10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 29, 2003

OR

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File No. 001-31353

EMULEX CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction	51-0300558 (I.R.S Employer
of incorporation or organization)	Identification No.)
3535 Harbor Boulevard
Costa Mesa, California	92626
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

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 27, 2002, which was the last trading day of the second quarter of fiscal 2003, of $19.01, was $1,559,475,806.98.

As of September 16, 2003, the registrant had 82,615,500 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (items 10, 11, 12 and 13) is incorporated by reference to portions of the registrant’s definitive proxy statement for the 2002 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 29, 2003.

TABLE OF CONTENTS

PART I
	Item I. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7a. Qualitative and Quantitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
	Item 16. Principal Accountant Fees and Services
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.21
EXHIBIT 10.22
EXHIBIT 10.23
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.A
EXHIBIT 31.B
EXHIBIT 32

PART I

All references to years refer to our fiscal years ended June 29, 2003, June 30, 2002, and July 1, 2001, 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 a leading designer, developer and supplier of a broad line of storage networking host bus adapters, or HBAs, and application specific computer chips, or ASICs, that provide connectivity solutions for storage area networks, or SANs, network attached storage, or NAS, and redundant array of independent disks, or RAID, storage. 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 network. Our products are based on internally developed ASIC and embedded firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. Emulex’s architecture offers customers a stable applications program interface, or API, that has been preserved across multiple generations of adapters and to which many of the world’s leading Original Equipment Manufacturers, or OEMs, have customized software for mission-critical server and storage system applications.

Emulex Corporation’s corporate headquarters are located at 3535 Harbor Blvd., 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. 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 the Delaware corporation. In 1999 and 2002, Emulex completed a secondary offering of our common stock and completed a private placement of convertible subordinated notes, respectively. See note 9 of the Consolidated Financial Statements for a more complete discussion of the convertible subordinated notes.

In 1998, we began outsourcing the manufacturing of our product lines to an electronics manufacturing service, or EMS, provider. This outsourcing resulted in, among other things, the closing of our manufacturing facility and the consolidating of our operations. See Item 1 — Manufacturers and Suppliers for a more complete discussion of the consolidation.

Substantially all of our revenues during 2003 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 2002 we were the world’s largest provider of Fibre Channel host bus adapters, in terms of revenue, ports and units shipped. In March 2001, we acquired Giganet, Inc., a privately-held developer of storage networking products based on Ethernet and Internet Protocol, or IP, technologies. Our strategy with this acquisition was to leverage Giganet’s technology and extend our market-leading HBA APIs into Internet Small Computer Systems Interface, or iSCSI, and Virtual Interface, or VI, based storage networking market sectors. Emulex has secured significant customer relationships with the world’s leading storage and server suppliers, including Dell, EMC, Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC, Network Appliance and Unisys. In addition, we include industry leaders Brocade, Computer Associates, Intel, Legato, McDATA, Microsoft and Veritas among our strategic partners.

Industry Background

In recent years, the volume of stored electronic data in enterprises has expanded significantly, due largely to the growth of data-intensive applications such as online transaction processing, data mining, data warehousing, multimedia and Internet applications. As a result, both the capacity and number of storage devices in enterprises have increased. Furthermore, with the increased use of, and reliance on, mission-critical applications such as e-commerce and distributed enterprise software applications, the real-time availability of electronic data has become more important to the daily operations of enterprises. As a result, enterprises face heightened 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.

Although LAN architectures proliferated in client-server applications, until recently, I/O pathways between servers and attached peripherals, notably storage subsystems, failed to evolve to networking architectures. Instead, traditional 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. With the dramatic increase in information storage and retrieval requirements, system performance has become increasingly constrained by the DAS architecture and its inability to overcome communication bottlenecks and management challenges.

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 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. As a general rule, 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. As networked storage gains market acceptance and SAN and NAS installations interconnect increasingly diverse servers and storage subsystems, OEMs are increasingly demanding storage networking products that are optimized for heterogeneous connectivity, scalability, performance, customization and lowest total cost of ownership. Gartner Dataquest expects that an increasing percentage of storage systems revenue will consist of fabric-attached storage, or NAS and SAN solutions.

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 both one and two gigabit per second solutions, offers the connectivity, distance and access benefits of networking architectures combined with the high performance and low latency needed for I/O applications.

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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. According to Gartner Dataquest, the market for Fibre Channel host bus adapters is expected to expand from approximately $570 million in calendar 2002 to $1.4 billion in calendar 2007.

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 development and deployment for the next several years, iSCSI may find acceptance in smaller organizations or in selected storage applications such as those requiring long-distance communication transports. Gartner Dataquest forecasts that the market for iSCSI HBAs will expand to approximately $230 million in 2007.

VI and RDMA

VI is a standardized interface designed for high performance, low latency communications that can be layered over a variety of networking transports. One of VI’s key characteristics is its ability to enable remote direct memory access, or RDMA, facilitating higher speed, lower latency communications between adapters and applications residing on servers. RDMA technology reduces data copy operations and latencies by allowing one computer to directly place information in another computer’s memory with minimal demands on memory bus bandwidth and CPU processing overhead, while preserving memory protection semantics. To date, VI’s primary application has been in very high performance clustering environments served by proprietary transports. Our current VI product has entered end-of-life status.

More recently, a proposed new VI-like interface named RDMA over Transmission Control Protocol/Internet Protocol, has emerged, sponsored by the RDMA Consortium. This new specification could result in a potentially more broadly endorsed standard that offers some of the benefits of VI for file transfer and other 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 HDD 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.

The storage systems, or arrays, that are deployed in external multi-user storage applications such as SANs typically require multiple embedded I/O ASICs to provide an external storage I/O interface and to internally interconnect disks inside the storage array to a controller that provides the array’s intelligence. Because the disks inside of the storage array may utilize a different I/O technology than the external I/O connection, multiple I/O technologies may be required to fully serve storage array requirements. In the past, many storage arrays installed in a Fibre Channel SAN utilized legacy SCSI disks and I/O protocol chips internally, but connected externally to the SAN via an embedded Fibre Channel ASIC. In recent quarters, some SAN-attached storage arrays began to transition from parallel SCSI to serial I/O-based internal architectures. This has created a growing embedded market opportunity for multiprotocol serial I/O ASICs that can serve the full spectrum of emerging serial I/O requirements.

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Our Products

We are a leading designer, developer and supplier of Fibre Channel host bus adapters, ASICs and embedded firmware and software products that enhance access to, and storage of, electronic data and applications. According to IDC and Gartner Dataquest, in calendar 2002 we were the world’s largest provider of Fibre Channel HBAs, in terms of revenue, ports and units shipped. In 2002, after our acquisition of Giganet, we entered the development-stage market for iSCSI HBAs and VI/IP HBAs. We are also a supplier of Fibre Channel hubs, which contribute immaterial revenue, as well as some traditional networking products and cLAN adapters, which have both 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, hubs, 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 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 and LP1050, which are targeted at midrange, open system environments. 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. 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 and PCI-X 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 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 product line also includes mid-range adapters that support a standard open systems environment based on Windows, Linux or NetWare. These open systems host adapters include our LP850, LP952, LP982 and LP1050. 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-optimized, standardized solution for the open systems market. We offer the LP850, LP952, LP982 and LP1050 with fully certified drivers for Windows, Linux and NetWare, as well as basic input/output system, or BIOS, and configuration utilities.

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Fibre Channel ASICs

Emulex HBAs are based upon our internally-developed Fibre Channel I/O ASICs. These ASICs 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 ASIC revenue remains relatively small, a growing percentage of our total ASIC unit volume is comprised of ASICs that are sold into embedded environments, which deliver incremental economies of scale for our overall 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. Emulex will market the resulting Fibre Channel products, and Intel will market the SATA and SAS products. 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.

iSCSI HBAs

Our GN9000/SI adapter is a one gigabit per second prototype iSCSI HBA that became available in limited quantities for OEM evaluation during 2002. In order to ease the migration between Fibre Channel and iSCSI technologies, the GN9000/SI has been designed to leverage the Emulex SLI API utilized by OEM customers that have developed customized software for our Fibre Channel host bus adapters.

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, we have focused our Fibre channel efforts in the HBA sector. Total hub revenue was immaterial in 2003.

As part of the traditional VI product family acquired with the Giganet operation, Emulex offered the cLAN family of VI-enabled adapters and switches. These products entered end-of-life status in 2002 and contributed immaterial revenue in 2003. Our GN9000/VI HBA is a VI enabled intelligent Ethernet adapter that has entered end-of-life status.

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 the fourth quarter of 2000 we issued last time buy notifications to customers for our traditional networking products.

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

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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 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 29, 2003, we employed 243 engineers, other technicians and support personnel engaged in the development of new products and the improvement of existing products. Engineering and development expenses were $61.3 million, $47.6 million and $27.0 million in 2003, 2002 and 2001, 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 29, 2003, we had unshipped product orders of approximately $77.6 million compared with approximately $76.8 million at June 30, 2002. 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 Agilent, JNI 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 where standards have yet to be finalized, we expect to face competition from established Fibre Channel competitors as well as new entrants, which may include established Ethernet suppliers such as Intel and established

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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, performance, technical support and API stability. We believe that we compete 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, Legato, 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. We may obtain sole source components manufactured by companies such as Cypress, E20, Finisar, ICS, Intel, IBM, Lattice, Micrel, Micron, Motorola, NEC, Quicklogic, Samsung, Seiko Epson, Siliconix, Tundra Semiconductor and Vitesse. 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 including IBM and LSI Logic. In addition to hardware, we design software to provide functionality to our hardware products. In the past, we have also licensed software from third party providers for use with our traditional networking products, and most of these providers are the sole source for the software. However, both our software and the third party software provided as embedded programs within the hardware products. Additionally, revenue related to our traditional networking products has decreased over the last several years due to the ongoing maturation of these products and a decrease in our focus on these products. We issued last time buy notifications to customers for our traditional networking products during the last quarter of 2000 and expect negligible, if any, revenues in succeeding quarters related to these products.

In 1998, we began outsourcing the manufacturing of our product lines to an electronics manufacturing service, 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. Suntron Corporation (formerly known as K*Tec Electronics) manufactures for us within the United States and Manufacturers’ Services, Ltd., or MSL, manufacturers for us in both the United States and in Europe at their Global Manufacturing Services production facility in Valencia, Spain.

In July 2002, MSL notified us that they would be closing their facility within the United States that manufactured our products. As a result, the facility has been closed and we have transitioned a portion of the manufacturing of our products to an alternative MSL facility within the United States. The transition was completed during fiscal 2003. In June 2003, we notified Suntron that we intend to discontinue using their services. We expect that we will no longer use Suntron as an EMS provider by the end of the second quarter of fiscal 2004. In June 2003, we selected Benchmark Electronics, Inc., or Benchmark, as an additional EMS provider and expect to begin shipping product to customers from Benchmark’s facility in Guadalajara, Mexico by the end of the second quarter of fiscal 2004. At this time, our customers have yet to qualify the Benchmark facility in Mexico. Although we do not expect these changes to our electronics manufacturing service providers to have a significant impact on us, if we were to experience significant delays in product qualifications, completing production runs or shipping product as a result of these changes, and we were unable to compensate for this disruption elsewhere, it could have a material adverse effect on our business, results of operations and financial condition.

An inability or an unwillingness on the part of any of our suppliers to provide us, or our EMS providers, with the quality and quantity of products, parts or software that we need in a timely fashion could have a material impact on our ability to supply products in accordance with customer requirements.

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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 29, 2003, we had a total of 36 regular full-time manufacturing support employees located at our facilities in Costa Mesa, California and in Bolton, Massachusetts.

Employees

At June 29, 2003, we employed 395 employees as follows: 243 in engineering and development, 55 in selling and marketing, 61 in general and administrative and 36 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 prolonged downturn in information technology spending in general or spending on high-performance computer and storage systems in particular could adversely affect our revenues and results of operations.

The demand for our Fibre Channel products, which represented 99 percent of our net revenues for fiscal 2003, has been supported by the demand for high-performance networking and data storage solutions that support enterprise computing requirements, including on-line transaction processing, data mining, data warehousing, multimedia and Internet applications. In early calendar 2001, the global economy experienced a significant slowdown that was exacerbated by the terrorist attacks on the United States and the resulting economic and political uncertainty throughout the world. Such downturn has resulted in substantial reductions in demand for networking, data storage and other information technology solutions and products. We are unable to predict the duration or depth of such downturn in technology spending. In the event that such downturn grows more severe or continues for an extended period of time, our business, results of operations and financial condition may be adversely affected. 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.

Our business depends upon the continued growth of the 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 dependent upon the broadening acceptance of our storage networking technologies as alternatives to other technologies traditionally utilized for network and storage communications, as well as the overall demand for storage. We believe that our investment in the storage networking market represents our greatest opportunity for revenue growth and profitability for the foreseeable future. However, we cannot be certain that the market for storage networking products will gain broader acceptance or that customers will continue to choose our technology and products. Additionally, since our products are sold as parts of integrated systems, our products’ demand 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 storage networking market does not grow, attracts more competitors than we expect, as discussed below, or if our products do not achieve market acceptance, our business, results of operations and financial condition could be materially adversely affected.

We have secured numerous design wins for our storage networking products from OEM customers. If our customers are unable to or otherwise do not ship systems that incorporate our products, or if their shipped systems were not commercially successful, our business, results of operations and financial condition would be materially adversely affected.

We experienced a downturn in Fibre Channel host bus adapter demand first evidenced by order deferrals experienced and disclosed by us in early February of calendar 2001. In the event such deferrals were to occur again, 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 could adversely affect our business.

We rely almost exclusively on OEMs and sales through distribution channels for our revenue. For fiscal 2003, we derived approximately 66 percent of our net revenues from OEMs and 34 percent from sales through distribution. Furthermore, because the majority of our sales through distribution channels consist of OEM-certified products, we believe that OEM

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customers effectively control more than 85 percent of our revenue. We cannot be certain that we will retain our current OEM and distributor customers or that we will be able to recruit additional or replacement customers. 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. Indeed, it is increasingly commonplace for our OEM and distributor customers to carry or utilize 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.

For fiscal 2003, direct sales to Hewlett-Packard and IBM were each 23 percent of our total net revenues. Direct sales to our top five customers accounted for 68 percent of total net revenues for fiscal 2003. Additionally, some of our larger OEM customers purchased or marketed products indirectly through distributors, resellers or other third parties. Total net revenues, including direct sales to our OEM customers and their OEM-specific models purchased or marketed indirectly through other distribution channels, amounted to 26 percent of our total net revenues for IBM, 23 percent for Hewlett-Packard and 22 percent for EMC for fiscal 2003.

Compaq and Hewlett-Packard consummated their merger in May 2002. Although we cannot predict the remaining effects of such merger on our business, to the extent that such merger results in decreased demand or margins for our products, our business, results of operations and financial condition could be materially and adversely affected.

Although we have attempted to expand our base of customers, we believe our revenues in the future will continue to be similarly derived from a limited number of customers, especially given the consolidation the industry has experienced. As a result, to the extent that sales to any of our significant customers are reduced or impaired, our business, results of operations and financial condition could be materially and adversely affected.

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 market 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 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. Furthermore, larger companies in other related industries may develop or acquire technologies and apply their significant resources, such as distribution channels and brand recognition, to acquire market share. Emerging companies attempting to obtain a share of the existing markets act as potential competition as well. Additionally, our existing competitors continue to introduce products with improved price/performance characteristics, and we will have to do the same to remain competitive. As the market grows and matures, we expect more customers to qualify multiple sources for OEM or standard products where we have prevailed previously as a single source, thus introducing competition into our existing customer accounts. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition.

Alternative legacy technologies such as SCSI compete with our Fibre Channel and IP storage networking technologies 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. Some of our competitors already have well-established relationships with our current and potential customers, have extensive knowledge of the markets we serve and may have better name recognition and more extensive development, sales and marketing resources than we have. 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.

Some of our suppliers, our strategic partners or our OEM customers could become competitors.

Some of our suppliers, our strategic partners and our OEM customers currently have or could develop products internally or could purchase another company with products or technology that would replace or compete with our products and technology. To the extent that our customers or suppliers are successful in developing and marketing competitive solutions, the resulting reductions in sales of our products could have a material adverse effect on our business, results of operations and financial condition.

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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. There can be no assurance that we will 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:

• The gain or loss of significant OEMs, OEM design wins or other customers;

• Changes in the size, timing and terms of OEM and other customer orders;

• Changes in the sales and deployment cycles for our products, particularly those sold through our OEM sales channels;

• Changes in our significant customers’ desired inventory levels;

• The timing and market acceptance of new or enhanced product introductions by us, our OEM customers and our competitors;

• Changes in the selling price of our products;

• Changes in the mix of product sales or the mix of sales channels;

• Difficulties in obtaining incremental market share growth;

• Fluctuations in product development and other operating expenses;

• Fluctuations in manufacturing cost, including the cost of components we use to produce our products;

• Component shortages experienced by us, or reduced demand from our customers if our customers are unable to acquire the components used in conjunction with our products in their deployments;

• The ability of our electronics manufacturing service providers to produce and distribute our products in a timely fashion;

• Difficulties, disruptions or delays caused by the move of our corporate headquarters in fiscal 2004;

• Difficulties with updates, changes or additions to our Enterprise Resource Planning (ERP) System;

• 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;

• Changes in our accounting or other policies resulting from the adoption of new laws, regulations or pronouncements; and/or

• Fluctuations in foreign currency exchange rates.

As a result of these and other unexpected factors or developments, it is possible that our future operating results will be below the expectations of investors or market analysts, which could have a material adverse effect on our stock price.

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Unfilled orders and our tendency to generate a large percentage of our quarterly sales near the end of the quarter contributes to possible quarterly 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 in that quarter. Alternatively, orders already in backlog may be deferred or cancelled. Also, we have typically generated a large percentage of our quarterly revenues in the last month of the quarter. Our customers may change their accounting practices and purchasing patterns, thus reducing our ability to predict our quarterly sales. Additionally, we use blanket purchase orders with some customers, with customer-provided forecasts and customer controlled just-in-time pulls of products from hub warehouses, thus reducing our ability to predict our quarterly sales. As a result of these and other factors, we may not be able to accurately predict our quarterly sales. Because our expense levels are partially based on our expectations of future sales, in the event we experience unexpected decreases in quarterly 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 of customer orders would likely have an immediate and adverse impact on our results of operations and may adversely affect our stock price.

The failure of one or more of our significant customers to make payments could adversely affect our business.

We are subject to credit risk associated with the concentration of our accounts receivable from our customers. Our days sales outstanding, or DSOs, were 37 days at both June 29, 2003, and June 30, 2002. There can be no assurance they will remain at this level or improve. If one of our current significant customers were to declare bankruptcy, if we were to lose one of our current significant customers and did not receive their payments due to us, or if one of our current significant customers were to dispute a significant amount owed to us, we could experience a material adverse effect on our business, results of operations and financial condition.

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 a 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 4 gigabit per second, or Gbps, Fibre Channel solutions; 10 Gbps Fibre Channel solutions; Infiniband; PCI-X 2.0; PCI Express; iSCSI; SATA; SAS; VI; and Remote Direct Memory Access, or RDMA; are in development by many companies and their ultimate acceptance and deployment in the market is uncertain. Emulex is 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. We cannot be certain that we will be successful in developing, manufacturing and marketing new products or product enhancements that respond to technological changes in a timely manner and achieve market acceptance. We also cannot be certain that we will be able to develop the underlying core technologies necessary to create new products and enhancements, or that we will be able to license the required core technologies with commercially reasonable terms from third parties. In addition, a key element of our current business strategy is to develop ASICs in order to increase system performance, enhance integration and reduce manufacturing costs, thereby enhancing the price/performance of our storage networking products. We cannot be certain that we will be successful at developing and incorporating ASICs effectively and in a timely manner. Additionally, the cost and time required for developing ASICs has been increasing and we cannot be certain of the impact on our business of such increases. 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 that may adversely affect our stock price and financial condition.

We have experienced losses in our history, most recently a net loss of $96.2 million in fiscal 2002, and $23.6 million in fiscal 2001. The net loss in fiscal 2002 included $156.2 million of amortization of goodwill and other intangibles related to the acquisition of Giganet, Inc. and a net excess and obsolete inventory charge of $10.1 million. The net loss in fiscal 2001 included $22.3 million of in-process research and development expenses and $52.1 million of amortization of goodwill and other intangibles related to the acquisition of Giganet, Inc. Beginning in the first quarter of fiscal 2003, when we adopted Statement 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill and other intangibles that have indeterminate useful lives. We currently have net goodwill related to the Giganet acquisition in the amount of $397.3

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million that will be reviewed at least annually for impairment. 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. While our recent losses have not been accompanied by negative cash flow from operations, 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 on our results of operations, including charges for obsolete inventory.

As our customers migrate from one platform to the enhanced price/performance of the next platform, we may experience reduced revenue, gross profit and gross margin levels associated with lower average selling prices and higher relative product costs associated with improved performance. Also, economic conditions during platform migration periods can have a significant impact on results. This was evidenced in late September 2001, as 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 initially recorded an inventory charge of $13.6 million in 2002 and then reduced this reserve by $3.5 million in 2002 as previously reserved inventory was sold. After initially recording our one Gbps reserve of $13.6 million during the first quarter of fiscal 2002, we subsequently reduced this reserve by a total of $6.9 million through June 29, 2003, as this 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 inventory charge was recorded. In addition to the sale of some of this previously reserved 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. As with all inventory, we regularly compare forecasted demand for our one Gbps products against inventory on hand and open purchase commitments and accordingly, we may have to record reductions to the carrying value of excess and obsolete inventory if forecasted demand decreases.

Any failure of our OEM customers to keep up with rapid technological change could adversely affect our business.

Our revenues depend significantly upon the ability and willingness of our OEM customers to develop, promote and deliver, on a timely basis, products that incorporate our technology. OEMs must commit significant resources to develop a product that incorporates our technology or solutions. The ability and willingness of OEM customers to develop, promote and deliver such products are significantly influenced by a variety of factors, many of which are outside of our control. We cannot be certain of the ability or willingness of our OEM customers to continue developing, marketing and selling products that incorporate our technology or solutions. Our business is dependent on our relationships with our OEM and distributor customers, so the inability or unwillingness of any of our significant customers to develop or promote products that use our technology or solutions 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 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 solutions at a significantly lower average selling price. We have previously offered ASICs to certain customers for certain applications that has effectively resulted in a lower-priced solution when compared to an HBA solution. This transition may occur for our products in other applications as well. The result of this transition may be an adverse effect on our revenues and profit margin. 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.

Rapid shifts in customer purchases from our high-end server and storage solutions to midrange server and storage solutions could adversely affect our business.

Historically, the majority of our Fibre Channel revenues has come from our high-end server and storage solutions. In recent quarters, an increasing percentage of revenues has come from midrange server and storage solutions, which typically have lower average selling prices than our high-end server and storage solutions. If this trend were to be more abrupt or more widespread than anticipated, there can be no assurance that we would be able to modify our business model in a timely manner, if at all, in order to mitigate the effect of this trend on our business, results of operations and financial position.

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A decrease in the average unit selling prices and/ or an increase in the manufactured cost of our Fibre Channel products could adversely affect our revenue, gross margins and financial performance.

Since we introduced our first Fibre Channel products, 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 Fibre Channel 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. 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. Prior delays have resulted from numerous factors, such as:

• Difficulties in hiring and retaining necessary personnel;

• Difficulties in reallocating engineering resources and other resource limitations;

• Difficulties with independent contractors;

• Unanticipated engineering or manufacturing complexity;

• 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.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.

Our products are complex and may contain undetected errors, especially when first introduced or as new versions are released. The occurrence of hardware or software errors could adversely affect sales of our products, cause us to incur significant repair costs, divert the attention of our engineering personnel from product development efforts and cause us to lose credibility with current or prospective customers.

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, Emulex will develop the protocol controller hardware, firmware and drivers. Intel will integrate it’s Intel® Xscale™ microarchitecture as the core technology for the new processors and will manufacture the processors on its 90-nanometer process technology. Emulex will market the resulting Fibre Channel products and Intel will market the SATA and SAS product. This activity has risks resulting from unproven new-generation manufacturing technology, from the licensing of SATA and SAS

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technology to Intel, from increased development costs, from reduced flexibility in making design changes in response to market changes and in reduced control over product completion schedules.

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;

• Undetected errors, failures or production quality issues;

• Timeliness of product delivery;

• Financial stability and viability of our suppliers and electronics manufacturing service providers;

• Changes in business strategies of our suppliers and electronics manufacturing service providers;

• Disruption in shipping channels;

• Natural disasters;

• 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 or the cost of shifting to a new supplier or electronics manufacturing service providers could have a material adverse effect on our business, results of operations and financial condition.

Additionally, key components that we use in our products may only be available from single sources with which we do not have contracts. We may obtain sole source components manufactured by companies such as Cypress, E20, Finisar, ICS, Intel, IBM, Lattice, Micrel, Micron, Motorola, NEC, Quicklogic, Samsung, Seiko Epson, Siliconix, Tundra Semiconductor and Vitesse. 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 including IBM and LSI Logic. In addition to hardware, we design software to provide functionality to our hardware products. In the past, we have also licensed software from third party providers for use with our traditional networking products, and most of these providers are the sole source for the software. However, both our software and the third party software are provided as embedded programs within the hardware products. The loss of one or more of our sole suppliers or third party foundries could have a material adverse effect on our business, results of operations and financial condition. In addition, an announcement made by one of our sole suppliers or third party foundries that they intend to stop producing a component in the future could cause us, based on forecasted demand that may or may not materialize, to enter into a long-term purchase commitment or make a last-time purchase that could have a material adverse effect on our business, results of operations and financial condition.

Because we outsource the production of our products to electronics manufacturing service providers, or EMS providers, we only manage the supply of a small number of our product components. Currently, we rely upon our EMS providers to complete numerous component purchases for our products. Consequently, we cannot be certain that the necessary components will be available to meet our future requirements at favorable prices, if at all.

In July 2002, MSL, one of our EMS providers, notified us that they would be closing their facility within the United States that manufactured our products. As a result, the facility has been closed and we have transitioned a portion of the manufacturing of our products to an alternative MSL facility within the United States. The transition was completed during fiscal 2003. In June 2003, we notified Suntron that we intend to discontinue using their services. We expect that we will no longer use Suntron as an EMS provider by the end of the second quarter of fiscal 2004. In June 2003, we selected

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Benchmark Electronics, Inc., or Benchmark, as an additional EMS provider and expect to begin shipping product to customers from Benchmark’s facility in Guadalajara, Mexico by the end of the second quarter of fiscal 2004. At this time, our customers have yet to qualify the Benchmark facility in Mexico. Although we do not expect these changes to our electronics manufacturing service providers to have a significant impact on us, if we were to experience significant delays in product qualifications, completing production runs or shipping product as a result of these changes, and we were unable to compensate for this disruption elsewhere, it could have a material adverse effect on our business, results of operations and financial condition. Moreover, because we rely upon our EMS providers to manufacture, store and ship our products, the manufacturing and sale of our products would be temporarily suspended if MSL, Suntron and/or Benchmark are unable or unwilling to complete production runs for us in the future, or experience any significant delays in completing production runs or shipping product. An interruption in supply of our products and the cost of qualifying and shifting production to an alternative manufacturing and distribution facility could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we rely upon the financial stability of our EMS providers and their ability and willingness to continue as our EMS providers.

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.”

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 our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.

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 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. Our future success depends upon our ability to attract, train and retain such personnel. We may need to increase the number of key managers as well as technical staff members with experience in high-speed networking applications as we further develop our storage networking product lines. Competition for such highly skilled employees in our local community as well as our industry is intense, and we cannot be certain that we will be successful in recruiting 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, our business, results of operations and financial condition could be materially adversely affected.

