UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File No. 001-31353

EMULEX CORPORATION

(714) 662-5600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

As of May 5, 2004, the registrant had 82,175,718 shares of common stock outstanding.

EMULEX CORPORATION AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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1.		Summary of Significant Accounting Policies and Basis of Presentation
		In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly its financial position as of March 28, 2004, and June 29, 2003, and its condensed consolidated statements of operations for the three and nine months ended March 28, 2004, and March 30, 2003, and its condensed consolidated statements of cash flows for the nine month periods then ended. Interim results for the three and nine months ended March 28, 2004, are not necessarily indicative of the results that may be expected for the year ending June 27, 2004. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2003.
		Recently Adopted Accounting Standards
		The Emerging Issues Task Force (“EITF”) recently reached a consensus on its tentative conclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides accounting guidance for customer solutions where delivery or performance of products, services and/or performance may occur at different points in time or over different periods of time. Companies are required to adopt this consensus for fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position, results of operations or liquidity.
		In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation 46, “ Consolidation of Variable Interest Entities.” In December 2003, the FASB issued Interpretation 46 (Revised) (“FIN 46-R”) to address certain Interpretation 46 implementation issues. FIN 46-R requires that the assets, liabilities and results of activities of a Variable Interest Entity (“VIE”) be consolidated into the financial statements of the enterprise that has a controlling interest in the VIE. FIN 46-R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE’s that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities acquired subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. The adoption of the provisions of the interpretation did not have a material impact on the Company’s financial position, results of operation or liquidity.
		In April 2003, the FASB issued Statement of Financial Accounting Standards No. (“Statement”) 149, an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires prospective application for contracts entered into or modified after June 30, 2003, except for contracts that exist in fiscal quarters that began prior to June 15, 2003, and for hedging relationships designated after June 30, 2003. For existing contracts in fiscal quarters that began prior to June 15, 2003, the provisions of this Statement that relate to Statement 133 implementation issues should continue to be applied in accordance with their respective effective dates. Statement 149 requires that contracts with comparable characteristics be accounted for similarly. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or liquidity.
		In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for public companies during the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or liquidity.
		In December 2003, The Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (“SAB No. 104”), which supercedes SAB No. 101 “Revenue Recognition in Financial Statements.” The primary purpose of SAB No. 104 is to rescind accounting guidance contained in SAB No. 101 related to multiple

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		element revenue arrangements that was superceded as a result of the issuance of EITF 00-21. While the wording of SAB No. 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption of SAB No. 104 did not have a material impact on the Company’s financial position, results of operations or liquidity.
		Stock-Based Compensation
		The Company accounts for its stock-based awards to employees using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations. Stock-based awards to non-employees, if any, are recorded using the fair value method. Had the Company determined compensation cost based on the fair value at the grant date for all its stock options under Statement 123, the Company’s net income would have been the pro forma amounts indicated below:

The fair value of each option granted during the three and nine months ended March 28, 2004, and March 30, 2003, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

The Black-Scholes model, and other currently accepted option valuation models, were developed to estimate the fair value of freely-tradable, fully-transferable options without vesting restrictions, which significantly differ from the Company’s stock option plans. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the grant date.

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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 payment for all validly tendered shares. On November 17, 2003, the Company completed its acquisition of Vixel by means of a short-form merger of Aviary Acquisition Corp., with and into Vixel.
		The Company acquired Vixel to expand its Fibre Channel product line and paid $298.4 million in cash for all outstanding common stock, preferred stock and warrants of Vixel Corporation. The Company also incurred acquisition-related expenses of $6.1 million in cash. In addition, the Company issued 2.2 million stock options with a fair value of approximately $47.5 million and kept the original vesting periods for the options in exchange for the outstanding Vixel options for a total acquisition value of $352.1 million. The Company calculated the fair value of the 2.2 million stock options issued at the date of acquisition using the Black-Scholes option-pricing model. Operations of Vixel will be included within the Company’s one operating segment, networking products.
		The Company accounted for the acquisition of Vixel under the purchase method of accounting and recorded a one-time expense of $11.4 million for purchased in-process research and development, or IPR&D, during the three months ended December 28, 2003. The values assigned to these projects were determined by identifying projects that have economic value but that had not yet reached technological feasibility and that have no alternative future use. The features of the related products had not been released to the market as of the date of the acquisition, but the features and functionality of the products had been defined.
		The IPR&D related to two significant internal product development efforts. The first project accounted for $7.4 million of the expenses. The second project accounted for $4.0 million of the expenses. Both projects are for embedded switching products.
		The first project was in development at the time of acquisition, but had not yet completed the full design, development and testing phases. Approximately 35 percent of the total expected time to be spent on the first project was complete at the date of the acquisition with the remaining activities of the design, development and testing phases as well as the validation and readiness stages still to occur. The estimated costs to complete the first project are $2.7 million. As of March 28, 2004, testing activities are in process, and the original estimates have not changed materially.
		The second project had completed design and development, and testing had begun as of the acquisition date. Approximately 70 percent of the total expected time to be spent on the second project was complete at the date of the acquisition with the remaining testing activities as well as the validation and readiness stages still to occur. The estimated costs to complete the second project are $1.2 million. As of March 28, 2004, testing activities and qualifications are in process, and the original estimates have not changed materially.
		The risks and uncertainties associated with these two projects include, but are not limited to, delays in product release to market if there are design flaws or testing does not go as planned. In addition, if the projects are delayed, such delay could potentially harm the Company’s relationships with its customers. Also, even if a product is successfully developed it may not be accepted in the marketplace.
		The values of these projects were determined using the Income Forecast Method. In applying the Income Forecast Method the value of the acquired technologies was estimated by discounting to present value the free cash flows generated by the products to which the technologies are associated over the remaining lives of the technologies. To distinguish between the cash flows attributable to the underlying technology and cash flows attributable to other assets available for generating product revenues, adjustments were made to provide for a

