UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

_____________________

For the quarterly period ended March 27, 2005

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 þ      No o

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

As of April 29, 2005 the registrant had 83,106,596 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.

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EMULEX CORPORATION AND SUBSIDIARIES

1.	Summary of Significant Accounting Policies and Basis of Presentation
	In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly its financial position as of March 27, 2005, and June 27, 2004, and its condensed consolidated statements of income for the three and nine months ended March 27, 2005, and March 28, 2004 and its condensed consolidated statements of cash flows for the nine months then ended. Interim results for the nine months ended March 27, 2005, are not necessarily indicative of the results that may be expected for the year ending July 3, 2005. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2004.
	New Accounting Standards
	Emerging Issues Task Force Issue 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” (“EITF 04-08”) became effective for fiscal periods ending after December 15, 2004. EITF 04-08 requires the inclusion of shares related to certain contingently convertible debt instruments for computing diluted earnings per share using the if-converted method, even when a market price contingency has not been met. The effect of EITF 04-08 has increased our weighted average shares outstanding by approximately 8.4 million (related to the Company’s outstanding 0.25 percent contingent convertible subordinated notes of $364.5 million issued in December 2003 and January 2004) in calculating the Company’s diluted earnings per share calculation for the quarter ended March 27, 2005. Prior periods earnings per share amounts presented for comparative purposes have been restated to conform to this method.
	In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe SFAS No. 151 will have a significant impact on the Company’s consolidated results of operations or financial position.
	In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. SFAS No. 153 states that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of SFAS No. 153 shall be applied prospectively. The Company does not believe the adoption of SFAS No. 153 will have a significant impact on the Company’s consolidated results of operations or financial position.
	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.
	In December 2004, the FASB issued two FASB Staff Positions (“FSPs”) that provide accounting guidance on how companies should account for the effects of the American Jobs Creations Act of 2004 (“the Act”) that was signed into law on October 22, 2004. The Act could affect how companies report their deferred income tax balances. The FSPs are FSP 109-1(“FSP 109-1”); the second is FSP 109-2 (“FSP 109-2”). In FSP 109-1, the FASB concludes that the tax relief (special tax deduction for domestic manufacturing) from the Act should be

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EMULEX CORPORATION AND SUBSIDIARIES

	accounted for as a “special deduction” instead of a tax rate reduction. FSP 109-2 gives a company additional time to evaluate the effects of the Act on any plan for Income Taxes. However, companies must provide certain disclosures if they choose to utilize the additional time granted by the FASB. The Company is evaluating the impact, if any, these FSPs may have on its results of operations, financial condition or cash flows.
	In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R is effective as of the first annual reporting period that begins after June 15, 2005; however, early adoption is permitted. The Company is currently evaluating its alternatives, which will likely include early adoption during the three months ending July 3, 2005. The adoption of SFAS No. 123R will have a significant impact on the Company’s results of operations, as demonstrated by the SFAS No. 123 pro-forma disclosures below.
	Stock-Based Compensation
	The Company currently accounts for its stock-based awards to employees using the intrinsic value method under APB 25 and related interpretations. Stock-based awards to non-employees, if any, are recorded using the fair value method. Had the Company determined compensation cost based on the fair value at the grant date for all its stock options under SFAS No. 123, 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

The fair value of each option granted during the three and nine months ended March 27, 2005, and March 28, 2004, 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. 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.
	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. Operations of Vixel, since the acquisition, have been included within the Company’s one operating segment, networking products.
	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 nine months ended March 27, 2005, would have been $48.1 million.
3.	Inventories
	Inventories, net, are summarized as follows:

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EMULEX CORPORATION AND SUBSIDIARIES

4.	Intangibles
	Intangibles, net, are as follows:

	The recorded value of the specifically-identified intangible assets associated with the acquisition of Vixel were reduced during the three months ended March 27, 2005, by $0.4 million related to tax benefits associated with stock option exercises.
	The intangible assets subject to amortization are being amortized on a straight-line basis over lives ranging from two to seven years. Aggregated amortization expense for these intangibles for the three and nine months ended March 27, 2005, was $6.5 million and $19.6 million, respectively. 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:

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EMULEX CORPORATION AND SUBSIDIARIES

	Deferred revenue includes an accrual for estimated returns and allowances of $1.5 million at March 27, 2005 and June 27, 2004.
	The Company provides a warranty of between one and five years on its products. The Company records a provision for estimated warranty-related costs based on historical product returns and the Company’s expected future cost of fulfilling its warranty obligations.
	Changes to the warranty reserve for the three and nine months ended March 27, 2005, and March 28, 2004, were: