spent on the second project was
complete at the date of the acquisition with the remaining testing
activities as well as the validation and readiness stages still to
occur. The original estimated costs to complete the second project
were $1.2 million. As of June 27, 2004, the remaining estimated costs
to complete the second project are $0.8 millionThe risks and uncertainties associated with these two projects
include, but are not limited to, delays in product release to market
if there are design flaws or testing does not go as planned. In
addition, if the projects are delayed, such delay could potentially
harm the Companys relationships with its customers. Also, even if a
product is successfully developed it may not be accepted in the
marketplace.The values of these projects were determined using the Income
Forecast Method. In applying the Income Forecast Method the value of
the acquired technologies was estimated by discounting to present
value the free cash flows generated by the products to which the
technologies are associated over the remaining lives of the
technologies. To distinguish between the cash flows attributable to
the underlying technology and cash flows attributable to other assets
available for generating product revenues, adjustments were made to
provide for a fair return to fixed assets, working capital and other
assets that contribute to value. The estimates were based on the
following assumptions:  
    
    The estimated revenues associated with the first
project were evaluated over seven years with peak revenues
expected in fiscal years 2008 and 2009 and declining revenues
thereafter. The estimated revenues associated with the second
project were evaluated over nine years with peak revenues
expected in fiscal years 2008 and 2009 and declining revenues
thereafter. These projections are based on managements
estimates over the expected remaining lives of the
technologies.  
    
    The discount rates used in the valuation reflect the
relative risk of the product lines, with a discount rate of
20% used for the first project and a discount rate of 18% used
for the second project. These discount rates were based on
the amount and risk of effort remaining to complete the
respective projects. 54




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  The Company believes that the foregoing assumptions used in
determining the income forecast associated with the IPR&D products
were reasonable. No assurance can be given, however, that the
underlying assumptions used to estimate the income forecast, the
ultimate revenues and costs on such projects or the events associated
with such projects will transpire as estimated.As a result of the acquisition, the Company reduced the headcount
obtained from Vixel by a total of 24 employees, 23 of which left
during fiscal 2004. The remaining employee left during the Companys
first fiscal quarter of 2005 ending September 26, 2004. The Company
accrued $1.5 million at November 13, 2003, the date the Company
gained effective control of Vixel, as an estimate for this reduction.
The Company subsequently reduced the estimate and the acquisition
value by $0.7 million and also paid out substantially all of the
remaining balance through June 27, 2004, leaving a remaining accrual
of less than $0.1 million at June 27, 2004.The total purchase and allocation among the fair values of tangible
and intangible assets and liabilities (including purchased IPR&D) are
summarized as follows (in thousands): Tangible assets
    
    $
    31,289Liabilities
    
    
    12,736Net tangible assets
    
    
    18,553Identifiable intangible assets:In-process research and development
    
    
    11,400Core technology
    
    
    43,300Developed technology
    
    
    9,400Patents
    
    
    13,100Backlog
    
    
    500Customer relationships
    
    
    38,200Tradename
    
    
    5,000Covenants not-to-compete
    
    
    3,100Deferred taxes
    
    
    9,986Goodwill
    
    
    186,243Deferred compensation
    
    
    13,926$
    352,708
  Intangible assets with identifiable lives are being amortized on a
straight-line basis since the acquisition date for their remaining
estimated lives as follows: Core technology
Developed technology
Patents
Backlog
Customer relationships
Tradename
Covenants not-to-compete
Weighted-average amortization period
    
    7 years
4 years
2 to 7 years
3 months
5 years
7 years
3 years
6 years
  The acquisition has been included in the June 27, 2004 consolidated
balance sheet of the Company and the operating results of Vixel have
been included in the consolidated statements of operations of the
Company since the date that the Company gained effective control of
Vixel, November 13, 2003.Following is the summarized unaudited pro forma combined results of
operations for the fiscal years ended June 27, 2004, and June 29,
2003, assuming the acquisition had taken place at the beginning of
each fiscal year. The unaudited pro forma combined statement of
operations for the year ended June 27, 2004, was 55




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  prepared based upon the statement of operations of Emulex for the
year ended June 27, 2004, and the statement of operations of Vixel
for the period from June 30, 2003, to November 12, 2003. All
operating results of Vixel were included in the statement of
operations of Emulex since November 13, 2003, the date Emulex gained
effective control of Vixel. The unaudited pro forma combined
statement of operations for the year ended June 29, 2003, was
prepared based upon the statement of income of Emulex for the year
ended June 29, 2003, and the statement of operations of Vixel for the
twelve months ended June 29, 2003. The unaudited pro forma results
exclude the effects of the IPR&D charge of $11.4 million but include
the amortization of other intangibles, the amortization of deferred
compensation and the increase and decrease to interest expense and
interest income, respectively, resulting from the acquisition. The
unaudited pro forma results are not necessarily indicative of the
future operations or operations that would have been reported had the
acquisitions been completed when assumed. The following unaudited
information is presented in thousands, except for the per share data. Years EndedJune 27,
    
    June 29,2004
    
    2003(in thousands, except per share data)Net revenues
    
    $
    375,674
    
    
    $
    330,401Net income (loss)
    
    $
    (534,678
    )
    
    $
    39,206Net income (loss) per diluted share
    
    $
    (6.50
    )
    
    $
    0.46
 Note 3 Cash, Cash Equivalents, Restricted Cash and Investments  The Companys portfolio of cash, cash equivalents, restricted cash and investments consists of the following: 2004
    
    2003( in thousands)Cash
    
    $
    158,222
    
    
    $
    96,818Money market funds
    
    
    33,915
    
    
    
    40,153Restricted cash
    
    
    23
    
    
    
    9,342Certificates of deposit
    
    
    17,571
    
    
    
    9,589Commercial paper
    
    
    23,977
    
    
    
    15,985Municipal bonds
    
    
    19,239
    
    
    
    21,220U.S. Government Agency securities
    
    
    264,892
    
    
    
    238,336Corporate bonds
    
    
    110,073
    
    
    
    137,422Other
    
    
    27,487
    
    
    
    51,597$
    655,399
    
    
    $
    620,462
  At June 27, 2004, and June 29, 2003, the net unrealized holding gains
and losses on investments were immaterial. The Company has the
positive intent and ability to hold these securities to maturity.
Investments at June 27, 2004 and June 29, 2003, were classified as
shown below: 2004
    
    2003( in thousands)Cash and cash equivalents
    
    $
    192,137
    
    
    $
    136,971Restricted cash
    
    
    23
    
    
    
    9,342Short-term investments (maturities less than one year)
    
    
    220,114
    
    
    
    239,302Long-term investments (maturities of one to five years)
    
    
    243,125
    
    
    
    234,847$
    655,399
    
    
    $
    620,462
 56




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 Note 4 Inventories  Inventories, net, are summarized as follows: June 27,
    
    June 29,2004
    
    2003(in thousands)Raw materials
    
    $
    19,181
    
    
    $
    3,802Finished goods
    
    
    12,654
    
    
    