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fair return to fixed assets, working capital and other assets that contribute to value. The estimates were based on the following assumptions:

	•		The estimated revenues associated with the first project were evaluated over seven years with peak revenues expected in fiscal years 2008 and 2009 and declining revenues thereafter. The estimated revenues associated with the second project were evaluated over nine years with peak revenues expected in fiscal years 2008 and 2009 and declining revenues thereafter. These projections are based on management’s estimates over the expected remaining lives of the technologies.
	•		The discount rates used in the valuation reflect the relative risk of the product lines, with a discount rate of 20% used for the first project and a discount rate of 18% used for the second project. These discount rates were based on the amount and risk of effort remaining to complete the respective projects.

		The Company believes that the foregoing assumptions used in determining the income forecast associated with the IPR&D products were reasonable. No assurance can be given, however, that the underlying assumptions used to estimate the income forecast, the ultimate revenues and costs on such projects or the events associated with such projects will transpire as estimated.
		As a result of the acquisition, the Company will reduce the headcount obtained from Vixel prior to the acquisition by a total of 24 employees, 21 of whom left during the Company’s second and third fiscal quarters of 2004. The remaining three employees are expected to leave during the Company’s fourth fiscal quarter ending June 27, 2004. The Company accrued $1.5 million at November 13, 2003 , the date the Company gained effective control of Vixel, as an estimate for this reduction. The Company subsequently reduced the estimate and the acquisition value by $0.7 million and also paid $0.7 million through March 28, 2004, leaving a remaining accrual of $0.1 million at March 28, 2004.
		The total purchase and allocation among the fair values of tangible and intangible assets and liabilities (including purchased IPR&D) are summarized as follows (in thousands):

In accordance with Statement 141, “Business Combinations,” the allocation period, which is the period that is required to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination, should not exceed one year from the date that the Company gained effective control of Vixel.

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Intangible assets with identifiable lives are being amortized on a straight-line basis since the acquisition date for their remaining estimated lives as follows:

		The acquisition has been included in the condensed consolidated balance sheets of the Company and the operating results of Vixel have been included in the condensed consolidated statements of operations of the Company since the date that the Company gained effective control of Vixel, November 13, 2003.
		Following is the summarized unaudited pro forma combined results of operations for the three and nine months ended March 28, 2004, and March 30, 2003, assuming the acquisition had taken place at the beginning of each fiscal year. The unaudited pro forma combined statement of income for the nine months ended March 28, 2004, was prepared based upon the statement of income of Emulex for the nine months ended March 28, 2004, and the statement of operations of Vixel for the period from June 30, 2003, to November 12, 2003. All operating results of Vixel were included in the statement of income of Emulex since November 13, 2003, the date Emulex gained effective control of Vixel. The unaudited pro forma combined statement of operations for the three and nine months ended March 30, 2003, was prepared based upon the statement of operations of Emulex for the three and nine months ended March 30, 2003, and the statement of operations of Vixel for the three and nine months ended March 30, 2003. The unaudited pro forma results exclude the effects of the IPR&D charge of $11.4 million but include the amortization of other intangibles, the amortization of deferred compensation and the increase and decrease to interest expense and interest income, respectively, resulting from the acquisition. The unaudited pro forma results are not necessarily indicative of the future operations or operations that would have been reported had the acquisitions been completed when assumed. The following unaudited information is presented in thousands, except for the per share data.

3.		Inventories
		Inventories, net, are summarized as follows:

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

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made, and forecasts received, indicated deteriorating demand for the Company’s one gigabit per second (“Gbps”) products as these customers were expected to migrate to two Gbps products for future purchases. As a result, the Company recorded an excess and obsolete inventory charge totaling $13.6 million during the three months ended September 30, 2001. After initially recording this one Gbps reserve in September 2001, the Company has subsequently reduced this reserve by a total of $8.9 million through March 28, 2004, as previously-reserved inventory was sold. Overall, the Company has been able to recover a significant portion of this reserved inventory that was not expected based on the Company’s forecasts and the forecasts received from its customers when this excess and obsolete inventory charge was recorded. In addition to the sale of some of this previously-reserved product, the Company has also scrapped $3.4 million of this reserved inventory and negotiated and paid cancellation charges of $0.2 million through March 28, 2004, related to this excess and obsolete inventory charge since it was initially recorded. As of March 28, 2004, the remaining reserve for one Gbps products was $1.1 million. However, as with all inventory, the Company regularly compares forecasted demand for its one Gbps products against inventory on hand and open purchase commitments and accordingly, the Company may have to record reductions to the carrying value of excess and obsolete inventory if forecasted demand decreases. As of March 28, 2004, the Company had unreserved one Gbps inventory on hand of approximately $0.5 million.

4.		Goodwill and Other Intangibles
		Goodwill and other intangibles, net, are as follows:

		Goodwill relates to the purchase of Vixel in November 2003 and the purchase of Giganet in fiscal 2001. Core technology and patents relate to the purchase of Vixel and Giganet and to the purchase of the technology assets of Trebia Corporation for $2.0 million in October 2003. The technology assets purchased from Trebia are being amortized on a straight-line basis over a four-year life. All other intangible assets subject to amortization relate to the purchase of Vixel.
		Effective July 1, 2002, the Company adopted Statement 142, “Goodwill and Other Intangible Assets” and, as a result, the Company ceased amortizing goodwill of $397.3 million related to the purchase of Giganet. Goodwill will be tested for impairment at least annually, but also on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.