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Our international business activities subject us to risks that could adversely affect our business.

For fiscal 2003, sales in the United States accounted for 60 percent of our total net revenues, sales in Europe accounted for 33 percent of our total net revenues, and sales in the Pacific Rim countries accounted for seven percent of our total net revenues. We expect that sales in the United States and Europe will continue to account for the substantial majority of our net revenues 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 a manufacturing subcontractor’s production facility in Valencia, Spain and in the future products will be produced in Guadalajara, Mexico. 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 governmental controls 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;

• Trade restrictions;

• Changes in tariffs;

• Loss of tax benefits due to international production;

• General economic and social conditions within foreign countries; and/or

• Political instability, war or terrorism.

In addition, the revenues we earn in various countries in which we do business may be subject to taxation by more than one jurisdiction, thereby adversely affecting our earnings. All of these factors could harm future sales of our products to international customers or future overseas production of our products, and have a material adverse effect on our business, results of operations and financial condition.

Export restrictions may adversely affect our business.

Our products are subject to U.S. Department of Commerce export control restrictions. Neither our customers nor we may export such products without obtaining an export license, where applicable. These U.S. export laws also prohibit the export of our products to a number of countries deemed by the United States to be hostile. These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market than our customers or we are. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised. The sale of our products could be harmed by our inability or the inability of our customers to obtain the required licenses or by the costs of compliance.

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:

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• Difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company;

• The diversion of management’s attention from other business concerns;

• Risks of entering markets in which we have no or limited prior experience;

• 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. 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 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;

• 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 that have experienced volatility in the market price of their stock have been the object of securities class action litigation. In this regard, 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 allege that we 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 Securities and Exchange Commission 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. If we were to be the subject of a securities class action lawsuit in the future it could have a material adverse effect on or results of operations and financial condition. See Part I – Item 3 – “Legal Proceedings” of this Form 10-K for a more complete discussion of such litigation and Memoranda of Understanding.

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The final amount collected for our receivable from our insurance carriers related to the tentative settlements of securities class action and derivative lawsuits may be materially different from the receivable amount.

For the three months ended March 30, 2003, we recorded a $13.5 million receivable from our insurance carriers related to the tentative settlements of securities class action and derivative lawsuits. We had directors and officers insurance with a primary limit of $10.0 million and a possible $10.0 million reinstatement for the period of February 2000 through February 2002; and excess insurance of $10.0 million for the period February 2000 through February 2001; and excess insurance of $20.0 million for the period February 2001 to February 2002. Our insurance carriers have asserted various defenses including coverage exclusions and late notice. Our actual insurance recovery may be materially different from the recorded amount for various reasons, including the strength of the defenses asserted by our insurance carriers. If one or all of our insurance carriers were unable or refused to make some or all payments due to us, or if an arbitrator or court determines that the recovery should be an amount other than the recorded amount, or if ultimately the amount received by us is more or less than the recorded amount, we would be required to record a corresponding gain or loss.

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 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. You should 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.

The recently enacted Sarbanes-Oxley Act of 2002 and related regulations may result in changes in accounting standards or accepted practices within our industry. New pronouncements and varying interpretations of pronouncements 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 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 that could result in rules or laws that may adversely affect our reported financial results, which could have an adverse effect on our stock price.

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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.

We cannot assure you that any additional financing we may need will 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 unanticipated 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.

Item 2. Properties.

Our corporate offices and principal product development facilities are currently located in approximately 114 thousand square feet of leased buildings in Costa Mesa, California. The lease expires in September 2003. We will then begin a month-to-month lease for our current corporate offices and principal product development facilities until occupying our new corporate headquarters, which is under construction and described in more detail below.

We lease facilities in Colorado and Massachusetts primarily for engineering and development and approximately 11 other remote offices, primarily for sales, throughout the world.

In 2002, we entered into an agreement to relocate our headquarters locally in Costa Mesa, California. We will finance the build to suit construction phase of the approximately 180 thousand square feet facility with our own capital, before beginning a 10-year lease term with an option to buy the land and buildings during the first six months of the lease term. If we do not exercise our option to purchase the facility, the landlord will obtain permanent financing and reimburse us for the construction costs. Construction on our new corporate headquarters is progressing. If purchased, we believe the total cost, including the land, building and other related capital expenditures, would be approximately $47 million. Our total gross undiscounted financial commitment for the 10-year lease term would be approximately $45.9 million. At June 29, 2003, the Company had restricted cash of $9.3 million held in escrow and associated with the construction of the headquarters.

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.

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,

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through February 9, 2001. The complaints allege that we 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. Pursuant to a Stipulation and Court Order, the actions were consolidated. On August 24, 2001, an Amended and Consolidated Complaint was filed. Defendants’ motion to dismiss was denied by way of an order dated March 7, 2002. Defendants’ motion for reconsideration of that order was denied by an order dated May 3, 2002. Plaintiffs commenced discovery. The court certified the class action by an order dated September 30, 2002. Following these class action lawsuits, a number of derivative cases were filed in state courts in California and Delaware, and in federal court in California, alleging that certain officers and directors breached their fiduciary duties to us in connection with the events alleged in the class action lawsuits. The derivative cases filed in California state courts were consolidated in Orange County Superior Court and plaintiffs filed a consolidated and amended complaint on January 31, 2002. On May 10, 2002, the Orange County Superior Court ordered that the consolidated actions be stayed pending resolution of the federal class action described above. The derivative suit in Delaware was dismissed on August 28, 2001. On March 15, 2002, the United States District Court for the Central District of California ordered that the federal derivative action be stayed pending resolution of the class action lawsuit described above. We received inquiries about events giving rise to the lawsuits from the Securities and Exchange Commission and Nasdaq Stock Market. On April 22, 2003, we entered into two Memoranda of Understanding, or MOU’s, agreeing to terms of settlement for both the class action and derivative litigation. The MOU’s call for settlement payments totaling $39.0 million, plus up to $0.5 million of the cost of providing notice to the class members. A Final Order and Judgment was approved by the court in the derivative cases on May 30, 2003, based on a Stipulation of Settlement of Derivative Claims dated as of May 13, 2003. An Order Preliminarily Approving Settlement and Providing for Notice was approved by the court in the federal class action on July 11, 2003, based on a Stipulation of Settlement dated as of July 3, 2003. A Settlement Hearing is scheduled for October 15, 2003, in the federal class action. Insurance proceeds are expected to reimburse us for a portion of the payments and the probable net after tax effect of the settlements to us, based on our current minimum estimate of reimbursement from the insurance carriers, is expected to be approximately $16.7 million. We commenced an arbitration proceeding against three of our insurance carriers in June 2003 seeking reimbursement of $30.0 million for the defense and settlement costs.

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 2003.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Principal Market and Prices

Effective June 24, 2002, our common stock began trading on the New York Stock Exchange under the symbol ELX. Prior to that date, our common stock traded on the Nasdaq Stock Market under the symbol EMLX. The following table sets forth for the indicated periods the high and low per share sales prices for our common stock, as reported on the New York Stock Exchange and the Nasdaq Stock Market.

		High		Low
2003	Fourth Quarter	$	26.50	$	18.67
	Third Quarter		25.50		16.81
	Second Quarter		26.64		7.85
	First Quarter		26.25		11.60
2002	Fourth Quarter	$	34.95	$	20.59
	Third Quarter		48.17		26.30
	Second Quarter		42.44		9.00
	First Quarter		40.93		8.40

Number of Common Stockholders

The approximate number of holders of record of our common stock as of September 16, 2003, was 530.

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.

See Item 12 – Security Ownership of Certain Beneficial Owners and Management for more information about 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., a privately-held developer of storage networking products based on Ethernet and IP technologies. For more detail, see note 2 to the Consolidated Financial Statements, Business Combination, contained elsewhere herein.

Selected Consolidated Statement of Operations Data

					Year Ended
					June 29,			June 30,			July 1,			July 2,			June 27,
					2003			2002			2001			2000			1999
					(in thousands, except per share data)
Net revenues:
	Fibre Channel				$	304,596		$	247,705		$	234,020		$	119,134		$	38,693
	IP networking					2,408			4,242			1,567			—			—
	Traditional networking and other					1,204			2,794			9,720			20,638			29,792
			Total net revenues			308,208			254,741			245,307			139,772			68,485
	Cost of sales					112,040			122,871			120,812			73,346			40,138
	Cost of sales – inventory charges related to consolidation					—			—			—			—			1,304
			Total cost of sales			112,040			122,871			120,812			73,346			41,442
				Gross profit		196,168			131,870			124,495			66,426			27,043
Operating expenses:
	Engineering and development					61,257			47,560			27,002			14,727			11,766
	Selling and marketing					18,994			19,462			16,734			10,077			6,953
	General and administrative					40,291			12,983			12,111			6,923			4,279
	Amortization of goodwill and other intangibles					5,807			156,209			52,085			—			—
	In-process research and development					—			—			22,280			—			—
	Consolidation charges, net					—			—			—			—			(987	)
			Total operating expenses			126,349			236,214			130,212			31,727			22,011
Operating income (loss)						69,819			(104,344	)		(5,717	)		34,699			5,032
Nonoperating income
	Interest income					12,991			11,239			12,539			9,325			670
	Interest expense					(5,510	)		(3,396	)		(1	)		(32	)		(72	)
	Other income (expense), net					(78	)		(26	)		1,763			(162	)		(118	)
	Gain on repurchase of convertible subordinated notes					28,729			—			—			—			—
			Total nonoperating income			36,132			7,817			14,301			9,131			480
Income (loss) before income taxes						105,951			(96,527	)		8,584			43,830			5,512
Income tax provision (benefit)						40,262			(293	)		32,187			11,016			247
Net income (loss)					$	65,689		$	(96,234	)	$	(23,603	)	$	32,814		$	5,265
Net income (loss) per share:
		Basic			$	0.80		$	(1.18	)	$	(0.31	)	$	0.46		$	0.10
		Diluted			$	0.79		$	(1.18	)	$	(0.31	)	$	0.43		$	0.09
Number of shares used in per share computations:
		Basic				82,051			81,487			76,122			70,823			50,739
		Diluted				87,914			81,487			76,122			76,452			56,524

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Selected Consolidated Balance Sheet Data

	Year Ended
	June 29,			June 30,			July 1,		July 2,		June 27,
	2003			2002			2001		2000		1999
	(in thousands)
Total current assets	$	498,232		$	597,566		$	267,636	$	190,146	$	134,338
Total current liabilities		75,061			39,360			41,302		24,544		16,044
Working capital		423,171			558,206			226,334		165,602		118,294
Total assets		1,189,769			1,207,364			918,014		229,995		169,991
Convertible subordinated notes		208,518			345,000			—		—		—
Retained earnings (accumulated deficit)		(11,134	)		(76,823	)		19,411		43,014		10,200
Total stockholders’ equity		901,930			823,004			876,686		205,451		151,893

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 this Form 10-K elsewhere herein. These factors include the fact that the economy generally, and the technology and storage segments specifically, have recently been in a state of uncertainty making it difficult to determine if past experience is a good guide to the future or if markets will grow or shrink in the short term. Recently, our results have been significantly impacted by a widespread slowdown in information technology spending that has also pressured the storage networking market that is the mainstay of our business. A prolonged 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 payment; the emergence of new or stronger competitors; 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 toward newer product platforms; possible transitions from board level to application specific integrated circuit, or ASIC, solutions for selected applications; a shift in unit product mix from high-end to midrange 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; the effect of our stock price on stock compensation charges; the effect of acquisitions; changes in federal, international, or state and local income tax laws or rates; or changes in accounting standards.

Readers should carefully review these cautionary statements as 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.

Business Combination

In March 2001, we acquired Giganet, a privately-held developer of storage networking products based on Ethernet and IP technologies. The acquisition has been included in the consolidated balance sheets and the operating results of Giganet have been included in the consolidated statements of operations since the acquisition date, March 1, 2001. Effective July 2, 2001, Giganet was merged with and into Emulex Corporation, a California corporation that is our primary operating subsidiary.

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 29, 2003, June 30, 2002, and July 1, 2001, as applicable, unless the calendar year is specified. The following table sets forth certain financial data for the years indicated as a percentage of revenues.

			Percentage of Net Revenues
			2003			2002			2001
Net revenues:
	Fibre Channel			98.8	%		97.2	%		95.4	%
	IP networking			0.8			1.7			0.6
	Traditional networking and other			0.4			1.1			4.0
		Total net revenues		100.0			100.0			100.0
Cost of sales				36.4			48.2			49.2
	Gross profit			63.6			51.8			50.8
Operating expenses:
	Engineering and development			19.9			18.7			11.0
	Selling and marketing			6.1			7.7			6.8
	General and administrative			13.0			5.1			5.0
	Amortization of goodwill and other intangibles			1.9			61.3			21.2
	In-process research and development			—			—			9.1
		Total operating expenses		40.9			92.8			53.1
Operating income (loss)				22.7			(41.0	)		(2.3	)
Nonoperating income
	Interest income			4.2			4.4			5.1
	Interest expense			(1.8	)		(1.3	)		—
	Other income (expense) net			—			—			0.7
	Gain on repurchase of convertible subordinated notes			9.3			—			—
	Total non-operating income			11.7			3.1			5.8
Income (loss) before income taxes				34.4			(37.9	)		3.5
Income tax provision (benefit)				13.1			(0.1	)		13.1
Net income (loss)				21.3	%		(37.8	)%		(9.6	)%

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.