    7,196$
    31,835
    
    
    $
    10,998
  Starting in late September 2001, some of the Companys major customers
made announcements that general economic conditions, exacerbated by
the increase in economic uncertainty in the aftermath of the terrorist
events of September 11, 2001, were having a negative impact on their
financial results. The announcements made, and forecasts received,
indicated deteriorating demand for the Companys one gigabit per
second (Gbps) products as these customers were expected to migrate
to two Gbps products for future purchases. As a result, the Company
recorded an excess and obsolete inventory charge totaling $13.6
million during the three months ended September 30, 2001. After
initially recording this one Gbps reserve in September 2001, the
Company has subsequently reduced this reserve by a total of $8.9
million through June 27, 2004, as previously-reserved inventory was
sold. Overall, the Company has been able to recover a significant
portion of this reserved inventory that was not expected based on the
Companys forecasts and the forecasts received from its customers when
this excess and obsolete inventory charge was recorded. In addition
to the sale of some of this previously-reserved product, the Company
has also scrapped $4.2 million of this reserved inventory and
negotiated and paid cancellation charges of $0.2 million through June
27, 2004, related to this excess and obsolete inventory charge since
it was initially recorded. As of June 27, 2004, the remaining reserve
for one Gbps products was $0.3 million. However, as with all
inventory, the Company regularly compares forecasted demand for its
one Gbps products against inventory on hand and open purchase
commitments and accordingly, the Company may have to record reductions
to the carrying value of excess and obsolete inventory if forecasted
demand decreases. As of June 27, 2004, the Company had unreserved one
Gbps inventory on hand of approximately $0.3 million. Note 5 Property and Equipment  Components of property and equipment, net, are as follows: 2004
    
    2003(in thousands)Production and test equipment
    
    $
    40,375
    
    
    $
    29,766Furniture and fixtures
    
    
    41,659
    
    
    
    25,499Leasehold improvements
    
    
    14,183
    
    
    
    2,545Land
    
    
    12,531
    
    
    
    108,748
    
    
    
    57,810Less accumulated depreciation and amortization
    
    
    (44,178
    )
    
    
    (31,225
    )$
    64,570
    
    
    $
    26,585
 57




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 Note 6 Other Assets  Components of other assets are as follows: 2004
    
    2003(in thousands)Deferred debt issuance costs  convertible subordinated notes, net
    
    $
    833
    
    
    $
    4,670Long-term prepaid assets
    
    
    236
    
    
    
    1,016Refundable deposits
    
    
    224
    
    
    
    96$
    1,293
    
    
    $
    5,782
 Note 7 Goodwill and Other Intangibles Goodwill and other intangibles, net, are as follows: 2004
    
    2003(in thousands)Intangible assets subject to amortization:Core technology and patents
    
    $
    99,094
    
    
    $
    40,600Accumulated amortization, core technology and patents
    
    
    (24,774
    )
    
    
    (13,533
    )Developed technology
    
    
    9,400
    
    
    
    Accumulated amortization, developed technology
    
    
    (1,472
    )
    
    
    Customer relationships
    
    
    38,200
    
    
    
    Accumulated amortization, customer relationships
    
    
    (4,786
    )
    
    
    Tradename
    
    
    5,000
    
    
    
    Accumulated amortization, tradename
    
    
    (448
    )
    
    
    Covenants not-to-compete
    
    
    3,100
    
    
    
    Accumulated amortization, covenants not-to-compete
    
    
    (647
    )
    
    
    Intangible assets subject to amortization
    
    $
    122,667
    
    
    $
    27,067Intangible assets not subject to amortization (in thousands):Goodwill balance as of June 29, 2003, and June 30, 2002
    
    $
    397,256Goodwill acquired during year
    
    
    186,243Impairment of goodwill
    
    
    (583,499
    )Goodwill balance as of June 27, 2004
    
    $
    
  Goodwill relates to the purchase of Vixel in November 2003 and the
purchase of Giganet in fiscal 2001. Core technology and patents relate
to the purchase of Vixel and Giganet and to the purchase of the
technology assets of Trebia Corporation for $2.1 million in October
2003. All other intangible assets subject to amortization relate to
the purchase of Vixel.Effective July 1, 2002, the Company adopted FAS 142, Goodwill and
Other Intangible Assets and, as a result, the Company ceased
amortizing goodwill of $397.3 million related to the purchase of
Giganet. Goodwill is tested for impairment at least annually, but also
on an interim basis if an event or circumstance indicates that it is
more likely than not that an impairment loss has been incurred. The
Companys annual impairment test occurred in the fourth quarter of
fiscal 2004, and this initial test indicated that no impairment
existed. However, tepid demand experienced in the fourth fiscal
quarter of 2004 from two of the Companys customers, resulted in lower
than expected revenue, earnings and cash flows in the fourth fiscal
quarter of 2004 and is expected to result in lower sequential quarterly
revenue, earnings and cash flows in the first fiscal quarter of 2005.
These events and circumstances resulted in a subsequent drop in the
Companys stock price, which indicated a potential impairment might
have occurred. As a result, the Company conducted a FAS 144,
Accounting for the 58




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  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 the Companys long-lived assets were not
impaired. However, the FAS 142 analysis indicated that goodwill was
impaired. This determination is made at the reporting unit level and
consists of two steps. First, the Company determined the fair value of
its only reporting unit, based on a market approach, and compared this
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,
the Company recorded $583.5 million for goodwill impairment. After
recording this impairment charge, there was no goodwill remaining on
the Companys balance sheet as of June 27, 2004.The intangible assets subject to amortization are being amortized on a
straight-line basis over lives ranging from three months to seven
years. Aggregated amortization expense for these intangibles for the
twelve months ended June 27, 2004, was $19.1 million. For the next
five full fiscal years aggregated amortization expense is expected to
be (in thousands):  2005
    
    $
    26,1902006
    
    $
    26,1272007
    
    $
    25,4422008
    
    $
    21,3022009
    
    $
    11,597
  The following table presents the impact on net income (loss) and net
income (loss) per share had Statement 142 been in effect for the
year ended June 30, 2002. 2004
    
    2003
    
    2002(in thousands, except per share data)Net income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )Add back: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    149,729Add back: Assembled workforce amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    415Adjusted net
income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    53,910Add back: Interest expense on convertible
subordinated notes, net of tax
    
    
    
    
    
    
    3,416
    
    
    
    Numerator for diluted net income (loss) per share
    
    $
    (532,322
    )
    
    $
    69,105
    
    
    $
    53,910Basic net income (loss) per share:Net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    (1.18
    )Add back: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    1.84Add back: Assembled workforce amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    Adjusted basic net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    0.66Diluted net income (loss) per share:Net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    (1.18
    )Add back: Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    1.82Add back: Assembled workforce amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    Adjusted diluted net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    0.64
 59




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 Note 8 Accrued Liabilities  Components of accrued liabilities are as follows: 2004
    
    2003( in thousands)Accrued payroll and related costs
    
    $
    8,936
    
    
    $
    8,406Accrued inventory purchases
    
    
    
    
    
    
    1,449Accrued interest
    
    
    162
    
    
    
    1,502Warranty reserves
    
    
    4,046
    
    
    
    2,349Deferred revenue
    
    
    1,561
    
    
    
    2,054Accrued advertising and promotions
    
    
    1,139
    
    
    
    719Other
    
    
    6,995
    
    
    
    2,327$
    22,839
    
    
    $
    18,806
  Deferred revenue includes an accrual for estimated returns and
allowances of $1.6 million and $1.9 million at June 27, 2004, and
June 29, 2003, respectively. Deferred revenue also includes deferred
revenue related to legacy cLAN products with unspecified upgrade
rights of $5 thousand and $0.2 million at June 27, 2004, and June 29,
2003, respectively.  The Company provides a warranty of between one and three years on its
Input/Output Fibre Channel and Internet Protocol products and
provides a warranty of between one and five years on its Fibre
Channel switching and traditional networking products. The Company
records a provision for estimated warranty-related costs based on historical product returns and the Companys
expected future cost of fulfilling its warranty obligations.Changes to the warranty reserve in 2004 and 2003 were: 2004
    
    2003(in thousands)Balance at beginning of period
    
    $
    2,349
    
    
    $
    2,244Additions to costs and expenses
    
    
    2,880
    
    
    
    1,642Amounts charged against reserve
    
    
    (2,036
    )
    
    
    (1,154
    )Change in estimate for preexisting warranties,
including expirations
    
    
    
    
    
    
    (383
    )Beginning balance of Vixel Corporation
    
    
    853
    
    
    
    Balance at end of period
    
    $
    4,046
    
    
    $
    2,349
 Note 9 Convertible Subordinated Notes  On January 29, 2002, the Company completed a $345.0 million private
placement of 1.75 percent convertible subordinated notes due February
1, 2007. Interest is payable in cash on February 1 and August 1 of
each year beginning August 1, 2002. These notes may be converted by
the holder at any time into shares of the Companys common stock at
the conversion price of $53.84 per share, subject to the potential
adjustments described in the terms of the notes issued. The Company
may redeem the notes on or after February 5, 2005, in whole or in
part. The Company incurred associated issuance costs of approximately
$11.0 million.  During the three months ended September 29, 2002, the Companys Board
of Directors expanded the Companys stock repurchase program to
include repurchase of the Companys 1.75 percent convertible
subordinated notes as well as shares of the Companys common stock.
In August 2002, the Company bought back at a discount to face value
approximately $136.5 million in face value of its convertible
subordinated notes for $104.2 million. The resulting net pre-tax gain
of $28.7 million was recorded for the three months ended September 29,
2002. 60




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  During the three months ended September 28, 2003, the Companys Board
of Directors expanded the Companys stock repurchase program to
include the repurchase of all of the Companys 1.75 percent
convertible subordinated notes and extended the entire program to June
2005. During fiscal 2004, the Company bought back a total of
approximately $191.6 million face value of its 1.75 percent
convertible subordinated notes for approximately $185.6 million. The
resulting net pre-tax gain of approximately $2.7 million was recorded
in 2004. The repurchased notes were cancelled, leaving 1.75 percent
convertible subordinated notes outstanding with a face value of
approximately $17.0 million that, if converted, would result in the
issuance of approximately 0.3 million shares. At June 27, 2004, the
entire $17.0 million face amount of the outstanding 1.75 percent
convertible subordinated notes remained authorized for repurchase. In
addition, 1.5 million shares of common stock remain authorized for
repurchase, after reflecting the repurchase of 1.5 million common shares
during the three months ended December 28, 2003.In 2004, the Company completed a $517.5 million private placement of
0.25 percent contingent convertible subordinated notes due 2023.
Interest is payable in cash on June 15th and December 15th of each
year beginning June 15, 2004. Under the terms of the offering, the
notes will be convertible 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 our 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 our common
stock is more than 120% of the then current conversion price
of the notes;
    
    if we elect to redeem the notes on or after December
20, 2008;
    
    upon the occurrence of specified corporate
transactions or significant distributions to holders of our
common stock; or
    
    subject to specified exceptions, for the ten business
day period after any five consecutive trading day period in
which the average trading prices for the notes for such five
trading day period was less than 98% of the average conversion
value of the notes during that period.  The notes will mature in twenty years and will not be callable for the
first five years. Holders of the notes may require the Company to
purchase the notes for cash by giving written notice within the 20
business days prior to each of December 15, 2006, December 15, 2008,
December 15, 2013 or December 15, 2018 or upon a change in control.
The Company incurred total associated bankers fees of approximately
$11.6 million, which were recorded as a reduction to the proceeds from
the issuance of the notes and will be accreted over the effective life
of the notes, as well as $0.7 million of other associated debt
issuance costs, which have been included in other assets and will also be
amortized over the effective life of the notes. The effective life
of the Companys 0.25 percent contingent convertible subordinated
notes due 2023 is three years, which is the period up to the first
date that the holders can require us to repurchase the notes. Note 10 Employee Retirement Savings Plan  The Company has a pretax savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code for substantially all
domestic employees. Under the plan, eligible employees are able
to contribute up to 15 percent of their compensation not to exceed
the maximum IRS deferral amount. Company discretionary
contributions match up to four percent of a participants
compensation. The Companys contributions under this plan were
$1.6 million, $1.2 million and $1.1 million in 2004, 2003 and
2002, respectively.The Companys eligible employees in the United Kingdom are offered a
similar plan, which allows the employees to contribute up to 15
percent of their compensation. Company discretionary contributions
match up to four percent of a participants compensation. The
Companys contributions under this plan were $34 thousand, $18
thousand and $15 thousand in 2004, 2003 and 2002, respectively. 61




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 Note 11 Commitments and Contingencies  LeasesThe Company leases certain facilities and equipment under long-term noncancelable operating lease agreements, which
expire at various dates through 2008. Rent expense for the Company under operating leases, including month-to-month
rentals, totaled $3.4 million, $3.8 million and $2.8 million in 2004, 2003 and 2002, respectively.Future minimum noncancelable lease commitments are as follows (in thousands): Fiscal year:
    
    Operating Leases2005
    
    $
    2,3442006
    
    
    9792007
    
    
    1322008
    
    
    382009 and thereafter $5,800
    
    
    Total minimum lease payments $5,800
    
    $
    3,493
  LitigationOn February 28, 2003, Vixel Corporation, prior to the Companys
acquisition of Vixel, filed a patent infringement action against QLogic
Corporation in the United States District Court for the District of
Delaware. The complaint states that QLogic is infringing U.S. Patent
No. 6,118,776, entitled Methods and Apparatus for Fibre Channel
Interconnection of Private Loop Devices, through the unauthorized
manufacture, use, sale and offering for sale of various storage area
network switching products, including but not limited to, QLogics
SANBox2 series of products. On March 28, 2003, Vixel filed a first
amended complaint stating that QLogic is also infringing U.S. Patent
No. 6,185,203, entitled Fibre Channel Switching Fabric and U.S.
Patent No. 6,470,007, entitled Interconnect System for Fibre Channel
Arbitrated Loop Including Private Loop Devices through the
unauthorized manufacture, use, sale and offering for sale of various
storage area network switching products, including but not limited
to, QLogics SANBox2 series of products. QLogic denied infringement
and challenged the validity of the patents referenced.On December 8, 2003, QLogic filed a complaint against Emulex in the
United States District Court for the Central District of California
alleging that one of Vixels products, the 7200 Fibre Channel Switch,
infringes U.S. Patent No. 4,821,034, entitled Digital Exchange
Switch Element and Network. The suit seeks unspecified monetary
damages as well as injunctive relief.On February 27, 2004, Emulex Design & Manufacturing Corporation filed
a complaint against QLogic in the United States District Court for
the District of Delaware asserting the validity and enforceability of
a December 15, 2003 tentative settlement and seeking a declaration
that the U.S. Patent No. 4,821,034 is invalid and is not infringed.
On March 18, 2004, QLogic filed an answer that included denials of
the Companys assertions concerning U.S. Patent 4,821,034 and a
denial that a valid and enforceable settlement had been reached. On
June 25, 2004, the Company entered into a Settlement Agreement with
QLogic dismissing each of the patent-related lawsuits and pursuant to
which (a) QLogic acknowledged the validity of the three Vixel patents
asserted in the litigation; (b) QLogic agreed to make an initial
payment and to pay ongoing royalties on certain future product sales;
and (c) the Company and QLogic cross-licensed each other for the
patents asserted in the lawsuits.On May 23, 2003, Vixel filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District
Court for the Northern District of California. The complaint states
that Brocade is infringing U.S. Patent No. 6,185,203, entitled Fibre
Channel Switching Fabric, U.S. Patent No. 6,118,776, entitled
Methods and Apparatus for Fibre Channel Interconnection of Private
Loop Devices, and U.S. Patent No. 6,470,007, entitled Interconnect
System for Fibre Channel Arbitrated Loop Including 62