The intangible assets subject to amortization are being amortized on a straight-line basis over lives ranging from three months to seven years. Aggregated amortization expense for these intangibles for the three and nine

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months ended March 28, 2004, was $6.8 million and $12.5 million, respectively, and for the three and nine months ended March 30, 2003, was $1.5 million and $4.4 million, respectively. For the next five full fiscal years aggregated amortization expense is expected to be (in thousands):

5. Other Assets

     Components of other assets are as follows:

6.		Accrued Liabilities
		Components of accrued liabilities are as follows:

		Deferred revenue includes an accrual for estimated returns and allowances of $1.0 million and $1.9 million at March 28, 2004 and June 29, 2003, respectively. Deferred revenue also includes the revenue related to legacy cLAN products with unspecified upgrade rights of $16 thousand and $0.2 million at March 28, 2004, and June 29, 2003, respectively.
		The Company provides a warranty of between one and three years on its Input/Output Fibre Channel and Internet Protocol products and provides a warranty of between one and five years on its Fibre Channel switching and traditional networking products. The Company records a provision for estimated warranty related costs at the time of sale based on historical product returns and the Company’s expected future cost of fulfilling its warranty obligations.

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Changes to the warranty reserve for the nine months ended March 28, 2004, and March 30, 2003, were:

Changes to the warranty reserve for the three months ended March 28, 2004, and March 30, 2003, were:

7.		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.
		During the three months ended September 28, 2003, the Company’s Board of Directors expanded the Company’s stock repurchase program to include the repurchase of all of the Company’s 1.75 percent convertible subordinated notes and extended the entire program to June 2005. The combined program authorizes the repurchase of up to 4.0 million shares of common stock and the repurchase of all of the remaining outstanding convertible subordinated notes. Also during the three months ended September 28, 2003, the Company bought back approximately $93.9 million in face value of its convertible subordinated notes at a discount to face value for approximately $87.3 million. The resulting net pre-tax gain of approximately $4.7 million was recorded in the three months ended September 28, 2003. The repurchased notes were cancelled.

During the three months ended December 28, 2003, the Company bought back approximately $85.4 million in face value of its 1.75 percent convertible subordinated notes for approximately $85.9 million. The resulting net pre-tax loss of approximately $1.8 million was recorded in the three months ended December 28, 2003 and was due to the expensing of the remaining deferred debt issuance costs. Also during the three months ended March 28, 2004, the Company bought back approximately $12.3 million face value of its 1.75 percent convertible subordinated notes for approximately $12.4 million. The resulting net pre-tax loss of approximately $0.2 million due to the expensing of the remaining deferred debt issuance costs was recorded during the three months ended March 28, 2004. The repurchased notes were cancelled, leaving 1.75 percent convertible subordinated notes outstanding with a face value of approximately $17.0 million that, if converted, would result

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in the issuance of approximately 0.3 million shares. At March 28, 2004, the entire $17.0 million face amount of the outstanding 1.75 percent convertible subordinated notes remained authorized for repurchase. In addition, 1.5 million shares of common stock remain authorized for repurchase, reflecting the repurchase of 1.5 million common shares during the three months ended December 28, 2003.

On December 12, 2003, the Company completed a $450.0 million private placement of 0.25 percent convertible subordinated notes due 2023. Interest is payable in cash on June 15th and December 15th of each year beginning June 15, 2004. Under the terms of the offering, the notes will be convertible, at the option of the holder and subject to the satisfaction of certain conditions, into shares of Emulex common stock at a price of $43.20 per share. In addition, the Company granted the initial purchasers of the notes an option, which they exercised during the three months ended March 28, 2004, to purchase an additional $67.5 million principal amount of the notes. The notes will mature in twenty years and will not be callable for the first five years. Holders of the notes may require the Company to purchase the notes for cash by giving written notice within the 20 business days prior to each of December 15, 2006, December 15, 2008, December 15, 2013, and December 15, 2018. The Company incurred total associated bankers’ fees of approximately $11.6 million, which were recorded as a reduction to the proceeds from the issuance of the notes and will be accreted over the effective life of the notes, as well as $0.7 million of other associated debt issuance costs, which have been recorded as an asset and will also be amortized over the effective life of the notes. The effective life of the Company’s 0.25 percent convertible subordinated notes due 2023 is three years, which is the period up to the first date that the holders can require us to repurchase the notes, instead of the 20 year term of the notes.