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Net Revenues by Product Line

				Percentage					Percentage
				of Net					of Net			Increase/			Percentage
(in thousands)		2003		Revenues			2002		Revenues			(Decrease)			Change
Fibre Channel		$	304,596		99	%	$	247,705		97	%	$	56,891			23	%
IP networking			2,408		1	%		4,242		2	%		(1,834	)		(43	%)
Traditional networking			1,204		—			2,794		1	%		(1,590	)		(57	%)
	Total net revenues	$	308,208		100	%	$	254,741		100	%	$	53,467			21	%

Our IP Networking products consist of both our iSCSI products, which are currently in development, and VI products; as well as legacy cLAN products. We expect that our VI, cLAN and traditional networking products, which have all entered end-of-life status, will contribute negligible revenues to succeeding quarters. Although we continue to devote resources to iSCSI product development, the market remains in an early stage of development and we do not expect material revenue from these products for the foreseeable future.

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

Net Revenues by Major Customers

	Direct Revenues						Total Direct and Indirect Revenues
	2003			2002			2003			2002
Net revenue percentage (1)
Hewlett-Packard (2)		23	%		25	%		23	%		25	%
IBM		23	%		20	%		26	%		27	%
EMC		—			—			22	%		22	%

(1)  Amounts less than 10 percent are not presented

(2)  Fiscal 2002 Hewlett-Packard percentages represent the combined revenues of Hewlett-Packard and Compaq

Direct sales to our top five customers accounted for 68 percent of total net revenues in 2003 compared to 65 percent in 2002 and we expect to be similarly concentrated in the future. Our net revenues from our customers can be significantly impacted by changes in the business models of our customers. Beginning in late 2002, EMC began sourcing more product through distribution rather than purchasing it directly. Consequently, direct sales to EMC have been impacted. Additionally, EMC has formed an alliance with Dell and entered into a worldwide manufacturing agreement with Dell. Consequently, some of our models previously sold under EMC-specific model numbers are now being sold under Dell-specific model numbers, and some net revenues for EMC, including direct sales to EMC and their customer-specific models purchased indirectly through other distribution channels, have been shifted as a result of this Dell alliance.

From a distribution channel perspective, net revenues generated from OEM customers were 66 percent of net revenues and sales through distribution were 34 percent in 2003. Our OEM customers may take products both directly and through distribution channels.

Net Revenues by Distribution Channel

				Percentage					Percentage
				of Net					of Net			Increase/			Percentage
(in thousands)		2003		Revenues			2002		Revenues			(Decrease)			Change
OEM		$	204,317		66	%	$	192,123		75	%	$	12,194			6	%
Distribution			103,719		34	%		62,217		25	%		41,502			67	%
End-User			172		—			401		—			(229	)		(57	%)
	Total net revenues	$	308,208		100	%	$	254,741		100	%	$	53,467			21	%

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A major factor in the increased distribution net revenues is that beginning in 2002, one of our larger OEM customers, EMC, began sourcing more product through distribution rather than purchasing it directly. In 2003 direct sales to EMC decreased $10.9 million while total direct and indirect sales to EMC increased by $11.0 million in 2003 compared to 2002.

In 2003 domestic net revenues increased by $32.6 million, or 21 percent, and international net revenues increased by $20.9 million, or 20 percent, compared to 2002.

Net Domestic and International Revenues

				Percentage					Percentage
				of Net					of Net			Increase/		Percentage
(in thousands)		2003		Revenues			2002		Revenues			(Decrease)		Change
Domestic		$	185,195		60	%	$	152,638		60	%	$	32,557		21	%
Europe			101,476		33	%		90,130		35	%		11,346		13	%
Pacific Rim			21,537		7	%		11,973		5	%		9,564		80	%
	Total net revenues	$	308,208		100	%	$	254,741		100	%	$	53,467		21	%

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

Gross Profit. 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 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 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 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 $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 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 $19.0 million and $19.5 million for

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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. 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 $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. Amortization of goodwill and other intangibles included the amortization of intangible assets with estimable lives in 2003 and 2002. Prior to the adoption of Financial Accounting Standards Board, or FASB, Statement 142, or Statement 142, amortization of goodwill and other intangible assets included the amortization of goodwill. 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. 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. 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 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.

The Internal Revenue Service recently completed an examination of our 1998 U.S. tax return, and no adjustments were made to the return.

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Fiscal 2002 versus Fiscal 2001

Net Revenues. Net revenues for 2002 were $254.7 million, an increase of $9.4 million, or four percent, from $245.3 million in 2001. Our net revenues consist primarily of sales to OEMs and distribution sales, which include sales to distributors, value added resellers, system integrators and similar companies. The following chart details our net revenues by distribution channel for the 2002 and 2001 fiscal years:

Net Revenues by Distribution Channel

				Percentage					Percentage
				of Net					of Net			Increase/			Percentage
(in thousands)		2002		Revenues			2001		Revenues			(Decrease)			Change
OEM		$	192,123		75	%	$	205,529		84	%	$	(13,406	)		(7	%)
Distribution			62,217		25	%		39,110		16	%		23,107			59	%
End-User			401		—			668		—			(267	)		(40	%)
	Total net revenues	$	254,741		100	%	$	245,307		100	%	$	9,434			21	%

A major factor in this shift from OEM to distribution net revenues is that one of our larger OEM customers, EMC, has sourced more product through distribution rather than purchasing it directly. Additionally, the widespread slowdown in technology investment has affected our OEM and distribution customers at different times and in varying degrees of severity. We continue to believe net revenues in this market are being generated primarily from OEMs taking product directly and through other distribution channels.

The following chart details our revenues by product line for the 2002 and 2001 fiscal years:

Net Revenues by Product Line

				Percentage					Percentage
				of Net					of Net			Increase/			Percentage
(in thousands)		2002		Revenues			2001		Revenues			(Decrease)			Change
Fibre Channel		$	247,705		97	%	$	234,020		95	%	$	13,685			6	%
IP networking			4,242		2	%		1,567		1	%		2,675			171	%
Traditional networking			2,794		1	%		9,720		4	%		(6,926	)		(71	%)
	Total net revenues	$	254,741		100	%	$	245,307		100	%	$	9,434			4	%

During the second half of 2001, we first experienced a downturn in Fibre Channel host bus adapter demand. We believe industry-wide decreases in end-user demand for technology solutions caused this downturn in demand and caused the slowing in net revenue growth generated from Fibre Channel products. IP Storage Networking products were added to our product offerings in the third quarter of 2001 with the acquisition of Giganet. Consequently, the increase of $2.7 million is due primarily to the inclusion of only approximately four months of net revenues for our IP Storage Networking products in 2001 compared to a full year in 2002. The decrease in net revenues from our traditional networking products was principally due to the ongoing maturation of these products and a decrease in our focus on these products. Our traditional networking products entered end-of-life status in 2000 and we expect that these will contribute negligible, if any, revenues in future periods.

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:

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Net Revenues by Major Customers

		Direct Revenues						Total Direct and Indirect Revenues
		2002			2001			2002			2001
Net revenue percentage (1):
	Hewlett-Packard (2)		25	%		25	%		25	%		25	%
	IBM		20	%		21	%		27	%		30	%
	EMC		—			12	%		22	%		22	%

(1)  Amounts less than 10 percent are not presented

(2)  Hewlett-Packard percentages represent the combined revenues of Hewlett-Packard and Compaq

Direct sales to our top five customers accounted for 65 percent of total net revenues in 2002, compared to 72 percent in 2001.

The following chart details our net domestic and international revenues for the 2002 and 2001 fiscal years:

Net Domestic and International Revenues

				Percentage					Percentage
				of Net					of Net			Increase/			Percentage
(in thousands)		2002		Revenues			2001		Revenues			(Decrease)			Change
Domestic		$	152,638		60	%	$	154,505		63	%	$	(1,867	)		(1	%)
Europe			90,130		35	%		81,645		33	%		8,485			10	%
Pacific Rim			11,973		5	%		9,157		4	%		2,816			31	%
	Total net revenues	$	254,741		100	%	$	245,307		100	%	$	9,434			4	%

We believe the decrease in domestic net revenues of $1.9 million, or one percent, is principally due to industry-wide decreases in end-user demand for technology solutions. We believe this increase in international net revenues of $11.3 million, or 12 percent, is a function of the overall size of the market for Fibre Channel products, increased market acceptance of our Fibre Channel products and an increase in demand from one international OEM customer.

Gross Profit. In 2002, gross profit increased $7.4 million, or six percent, to $131.9 million from $124.5 million in 2001. Gross margin increased to 52 percent in 2002 compared to 51 percent in 2001, but included a net excess and obsolete inventory charge of $10.1 million during 2002 associated with older-generation one gigabit products. 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 gigabit products as these customers were expected to migrate to two gigabit 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 2002. Subsequently, as a result of generally improved demand exceeding prior estimates and the sale of products for which a reserve had been recorded, we recorded a reduction of $3.6 million of this excess and obsolete inventory charge in 2002. Excluding the net excess and obsolete inventory charge of $10.1 million from 2002, gross profit would have been $141.9 million and gross margin would have been 56 percent. The increase in gross profit, excluding the net inventory charge, to $141.9 million in 2002 from $124.5 million in 2001 was primarily due to cost reductions for Fibre Channel products, higher Fibre Channel net revenues and changes in product mix, which more than offset the inclusion of costs associated with the former Giganet operations, acquired in March 2001. With an acquisition date of March 1, 2001, the former Giganet operations were included in expenses for approximately four months in 2001 compared to a full year in 2002. The improvement in gross margin in 2002, excluding the net inventory charge, to 56 percent compared to 51 percent in 2001, is primarily due to changes in product mix and the improved cost structures for our newer generation products. Additionally, cost of sales included $48 thousand and $24 thousand of amortized deferred compensation expense related to the acquisition of Giganet in 2002 and 2001, respectively.

Engineering and development. Engineering and development expenses were $47.6 million and $27.0 million for 2002 and 2001, representing 19 and 11 percent of net revenues, respectively. Engineering and development expenses increased by $20.6 million, or 76 percent, in 2002 compared to 2001. This increase of $20.6 million was due to our increased investment in Fibre Channel and Internet Protocol product development, which represented substantially all of our engineering and development expenses. The impact of the absorption of engineering and development expenses associated with the former

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Giganet operations, which represented a major portion of our increased investment in Fibre Channel and Internet Protocol product development, for all of 2002 versus approximately four months of 2001, was an estimated increase of approximately $9.3 million. Engineering and development expenses included $2.1 million and $0.8 million of amortized deferred compensation expenses related to the acquisition of Giganet for 2002 and 2001, respectively. Due to the technical nature of our products, engineering support is a critical part of our strategy during both the development of our products and the support of our customers from product design through deployment into the market. Management intends to continue to make significant investments in the technical support and enhancement of our current products, as well as the continued development of new products.

Selling and marketing. Selling and marketing expenses were $19.5 million and $16.7 million for 2002 and 2001, representing eight and seven percent of net revenues, respectively. The increase in selling and marketing expenses of $2.7 million, or 16 percent, was primarily due to increased salaries and commissions associated with additional employees and higher revenues of $2.4 million, as well as increased promotion and advertising costs of $0.3 million. These increases included the impact of the absorption of the former Giganet operations’ selling and marketing expenses for all of 2002 versus approximately four months of 2001. Selling and marketing expenses included $1.1 million and $0.5 million of amortized deferred compensation expenses related to the acquisition of Giganet for 2002 and 2001, respectively. Additionally, we recognized $0.3 million of amortized deferred compensation expense in both 2002 and 2001 associated with a change in the United Kingdom’s tax laws.

General and administrative. General and administrative expenses were $13.0 million and $12.1 million for 2002 and 2001, respectively, representing five percent of net revenues in each year. General and administrative expenses remained relatively flat for 2002, compared to 2001, due to our emphasis on operating expense controls, which offset the absorption of our former Giganet operations’ general and administrative expenses for a full year in 2002 versus approximately four months in 2001. General and administrative expenses included $0.2 million and $0.1 million of amortized deferred compensation expenses related to the acquisition of Giganet for 2002 and 2001, respectively.

Amortization of goodwill and other intangibles. Amortization of goodwill and other intangibles included the amortization of goodwill and other purchased intangible assets that related to the purchase of Giganet, completed during 2001. The amortization of goodwill and other intangibles was $156.2 million and $52.1 million in 2002 and 2001, representing 61 and 21 percent of net revenues, respectively. In 2002 the amortization consisted of $149.7 million and $0.7 million for goodwill and assembled workforce, respectively; as well as $5.8 million for core technology and patents and $9 thousand for completed technology. In 2001, the amortization consisted of $49.9 million and $0.2 million for goodwill and assembled workforce, respectively; as well as $1.9 million for core technology and patents and $4 thousand for completed technology. Effective with our adoption of FASB Statement 142 at the beginning of our fiscal year 2003, we no longer incur amortization expense associated with goodwill and assembled workforce. We have completed our transitional impairment analysis under Statement 142 and no transitional impairment loss resulted upon the adoption of Statement 142 as of July 1, 2002.

In-process research and development. In-process research and development expense related to the purchase of Giganet, completed during 2001. No in-process research and development expenses were incurred in 2002. The in-process research and development expense was $22.3 million in 2001, representing nine percent of net revenues.

Nonoperating income. Nonoperating income consisted primarily of interest income partially offset by interest expense. Our nonoperating income decreased $6.5 million to $7.8 million in 2002, compared to $14.3 million in 2001. The decrease is due primarily to lower interest rates causing lower interest income on our investments as well as a loss of $0.2 million on the sale of strategic investment during 2002. The decrease in nonoperating income is also due to a gain of $1.9 million from the sale of a strategic investment during 2001 and $0.7 million of interest earned on a pre-acquisition note from Giganet during 2001. In 2002, interest expense of $3.4 million associated with our issuance of convertible subordinated notes in 2002 was included.

Income Taxes. In 2002, we recorded a tax benefit in the amount of $0.3 million. We recorded the tax benefit at a rate other than the statutory federal tax rate 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 operating loss carryforwards and research credit carryforwards) would be realized due to our projection of future taxable income. In 2001, we recorded a tax provision in the amount of $32.2 million. We recorded a tax provision rather than a tax benefit in 2001, and at a rate other than the statutory federal tax rate, primarily due to the non-deductibility of both the goodwill amortization and the in-process research and development charge.

