UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File No. 001-31353

EMULEX CORPORATION

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

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

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

As of November 1, 2004, the registrant had 82,730,324 shares of common stock outstanding.

EMULEX CORPORATION AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

See accompanying notes to the condensed consolidated financial statements.

2

EMULEX CORPORATION AND SUBSIDIARIES

See accompanying notes to the condensed consolidated financial statements.

3

EMULEX CORPORATION AND SUBSIDIARIES

See accompanying notes to the condensed consolidated financial statements.

4

EMULEX CORPORATION AND SUBSIDIARIES

1.		Summary of Significant Accounting Policies and Basis of Presentation
		In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly its financial position as of September 26, 2004, and June 27, 2004, and its condensed consolidated statements of income for the three months ended September 26, 2004, and September 28, 2003, and its condensed consolidated statements of cash flows for the three months then ended. Interim results for the three months ended September 26, 2004, are not necessarily indicative of the results that may be expected for the year ending July 3, 2005. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2004.
		New Accounting Standards
		The Emerging Issues Task Force (“EITF”) recently reached consensus on EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which was ratified by the Financial Accounting Standards Board, or FASB, on October 13, 2004. EITF 04-08 will require the inclusion of shares related to contingently convertible debt instruments for computing diluted earnings per share using the if-converted method, even when the market price contingency has not been met. The effect of EITF 04-08 would increase the weighted average shares outstanding by approximately 8.4 million (related to the Company’s currently outstanding 0.25 percent contingent convertible subordinated notes issued in December 2003) in calculating the Company’s diluted earnings per share calculation, if dilutive. EITF 04-08 would require prior periods earnings per share amounts presented for comparative purposes to be recalculated to conform to this method. This consensus is expected to be effective for fiscal periods beginning after December 15, 2004, upon the effective date of a proposed FASB standard on earnings per share.
		In November 2003, the EITF reached an interim consensus on EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” to require additional disclosure requirements for securities classified as available-for-sale or held-to-maturity for fiscal years ending after December 15, 2003. In March 2004, the EITF reached a final consensus on this Issue, to provide additional guidance, which companies must follow in determining whether investment securities have an impairment, which should be considered other-than-temporary. The effective date of this consensus has been delayed pending further FASB action. EITF 03-01 is not expected to have a significant impact on the carrying value of the Company’s investments.
		Stock-Based Compensation
		The Company accounts for its stock-based awards to employees using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations. Stock-based awards to non-employees, if any, are recorded using the fair value method. Had the Company determined compensation cost based on the fair value at the grant date for all its stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” the Company’s net income would have been the pro forma amounts indicated below (in thousands, except per share data):

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

The fair value of each option granted during the three months ended September 26, 2004, and September 28, 2003, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

		The Black-Scholes model, and other currently accepted option valuation models, were developed to estimate the fair value of freely-tradable, fully-transferable options without vesting restrictions, which significantly differ from the Company’s stock option plans. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the grant date.
2.		Business Combination
		On November 13, 2003, the Company completed the cash tender offer to acquire all outstanding shares of Vixel Corporation for $10.00 net per share, without interest. On November 17, 2003, the Company completed its acquisition of Vixel. The Company acquired Vixel to expand its Fibre Channel product line and paid $298.4 million in cash for all outstanding common stock, preferred stock and warrants of Vixel Corporation. The Company also incurred acquisition-related expenses of $6.7 million in cash. In addition, the Company issued 2.2 million stock options with a fair value of approximately $47.5 million and kept the original vesting periods for the options in exchange for the outstanding Vixel options for a total acquisition value of $352.7 million. The Company calculated the fair value of the 2.2 million stock options issued at the date of acquisition using the Black-Scholes option-pricing model. Operations of Vixel, since the acquisition, have been included within the Company’s one operating segment, networking products.
		As a result of the acquisition, the Company reduced the headcount obtained from Vixel by a total of 24 employees, 23 of whom left during fiscal 2004. The remaining employee left during the three months ended September 26, 2004.
		The total purchase and allocation among the fair values of tangible and intangible assets and liabilities (including purchased IPR&D) are summarized as follows (in thousands):