8.		Commitments and Contingencies
		Litigation
		On February 28, 2003, Vixel Corporation, prior to the Company’s acquisition of it, filed a patent infringement action against QLogic Corporation in the United States District Court for the District of Delaware. The complaint states that QLogic is infringing U.S. Patent No. 6,118,776, entitled “Methods and Apparatus for Fibre Channel Interconnection of Private Loop Devices,” through the unauthorized manufacture, use, sale and offering for sale of various storage area network switching products, including but not limited to, QLogic’s SANBox2 series of products. On March 28, 2003, Vixel filed a first amended complaint stating that QLogic is also infringing U.S. Patent No. 6,185,203, entitled “Fibre Channel Switching Fabric” and U.S. Patent No. 6,470,007, entitled “Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop Devices” through the unauthorized manufacture, use, sale and offering for sale of various storage area network switching products, including but not limited to, QLogic’s SANBox2 series of products. On May 23, 2003, Vixel filed a patent infringement action against Brocade Communications Systems, Inc. in the United States District Court for the Northern District of California. The complaint states that Brocade is infringing U.S. Patent No. 6,185,203, entitled “Fibre Channel Switching Fabric,” U.S. Patent No. 6,118,776, entitled “Methods and Apparatus for Fibre Channel Interconnection of Private Loop Devices,” and U.S. Patent No. 6,470,007, entitled “Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop Devices,” through the unauthorized manufacture, use, sale and offering for sale of various storage area network switching products, including but not limited to, Brocade’s Silkworm switch products. QLogic and Brocade denied infringement and challenged the validity of the patents referenced. Brocade also challenged the enforceability of those patents. In both of these suits, Vixel was seeking unspecified past damages, potential future royalties, or, alternatively, injunctive relief.
		On December 8, 2003, QLogic filed a complaint against Emulex in the United States District Court for the Central District of California alleging that one of Vixel’s products, the 7200 Fibre Channel Switch, infringes U.S. Patent No. 4,821,034, entitled “Digital Exchange Switch Element and Network.” The suit seeks unspecified monetary damages as well as injunctive relief.

On December 15, 2003, the Company and QLogic tentatively agreed to settle the claims and mutually release each other from any liability associated with the claims (and the related counterclaims filed by QLogic) in exchange for payments by QLogic. In connection with the settlement, QLogic will be required to make an upfront payment and pay quarterly royalties associated with the future sales of certain products. The settlements are subject to execution of final written agreements with normal and customary terms and court approval of the dismissal of the lawsuits. On February 27, 2004, Emulex Design & Manufacturing Corporation (the new name

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given to Vixel) filed a complaint against QLogic in the United States District Court for the District of Delaware asserting the validity and enforceability of the December 15, 2003 settlements and seeking a declaration that the U.S. Patent No. 4,821,034 is invalid and is not infringed. On March 18, 2004, QLogic filed an answer that included denials of the Company’s assertions concerning U.S. Patent 4,821,034 and a denial that a valid and enforceable settlement had been reached.

On November 15, 2001, prior to the Company’s acquisition of Vixel Corporation, a securities class action was filed in the United States District Court in the Southern District of New York against Vixel and two of its officers and directors and certain underwriters who participated in the Vixel initial public offering in late 1999. The amended complaint alleges violations under Section 10(b) of the Exchange Act and Section 11 of the Securities Act and seeks unspecified damages on behalf of persons who purchased Vixel stock during the period October 1, 1999 through December 6, 2000. In October 2002, the parties agreed to toll the statute of limitations with respect to Vixel’s officers and directors until September 30, 2003, and on the basis of this agreement, Vixel’s officers and directors were dismissed from the lawsuit without prejudice. During June 2003, Vixel and the other issuer defendants in the action reached a tentative settlement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all claims against the defendants and their officers and directors. In connection with the possible settlement, those officers and directors who had entered tolling agreements with the plaintiffs agreed to extend those agreements so that they would not expire prior to any settlement being finalized. Although Vixel approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well as formal approval by the court.

On October 9, 2003, before the Company’s acquisition of Vixel, a purported class action lawsuit was filed in King County Superior Court of the State of Washington against Vixel and each of Vixel’s directors and certain unnamed individuals (the “Vixel Parties”), entitled Russell Fink v. Vixel Corporation, et al., Case No. 03-2-37226-9SEA. The complaint made general allegations that, among other things, Vixel’s directors breached their fiduciary duties to Vixel stockholders in connection with the approval of the merger with Emulex and sought to enjoin the tender offer and have the merger agreement declared unlawful, among other forms of relief. On November 7, 2003, the Vixel Parties entered into a memorandum of understanding for a $0.7 million settlement with the plaintiff in the class action suit pursuant to which the parties have agreed to settle the action, subject to court approval. The $0.7 million was recorded as general and administrative expense for the three months ended December 28, 2003. Formal settlement documents were signed on May 5, 2004 and the plaintiff has completed discovery as agreed to by the parties. The consummation of the settlement is subject to the final court approval (as defined by law) of the settlement and dismissal of the action with prejudice.

Beginning on or about February 20, 2001, the Company and certain of its officers and directors were named as defendants in a number of securities class action lawsuits filed in the United States District Court, Central District of California. The plaintiffs in the actions represent purchasers of the Company’s common stock during various periods ranging from January 18, 2001, through February 9, 2001. The complaints alleged that the Company and certain of its officers and directors made misrepresentations and omissions in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints generally seek compensatory damages, costs and attorney’s fees in an unspecified amount. In addition, the Company has received inquiries about events giving rise to the lawsuits from the SEC and the Nasdaq Stock Market. On April 22, 2003, the Company entered into two Memoranda of Understanding agreeing to terms of settlement for both the class action and derivative litigation. The settlement was approved and $39.5 million held in escrow was paid to the plaintiffs. The Company is currently seeking to recover a portion of this amount from the Company’s insurance carriers. The final amount collected for the Company’s receivable from its insurance carriers related to the settlements of securities class action and derivative lawsuits may be materially different from the receivable amount. The Company reached an agreement with one of its insurers, under which the Company received $10.0 million less $2.0 million previously paid by the insurer for the defense of the securities class action lawsuits, resulting in a net payment to the Company of $8.0 million during the three months ended March 28, 2004.