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New Accounting Standards

The Emerging Issues Task Force, or EITF, recently reached a consensus on its tentative conclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides accounting guidance for customer solutions where delivery or performance of products, services and/or performance may occur at different points in time or over different periods of time. Companies are required to adopt this consensus for fiscal periods beginning after June 15, 2003. We believe the adoption of EITF 00-21 will not have a material impact on our financial position, results of operations or liquidity.

In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We do not believe that we have any variable interest entities to which Interpretation 46 would apply.

In April 2003, the FASB issued Statement 149, an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires prospective application for contracts entered into or modified after June 30, 2003, except for contracts that exist in fiscal quarters that began prior to June 15, 2003, and for hedging relationships esignated after June 30, 2003. For existing contracts in fiscal quarters that began prior to June 15, 2003, the provisions of this Statement that relate to Statement 133 implementation issues should continue to be applied in accordance with their respective effective dates. Statement 149 requires that contracts with comparable characteristics be accounted for similarly. We do not expect the adoption of this pronouncement to have a material impact on our financial position, results of operations or liquidity.

In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning December 15, 2003. We do not expect the adoption of this pronouncement to have a material impact on our financial position, results of its operations or liquidity.

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 potentially result in materially different results under different assumptions and conditions.

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. Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101. 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 revenues 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.

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For products with unspecified software upgrade rights, which are our legacy cLAN products that contribute negligible revenues, we apply the American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, ‘Software Revenue Recognition’ With Respect to Certain Transactions.” Under SOP 97-2, as amended by SOP 98-9, revenue is recognized from software licenses, provided the software has been delivered to the customer, persuasive evidence of an arrangement exists, the price charged to the customer is fixed or determinable at fair value, there are no significant Company obligations related to the sale and the resulting receivable is deemed collectible, net of an allowance for doubtful accounts. In accordance with SOP 97-2, as amended by SOP 98-9, we have deferred the revenue over the upgrade period for certain legacy cLAN products with unspecified software upgrade rights.

Furthermore, we provide a warranty of between one and three years on our Fibre Channel and Internet Protocol products and provide a warranty of between one and five years on our traditional networking products. We record a provision for estimated warranty-related costs at the time of sale based on historical product return rates and our expected future costs of fulfilling our 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.

Goodwill, Other Intangibles and Long-Lived Assets. Goodwill and other intangibles resulting from the acquisition of Giganet 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. We adopted Statement 142 effective July 1, 2002, and no longer amortize goodwill and other intangibles that have indeterminate useful lives. The adoption of Statement 142 had a significant effect on our results of operations. Prior to the adoption for Statement 142 we applied Statement 121 for goodwill, other intangibles and long-lived assets. We completed our transitional impairment analysis under Statement 142 and found no impairment upon the adoption of Statement 142 as of July 1, 2002. Our annual impairment test occurred in the fourth quarter of fiscal 2003 with no impairment charges resulting. In accordance with Statement 142, goodwill and other intangibles that have indeterminate lives will be tested for impairment at least annually, but also on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Any future impairment loss could materially and adversely affect our financial position and results of operations.

We apply 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. 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.

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.

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 and note 12 of the Consolidated Financial Statements for more information. Although we have no plans to adopt the fair value provisions of

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Statement 123 unless required to under new accounting standards 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 impact on our results of operations.

Liquidity and Capital Resources

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. At June 30, 2002, we had $558.2 in working capital, and $631.8 in cash and cash equivalents, restricted cash, current investments and long-term investments. Our cash and cash equivalents decreased by $145.6 million from $282.6 million as of June 30, 2002, to $137.0 million as of June 29, 2003. The decrease in cash and cash equivalents was due to our investing and financing activities, which used $153.5 million and $99.2 million of cash and cash equivalents, respectively. The cash and cash equivalents used by investing and financing activities were partially offset by our operating activities, which provided $107.1 million of cash and cash equivalents.

In 2003, investing activities, which primarily consisted of purchases of investments of $650.2 million, maturities of investments of $523.2 million and additions to property and equipment of $19.2 million, used $153.5 million of cash and cash equivalents. In 2002, investing activities, which primarily consisted of purchases of investments of $732.1 million, maturities of investments of $571.5 and additions to property and equipment of $9.7 million, used $172.2 million of cash and cash equivalents.

Financing activities used $99.2 million of cash and cash equivalents in 2003. This decrease in cash and cash equivalents was primarily due to our repurchase of approximately $136.5 million in face value of convertible subordinated notes at a discount to face value, spending $104.2 million. This decrease in cash and cash equivalents was partially offset by proceeds from the issuance of common stock under stock option plans and proceeds from the issuance of common stock under the employee stock purchase plan. In 2002, financing activities, which consisted primarily of the net proceeds from the issuance of convertible subordinated notes of $334.2 million as well as the repurchase of common stock and the proceeds from the issuance of common stock under stock option plans and the employee stock purchase plan, provided $329.1 million of cash and cash equivalents.

Operating activities provided $107.1 million of cash and cash equivalents in 2003, primarily from net income before non-cash activities. Such non-cash activities consisted primarily of the gain on repurchase of convertible subordinated notes, deferred income taxes, litigation settlements, depreciation and amortization of property and equipment, the amortization of other intangibles, deferred stock-based compensation and the tax benefit from the exercise of stock options. Additional increases in cash and cash equivalents were due to a decrease in inventories and a decrease in prepaid expenses and other assets. These increases to net cash provided by operating activities were partially offset by an increase in accounts receivable, decrease in accrued liabilities, a decrease in income taxes payable and a decrease in accounts payable. In 2002, operating activities provided $89.3 million of cash and cash equivalents. This increase in cash and cash equivalents provided by operating activities in 2002 was primarily due to our net income before non-cash activities such as the amortization of goodwill and other intangibles, depreciation and amortization of property and equipment, deferred stock-based compensation, the tax benefit from the exercise of stock options, and deferred income taxes, as well as changes in other working capital balances. The changes in other working capital balances in 2002 included the effect of the net excess and obsolete charge of $10.1 million associated with older generation one Gbps products.

Our Board of Directors authorized the repurchase of up to four million common shares over the two years beginning in September 2001. The repurchase plan authorized us to make repurchases in the open market or through privately negotiated transactions with the timing and terms of any purchase to be determined by management based on market conditions. During the first quarter of fiscal 2002, we repurchased 1.0 million common shares and did not subsequently repurchase any additional shares during fiscal 2002 or 2003.

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, our Board of Directors expanded our repurchase program to include the repurchase of our convertible subordinated notes up to a purchase price of $125.0 million. Also 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 convertible subordinated notes, spending $104.2 million. The repurchased notes were cancelled, leaving convertible subordinated notes outstanding with a face value of $208.5 million, which, if converted, would result in the issuance of approximately 3.9 million shares. The resulting net pre-tax gain of approximately $28.7 million from the repurchase of the convertible subordinated notes was recorded for the three months ended September 29, 2002.

33

During the three months ended March 30, 2003, our Board of Directors further expanded the repurchase program for the repurchase of our convertible subordinated notes up to a total purchase price of $190.0 million. The combined program authorizes the repurchase of up to 4.0 million shares of common stock, leaving 3.0 million common shares authorized for repurchase at June 29, 2003, and up to $190.0 million to be spent on the repurchase of convertible subordinated notes, leaving $85.8 million authorized for repurchase at June 29, 2003.

Subsequent to the year ended June 29, 2003, our Board of Directors expanded our stock repurchase program to include the repurchase of all of our convertible subordinated notes and extend the entire program to June 2005. The combined program authorizes the repurchase of up to 4.0 million shares of common stock and the repurchase of all of the convertible subordinated notes. Also subsequent to the year ended June 29, 2003, and through August 27, 2003, we bought back approximately $93.9 million of our convertible subordinated notes at a discount to face value, spending approximately $87.3 million. The repurchased notes were cancelled, leaving convertible subordinated notes outstanding with a face value of approximately $114.7 million that, if converted, would result in the issuance of approximately 2.1 million shares. The resulting net pre-tax gain of approximately $4.7 million from the repurchase of the convertible subordinated notes will be reported in the first quarter of fiscal 2004.

We were previously required to enter into end-of-life purchase agreements for two key inventory components as the sole-source manufacturers of these components announced their discontinued manufacturing of the components. As of June 29, 2003, our remaining purchase obligation for the two components was $13.8 million.

For the three months ended March 30, 2003, we recorded a net $27.0 million before-tax charge associated with the tentative settlements of securities class action and derivative lawsuits. The net $27.0 million charge included $39.5 million expected to be paid to plaintiffs during fiscal 2004, less an estimated $12.5 million probable minimum recovery from our insurance carriers expected in fiscal 2004. In addition to the $12.5 million, our litigation settlements receivable based upon our probable minimum recovery at June 29, 2003, also includes $0.6 million designated for related legal fees. At June 29, 2003, all related unpaid legal fees have been accrued as a liability.

In 2002, we entered into an agreement to relocate our headquarters locally in Costa Mesa, California. We will finance the build to suit construction phase of the approximately 180 thousand square feet facility with our own capital, before beginning a 10-year lease term with an option to buy the land and buildings during the first six months of the lease term. If we do not exercise our option to purchase the facility, the landlord will obtain permanent financing and reimburse us for the construction costs. Construction on our new corporate headquarters is progressing. If purchased, we believe the total cost, including the land, building and other related capital expenditures, would be approximately $47.0 million. Our total gross undiscounted financial commitment for the 10-year lease term would be approximately $45.9 million. At June 29, 2003, we had restricted cash of $9.3 million held in escrow associated with the construction of the headquarters. 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 part of our commitment to storage networking product development, including Fibre Channel and IP Networking, we expect to continue our investments in property and equipment, most notably for additional engineering equipment, continued enhancement of our global IT infrastructure and the local relocation of our Costa Mesa, California facility. In addition, the plaintiffs in the tentative settlements of securities class action and derivative lawsuits will be paid $39.5 million during fiscal 2004. 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.

As described above and in note 11 of the Consolidated Financial Statements, the following summarizes our contractual obligations at June 29, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

34

	Payments Due by Period
	(in thousands)
			Less than		1-3		4-5		After 5
Contractual Obligations	Total		1 year		years		years		years
Convertible subordinated notes and interest	$	223,114	$	3,649	$	7,298	$	212,167	$	—
Operating leases		5,061		2,219		2,713		129		—
Non-cancelable purchase obligations for end of life components		13,784		13,784		—		—		—
Litigation settlement		39,500		39,500		—		—		—
Letter of credit		1,000		1,000		—		—		—
New corporate headquarters – lease option		45,899		2,220		8,972		9,104		25,603
Total	$	328,358	$	62,372	$	18,983	$	221,400	$	25,603

Item 7a. Qualitative and Quantitative Disclosures about Market Risk.

Interest Rate Sensitivity

At June 29, 2003, our investment portfolio consisted primarily of fixed income securities, excluding those classified as cash, cash equivalents and restricted cash, of $474.1 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 29, 2003, 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. Our 1.75 percent convertible subordinated notes are due February 1, 2007.

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 its 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.

35

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 2003 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 29, 2003.

Executive Officers of the Registrant

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

Name	Position	Age
Paul F. Folino	Chairman of the Board and Chief Executive Officer		58
Kirk D. Roller	President and Chief Operating Officer		41
Ronald P. Quagliara (1) (2)	Chief Technology Officer		54
William F. Gill (1)	Executive Vice President, Worldwide Sales		46
Sadie A. Herrera (1)	Executive Vice President, Human Resources		54
Karen Mulvany (1)	Executive Vice President, Business Planning and Development		46
Michael J. Rockenbach	Executive Vice President, Chief Financial Officer, Secretary and Treasurer		42
Michael E. Smith (1)	Executive Vice President, Worldwide Marketing		42

(1)	These persons serve in the indicated capacities as officers of the Registrant’s principal operating subsidiary; they are not officers of the Registrant.
(2)	Mr. Quagliara will be retiring from the Company, effective April 1, 2004.

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. 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. 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 technical officer in July 2002. 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 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.

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

36

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 ½ 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.

None of the executive officers of the parent Company or officers of its principal operating subsidiary has any family relationship with any other executive officer of the Company, other officer of its principal operating subsidiary or director of the Company.

Item 11. Executive Compensation.

There is incorporated herein by reference the information required by this Item in our definitive proxy statement for the 2003 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 29, 2003.

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 2003 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 29, 2003.

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 29, 2003. The table includes the following plans: The Emulex Corporation Employee Stock Option Plan; The Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors; and The Emulex Corporation Employee Stock Purchase Plan.

							Number of securities
				Weighted-average			remaining available for future
	Number of securities			exercise price of			issuance under equity
	to be issued upon			outstanding			compensation plans
	exercise of outstanding			options, warrants			(excluding securities
Plan Category	options, warrants and rights			and rights			related in column (a))
	(a)			(b)			(c)
Equity compensation plans approved by security holders (1)		9,669,510		$	29.94			4,390,639
Employee stock purchase plan approved by security holders		—	(2)		—	(2)		649,205
Total		9,669,510		$	29.94			5,039,844

(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.

37

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 2003 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 29, 2003.

Item 14. 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 which took place as of a date within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

Since the date of the most recent evaluation of our internal controls by the Chief Executive and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

38

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 September 3, 2002, with respect to expansion of the Registrant’s repurchase program to include the Registrant’s convertible subordinated notes and the subsequent repurchase of $136.5 million of convertible subordinate notes.

2. The Registrant filed Form 8-K on April 24, 2003, containing press releases announcing the Registrant’s financial results for the three months ended March 30, 2003, and the settlement in principle of a class action lawsuit.

Item 16. Principal Accountant Fees and Services.

This item is effective for filings for fiscal years ending after December 15, 2003, and is therefore is not applicable to this filing.