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  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. This litigation against Brocade is
ongoing.On November 15, 2001, prior to the Companys acquisition of Vixel
Corporation, a securities class action was filed in the United States
District Court in the Southern District of New York against Vixel and
two of its officers and directors and certain underwriters who
participated in the Vixel initial public offering in late 1999. The
amended complaint alleges violations under Section 10(b) of the
Exchange Act and Section 11 of the Securities Act and seeks
unspecified damages on behalf of persons who purchased Vixel stock
during the period October 1, 1999 through December 6, 2000. In
October 2002, the parties agreed to toll the statute of limitations
with respect to Vixels officers and directors until September 30,
2003, and on the basis of this agreement, Vixels officers and
directors were dismissed from the lawsuit without prejudice. During
June 2003, Vixel and the other issuer defendants in the action
reached a tentative settlement with the plaintiffs that would, among
other things, result in the dismissal with prejudice of all claims
against the defendants and their officers and directors. In
connection with the possible settlement, those officers and directors
who had entered tolling agreements with the plaintiffs agreed to
extend those agreements so that they would not expire prior to any
settlement being finalized. Although Vixel approved this settlement
proposal in principle, it remains subject to a number of procedural
conditions, as well as formal approval by the court.On October 9, 2003, before the Companys acquisition of Vixel, a
purported class action lawsuit was filed in King County Superior
Court of the State of Washington against Vixel and each of Vixels
directors and certain unnamed individuals (the Vixel Parties),
entitled Russell Fink v. Vixel Corporation, et al., Case No.
03-2-37226-9SEA. The complaint made general allegations that, among
other things, Vixels directors breached their fiduciary duties to
Vixel stockholders in connection with the approval of the merger with
Emulex and sought to enjoin the tender offer and have the merger
agreement declared unlawful, among other forms of relief. On November
7, 2003, the Vixel Parties entered into a memorandum of understanding
for a $0.7 million settlement with the plaintiff in the class action
suit pursuant to which the parties have agreed to settle the action,
subject to court approval. The $0.7 million was recorded as general
and administrative expense for the three months ended December 28,
2003. Formal settlement documents were signed on May 5, 2004 and the
plaintiff has completed discovery as agreed to by the parties. In
August 2004, final court approval was obtained for the settlement of
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. The plaintiffs in the actions
represent purchasers of the Companys common stock during various
periods ranging from January 18, 2001, through February 9, 2001. The
complaints alleged that the Company and certain of its officers and
directors made misrepresentations and omissions in violation of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended. The complaints generally seek compensatory damages, costs
and attorneys fees in an unspecified amount. In addition, the
Company has received inquiries about events giving rise to the
lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003,
the Company entered into two Memoranda of Understanding agreeing to
terms of settlement for both the class action and derivative
litigation. The settlement was approved and $39.5 million held in
escrow was paid to the plaintiffs. The Company is currently seeking
to recover a portion of this amount from the Companys insurance
carriers. The final amount collected for the Companys receivable
from its insurance carriers related to the settlements of securities
class action and derivative lawsuits may be materially different from
the receivable amount. The Company reached an agreement with one of
its insurers, under which the Company received $10.0 million less
$2.0 million previously paid by the insurer for the defense of the
securities class action lawsuits, resulting in a net payment to the
Company of $8.0 million during the three months ended March 28, 2004.
In July 2004, the Company obtained an arbitration award against two
of its insurers, and the amount of the award exceeded our previous
estimate by approximately $4.0 million to $5.0 million. 63




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Ongoing lawsuits or arbitrations present risks inherent in disputes
of this type, any of which could have a material adverse effect on
the Companys business, financial condition or results of operations.
Such potential risks include the continuing expenses of litigation,
the risk of loss of patent rights, the risk of injunction against the
sale of products incorporating the technology in question,
counterclaims and attorneys fee liability.Additionally, the Company is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not
have a material adverse effect on the Companys consolidated
financial position, results of operations or liquidity.Other Commitments and ContingenciesThe Company recorded an estimated excess and obsolete inventory
charge of $13.6 million associated with older-generation one Gbps
products during the three months ended September 30, 2001. After
initially recording this one Gbps reserve in September 2001, the
Company has subsequently reduced this reserve by a total of $8.9
million through June 27, 2004, as previously-reserved inventory has
been sold. Overall, the Company has been able to recover a
significant portion of this reserved inventory that was not expected
based on the Companys forecast and the forecasts received from its
customers when this excess and obsolete inventory charge was
recorded. In addition to the sale of some of this
previously-reserved product, the Company has also scrapped $4.2
million of this reserved inventory and negotiated and paid
cancellation charges of $0.2 million through June 27, 2004, related
to this excess and obsolete inventory charge since it was initially
recorded. As of March 28, 2004, the remaining reserve for one Gbps
products was $0.3 million. However, as with all inventory, the
Company regularly compares forecasted demand for its one Gbps
products against inventory on hand and open purchase commitments and
accordingly, the Company may have to record reductions to the
carrying value of excess and obsolete inventory if forecasted demand
decreases. As of June 27, 2004, the Company had unreserved one Gbps
inventory on hand of approximately $0.3 million.The Company was required to enter into purchase agreements for seven
key inventory components, and as of June 27, 2004, the Companys
remaining purchase obligation for the seven components was $5.3
million. As of June 27, 2004, the Company has a $1.0 million letter
of credit in place in lieu of a rental deposit on one of its
facilities and a $0.1 million of credit in place related to one of
its other facilities. The $1.0 million letter of credit was
cancelled in fiscal 2005. Note 12 Stockholders Equity  Stock Repurchase ProgramThe Companys Board of Directors has authorized the repurchase of up
to 4.0 million common shares over the two years beginning in
September 2001. The repurchase plan authorized the Company to make
repurchases 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. In 2002, the
Company repurchased 1.0 million common shares, leaving 3.0 million
common shares authorized for repurchase at June 29, 2003.During the three months ended September 29, 2002, the Companys Board
of Directors expanded the Companys stock repurchase program to
include the repurchase of the Companys 1.75 percent convertible
subordinated notes as well as shares of the Companys stock. During
the three months ended March 30, 2003, the Companys Board of
Directors further expanded the repurchase of the 1.75 percent
convertible subordinated notes up to a total purchase price of $190.0
million. During the three months ended September 28, 2003, the
Companys Board of Directors expanded the Companys stock repurchase
program to include the repurchase of all of the Companys 1.75
percent convertible subordinated notes and extended the entire
program to June 2005. At June 27, 2004, the entire $17.0 million
face amount of the outstanding 1.75 percent convertible subordinated
notes remained authorized for repurchase. In addition,
1.5 million shares of common stock remain authorized for
repurchase, after reflecting
the repurchase of 1.5 million common shares during the three months
ended December 28, 2003. 64