Each of the foregoing lawsuits or arbitrations is pending, and presents risks inherent in disputes of this type, any of which could have a material adverse effect on the Company’s business, financial condition or results of operations. Such potential risks include the continuing expenses of litigation, the risk of loss of patent rights, the risk of injunction against the sale of products incorporating the technology in question, counterclaims and attorneys’ fee liability.

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

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EMULEX CORPORATION AND SUBSIDIARIES

The antidilutive options were excluded from the computation of diluted net income per share because the options’ exercise price was greater than the average market price of the common shares during the three and nine months ended March 28, 2004. As the Company recorded a net loss for the three months ended March 30, 2003, all outstanding stock options and common stock equivalents associated with the Company’s 1.75 percent convertible subordinated notes were excluded for the three months ended March 30, 2003, as the effect would have been antidilutive. The effect of the common stock equivalents associated with the Company’s 1.75 percent convertible subordinated notes was excluded for the nine months ended March 30, 2003, as the effect would have been antidilutive. The effect of the 0.25 percent convertible subordinated notes issued in December 2003 was excluded as these are contingent convertible subordinated notes and did not meet the criteria for conversion into common stock during the three and nine months ended March 28, 2004.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements contained in this Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue” and similar expressions may be intended to identify forward-looking statements.

Actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below, and, in particular, the subsection entitled “Risk Factors” set forth therein, and in our most recently filed Annual Report on Form 10-K. These factors include risks related to the recent acquisition of Vixel and the fact that the economy generally, and the technology and storage segments specifically, have been in a state of uncertainty making it difficult to determine if past experience is a good guide to the future and making it impossible to determine if markets will grow or shrink in the short term. Our results have been significantly impacted by a widespread slowdown in information technology investment that has also pressured the storage networking market that is the mainstay of our business. A continued downturn in information technology spending could adversely affect our revenues and results of operations. As a result of this uncertainty, we are unable to predict with any accuracy what future results might be. Other factors affecting these forward-looking statements include, but are not limited to, the following: slower than expected growth of the storage networking market or the failure of our Original Equipment Manufacturer, or OEM, customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, or decrease or delays in orders by, any such customers, or the failure of such customers to make payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our or our OEM customers’ new or enhanced products; the variability in the level of our backlog and the variable booking patterns of our customers; the effects of terrorist activities and resulting political or economic instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; our ability and the ability of our OEM customers to keep pace with the rapid technological changes in our industry and gain market acceptance for new products and technologies; the effect of rapid migration of customers towards newer product platforms; possible transitions from board or box level to application specific integrated circuit, or ASIC, solutions for selected applications; a shift in the use of lower-end host bus adapters, or HBAs, in higher-end environments or applications; a decrease in the average unit selling prices or an increase in the manufactured cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; any inadequacy of our intellectual property protection or the potential for third-party claims of infringement; our ability to attract and retain key technical personnel; our dependence on foreign sales and foreign-produced products; the effect of acquisitions; changes in tax rates or changes in accounting standards.

Readers should carefully review these cautionary statements since they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends and are in addition to other factors discussed elsewhere in this Form 10-Q, in our filings with the Securities and Exchange Commission or in materials incorporated therein by reference. We caution the reader, however, that these lists of risk factors may not be exhaustive. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances.

Company Overview

Emulex Corporation is the world leader in Fibre Channel HBAs and delivers a broad range of intelligent building blocks, including embedded storage switches and Input/Output, or I/0, controllers for next generation storage networking systems. HBAs are the data communication products that enable servers to connect to storage networks by offloading communication-processing tasks as information is delivered and sent to the storage network. Embedded storage switches and I/0 controllers are deployed inside storage arrays, tape libraries and other storage

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appliances, delivering improved performance and reliability and storage connections. Emulex’s architecture offers customers a stable applications program interface, or API, that has been preserved across multiple generations of storage networking solutions and to which many of the world’s leading OEMs have customized software for mission-critical server and storage system applications.

Substantially all of our revenues during the third quarter of fiscal 2004 ended March 28, 2004, were comprised of products based on Fibre Channel technology. Our Fibre Channel development efforts began in 1992, and we shipped our first Fibre Channel product in volume in 1996. According to IDC, in calendar 2003 we were the world’s largest provider of Fibre Channel HBAs, in terms of revenue and units shipped. Many of the world’s leading server and storage providers rely on Emulex HBAs, embedded storage switching and I/O controller products to build reliable, scalable and high performance storage solutions. The Emulex award winning product families, including our LightPulse™ HBAs and InSpeed™ embedded storage switching products, are based on internally developed ASIC, firmware and software technologies, and offer customers high performance, scalability, flexibility and reduced total cost of ownership. Emulex’s products have been selected by many of the world’s leading server and storage providers, including Dell, EMC, Fujitsu Ltd., Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance, Quantum Corp., StorageTek, Sun Microsystems, Unisys and Xyratex. In addition, we include industry leaders Brocade, Computer Associates, Intel, McDATA, Microsoft and VERITAS among our strategic partners. We market to OEMs and end users through our own worldwide selling organization as well as our two tier distribution partners, including ACAL, Avnet, Bell Microproducts, Info-X, Netmarks, Tech Data, Tidalwire and Tokyo Electron. Corporate headquarters are located in Costa Mesa, California. Our periodic and current reports filed with or furnished to the Securities and Exchange Commission pursuant to the requirements of the Securities and Exchange Act of 1934 are available free of charge through our website (www.emulex.com) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. As of March 28, 2004, we had a total of 510 employees. References contained herein to “Emulex,” the “Company,” the “Registrant,” “we,” “our,” and “us,” refer to Emulex Corporation and its subsidiaries.