39

EMULEX CORPORATION AND SUBSIDIARIES
Annual Report — Form 10-K
Items 8, 15(a)(1) and 15(a)(2)
Index to Consolidated Financial Statements and Schedule
June 29, 2003, June 30, 2002, and July 1, 2001
(With Independent Auditors’ Report Thereon)

	Page Number
Consolidated Financial Statements
Independent Auditors’ Report		41
Consolidated Balance Sheets — June 29, 2003, and June 30, 2002		42
Consolidated Statements of Operations — Years ended June 29, 2003, June 30, 2002, and July 1, 2001		43
Consolidated Statements of Stockholders’ Equity — Years ended June 29, 2003, June 30, 2002, and July 1, 2001		44
Consolidated Statements of Cash Flows — Years ended June 29, 2003, June 30, 2002, and July 1, 2001		45
Notes to Consolidated Financial Statements		46
Schedule
Schedule II — Valuation and Qualifying Accounts and Reserves		70

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.

40

INDEPENDENT AUDITORS’ REPORT

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 auditing standards generally accepted in the United States of America. 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 29, 2003, and June 30, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended June 29, 2003, in conformity with accounting principles generally accepted in the United States of America. 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.”

KPMG LLP

Costa Mesa, California
August 1, 2003, except as to note 17, which is as of August 27, 2003

41

EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 29, 2003, and June 30, 2002
(in thousands, except share data)

				2003			2002
	Assets
Current assets:
		Cash and cash equivalents		$	136,971		$	282,561
		Restricted cash			9,342			2,024
		Investments			239,302			227,905
		Accounts and other receivables, less allowance for doubtful accounts of $1,844 in 2003 and $1,597 in 2002			46,678			36,259
		Litigation settlements receivable			13,095			—
		Inventories, net			10,998			14,833
		Prepaid expenses			5,516			3,779
		Deferred income taxes			36,330			30,205
			Total current assets		498,232			597,566
Property and equipment, net					26,585			18,574
Investments					234,847			119,302
Goodwill					397,256			397,256
Other intangibles, net					27,067			32,874
Deferred income taxes					—			29,385
Other assets					5,782			12,407
				$	1,189,769		$	1,207,364
	Liabilities and Stockholders’ Equity
Current liabilities:
		Accounts payable		$	11,298		$	12,663
		Accrued liabilities			18,806			19,677
		Accrued litigation settlements			39,500			—
		Income taxes payable			5,457			7,020
			Total current liabilities		75,061			39,360
Convertible subordinated notes and other liabilities					208,518			345,000
Deferred income taxes					4,260			—
Total liabilities					287,839			384,360
Commitments and contingencies (note 11)
Subsequent event (note 17)
Stockholders’ equity:
		Preferred stock, $0.01 par value; 1,000,000 shares authorized (150,000 shares designated as Series A Junior Participating Preferred Stock); none issued and outstanding			—			—
		Common stock, $0.10 par value; 240,000,000 shares authorized; 82,465,813 and 81,800,909 issued and outstanding in 2003 and 2002, respectively			8,247			8,180
		Additional paid-in capital			907,976			898,803
		Deferred compensation			(3,159	)		(7,156	)
		Accumulated deficit			(11,134	)		(76,823	)
Total stockholders’ equity					901,930			823,004
				$	1,189,769		$	1,207,364

See accompanying notes to consolidated financial statements.

42

EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 29, 2003, June 30, 2002, and July 1, 2001
(in thousands, except per share data)

				2003			2002			2001
Net revenues				$	308,208		$	254,741		$	245,307
Cost of sales					112,040			122,871			120,812
			Gross profit		196,168			131,870			124,495
Operating expenses:
		Engineering and development			61,257			47,560			27,002
		Selling and marketing			18,994			19,462			16,734
		General and administrative			40,291			12,983			12,111
		Amortization of goodwill and other intangibles			5,807			156,209			52,085
		In-process research and development			—			—			22,280
			Total operating expenses		126,349			236,214			130,212
Operating income (loss)					69,819			(104,344	)		(5,717	)
Nonoperating income:
		Interest income			12,991			11,239			12,539
		Interest expense			(5,510	)		(3,396	)		(1	)
		Other income (expense), net			(78	)		(26	)		1,763
		Gain on repurchase of convertible subordinated notes			28,729			—			—
			Total nonoperating income		36,132			7,817			14,301
Income (loss) before income taxes					105,951			(96,527	)		8,584
Income tax provision (benefit)					40,262			(293	)		32,187
Net income (loss)				$	65,689		$	(96,234	)	$	(23,603	)
Net income (loss) per share:
	Basic			$	0.80		$	(1.18	)	$	(0.31	)
	Diluted			$	0.79		$	(1.18	)	$	(0.31	)
Number of shares used in per share computations:
	Basic				82,051			81,487			76,122
	Diluted				87,914			81,487			76,122

See accompanying notes to consolidated financial statements.

43

EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years ended June 29, 2003, June 30, 2002, and July 1, 2001
(in thousands, except share data)

														Retained			Total
		Common Stock						Additional			Deferred			Earnings			Stock-
								Paid-In			Com-			(Accumu-			holders’
		Shares			Amount			Capital			pensation			lated Deficit)			Equity
Balance at July 2, 2000			72,466,848		$	7,247		$	155,190		$	—		$	43,014		$	205,451
	Common shares issued, options assumed and deferred stock-based com-pensation for business combination		6,744,638			674			663,256			(13,892	)		—			650,038
	Proceeds from note receivable issued in exchange for restricted stock		—			—			1,114			—			—			1,114
	Deferred stock-based compensation for international employees’ options		—			—			1,113			(1,113	)		—			—
	Amortization of deferred stock-based compensation		—			—			—			1,756			—			1,756
	Reversal of deferred stock-based com-pensation due to employee terminations		—			—			(883	)		883			—			—
	Exercise of stock options		2,587,836			259			9,483			—			—			9,742
	Tax benefit from exercise of stock options		—			—			32,188			—			—			32,188
	Net loss		—			—			—			—			(23,603	)		(23,603	)
Balance at July 1, 2001			81,799,322			8,180			861,461			(12,366	)		19,411			876,686
	Valuation allowance adjustment		—			—			39,528			—			—			39,528
	Amortization of deferred stock-based compensation		—			—			—			3,742			—			3,742
	Reversal of deferred stock-based com-pensation due to employee terminations		—			—			(1,468	)		1,468			—			—
	Exercise of stock options, net of 56 shares retired		847,338			85			4,145			—			—			4,230
	Tax benefit from exercise of stock options		—			—			4,326			—			—			4,326
	Repurchase of common stock		(1,000,000	)		(100	)		(10,439	)		—			—			(10,539	)
	Issuance of common stock under employee stock purchase plan		154,249			15			1,212			—			—			1,227
	Other stock-based compensation		—			—			38			—			—			38
	Net loss		—			—			—			—			(96,234	)		(96,234	)
Balance at June 30, 2002			81,800,909		$	8,180		$	898,803		$	(7,156	)	$	(76,823	)	$	823,004
	Amortization of deferred stock-based compensation		—			—			—			4,205			—			4,205
	Reversal of deferred stock-based com-pensation due to employee terminations		—			—			(790	)		790			—			—
	Exercise of stock options		518,358			52			3,554			—			—			3,606
	Tax benefit from exercise of stock options		—			—			4,054			—			—			4,054
	Deferred stock-based compensation for employee stock purchase plan		—			—			998			(998	)		—			—
	Issuance of common stock under employee stock purchase plan		146,546			15			1,357			—			—			1,372
	Net income		—			—			—			—			65,689			65,689
Balance at June 29, 2003			82,465,813		$	8,247		$	907,976		$	(3,159	)	$	(11,134	)	$	901,930

See accompanying notes to consolidated financial statements.

44

EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 29, 2003, June 30, 2002, and July 1, 2001
(in thousands)

				2003			2002			2001
Cash flows from operating activities:
Net income (loss)				$	65,689		$	(96,234	)	$	(23,603	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Depreciation and amortization of property and equipment		11,049			9,108			4,801
			Loss (gain) on sale of a strategic investment		—			248			(1,884	)
			Gain on repurchase of convertible subordinated notes		(28,729	)		—			—
			Litigation settlements, net of estimated insurance recoveries		27,007			—			—
			Deferred stock-based compensation		4,205			3,780			1,756
			Amortization of goodwill and other intangibles		5,807			156,209			52,085
			In-process research and development		—			—			22,280
			Loss on disposal of property and equipment		147			435			400
			Deferred income taxes		27,520			(11,855	)		(536	)
			Tax benefit from exercise of stock options		4,054			4,326			32,188
			Provision for doubtful accounts		248			510			435
			Changes in assets and liabilities:
			Accounts receivable		(10,667	)		3,470			(15,714	)
			Inventories		3,835			23,783			(25,007	)
			Prepaid expenses and other assets		1,577			(2,725	)		(111	)
			Accounts payable		(1,365	)		(16,427	)		5,882
			Accrued liabilities		(1,746	)		7,884			4,006
			Income taxes payable		(1,563	)		6,738			(37	)
	Net cash provided by operating activities				107,068			89,250			56,941
Cash flows from investing activities:
Net proceeds from sale of property and equipment					11			—			—
Additions to property and equipment					(19,218	)		(9,738	)		(11,657	)
Net increase in restricted cash related to construction escrow account					(7,318	)		(2,024	)		—
Payment for purchase of Giganet, Inc., net of cash acquired					—			(24	)		(15,530	)
Purchases of investments					(650,184	)		(732,088	)		(524,091	)
Maturities of investments					523,242			571,490			491,009
Proceeds from sale of a strategic investment					—			152			5,484
	Net cash used in investing activities				(153,467	)		(172,232	)		(54,785	)
Cash flows from financing activities:
Principal payments under capital leases					—			—			(12	)
Proceeds from issuance of common stock under stock option plans					3,606			4,230			9,742
Proceeds for issuance of common stock under employee stock purchase plan					1,372			1,227			—
Proceeds from note receivable issued in exchange for restricted stock					—			—			1,114
Repurchase of common stock					—			(10,539	)		—
Net proceeds from issuance of convertible subordinated notes					—			334,154			—
Repurchase of convertible subordinated notes					(104,169	)		—			—
	Net cash provided by (used in) financing activities				(99,191	)		329,072			10,844
Net increase (decrease) in cash and cash equivalents					(145,590	)		246,090			13,000
Cash and cash equivalents at beginning of year					282,561			36,471			23,471
Cash and cash equivalents at end of year				$	136,971		$	282,561		$	36,471
Supplemental disclosures:
Noncash investing and financing activities
		Fair value of assets acquired		$	—		$	—		$	7,832
		Fair value of liabilities assumed			—			(139	)		8,136
		Common stock issued and options assumed for acquired business			—			—			661,678
Cash paid during the year for:
		Interest		$	4,878		$	7		$	352
		Income taxes			10,735			497			221

See accompanying notes to consolidated financial statements.

45

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 1	Summary of Significant Accounting Policies
	Principles of Consolidation
	The consolidated financial statements include the accounts of Emulex Corporation, a Delaware corporation, and its wholly owned subsidiaries (collectively, the “Company” or “Emulex”). All significant intercompany balances and transactions have been eliminated in consolidation.
	Fiscal Year
	The Company’s fiscal year ends on the Sunday nearest June 30. Fiscal years 2003, 2002 and 2001 were each comprised of 52 weeks.
	Reclassifications
	Certain reclassifications have been made to the prior years’ information to be consistent with the 2003 presentation.
	Foreign Currency Translation
	The Company has designated the U.S. dollar as its functional currency. Accordingly, monetary assets and liabilities denominated in foreign currencies are remeasured into the U.S. dollar at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are remeasured into the U.S. dollar at the appropriate historical exchange rates. Income and expense amounts denominated in foreign currencies are remeasured into the U.S. dollar at the average exchange rates during the period, except for expense items related to non-monetary accounts, which are remeasured at the appropriate historical exchange rates. Gains and losses resulting from remeasurement are included in other nonoperating income (expenses) in the period incurred.
	Cash Equivalents
	The Company classifies all corporate bonds and commercial paper with original maturities of three months or less as short-term investments. All other highly liquid debt instruments with original maturities of three months or less and deposits in money market funds are considered to be cash equivalents.
	Investments
	The Company determines the appropriate balance sheet classification of its investments in debt securities based on maturity date at the time of purchase and evaluates the classification at each balance sheet date. Debt securities are classified as held to maturity as the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity value. Such amortization and accretion are included in interest income. The Company’s investments in debt securities are diversified among high credit quality securities in accordance with the Company’s investment policy.
	Inventories
	Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. The Company uses a standard cost system for purposes of determining cost. The standards are adjusted periodically to ensure they represent actual cost. The Company regularly compares forecasted demand and the composition of the forecast for its products against inventory on hand and open purchase commitments to ensure the carrying value of inventory does not exceed net realizable value. Accordingly, the Company may have to record reductions to the carrying value of excess and obsolete inventory if forecasted demand decreases.
	Property and Equipment
	Property and equipment are stated at cost, and depreciation and amortization are provided on the straight-line method over estimated useful lives of up to ten years.

46

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Long-Lived Assets

The Company applies 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 the Company may not be able to recover the asset’s carrying value. The amount of impairment, if any, is measured based on fair value, which is determined using projected discounted future operating cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Software Development Costs

Capitalized software development costs can consist of costs to purchase software to be used within the Company’s products and costs to develop software internally. In accordance with Statement 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,” capitalization of purchased software occurs only if technological feasibility has been established. The establishment of technological feasibility and the ongoing assessment of recoverability of any capitalized software development costs require judgment by management with respect to certain external factors, including but not limited to, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies. Further, Statement 86 requires that at each balance sheet date the unamortized costs of a computer software product be compared to the net realizable value of that product. The amount by which the unamortized costs exceeds the net realizable value of a product is to be written off. No purchased or internally developed software costs were capitalized in 2003, 2002 or 2001. As of June 29, 2003, and June 30, 2002, there were no unamortized costs of capitalized purchased software included in intangible assets.