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Stock Option PlansUnder the Companys Employee Stock Option Plan (the Plan), which
offers stock options to both domestic and international employees,
the exercise price of options granted will not be less than the fair
market value at the date of grant. The total number of shares of
common stock authorized for issuance under the Plan is 33.7 million,
and 2.4 million shares were available for grant at June 29, 2003.
Unless otherwise provided by the Board of Directors or a committee of
the Board administering the Plan, each option granted under the Plan
becomes exercisable at the rate of 25 percent one year after the date
of grant with an additional 6.25 percent becoming exercisable each
three-month interval thereafter.On October 9, 1997, the Companys Board of Directors adopted the
Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors
(the Director Plan), which, as amended, allows for a maximum of 1.7
million shares of common stock, and 0.4 million shares were available
for grant at June 27, 2004. The Director Plan currently provides
that an option to purchase 30 thousand shares of common stock of the
Company will be granted to each non-employee director of the Company
upon the first date that such director becomes eligible to
participate. These options shall be exercisable as to one-third of
the shares on each anniversary of the grant if the director is still
a director of the Company. In addition, on each yearly anniversary
of the date of the initial grant, each eligible director shall
automatically be granted an additional option to purchase 10 thousand shares of common stock. These options shall be exercisable as to
one-half of the shares on the six month anniversary, one quarter on
the nine month anniversary and one quarter on the year anniversary of
the grant date. Options granted under the Director Plan are
non-qualified stock options. The exercise price per option granted
will not be less than the fair market value at the date of grant. No
option granted under the Director Plan shall be exercisable after the
expiration of the earlier of (i) ten years following the date the
option is granted or (ii) one year following the date the optionee
ceases to be a director of the Company for any reason. Options to
purchase 0.1 million shares per year were granted under the Director
Plan in 2004, 2003 and 2002.Employee Stock Purchase PlanIn 2001, the Companys Board of Directors adopted the Employee Stock
Purchase Plan (the Purchase Plan). Under the Purchase Plan,
employees of the Company who elect to participate are granted options
to purchase common stock at a 15 percent discount from the lower of
the market value of the common stock at the beginning or the end of
each six month offering period. The Purchase Plan permits an
enrolled employee to make contributions to purchase shares of common
stock by having withheld from their salary an amount up to 10 percent
of their compensation. The Compensation Committee of the Board of
Directors administers the Purchase Plan. The Company has reserved a
total of 1.0 million shares of common stock for issuance under the
Purchase Plan. A total of 0.5 million shares have been issued by the
Plan since its inception and 0.5 million shares were available for
purchase at June 27, 2004. 65




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Following is a summary of stock option transactions for 2002, 2003 and
2004: WeightedNumber
    
    average exerciseof Shares
    
    price per shareOptions outstanding at July 1, 2001
    
    
    9,095,338
    
    
    
    27.27Granted
    
    
    1,439,000
    
    
    
    23.19Exercised
    
    
    (847,394
    )
    
    
    4.99Canceled
    
    
    (366,590
    )
    
    
    29.76Options outstanding at June 30, 2002
    
    
    9,320,354
    
    
    
    28.56Granted
    
    
    1,586,500
    
    
    
    23.24Exercised
    
    
    (518,358
    )
    
    
    6.96Canceled
    
    
    (292,276
    )
    
    
    28.56Options outstanding at June 29, 2003
    
    
    10,096,220
    
    
    $
    28.84Granted
    
    
    5,022,813
    
    
    
    18.32Exercised
    
    
    (1,284,754
    )
    
    
    8.74Canceled
    
    
    (1,461,709
    )
    
    
    47.84Options outstanding at June 27, 2004
    
    
    12,372,570
    
    
    $
    24.41
  The 5.0 million options granted in 2004 included 2.2 million options
that were issued in exchange for the outstanding Vixel options. As
of June 27, 2004, June 29, 2003, and June 30, 2002, the number of
options exercisable was 7.3 million, 6.2 million, and 3.7 million,
respectively, and the weighted average exercise price of those
options was $25.74, $28.97 and $27.80, respectively. Outstanding Options
    
    Options ExercisableWeighted
    
    Weightedaverage
    
    Average
    
    
    
    
    
    Weighted averageOutstanding
    
    exercise
    
    remaining
    
    Exercisable
    
    ExerciseRange of
    
    as of
    
    price per
    
    contractual
    
    as of
    
    price perExercise Prices
    
    June 27, 2004
    
    option
    
    life (years)
    
    June 27, 2004
    
    option$
    0.28 to $10.93
    
    
    
    1,956,041
    
    
    $
    5.21
    
    
    
    5.95
    
    
    
    1,522,944
    
    
    $
    4.61$
    11.07 to $20.84
    
    
    
    2,519,497
    
    
    $
    16.32
    
    
    
    7.14
    
    
    
    1,521,339
    
    
    $
    15.85$
    20.87 to $25.38
    
    
    
    2,984,302
    
    
    $
    23.08
    
    
    
    7.96
    
    
    
    1,131,492
    
    
    $
    21.73$
    25.41 to $30.05
    
    
    
    2,487,837
    
    
    $
    26.44
    
    
    
    8.27
    
    
    
    968,606
    
    
    $
    26.68$
    30.07 to $109.03
    
    
    
    2,424,893
    
    
    $
    47.84
    
    
    
    6.29
    
    
    
    2,184,266
    
    
    $
    49.03$
    0.28 to $109.03
    
    
    
    12,372,570
    
    
    $
    24.41
    
    
    
    7.21
    
    
    
    7,328,647
    
    
    $
    25.74
  Shareholder Rights PlanThe Company has a Shareholder Rights Plan that provides for Preferred
Stock Purchase Rights (Rights) that attach to and transfer with
each share of common stock. When the Rights become exercisable, each
Right entitles the holder to purchase from the Company one unit
consisting of 1/100 of a share of Series A Junior Participating
Preferred Stock for $300 per unit, subject to adjustment. The Rights
become exercisable if (i) a person or group (Acquiring Person) has
acquired, or obtained the right to acquire, 20 66




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  percent or more of the outstanding shares of common stock, (ii) a
person becomes the beneficial owner of 30 percent or more of the
outstanding shares of common stock, (iii) an Acquiring Person engages
in one or more self-dealing transactions with the Company or (iv)
an event occurs which results in an Acquiring Persons ownership
interest being increased by more than 1 percent. Upon exercise and
payment of the purchase price for the Rights, the Rights holder
(other than an Acquiring Person) will have the right to receive
Company common stock (or, in certain circumstances, cash, property or
other securities of the Company) equal to two times the purchase
price. The Company is entitled to redeem the Rights at any time
prior to the expiration of the Rights in January 2009, or 10 days
following the time that a person has acquired beneficial ownership of
20 percent or more of the shares of common stock then outstanding.
The Company is entitled to redeem the Rights in whole, but not in
part, at a price of $0.01 per Right, subject to adjustment. Note 13 Income Taxes  The components of income tax expense (benefit) are as follows: 2004
    
