OR

Commission File No. 001-31353

EMULEX CORPORATION

(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.

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.

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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.

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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

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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-

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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

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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

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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

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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.

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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.

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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

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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.

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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

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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

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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;

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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;

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•

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

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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.

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Executive Officers of the Registrant

The executive and certain other officers of the Company or its principal operating subsidiaries are as follows:

Mr. Folino joined 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. McCluney joined 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. Roller joined 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. Quagliara joined 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. Gill joined 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. Herrera joined 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.

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Ms. Mulvany joined 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. Rockenbach joined 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. Smith joined 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. Wick joined 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,

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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.

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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.

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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.

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.

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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

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.

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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

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Selected Consolidated Balance Sheet Data

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

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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

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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.

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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

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 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

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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

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

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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.

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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

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

(1)		Amounts less than 10 percent are not presented
(2)		Fiscal 2002 Hewlett-Packard percentages represent the combined revenues of Hewlett-Packard and Compaq

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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

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

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

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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

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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

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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

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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

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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:

(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

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.

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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.

(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

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

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)

Documents Filed with Report

		1. Consolidated Financial Statements
		The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedule are filed as part of this report.
		2. Financial Statement Schedule
		The financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Schedule is filed as part of this report.
		3. Exhibits
		The 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

EMULEX CORPORATION AND SUBSIDIARIES

Annual Report — Form 10-K
Items 8, 15(a)(1) and 15(a)(2)

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.

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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

EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 27, 2004, and June 29, 2003
(in thousands, except share data)

See accompanying notes to consolidated financial statements.

44

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)