Goodwill and Other Intangibles

Goodwill and other intangibles resulting from the acquisition of Giganet 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. The Company adopted Statement 142 effective July 1, 2002, and no longer amortizes goodwill and other intangibles that have indeterminate useful lives. Prior to the adoption of Statement 142 the Company applied Statement 121 for goodwill, other intangibles and long-lived assets. The Company completed its transitional impairment analysis under Statement 142 and found no impairment upon the adoption of Statement 142 as of July 1, 2002. The Company’s annual impairment test occurred in the fourth quarter of fiscal 2003 with no impairment charges resulting. In accordance with Statement 142, goodwill and other intangibles that have indeterminate lives will be tested for impairment at least annually, but also on an interim basis if an event or circumstance indicates that it is more likely than not than an impairment loss has been incurred.

Revenue Recognition

The Company’s revenue recognition policies are in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101. The Company recognizes revenue at the time of shipment when title and risk of loss have passed, evidence of an arrangement has been obtained and collectibility has been reasonably assured. The Company makes certain sales through two-tier distribution channels and has various distribution agreements with selected distributors and Master Value Added Resellers, or collectively the Distributors. These distribution agreements may be terminated upon written notice by either party. Additionally, these Distributors are generally given privileges to return a portion of inventory and to participate in price protection and cooperative marketing programs. Therefore, the Company recognizes revenues on its standard products sold to its Distributors based on data received from the Distributors and management’s estimates to approximate the point that these products have been resold by the Distributors. As OEM-specific models sold to the Company’s Distributors are governed under the related OEM agreements rather than under these distribution agreements, the Company recognizes revenue at the time of shipment to the Distributors when title and risk of loss have passed, evidence of an arrangement has been obtained and collectibility has been reasonably assured. Additionally, the Company maintains accruals and allowances for price protection and cooperative marketing programs.

47

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

For products with unspecified software upgrade rights, which are the Company’s legacy cLAN products that contribute negligible revenues, the Company applies the American Institute of Certified Public Accountants Statement of Position, or (“SOP”), 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2, ‘Software Revenue Recognition’ With Respect to Certain Transactions.” Under SOP 97-2, as amended by SOP 98-9, revenue is recognized from software licenses, provided the software has been delivered to the customer, persuasive evidence of an arrangement exists, the price charged to the customer is fixed or determinable at fair value, there are no significant Company obligations related to the sale and the resulting receivable is deemed collectible, net of an allowance for doubtful accounts. In accordance with SOP 97-2, as amended by SOP 98-9, the Company has deferred the revenue over the upgrade period for certain legacy cLAN products with unspecified software upgrade rights.

Furthermore, the Company provides a warranty of between one and three years on its Fibre Channel and Internet Protocol products and provides a warranty of between one and five years on its traditional networking products. The Company records a provision for estimated warranty-related costs at the time of sale based on historical product return rates and on the Company’s expected future costs of fulfilling its warranty obligations.

Research and Development

Research and development costs, including costs related to the development of new products and process technology, are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews historical and anticipated future pre-tax results of operations to determine whether the Company will be able to realize the benefit of its deferred tax assets. A valuation allowance is required to reduce the potential deferred tax asset when it is more likely than not that all or some portion of the potential deferred tax asset will not be realized due to the lack of sufficient taxable income.

Net Income (Loss) per Share

Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution of securities that could share in the earnings of an entity. Such shares are not included when there is a loss as the effect would be anti-dilutive.

Comprehensive Income

The Company had no transactions, other than net income (loss), that would be considered other comprehensive income.

Stock-Based Compensation

The Company accounts for its stock-based awards to employees using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations. Stock-based awards to non- employees, if any, are recorded using the fair value method. Had the Company determined compensation cost based on the fair value at the grant date for all its stock options under Statement 123, the Company’s net income (loss) would have been the pro forma amounts indicated below:

48

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

		2003			2002			2001
		(In thousands, except per share data)
Net income (loss) as reported		$	65,689		$	(96,234	)	$	(23,603	)
Add: Total employee stock-based compensation expense included in net income (loss) as reported, net of related tax effects			1,395			290			339
Deduct: Total employee stock-based compensation expense determined under fair value method for all awards, net of related tax effects			(31,460	)		(54,379	)		(53,037	)
Pro forma net income (loss)		$	35,624		$	(150,323	)	$	(76,301	)
Pro forma net income (loss) per share
	Basic – as reported	$	0.80		$	(1.18	)	$	(0.31	)
	Basic – pro forma	$	0.43		$	(1.84	)	$	(1.00	)
	Diluted – as reported	$	0.79		$	(1.18	)	$	(0.31	)
	Diluted – pro forma	$	0.43		$	(1.84	)	$	(1.00	)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2003			2002			2001
Risk-free interest rate		1.7	%		3.7	%		5.0	%
Stock volatility		97.7	%		97.8	%		96.9	%
Dividend yield		0.0	%		0.0	%		0.0	%
Average expected lives (years)		3.6			3.5			3.6
Weighted-average fair value per option granted	$	15.23		$	14.99		$	25.87

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

Fair Value of Financial Instruments

Management believes the fair values of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, investments, accounts payable and accrued liabilities, approximate carrying value. The net deferred debt issuance costs associated with the convertible subordinated notes are included in other assets and the convertible subordinated notes are shown at cash settlement value.

Allowance for Doubtful Accounts

The company maintains an allowance for doubtful accounts based upon historical write-offs as a percentage of net revenues. Although the Company has not experienced significant losses on accounts receivable historically, its accounts receivable are concentrated with a small number of customers. Consequently, any write off associated with one of these customers could have a significant impact on the Company’s allowance for doubtful accounts.

Business and Credit Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term investments and accounts receivable. Cash, cash equivalents, and investments, both short-term and long-term, are primarily maintained at five major financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits, if any.

49

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

The Company principally invests in U.S. Government Agency securities and corporate bonds and limits the amount of credit exposure to any one entity.

The Company sells its products to Original Equipment Manufacturers (“OEMs”) and distributors in the computer storage and server industry. Consequently, the Company’s net revenues and accounts receivables are concentrated. Direct sales to the Company’s top five customers accounted for 68 percent, 65 percent and 72 percent of total net revenues in 2003, 2002 and 2001, respectively. The level of sales to any single customer may vary and the loss of any one of these customers, or a decrease in the level of sales to any one of these customers, could have a material adverse impact on the Company. Furthermore, although the Company sells to customers throughout the world, sales in the United States and Europe accounted for approximately 93 percent of the Company’s net revenues in 2003, and the Company expects for the foreseeable future, these sales will account for the substantial majority of the Company’s revenues. Sales to customers are denominated in U.S. dollars. Consequently, the Company believes its foreign currency risk is minimal. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company maintains an allowance for doubtful accounts. Historically, the Company has not experienced significant losses on accounts receivable.

Additionally, the Company currently relies on single and limited supply sources for several key components used in the manufacture of its products. Additionally, the company relies on a total of three sites from two Electronics Manufacturing Services (“EMS”) providers for the production of its products. The inability or unwillingness of any single and limited source suppliers or the inability or unwillingness of any of the Company’s EMS provider sites to fulfill supply and production requirements, respectively, could materially impact future operating results.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities. Actual results could differ from these estimates.

Segment Information

The Company applies Statement 131, “Disclosures about Segments of an Enterprise and Related Information.” Statement 131 uses the “management” approach to determine segments of an enterprise. The management approach is based on the method by which management organizes its operating segments within the enterprise. Operating segments, as defined by Statement 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. Statement 131 also requires disclosures about products and services, geographic areas, and major customers. The Company operates in one operating segment, networking products, for purposes of Statement 131.

Recently Adopted Accounting Standards

Effective July 1, 2002, the Company adopted Statement 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” under which the recoverability of long-lived assets is assessed by determining whether the carrying value of an asset can be recovered through projected undiscounted future operating cash flows over its remaining life. 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. The adoption of Statement 144 did not have a material impact on the Company’s financial position, results of operations or liquidity.

In November 2002, the FASB issued Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The required disclosures are included in note 8. Interpretation 45 also requires the recognition of a liability by a guarantor at

50

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

the inception of certain guarantees. Interpretation 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee. This is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. As noted above, the Company has adopted the disclosure requirements of Interpretation 45 and has applied the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002. The adoption did not have a material impact on the Company’s financial position, results of operations or liquidity.

In December 2002, the FASB issued Statement 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Statement 148 amends the disclosure requirements in Statement 123, “Accounting for Stock-Based Compensation” for annual periods ending after December 15, 2002, and for interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of Statement 148 during the three months ended March 30, 2003. Effective for financial statements for fiscal years ending after December 15, 2002, Statement 148 also provides three alternative transition methods for companies that choose to adopt the fair value measurement provisions of Statement 123. Should the Company be required to adopt the fair value measurement provisions of Statement 123 and Statement 148, it would have a material impact on the Company’s results of operations. However, the Company has no plans to adopt the fair value measurement provisions of Statement 123 unless required to under new accounting standards and, as such, the adoption of Statement 148 did not have a material impact on the Company’s financial position, results of operations or liquidity.

Note 2    Business Combination

On March 1, 2001, the Company completed the acquisition of Giganet, Inc., a privately-held developer of storage networking products based on Ethernet and IP technologies and a Massachusetts corporation (“Giganet”), pursuant to the terms of an Agreement and Plan of Merger dated December 7, 2000 (as amended by Amendment No. 1 thereto dated February 7, 2001, the “Merger Agreement”), by and among the Company, Giganet, GEMX Network Sub, Inc., a Massachusetts corporation and wholly-owned subsidiary of the Company and the Stockholder Representatives identified therein. As a result of the merger (the “Merger”), GEMX Network Sub, Inc. merged with and into Giganet and Giganet became a wholly-owned subsidiary of Emulex. Effective July 2, 2001, Giganet was merged with and into Emulex Corporation, a California corporation that is the primary operating subsidiary of the Company.

In connection with the Merger, the Company issued an aggregate of approximately 6.7 million shares of Emulex common stock in exchange for all of the outstanding shares of Giganet common stock and preferred stock. Of the total shares issued, 0.8 million shares were held in escrow for a period of one year to secure indemnification obligations of Giganet under the terms of the Merger Agreement. In addition, the Company reserved for issuance an aggregate of approximately 1.3 million shares of its common stock for issuance upon exercise of Giganet options assumed by the Company.

The Merger has been accounted for under the purchase method of accounting in accordance with generally accepted accounting principles. The Company recorded a one-time charge for purchased in-process research and development (“IPR&D”) expenses of $22.3 million related to the acquisition during the third quarter of 2001. The Company assessed and allocated values to IPR&D. 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. These products had not been released to the market as of the date of the Merger, but the features and functionality of the products had been defined.

The IPR&D expenses related primarily to three significant internal product development efforts. The first project accounted for $11.0 million of the expenses and was designed using commercially available third party one Gbps components to implement Virtual Interface (“VI”) over Transmission Control Protocol/Internet Protocol (“TCP/IP”) thereby greatly enhancing the speeds of data traffic on existing Internet Protocol (“IP”) networks. The second project accounted for $4.1 million of the IPR&D expenses and was internally designing a one gigabit per

51

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

second (“Gbps”) custom application-specific computer chip (“ASIC”) to run Virtual Interface over Internet Protocol (“VI over IP”) at a cost reduced point compared to the first project. The third project accounted for $7.2 million of the IPR&D expenses and was a single ASIC design capable of running multiple protocols over IP at 10 Gbps speed.

The first project was complete from a board layout perspective but still required firmware, hardware and operating system integration. At the time of the acquisition, the first project was 60% complete. The second project had completed requirement and architectural specifications and was 16% complete at the time of the acquisition. Remaining efforts to complete the second project included delivery of design specifications to the foundry, manufacture of prototypes, and testing of those prototypes against the original specifications. This development would include routing, tape out, prototyping, integration, testing and release processes. The third project, a 10 Gbps multi-protocol IP chip, was complete from a marketing requirements perspective and was 20% complete at the time of the acquisition. Remaining efforts to complete the third project included architectural specifications, delivery of design specifications to the foundry, manufacture of prototypes, and testing of those prototypes against the original specifications. This development would include architectural design, routing, tape out, prototyping, integration, testing and release processes.

At the time of the acquisition, the first project was anticipated to be completed and brought to market in July of 2001 as requirements, function specifications and discrete board layouts had been completed. The estimated costs to complete the first project were $1.9 million. At the time of the acquisition, the second project was anticipated to be completed and brought to market in September 2002 as functional and architectural requirements had been completed. The estimated costs to complete the second project were $4.6 million. At the time of the acquisition, the third project was anticipated to be completed and brought to market in the first calendar quarter of 2003 as the project was complete from a marketing requirements perspective only. The estimated costs to complete the third project were $5.5 million.

Subsequent to the acquisition, the Company reviewed the three IPR&D projects. The first project was required to fulfill a contractual obligation for implementing VI over IP with one of the Company’s customers and was completed substantially on time and met the Company’s customer’s needs.

The second project was a follow on to the first project and was designed to integrate the functions and technologies of multiple chips into a single ASIC that would allow for the transporting of storage data over an IP network at one Gbps, which was similar to what the Company’s HBA products do on a Fibre Channel network. By the end of Q1 fiscal 2002, the transition to two Gbps Fibre Channel products was accelerating, and at the same time deployment of new technologies was slowing down due to the overall slowdown in the economy in general, and information technology spending specifically. Because of the economic conditions, combined with the significant performance advantages of two Gbps Fibre Channel versus the one Gbps IP solutions, the Company did not believe the second project would be a commercially feasible product by the time it reached market. Consequently, the Company decided to cancel this project and focus on 10 Gbps for both Fibre Channel and IP.

The third project was a 10 Gbps program for IP that was in the early stages of development at the time of the acquisition. Although the marketing requirements had been defined, the architecture had not been completed. At the time of acquisition, the Company was also working on the requirements for a 10 Gbps Fibre Channel product. After completing the acquisition, the Company reviewed both the 10 Gbps Fibre Channel and the 10 Gbps IP projects to determine how best to leverage the required resources to bring both products to market. Because of the similar operating environments and performance requirements for both technologies, the Company decided to cancel the third project and develop a common architecture that could leverage the Company’s existing drivers, as that would provide the greatest advantage for both Fibre Channel and IP 10 Gbps technology.