Business Combination

On November 13, 2003, we completed the cash tender offer by Aviary Acquisition Corporation, our wholly owned subsidiary, to acquire all outstanding shares of Vixel Corporation for $10.00 net per share, without interest. Approximately 23.9 million shares (including the associated preferred stock purchase and other nights) of Vixel’s common stock representing approximately 91.6 percent of Vixel’s outstanding common stock, and 2.9 million shares of Vixel’s Series B convertible preferred stock, representing all of Vixel’s outstanding preferred stock, were tendered in the offer. Through our wholly owned subsidiary, we accepted payment for all validly tendered shares. On November 17, 2003, we completed our acquisition of Vixel by means of a short-form merger of Aviary Acquisition Corp., with and into Vixel.

We acquired Vixel to expand our Fibre Channel product line and paid $298.4 million in cash for all outstanding common stock, preferred stock and warrants of Vixel Corporation. We also incurred acquisition-related expenses of $6.1 million in cash. In addition, we issued 2.2 million stock options with a fair value of approximately $47.5 million and kept the original vesting periods for the options in exchange for the outstanding Vixel options for a total acquisition value of $352.1 million. We calculated the fair value of the 2.2 million stock options issued at the date of acquisition using the Black-Scholes option-pricing model. The operations of Vixel will be included within the Company’s one operating segment, networking products.

We accounted for the acquisition of Vixel under the purchase method of accounting and recorded a one-time expense of $11.4 million for purchased in-process research and development, or IPR&D, during the three months ended December 28, 2003. The values assigned to these projects were determined by identifying projects that have economic value but that had not yet reached technological feasibility and that have no alternative future use. The features of the related products had not been released to the market as of the date of the acquisition, but the features and functionality of the products had been defined. For more information regarding in-process research and development see note 2 to the condensed consolidated financial statements.

Convertible Subordinated Notes Offering

On December 12, 2003, we completed a $450.0 million private placement of 0.25 percent convertible subordinated notes due 2023. Interest is payable in cash on June 15th and December 15th of each year beginning June 15, 2004. Under the terms of the offering, the notes will be convertible, at the option of the holder and subject to the satisfaction of certain conditions, into shares of Emulex common stock at a price of $43.20 per share. In addition, we

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granted he initial purchasers of the notes an option, which they exercised during the three months ended March 28, 2004, to purchase an additional $67.5 million principal amount of the notes. We incurred total associated bankers’ fees of $11.6 million, which were recorded as a reduction to the proceeds from the issuance of the notes and will be accreted over the effective life of the notes, as well as approximately $0.7 million of other associated debt issuance costs, which have been recorded as an asset and will be amortized over the effective life of the notes. Holders of the notes may require the Company to purchase the notes for cash by giving written notice within the 20 business days prior to each of December 15, 2006, December 15, 2008, December 15, 2013, and December 15, 2018. Consequently, the effective life of our 0.25 percent convertible subordinated notes due 2023 is three years, which is the period up to the first date that the holders can require us to repurchase the notes, instead of the 20-year term of the notes. When we issued our earnings release for the three and nine months ended March 28, 2004, interest expense, related to the accretion of the bankers’ fees and amortization of the associated debt issuance costs, was inadvertently calculated using a life longer than the three-year effective life of our 0.25 percent convertible subordinated notes. The net impact after tax of using the shorter effective life was a decrease to net income of $223 thousand. Basic and diluted net earnings per share for the three and nine months ended March 28, 2004, did not change. See Part II, Item 2 Changes in Securities and Use of Proceeds for a more detailed discussion of the convertible subordinated notes offering.

Results of Operations

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements included elsewhere herein.

Three months ended March 28, 2004, compared to three months ended March 30, 2003

Net Revenues. Net revenues for the third quarter of fiscal 2004 ended March 28, 2004, increased by $19.5 million, or 24 percent, to $99.0 million, compared to the same quarter of fiscal 2003 ended March 30, 2003.

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From a product line perspective, net revenues generated from our Fibre Channel products for the three months ended March 28, 2004, were $99.0 million, an increase of $20.8 million, or 27 percent, compared to the three months ended March 30, 2003, and represented substantially all of our net revenues. We believe that our net revenues from our broad range of Input/Output, or I/O, and Fibre Channel switching products are being generated primarily as a result of our product certifications and qualifications with OEM customers, which take product both directly and through distribution. The following chart details our net revenues by product line for the three months ended March 28, 2004 and March 30, 2003:

Net Revenues by Product Line

Our IP networking products consist of both our iSCSI products, which have not completed development, as well as legacy VI and cLAN products. We expect that our VI, cLAN and traditional networking products, which have all entered end-of-life status, will contribute negligible revenues to succeeding quarters. We do not expect material revenue from iSCSI products for the foreseeable future.

In addition to direct sales, some of our larger OEM customers purchased or marketed products indirectly through distributors, resellers or other third parties. Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10 percent of our net revenues were as follows:

Net Revenues by Major Customers

(1)		Amounts less than 10 percent are not presented.
(2)		Customer-specific models sold indirectly are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.

Direct sales to our top five customers accounted for 65 percent of total net revenues for the three months ended March 28, 2004, compared to 69 percent for the three months ended March 30, 2003, and we expect to be similarly concentrated in the future. Our EMC OEM products are sold both directly to EMC and indirectly through distributors such as Info-X. As a result, for the three months ended March 28, 2004, and March 30, 2003, direct revenues attributable to EMC were less than 10 percent but direct and indirect revenues attributable to EMC were greater than 10 percent of total net revenues.