    2003
    
    2002(in thousands)Federal:Current
    
    $
    18,101
    
    
    $
    8,105
    
    
    $
    7,776Deferred
    
    
    17,019
    
    
    
    26,871
    
    
    
    (6,539
    )State:Current
    
    
    4,076
    
    
    
    4,609
    
    
    
    3,734Deferred
    
    
    (1,199
    )
    
    
    649
    
    
    
    (5,314
    )Foreign:Current
    
    
    65
    
    
    
    28
    
    
    
    50$
    38,062
    
    
    $
    40,262
    
    
    $
    (293
    )
  The income tax expense in 2004, 2003 and 2002 included a
charge-in-lieu of taxes of $9.5 million, $4.1 million and $4.3
million, respectively, for current year tax benefits related to
exercises of stock options under the Companys stock option plans.
In 2002, additional charges-in-lieu of taxes relate to the release of
valuation allowance directly to goodwill and additional paid-in
capital. Tax benefits related to the release of valuation allowance
were allocated as follows: 2004
    
    2003
    
    2002(in thousands)Reported in consolidated statement of operations
    
    $
    
    
    
    $
    
    
    
    $
    17,870Goodwill
    
    
    
    
    
    
    
    
    
    
    3,838Additional paid-in-capital
    
    
    
    
    
    
    
    
    
    
    39,528$
    
    
    
    
    
    
    
    $
    61,236
  The valuation allowance, released in 2002, was originally established
primarily in relation to net operating loss carryforwards and tax
credits. In 2002, the total tax benefits (including both the benefits
generated in the year and those that related to the release of the
valuation allowance) reflected in income tax expense that related to
operating losses and tax credits amounted to $10.0 million and $10.9
million, respectively.Income (loss) before income taxes consists of the following: 2004
    
    2003
    
    2002(in thousands)Domestic
    
    $
    (494,481
    )
    
    $
    105,857
    
    
    $
    (96,694
    )Foreign
    
    
    221
    
    
    
    94
    
    
    
    167Total
    
    $
    (494,260
    )
    
    $
    105,951
    
    
    $
    (96,527
    )
 67




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are
presented below: 2004
    
    2003(in thousands)Deferred tax assets:Capitalization of inventory costs
    
    $
    224
    
    
    $
    124Reserves not currently deductible
    
    
    7,887
    
    
    
    18,859Deferred compensation
    
    
    992
    
    
    
    152Provisions for discontinued operations and consolidation charges
    
    
    138
    
    
    
    12Net operating loss carryforwards
    
    
    43,442
    
    
    
    5,251General business and state credit carryforwards
    
    
    17,719
    
    
    
    16,004Capitalized research and development expenditures
    
    
    2,349
    
    
    
    1,479Alternative minimum tax credit carryforwards
    
    
    4,031
    
    
    
    4,279Other
    
    
    109
    
    
    
    111Total gross deferred tax assets
    
    $
    76,891
    
    
    $
    46,271Deferred tax liabilities:Various state taxes
    
    $
    2,571
    
    
    $
    2,580Intangible  Customer Relationships
    
    
    13,366
    
    
    
    Intangible  Assembled workforce
    
    
    715
    
    
    
    715Intangible  Core technology and patents
    
    
    32,201
    
    
    
    10,827Depreciation
    
    
    848
    
    
    
    79Intangible  Other
    
    
    846
    
    
    
    Total gross deferred tax liabilities
    
    
    50,547
    
    
    
    14,201Net deferred tax assets
    
    $
    26,344
    
    
    $
    32,070
  Based on the Companys historical and anticipated future pre-tax
results of operations, management believes it is more likely than not
that the Company will realize the benefit of the net deferred tax
assets existing as of June 27, 2004. Management believes the existing
net deductible temporary differences will reverse during periods in
which the Company generates net taxable income; however, there can be
no assurance that the Company will generate any earnings or any
specific level of continuing earnings in future years. Certain tax
planning or other strategies could be implemented, if necessary, to
supplement earnings from operations to fully realize recorded tax
benefits. The change in the valuation allowance during 2002 was a
decrease of $61.2 million.The effective income tax expense (benefit) on pretax income (loss)
differs from expected federal income tax for the following reasons: 2004
    
    2003
    
    2002(in thousands)Expected income tax expense (benefit) at 35 percent
    
    $
    (172,991
    )
    
    $
    37,083
    
    
    $
    (33,785
    )State income tax expense (benefit), net of federal tax benefit
    
    
    3,414
    
    
    
    4,336
    
    
    
    (2,102
    )Impairment of goodwill
    
    
    204,743
    
    
    
    
    
    
    
    Amortization of nondeductible goodwill
    
    
    
    
    
    
    
    
    
    
    57,271Inprocess research and development expenditures
    
    
    4,000
    
    
    
    
    
    
    
    Change in valuation allowance allocated to income tax expense
    
    
    
    
    
    
    
    
    
    
    (17,870
    )Extraterritorial income exclusion
    
    
    (855
    )
    
    
    (681
    )
    
    
    (1,470
    )Research and other credits
    
    
    (1,443
    )
    
    
    (2,705
    )
    
    
    (3,077
    )Other, net
    
    
    1,194
    
    
    
    2,229
    
    
    
    740$
    38,062
    
    
    $
    40,262
    
    
    $
    (293
    )
 68




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##### Table of Contents



EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  At June 27, 2004, the Company had federal and state net operating
loss carryforwards of $114.1 million and $48.9 million, respectively,
which are available to offset future federal and state taxable
income. If unused, the federal net operating loss carryforwards will
expire during the years 2011 through 2023, and the state net
operating loss carryforwards will begin to expire in 2005. Included
in these amounts are a Vixel Corporation federal net operating loss carryforward of $112.7 million
and a Giganet, Inc. federal net operating loss carryforward of $1.4
million, which were incurred prior to these acquisitions by the
Company. The annual utilization of these net operating loss
carryforwards is limited due to restrictions imposed under federal
law due to a change in ownership.  At June 27, 2004, the Company had federal and state research and
experimentation credit carryforwards of $12.1 million and $5.5
million, which are available to reduce federal and state income
taxes. If unused, the federal carryforwards expire during the years 2020 through 2024, and
the state carryforwards are available indefinitely. For federal
purposes, the Company has alternative minimum tax credit
carryforwards of approximately $4.0 million, which are available for
carryforward indefinitely, and $126 thousand of foreign tax credit
carryforwards available through 2009.  The Internal Revenue Service is auditing the Companys Federal Income
tax return for the taxable year ending July 1, 2001. Management does
not expect a material impact on the consolidated financial statements
from this examination. Note 14 Revenue by Product Families, Geographic Area and Significant Customers  Revenues by Product Families:  The Company designs and markets three major distinct product families
within one industry segment: high-speed Fibre Channel products, IP
networking products and the Companys other products which consist
primarily of printer servers and network access products. 2004
    
    2003
    
    2002( in thousands)Net revenues:Fibre Channel
    
    $
    363,871
    
    
    $
    304,596
    
    
    $
    247,705IP networking
    
    
    529
    
    
    