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

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

		The acquisition has been included in the condensed consolidated balance sheets of the Company and the operating results of Vixel have been included in the condensed consolidated statements of operations of the Company since the date that the Company gained effective control of Vixel, November 13, 2003.
		In connection with the preparation of Vixel Corporation’s tax return in the first quarter of fiscal 2005, the Company revised estimates and discovered errors related to the deferred tax assets of Vixel Corporation (acquired in November 2003). As a result, the Company recorded a $1.8 million impairment of goodwill in the three months ended September 26, 2004. Had these items been recorded in fiscal 2004, the Company’s net loss would have been $1.8 million higher, or $534.1 million, instead of $532.3 million. The Company does not believe that this $1.8 million impairment of goodwill is material to fiscal 2004 or will be material to fiscal 2005 operations or financial results. Excluding this adjustment, net income for the three months ended September 26, 2004, would have been $16.1 million.
3.		Inventories
		Inventories, net, are summarized as follows:

4.		Other Intangibles
		Other intangibles, net, are as follows:

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

The intangible assets subject to amortization are being amortized on a straight-line basis over lives ranging from two to seven years. Aggregated amortization expense for these intangibles for the three months ended September 26, 2004, was $6.5 million. For the following five full fiscal years aggregated amortization expense is expected to be (in thousands):

5.		Other Assets
		Components of other assets are as follows:

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

		Deferred revenue includes an accrual for estimated returns and allowances of $1.4 million and $1.6 million at September 26, 2004 and June 27, 2004, respectively.
		The Company provides a warranty of between one and three years on its Input/Output Fibre Channel and Internet Protocol products and provides a warranty of between one and five years on its Fibre Channel switching and traditional networking products. The Company records a provision for estimated warranty-related costs based on historical product returns and the Company’s expected future cost of fulfilling its warranty obligations.
		Changes to the warranty reserve for the three months ended September 26, 2004, and September 28, 2003, were:

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

7.		Convertible Subordinated Notes
		In fiscal 2002, the Company completed a $345.0 million private placement of 1.75 percent convertible subordinated notes due February 1, 2007. Interest is payable in cash on February 1 and August 1 of each year beginning August 1, 2002. These notes may be converted by the holder at any time into shares of the Company’s common stock at the conversion price of $53.84 per share, subject to the potential adjustments described in the terms of the notes issued. The Company may redeem the notes on or after February 5, 2005, in whole or in part. The Company incurred associated issuance costs of approximately $11.0 million.
		During the three months ended September 28, 2003, as part of a repurchase program authorized by the Company’s Board of Directors, the Company bought back approximately $93.9 million in face value of its 1.75 percent convertible subordinated notes at a discount to face value for approximately $87.3 million. The resulting net pre-tax gain of approximately $4.7 million was recorded in the three months ended September 28, 2003. Beginning in the quarter ended September 29, 2002, to date, the Company has bought back approximately $328.0 million face value of its 1.75 percent convertible subordinated notes for approximately $289.8 million, resulting in a net pre-tax gain of approximately $31.4 million recorded in prior periods. The repurchased notes were cancelled, leaving 1.75 percent convertible subordinated notes outstanding with a face value of approximately $17.0 million that, if converted, would result in the issuance of approximately 0.3 million shares. At September 26, 2004, the entire $17.0 million face amount of the outstanding 1.75 percent convertible subordinated notes remained authorized for repurchase.
		In fiscal 2004, the Company completed a $517.5 million private placement of 0.25 percent contingent convertible subordinated notes due December 15, 2023. Interest is payable in cash on June 15 and December 15 of each year beginning June 15, 2004. Under the terms of the offering, the notes will be convertible into shares of Emulex common stock at a price of $43.20 per share at the option of the holder upon the occurrence of any of the following:

•		prior to December 15, 2021, on any date during any fiscal quarter (and only during such fiscal quarter) after the fiscal quarter ending December 31, 2003, if the closing sale price of the Company’s common stock was more than 120% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last day of the previous fiscal quarter;
•		on or after December 15, 2021, at all times on or after any date on which the closing sale price of the Company’s common stock is more than 120% of the then current conversion price of the notes;
•		if the Company elects to redeem the notes on or after December 20, 2008;
•		upon the occurrence of specified corporate transactions or significant distributions to holders of the Company’s common stock; or
•		subject to specified exceptions, for the ten business day period after any five consecutive trading day period in which the average trading prices for the notes for such five trading day period was less than 98% of the average conversion value of the notes during that period.

The notes will mature in twenty years and will not be callable for the first five years. Holders of the notes may require the Company to purchase the notes for cash by giving written notice within the 20 business days prior to each of December 15, 2006, December 15, 2008, December 15, 2013 or December 15, 2018 or upon a change in control. The Company incurred total associated bankers’ fees of approximately $11.6 million, which were recorded as a reduction to the proceeds from the issuance of the notes and will be accreted over the effective life of the notes, as well as $0.7 million of other associated debt issuance costs, which have been included in other assets and will also be amortized over the effective life of the notes. The effective life of the Company’s 0.25 percent contingent convertible subordinated notes due 2023 is three years, which is the period up to the first date that the holders can require us to repurchase the notes.

During the three months ended September 26, 2004, the Company’s Board of Directors expanded the Company’s repurchase program to include up to $200 million aggregate par value of the Company’s issued and outstanding 0.25 percent contingent convertible subordinated notes at a discount to par value. On August

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

		25, 2004, the Company repurchased approximately $153.0 million of its 0.25 percent convertible subordinated notes at a discount to face value, spending approximately $137.2 million. The resulting net pre-tax gain of $13.1 million from the repurchase of these 0.25 percent convertible subordinated notes was recorded in the three months ended September 26, 2004. The repurchased notes were cancelled, leaving 0.25 percent convertible subordinated notes outstanding with a face value of approximately $364.5 million that, if converted, would result in the issuance of approximately 8.4 million shares. At September 26, 2004, approximately $47 million aggregate par value of the Company’s 0.25 percent contingent convertible notes remained authorized for repurchase.
8.		Commitments and Contingencies
		Litigation
		On May 23, 2003, Vixel filed a patent infringement action against Brocade Communications Systems, Inc. in the United States District Court for the Northern District of California, Civil Action No. C-030-02446. The complaint states that Brocade is infringing U.S. Patent No. 6,185,203, entitled “Fibre Channel Switching Fabric,” U.S. Patent No. 6,118,776, entitled “Methods and Apparatus for Fibre Channel Interconnection of Private Loop Devices,” and U.S. Patent No. 6,470,007, entitled “Interconnect System for Fibre Channel Arbitrated Loop Including Private Loop Devices,” through the unauthorized manufacture, use, sale and offering for sale of various storage area network switching products, including but not limited to, Brocade’s Silkworm switch products. Brocade denied infringement and challenged the validity of the patents referenced. Brocade also challenged the enforceability of those patents. In the suit against Brocade, Vixel was seeking unspecified past damages, potential future royalties, or, alternatively, injunctive relief.
		On September 24, 2004, Emulex Corporation and Brocade Communications Systems, Inc. entered into a settlement including a litigation standstill agreement whereby Emulex and Brocade agreed to dismiss without prejudice their claims and counterclaims against each other in the pending patent infringement case in the United States District Court for the Northern District of California entitled Vixel Corporation. v. Brocade Communications Systems, Inc., Civil Action No. C-030-02446. The settlement included the formation of a strategic relationship under which the parties are to work together to pursue mutual objectives. Under the litigation standstill agreement both parties preserved their respecti