From a sales channel perspective, net revenues generated from OEM customers were 62 percent of total net revenues and sales through distribution were 38 percent in the three months ended March 28, 2004 compared to net revenues from OEM customers of 69 percent and sales through distribution of 31 percent in the three months ended March 30, 2003. Our OEM customers may take products both directly

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and through distribution channels. The following chart details our net revenues by sales channel for the three months ended March 28, 2004, and March 30, 2003:

Net Revenues by Sales Channel

In the three months ended March 28, 2004, domestic net revenues increased by $6.2 million, or 14 percent, and international net revenues increased by $13.3 million, or 38 percent, compared to the three months ended March 30, 2003. The following chart details our net domestic and international revenues based on billed-to location for the three months ended March 28, 2004, and March 30, 2003:

Net Domestic and International Revenues

We believe the increases in domestic and international net revenues were principally a function of the overall size of the market for Fibre Channel products and increased market acceptance of our Fibre Channel products. However, because we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.

Gross Profit. Cost of sales included the cost of production of finished products as well as support costs and other expenses related to inventory management, manufacturing quality and order fulfillment. For the three months ended March 28, 2004, cost of sales included $0.6 million of retention bonuses for terminated employees related to the Vixel acquisition and amortized deferred stock-based compensation expenses. For the three months ended March 30, 2003, cost of sales included $0.1 million of amortized deferred stock-based compensation expenses. In the three months ended March 28, 2004, gross profit increased $12.2 million, or 24 percent, to $62.7 million, from $50.5 million in the three months ended March 30, 2003. The remaining increase in gross profit in the three months ended March 28, 2004, compared to the three months ended March 30, 2003, was primarily due to higher net revenues and volumes. Gross margin stayed relatively flat at 63 percent in both the three months ended March 28, 2004, and March 30, 2003. We have recorded reductions related to our one gigabit per second, or Gbps, reserve, as previously-reserved inventory was sold. In the three months ended March 28, 2004, and March 30, 2003, the reductions were $45 thousand and $0.3 million, respectively. This reserve was initially recorded during the first quarter of fiscal 2002.

Engineering and Development. Engineering and development expenses consisted primarily of salaries and related expenses for personnel engaged in the design, development and technical support of our products. These expenses included third-party fees paid to consultants, prototype development expenses and computer services costs related to supporting computer tools used in the engineering and design process. Engineering and development expenses were $19.0 million and $15.8 million in the three months ended March 28, 2004, and March 30, 2003, representing 19 percent and 20 percent of net revenues in each period, respectively. Engineering and development expenses increased by $3.2 million, or 20 percent, in the three months ended March 28, 2004, compared to the three months ended March 30, 2003. This increase was primarily due to the inclusion of the engineering and development expenses associated with our acquisition of Vixel, driven in part by the addition of 60 employees and their associated expenses. Since we completed our integration of Vixel’s day-to-day operations during the three months ended

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March 28, 2004, we no longer separately track former-Vixel operations. However, the expenses associated with the former-Vixel operations are estimated to account for approximately $2.7 million, or approximately 83 percent of the overall $3.2 million increase. The remaining increase was due to our continued investment in Fibre Channel I/O and IP engineering and development, which represented substantially all of our engineering and development efforts and expenses prior to the acquisition of Vixel. Engineering and development expenses included $0.7 million and $0.9 million of amortized deferred stock-based compensation expenses for the three months ended March 28, 2004 and March 30, 2003, respectively. Due to the technical nature of our products, engineering support is a critical part of our strategy during both the development of our products and the support of our customers from product design through deployment into the market. We intend to continue to make significant investments in the technical support and enhancement of our current products as well as the continued development of new products. While our engineering expenses in the three months ended March 28, 2004, increased at a similar rate as net revenues in comparison to the three months ended March 30, 2003, engineering expenses can fluctuate significantly from quarter to quarter depending on several factors, including, but not limited to, non-recurring engineering charges associated with new product introduction schedules, hiring patterns and depreciation of capital equipment.

Selling and Marketing. Selling and marketing expenses consisted primarily of salaries, commissions and related expenses for personnel engaged in the marketing and sales of our products, as well as trade shows, product literature, promotional support costs and other advertising-related costs. Selling and marketing expenses were $8.4 million and $4.9 million in the three months ended March 28, 2004, and March 30, 2003, representing eight and six percent of net revenues, respectively. Selling and marketing expenses increased by $3.5 million, or 71 percent, in the three months ended March 28, 2004, compared to the three months ended March 30, 2003. This increase was primarily due to the inclusion of the selling and marketing expenses associated with our acquisition of Vixel, driven in part by the addition of 22 employees and their associated expenses. Similar to engineering and development expenses, we no longer track former-Vixel operations separately. However, the expenses associated with the former-Vixel operations are estimated to account for approximately $1.5 million, or approximately 42 percent of the overall $3.5 million increase. The remaining increases in selling and marketing expenses were due primarily to increased customer promotions and channel support programs of approximately $0.9 million and Vixel training and transition expenses of approximately $0.2 million. For the three months ended March 28, 2004, selling and marketing expenses included $0.6 million of retention bonuses for terminated employees related to the Vixel acquisition and amortized deferred stock-based compensation expenses. For the three months ended March 30, 2003 selling and marketing expenses included $0.4 million of amortized deferred stock-based compensation expenses. As a portion of selling and marketing expenses, such as selling and marketing employees’ base compensation and amortized deferred stock-based compensation expense, is not driven directly by net revenue increases, the expenses have not expanded at the same rate as our net revenues.