    2,408
    
    
    
    4,242Other
    
    
    22
    
    
    
    1,204
    
    
    
    2,794Total net revenues
    
    $
    364,422
    
    
    $
    308,208
    
    
    $
    254,741
  Revenues by Geographic Area:The Companys net revenues by geographic area based on bill-to location
are: 2004
    
    2003
    
    2002( in thousands)United States
    
    $
    205,390
    
    
    
    56
    %
    
    $
    185,195
    
    
    
    60
    %
    
    $
    152,638
    
    
    
    60
    %Europe
    
    
    122,773
    
    
    
    34
    %
    
    
    101,476
    
    
    
    33
    %
    
    
    90,130
    
    
    
    35
    %Pacific Rim Countries
    
    
    36,259
    
    
    
    10
    %
    
    
    21,537
    
    
    
    7
    %
    
    
    11,973
    
    
    
    5
    %$
    364,422
    
    
    
    100
    %
    
    $
    308,208
    
    
    
    100
    %
    
    $
    254,741
    
    
    
    100
    %
  In 2004, 2003 and 2002 net revenues to the United Kingdom, based on
bill-to location, were 13, 14 and 14 percent, respectively, and no
other country in Europe accounted for more than 10 percent of net
revenues during these periods. 69




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002  Significant Customers:  The following table represents direct sales to customers accounting
for greater than 10 percent of the Companys net revenues or customer
accounts receivable accounting for greater than 10 percent of the
Companys accounts receivable. Amounts not presented were less than
10 percent. Net Revenues
    
    Accounts Receivable2004
    
    2003
    
    2002
    
    2004
    
    2003Hewlett-Packard, including Compaq
    
    
    18
    %
    
    
    23
    %
    
    
    25
    %
    
    
    13
    %
    
    
    27
    %IBM
    
    
    24
    %
    
    
    23
    %
    
    
    20
    %
    
    
    31
    %
    
    
    34
    %Info-X
    
    
    12
    %
    
    
    
    
    
    
    
    
    
    
    18
    %
    
    
    13
    %
  In addition to direct sales, some of our larger OEM customers
purchased or marketed products indirectly through distributors,
resellers, or other third parties. Customers with total direct and
indirect revenues, including customer-specific models purchased or
marketed indirectly through distributors, resellers and other third
parties, of more than 10 percent were as follows: Net Revenues2004
    
    2003
    
    2002Hewlett-Packard, including Compaq
    
    
    20
    %
    
    
    23
    %
    
    
    25
    %IBM
    
    
    24
    %
    
    
    26
    %
    
    
    27
    %EMC
    
    
    24
    %
    
    
    22
    %
    
    
    22
    %
 Note 15 Net Income (Loss) per Share  Basic net income (loss) per share is computed by dividing net
income (loss) by the
weighted average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed by dividing
adjusted net income (loss) by the weighted average number of common shares
outstanding during the period increased to include, if dilutive, the
number of additional common shares that would be outstanding if the
dilutive potential common shares from stock option plans and
convertible subordinated notes had been issued. The dilutive effect
of outstanding stock options is reflected in diluted net income per
share by application of the treasury stock method. The dilutive
effect of convertible subordinated notes is reflected in diluted net
income per share by application of the if converted method. The following
table sets forth the computation of basic and diluted net income
(loss) per share: 2004
    
    2003
    
    2002(in thousands, except per share data)Numerator:Net income (loss)
    
    $
    (532,322
    )
    
    $
    65,689
    
    
    $
    (96,234
    )Adjustment for interest expense on convertible
subordinated
notes, net of tax
    
    
    
    
    
    
    3,416
    
    
    
    Numerator for diluted net income (loss) per share
    
    $
    (532,322
    )
    
    $
    69,105
    
    
    $
    (96,234
    )Denominator:Denominator for basic net income (loss) per share 
weighted
average shares outstanding
    
    
    82,293
    
    
    
    82,051
    
    
    
    81,487Effect of dilutive securities:Dilutive options outstanding
    
    
    
    
    
    
    1,579
    
    
    
    Dilutive common shares from assumed conversion of
outstanding 1.75 percent convertible subordinated notes
    
    
    
    
    
    
    4,284
    
    
    
    Denominator for diluted net income (loss) per share 
adjusted weighted average shares
    
    
    82,293
    
    
    
    87,914
    
    
    
    81,487
 70




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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 27, 2004, June 29, 2003, and June 30, 2002 2004
    
    2003
    
    2002(in thousands, except per share data)Basic net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.80
    
    
    $
    (1.18
    )Diluted net income (loss) per share
    
    $
    (6.47
    )
    
    $
    0.79
    
    
    $
    (1.18
    )Antidilutive options excluded from the computations
    
    
    12,373
    
    
    
    6,696
    
    
    
    9,320Antidilutive common shares from assumed conversion of
outstanding convertible subordinated notes excluded from the
calculation
    
    
    1,439
    
    
    
    
    
    
    
    6,408Average market price of common stock
    
    $
    23.80
    
    
    $
    19.71
    
    
    $
    29.15
  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
2003. As the Company recorded a net loss in 2004 and 2002, all
outstanding stock options and potential common shares associated
with the Companys 1.75 percent convertible subordinated notes were
excluded in 2004 and 2002, as the effect would have been
antidilutive. The effect of the Companys 0.25 percent contingent
convertible subordinated notes issued in December 2003 was excluded
as these are contingent convertible subordinated notes and did not
meet the criteria for conversion (detailed in note 9) into common
stock during 2004. Note 16 Quarterly Financial Data (Unaudited)  Selected quarterly financial data for 2004 and 2003 is as follows: DilutedNet IncomeNet
    
    
    
    
    
    Net
    
    (Loss)Revenues
    
    Gross Profit
    
    Income (Loss)
    
    Per share(in thousands, except per share data)2004:Fourth quarter
    
    $
    86,438
    
    
    $
    54,142
    
    
    $
    (572,853
    ) (1)
    
    $
    (6.97
    )Third quarter
    
    
    99,038
    
    
    
    62,664
    
    
    
    14,328
    
    
    
    0.17Second quarter
    
    
    94,369
    
    
    
    59,563
    
    
    
    3,615
    
    
    
    0.04First quarter
    
    
    84,577
    
    
    
    56,250
    
    
    
    22,588
    
    
    
    0.27Total
    
    $
    364,422
    
    
    $
    232,619
    
    
    $
    (532,322
    )2003:Fourth quarter
    
    $
    81,762
    
    
    $
    54,033
    
    
    $
    18,439
    
    
    $
    0.22Third quarter
    
    
    79,573
    
    
    
    50,485
    
    
    
    (248
    )
    
    
    (0.00
    )Second quarter
    
    
    76,448
    
    
    
    49,107
    
    
    
    15,517
    
    
    
    0.19First quarter
    
    
    70,425
    
    
    
    42,543
    
    
    
    31,981
    
    
    
    0.37Total
    
    $
    308,208
    
    
    $
    196,168
    
    
    $
    65,689
  (1) Includes an impairment of goodwill charge of $583.5 million. See note
7 for additional information. Note 17 Subsequent Event  Subsequent to the year ended June 27, 2004, the Companys Board of
Directors expanded the Companys repurchase program to include up to $200
million aggregate par value of the Companys issued and outstanding
0.25 percent contingent convertible subordinated notes at a discount to
par value. On August 25, 2004, the Company repurchased approximately $153
million of its 0.25 percent convertible subordinated notes at a discount
to face value, spending approximately $137 million. The resulting net
pre-tax gain of approximately $13 million from the repurchase of these
0.25 percent convertible subordinated notes will be reported in the first
quarter of fiscal 2005. The repurchased notes will be cancelled. 71