General and Administrative. Ongoing general and administrative expenses consisted primarily of salaries and related expenses for executives, financial accounting support, human resources, administrative services, professional fees and other associated corporate expenses. General and administrative expenses were $6.0 million and $30.6 million in the three months ended March 28, 2004, and March 30, 2003, representing six percent and 38 percent of net revenues in each period, respectively. General and administrative expenses decreased by $24.6 million, or 80 percent, in the three months ended March 28, 2004, compared to the three months ended March 30, 2003. This decrease was primarily due to the net $27.0 million charge associated with the settlements of securities class action and derivative lawsuits in the three months ended March 30, 2003. The decrease was partially offset by the inclusion of the general and administrative expenses associated with our acquisition of Vixel, driven in part by the addition of 15 employees and their associated expenses. Similar to other operating expenses, we no longer track former-Vixel operations separately. However, the expenses associated with the former-Vixel operations are estimated to account for approximately $1.6 million of the offset to the overall decrease in general and administrative expenses. Other increases in general and administrative expenses were primarily due to increased accounting, tax and legal expenses of approximately $0.4 million. For the three months ended March 28, 2004, general and administrative expenses included $1.0 million of retention bonuses for terminated employees related to the Vixel acquisition and amortized deferred stock-based compensation expenses. For the three months ended March 30, 2003, general and administrative expenses included $0.1 million of amortized deferred stock-based compensation expenses.

Amortization of Other Intangibles. Amortization of other intangibles included the amortization of intangible assets with estimable lives. For the three months ended March 28, 2004, amortization of other intangibles was for intangible assets related to the purchase of Vixel and the purchase of the technology assets of Trebia Corporation, which were both completed during the three months ended December 28, 2003, and the purchase Giganet, completed during fiscal 2001. The $5.3 million increase in amortization of other intangibles to $6.8 million for the three months ended March 28, 2004, from $1.5 million for the three months ended March 30, 2003, was due to the addition of

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amortization related to the Vixel acquisition and the purchase of the technology assets of Trebia Corporation. Amortization of other intangibles represented seven and two percent of net revenues for the three months ended March 28, 2004, and for the three months ended March 30, 2003, respectively.

Nonoperating Income. Nonoperating income consisted primarily of interest income, interest expense and other non-operating income and expense items such as the loss on the repurchase of convertible subordinated notes. Our nonoperating income decreased by $1.4 million to $0.4 million in the three months ended March 28, 2004, from $1.9 million in the three months ended March 30, 2003. The decrease was due primarily to interest income decreasing by $0.9 million to $2.2 million in the three months ended March 28, 2004, from $3.1 million in the three months ended March 30, 2003, primarily due to lower interest yields. Additionally, we incurred a loss on the repurchase of convertible subordinated notes of $0.2 million in the three months ended March 28, 2004, due to the expensing of the remaining deferred debt issuance costs. Interest expense increased by $0.3 million to $1.5 million in the three months ended March 28, 2004, from $1.2 million in the three months ended March 30, 2003, due primarily to the outstanding balance of convertible subordinated notes.

Income Taxes. In the three months ended March 28, 2004, we recorded a tax provision in the amount of $8.6 million, or approximately 38 percent of our income before income taxes. In the three months ended March 30, 2003, we recorded a tax benefit in the amount of $0.2 million, or approximately 38 percent of our loss before income taxes.

Nine months ended March 28, 2004, compared to nine months ended March 30, 2003

Net Revenues. Net revenues for the nine months of fiscal 2004 ended March 28, 2004, increased $51.5 million, or 23 percent, to $278.0 million, compared to the nine month period of fiscal 2003 ended March 30, 2003.

From a product line perspective, net revenues generated from our Fibre Channel products for the nine months ended March 28, 2004, were $277.5 million, an increase of $54.3 million, or 24 percent, compared to the nine months ended March 30, 2003, and represented substantially all of our net revenues. The following chart details our net revenues by product line for the nine months ended March 28, 2004, and March 30, 2003.

Net Revenues by Product Line

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

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(1)		Amounts less than 10 percent are not presented.
(2)		Customer-specific models sold indirectly are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.

Direct sales to our top five customers accounted for 69 percent of total net revenues for the nine months ended March 28, 2004, compared to 66 percent for the nine months ended March 30, 2003, and we expect to be similarly concentrated in the future. Our net revenues from our customers can be significantly impacted by changes in the business models of our customers. Our EMC OEM products are sold both directly to EMC and indirectly through distributors such as Info-X. As a result, direct revenues attributable to EMC were less than 10 percent but direct and indirect revenues attributable to EMC were greater than 10 percent of total net revenues.

From a sales channel perspective, net revenues generated from OEM customers were 63 percent of net revenues and sales through distribution were 37 percent in the nine months ended March 28, 2004 compared to net revenues from OEM customers of 68 percent and sales through distribution of 32 percent in the nine month ended March 30, 2003. The following chart details our net revenues by sales channel for the nine months ended March 28, 2004, and March 30, 2003:

Net Revenues by Sales Channel

We believe that our net revenues are being generated primarily as a result of product certifications and qualifications with our OEM customers, which take product both directly and through distribution.

In the nine months ended March 28, 2004, domestic net revenues increased by $19.7 million, or 15 percent, and international net revenues increased by $31.9 million, or 35 percent, compared to the nine months ended March 30, 2003. The following chart details our net domestic and international revenues based on billed-to location for the nine months ended March 28, 2004, and March 30, 2003:

Net Domestic and International Revenues