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CONSOLIDATED FINANCIAL STATEMENT SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES 72




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Schedule II EMULEX CORPORATION AND SUBSIDIARIES 
 Valuation and Qualifying Accounts and Reserves Years ended June 27, 2004, June 29, 2003, and June 30, 2002
(in thousands) Additions
    
    
    
    
    
    AmountsBalance at
    
    Charged to
    
    
    
    
    
    Charged
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Additions-
    
    Against
    
    Reductions-
    
    At EndClassification
    
    of Period
    
    Expenses
    
    Other (1)
    
    Reserve
    
    Other (2)
    
    Of PeriodYear ended July 27, 2004:Allowance for doubtful accounts
    
    $
    1,844
    
    
    $
    145
    
    
    $
    108
    
    
    $
    16
    
    
    $
    
    
    
    $
    2,081Sales returns, allowances
and
reserves
    
    $
    2,153
    
    
    $
    12,476
    
    
    $
    
    
    
    $
    11,070
    
    
    $
    
    
    
    $
    3,559Warranty reserve
    
    $
    2,349
    
    
    $
    2,880
    
    
    $
    1,453
    
    
    $
    2,636
    
    
    $
    
    
    
    $
    4,046Year ended June 29, 2003:Allowance for doubtful accounts
    
    $
    1,597
    
    
    $
    248
    
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    1,844Sales returns, allowances
and reserves
    
    $
    718
    
    
    $
    5,840
    
    
    $
    
    
    
    $
    4,405
    
    
    $
    
    
    
    $
    2,153Warranty reserve
    
    $
    2,244
    
    
    $
    1,642
    
    
    $
    
    
    
    $
    1,154
    
    
    $
    383
    
    
    $
    2,349Year ended June 30, 2002:Allowance for doubtful accounts
    
    $
    1,298
    
    
    $
    510
    
    
    $
    
    
    
    $
    211
    
    
    $
    
    
    
    $
    1,597Sales returns, allowances
and reserves
    
    $
    961
    
    
    $
    4,293
    
    
    $
    
    
    
    $
    4,536
    
    
    $
    
    
    
    $
    718Warranty reserve
    
    $
    1,474
    
    
    $
    1,394
    
    
    $
    
    
    
    $
    624
    
    
    $
    
    
    
    $
    2,244
  (1)
    
    Represents the acquisition of Vixel Corporation.  (2)
    
    Change in estimate for preexisting warranties, including expirations 73




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. EMULEX CORPORATIONDate: September 9, 2004
    
    By:
    
    /s/ Paul F. FolinoPaul F. FolinoChairman of the Board andChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
September 9, 2004. Signature
    
    TitlePrincipal Executive Officer:/s/ Paul F. Folino
(Paul F. Folino)
    
    Chairman of the Board and
Chief Executive OfficerPrincipal Financial and Accounting Officer:/s/ Michael J. Rockenbach
(Michael J. Rockenbach)
    
    Exec. Vice President, Chief
Financial Officer, Secretary
and Treasurer/s/ Fred B. Cox
(Fred B. Cox)
    
    Director and Chairman Emeritus/s/ Michael P. Downey
(Michael P. Downey)
    
    Director/s/ Bruce C. Edwards
(Bruce C. Edwards)
    
    Director/s/ Robert H. Goon
(Robert H. Goon)
    
    Director/s/ Don M. Lyle
(Don M. Lyle)
    
    Director
 74




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##### Table of Contents



EXHIBIT INDEX EXHIBIT NO.
    
    DESCRIPTION OF EXHIBIT3.1
    
    Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys 1997 Annual Report on Form
10-K).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).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).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).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).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).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).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).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).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).4.6
    
    Form of 0.25% Convertible Subordinated Note due December 15,
2023 (incorporated by reference to Exhibit 4.6 to the Companys
quarterly report on Form 10-Q for the quarterly period ended
December 28, 2003).4.7
    
    Indenture between the Company, as Issuer, and U.S. Bank
National Association, as Trustee, dated December 12, 2003, related
to the Companys 0.25% Convertible Subordinated Notes due December
15, 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).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 December 15,
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).




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##### Table of Contents



EXHIBIT INDEX EXHIBIT NO.
    
    DESCRIPTION OF EXHIBIT10.1
    
    Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).10.2
    
    Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the Companys Definitive
Proxy Statement for its Annual Meeting of Stockholders held on
November 21, 2002).10.3
    
    Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix C to
the Companys Definitive Proxy Statement for its Annual Meeting of
Stockholders held on November 21, 2002).10.4
    
    Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix D to the Companys Definitive
Proxy Statement for its Annual Meeting of Stockholders held on
November 21, 2002).10.5
    
    Manufacturing agreement dated November 2, 2000, between Emulex
Corporation and Manufacturers Services, Ltd. (incorporated by
reference to Exhibit 10.14 to the Companys 2001 Annual Report on
Form 10-K).10.6
    
    Standard Commercial Lease between the Flatley Company and
Giganet, Inc. (incorporated by reference to Exhibit 10.15 to the
Companys 2001 Annual Report on Form 10-K).10.7
    
    Form of Key Employee Retention Agreement to which the
following executive officers of the Company are a party: Paul F.
Folino, James M. McCluney, Kirk D. Roller, William F. Gill, Sadie A.
Herrera, Karen Mulvany, Michael J. Rockenbach and Michael E. Smith
(incorporated by reference to Exhibit 10.14 to the Companys 2002
Annual Report on Form 10-K).10.8
    
    Form of Indemnification Agreement between the Company and each
of its directors
(incorporated by reference to Exhibit 10.15 to the
Companys 2002 Annual Report on Form 10-K).10.9
    
    Manufacturing agreement dated June 2, 2003, between Emulex
Corporation and Benchmark Electronics Incorporated (incorporated by
reference to Exhibit 10.21 to the Companys 2003 Annual Report on
Form 10-K).10.10
    
    Real Estate Lease dated September 12, 2000, between LM
Venture, LLC and Emulex Corporation (incorporated by reference to
Exhibit 10.22 to the Companys 2003 Annual Report on Form 10-K).10.11
    
    First Amendment to Lease (amendment dated February 8, 2001),
between LM Venture LLC and Emulex Corporation (incorporated by
reference to Exhibit 10.23 to the Companys 2003 Annual Report on
Form 10-K).10.12
    
    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).10.13
    
    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).




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##### Table of Contents



EXHIBIT INDEX EXHIBIT NO.
    
    DESCRIPTION OF EXHIBIT10.14
    
    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).10.15
    
    First Amendment to Standard Commercial Lease (amendment dated
July 1, 2004) between the Flatley Company and Emulex Design &
Manufacturing Corporation, successor-in-interest to Giganet, Inc.21
    
    List of the Companys subsidiaries.23
    
    Consent of Independent Registered Public Accounting Firm.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 2002.31B
    
    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 2002.32
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to §906 of the Sarbanes-Oxley Act of 2002.