The values of these projects were determined using the Income Forecast Method. In applying the Income Forecast Method, the value of the acquired technologies was estimated by discounting to present value the free cash flows generated by the products with which the technologies are associated, over the remaining economic lives of the technologies. To distinguish between the cash flows attributable to the underlying technology and cash flows attributable to other assets available for generating product revenues, adjustments were made to provide for a fair

52

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

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

• The estimated revenues assume average compound annual revenue growth rates of 102 percent to 316 percent during fiscal years 2002 through 2008, depending on the product line. Estimated total revenues from the purchased in-process products peak in the year 2007 and decline in 2008 as other new products are expected to be introduced by the Company. These projections are based on management’s estimates over the expected remaining economic lives of the technologies.

• IPR&D value was comprised of three on-going projects. The estimated cost of revenues as a percentage of revenues is expected to range from 50 percent to 60 percent.

• The discount rates used in the valuation reflect the relative risk of the product lines. For IPR&D projects, the discount rates ranged from 30 percent to 45 percent, which was based on the amount and risk of effort remaining to complete the respective development projects.

The Company believes that the foregoing assumptions used in determining the income forecast associated with the IPR&D products were reasonable. No assurance can be given, however, that the underlying assumptions used to estimate the income forecast, the ultimate revenues and costs on such projects or the events associated with such projects, will transpire as estimated.

The total purchase price and allocation among the fair value of tangible and intangible assets and liabilities (including purchased IPR&D) are summarized as follows (in thousands):

Tangible assets		$	20,421
Liabilities			7,997
Net tangible assets			12,424
Identifiable intangible assets:
	In-process research and development		22,280
	Completed technology		20
	Assembled workforce		2,680
	Core technology and patents		40,600
Goodwill			598,962
Deferred compensation			11,624
		$	688,590

In 2002, $3.8 million of tax benefits related to the release of valuation allowance were allocated from goodwill to deferred tax assets (see note 13). The goodwill and other intangibles were being amortized on a straight-line basis over the following estimated useful lives, in years, until the adoption of Statement 142 on July 1, 2002, when the Company stopped amortizing assembled workforce and goodwill. The Company continued amortization of completed technology until fully amortized in 2003 and continues to amortize core technology and patents for its remaining estimated useful life.

Completed technology	2
Assembled workforce	4
Core technology and patents	7
Goodwill	4

The acquisition has been included in the consolidated balance sheets and the operating results of Giganet have been included in the consolidated statements of operations since the acquisition date, March 1, 2001.

Following is the summarized unaudited pro forma combined results of operations for the year ended July 1, 2001, assuming the acquisition had taken place at the beginning of that fiscal year. The unaudited pro forma combined statement of operations for the year ended July 1, 2001, was prepared based upon the statement of operations of

53

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Emulex for the year ended July 1, 2001, and the statement of operations for Giganet for the eight months ended March 1, 2001. All operating results of Giganet were included in the statement of operations of Emulex since the acquisition date, March 1, 2001. The unaudited pro forma results exclude the effects of the IPR&D charge but include the amortization of goodwill and other intangibles, and the amortization of deferred compensation. The unaudited pro forma results are not necessarily indicative of the future operations or operations that would have been reported had the acquisitions been completed when assumed. In the fourth quarter of 2001, the Company acquired additional information regarding the purchase resulting in a $2.5 million adjustment in the goodwill balance. The following unaudited information is presented in thousands, except for the per share data.

	July 1,
	2001
Net revenues	$	247,850
Net loss	$	(126,194	)
Net loss per share	$	(1.57	)

Note 3    Cash, Cash Equivalents, Restricted Cash and Investments

The Company’s portfolio of cash, cash equivalents, restricted cash and investments consists of the following:

	2003		2002
	(in thousands)
Cash	$	96,818	$	2,237
Money market funds		40,153		280,324
Restricted cash		9,342		2,024
Certificates of Deposit		9,589		22,352
Commercial paper		15,985		67,511
Municipal bonds		21,220		32,812
U.S. Government Agency securities		238,336		120,716
Corporate bonds		137,422		90,802
Other		51,597		13,014
	$	620,462	$	631,792

At June 29, 2003, and June 30, 2002, the net unrealized holding gains and losses on investments were immaterial. The Company has the positive intent and ability to hold these securities to maturity. Investments at June 29, 2003 and June 30, 2002, were classified as shown below:

	2003		2002
	(in thousands)
Cash and cash equivalents	$	136,971	$	282,561
Restricted cash		9,342		2,024
Short-term investments (maturities less than one year)		239,302		227,905
Long-term investments (maturities of one to five years)		234,847		119,302
	$	620,462	$	631,792

54

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 4    Inventories

Components of inventories, net of reserves, are as follows:

	2003		2002
	(in thousands)
Raw materials	$	3,802	$	4,166
Finished goods		7,196		10,667
	$	10,998	$	14,833

Starting in late September 2001, some of the Company’s major customers made announcements that general economic conditions, exacerbated by the increase in economic uncertainty in the aftermath of the terrorist events of September 11, 2001, were having a negative impact on their financial results. The announcements made, and forecasts received, indicated deteriorating demand for the Company’s one Gbps products as these customers were expected to migrate to two Gbps products for future purchases. As a result, the Company recorded an excess and obsolete inventory charge totaling $13.6 million during the three months ended September 30, 2001. Subsequently, as a result of the sale of previously reserved products, the Company recorded a reduction of $3.6 million of this excess and obsolete inventory reserve in 2002, and a further reduction of $3.3 million in 2003. After initially recording its one Gbps reserve in September 2001, the Company has subsequently reduced this reserve by a total of $6.9 million through June 29, 2003, as previously reserved inventory has been sold. Overall, the Company has been able to recover a significant portion of this reserved inventory that was not expected based on the Company’s forecasts and the forecasts received from its customers when this excess and obsolete inventory charge was recorded. In addition to the sale of some of this previously reserved product, the Company has also scrapped $3.3 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. As of June 29, 2003, the remaining reserve for one Gbps products was $3.2 million. However, as with all inventory, the Company regularly compares forecasted demand for its one Gbps products against inventory on hand and open purchase commitments and accordingly, the Company may have to record reductions to the carrying value of excess and obsolete inventory if forecasted demand decreases. As of June 29, 2003, the Company had unreserved one Gbps inventory on hand of approximately $0.9 million.

Note 5    Property and Equipment

Components of property and equipment, net, are as follows:

	2003			2002
	(in thousands)
Production and test equipment	$	29,766		$	22,749
Furniture and fixtures		25,499			17,912
Leasehold improvements		2,545			2,334
Other equipment		—			105
		57,810			43,100
Less accumulated depreciation and amortization		(31,225	)		(24,526	)
	$	26,585		$	18,574

55

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 6    Other Assets

Components of other assets are as follows:

	2003		2002
	(in thousands)
Deferred debt issuance costs – convertible subordinated notes, net	$	4,670	$	9,882
Long-term prepaid assets		1,016		1,417
Refundable deposits		96		1,108
	$	5,782	$	12,407

Note 7    Goodwill and Other Intangibles

Goodwill and other intangibles, net, are as follows:

		2003			2002
		(in thousands)
Intangible assets not subject to amortization after July 1, 2002:
	Goodwill	$	397,256		$	395,470
	Assembled workforce, net		—			1,786
	Intangible assets not subject to amortization	$	397,256		$	397,256
Intangible assets subject to amortization:
	Core technology and patents	$	40,600		$	40,600
	Accumulated amortization, core technology and patents		(13,533	)		(7,733	)
	Completed technology		20			20
	Accumulated amortization, completed technology		(20	)		(13	)
	Intangible assets subject to amortization	$	27,067		$	32,874

Effective July 1, 2002, the Company adopted Statement 142, “Goodwill and Other Intangible Assets” and, as a result, the Company ceased amortizing goodwill of $397.3 million beginning July 1, 2002. Included in goodwill is $1.8 million of assembled workforce that was reclassified to goodwill effective July 1, 2002. In conjunction with the adoption of Statement 142, the Company completed its transitional goodwill impairment test for its one reporting unit during the three months ended September 29, 2002, with no impairment charges resulting. The Company’s annual impairment test occurred in the fourth quarter of fiscal 2003 with no impairment charges resulting. Goodwill will be tested for impairment at least annually, but also on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. In 2002, $3.8 million of tax benefits related to the release of valuation allowance were allocated from goodwill to deferred tax assets (see note 13).

The remaining intangible assets subject to amortization are being amortized on a straight-line basis over seven years. Aggregated amortization expense for other intangibles for the twelve months ended June 29, 2003, was $5.8 million and for the next five fiscal years is expected to be (in thousands):

2004	$	5,800
2005	$	5,800
2006	$	5,800
2007	$	5,800
2008	$	3,867

56

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

The following table presents the impact on net income (loss) and net income (loss) per share had Statement 142 been in effect for the twelve months ended June 30, 2002

			2003		2002			2001
			(In thousands, except per share data)
Net income (loss)			$	65,689	$	(96,234	)	$	(23,603	)
	Add back: Goodwill amortization, net of tax			—		149,729			49,925
	Add back: Assembled workforce amortization, net of tax			—		415			138
Adjusted net income			$	65,689	$	53,910		$	26,460
	Add back: Interest expense on convertible subordinated notes, net of tax			3,416		—			—
Numerator for diluted net income per share			$	69,105	$	53,910		$	26,460
Basic net income (loss) per share:
	Net income (loss) per share		$	0.80	$	(1.18	)	$	(0.31	)
		Add back: Goodwill amortization, net of tax		—		1.84			0.66
		Add back: Assembled workforce amortization, net of tax		—		—			—
Adjusted basic net income			$	0.80	$	0.66		$	0.35
Diluted net income (loss) per share:
	Net income (loss) per share		$	0.79	$	(1.18	)	$	(0.31	)
		Add back: Goodwill amortization, net of tax		—		1.82			0.64
		Add back: Assembled workforce amortization, net of tax		—		—			—
Adjusted diluted net income			$	0.79	$	0.64		$	0.33

Note 8    Accrued Liabilities

Components of accrued liabilities are as follows:

	2003		2002
	(in thousands)
Accrued payroll and related costs	$	8,406	$	6,399
Accrued inventory purchases		1,449		3,208
Accrued interest		1,502		2,498
Warranty reserves		2,349		2,244
Deferred revenue		2,054		1,255
Accrued advertising and promotions		719		1,628
Other		2,327		2,475
	$	18,806	$	19,677

Deferred revenue includes an accrual for estimated returns and allowances of $1.9 million and $0.6 million at June 29, 2003, and June 30, 2002, respectively. Deferred revenue also includes deferred revenue related to legacy cLAN products with unspecified upgrade rights of $0.2 million and $0.7 million at June 29, 2003, and June 30, 2002, respectively.

The Company provides a warranty of between one and three years on its Fibre Channel and Internet Protocol products and provides a warranty of between one and five years on its traditional networking products. The Company records a provision for estimated warranty-related costs at the time of sale based on historical product returns and the Company’s expected future cost of fulfilling its warranty obligations.

57

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Changes to the warranty reserve in 2003 were (in thousands):

Balance at June 30, 2002	$	2,244
Additions to costs and expenses		1,642
Amounts charged against reserve		(1,154	)
Change in estimate for preexisting warranties, including expirations		(383	)
Balance at June 29, 2003	$	2,349

Note 9 Convertible Subordinated Notes

On January 29, 2002, the Company completed a $345.0 million private placement of 1.75 percent convertible subordinated notes due February 1, 2007. Interest is payable in cash on February 1 and August 1 of each year beginning August 1, 2002. These notes may be converted by the holder at any time into shares of the Company’s common stock at the conversion price of $53.84 per share, subject to the potential adjustments described in the terms of the notes issued. The Company may redeem the notes on or after February 5, 2005, in whole or in part. The Company incurred associated issuance costs of approximately $11.0 million (see note 6).

During the three months ended September 29, 2002, the Company’s Board of Directors expanded the Company’s stock repurchase program to include repurchase of the Company’s convertible subordinated notes as well as shares of the Company’s common stock. The combined program authorized the repurchase of up to 4.0 million shares with 3.0 million shares of common stock still available for repurchase at June 29, 2003, and up to an additional $125.0 million to be spent on the repurchase of the convertible subordinated notes. In August 2002, the Company bought back at a discount to face value approximately $136.5 million in face value of its convertible subordinated notes, spending $104.2 million. The repurchased notes were cancelled, leaving convertible subordinated notes outstanding with a face value of $208.5 million, which, if converted, would result in the issuance of approximately 3.9 million shares. The resulting net pre-tax gain of $28.7 million from the repurchase of the convertible subordinated notes was recorded for the three months ended September 29, 2002. During the three months ended March 30, 2003, the Company’s Board of Directors further expanded the repurchase of the convertible subordinated notes up to a total purchase price of $190.0 million, leaving $85.8 million authorized for repurchase at June 29, 2003 (see note 17).

Note 10 Employee Retirement Savings Plan

The Company has a pretax savings and profit sharing plan under Section 401(k) of the Internal Revenue Code for substantially all domestic employees. Under the plan, eligible employees are able to contribute up to 15 percent of their compensation not to exceed the maximum IRS deferral amount. Company discretionary contributions match up to four percent of a participant’s compensation. The Company’s contributions under this plan were $1.2 million, $1.1 million and $0.5 million in 2003, 2002 and 2001, respectively.

The Company’s eligible employees in the United Kingdom are offered a similar plan, which allows the employees to contribute up to 15 percent of their compensation. Company discretionary contributions match up to four percent of a participant’s compensation. The Company’s contributions under this plan were $18 thousand, $15 thousand and $7 thousand in 2003, 2002 and 2001, respectively.

58

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 11 Commitments and Contingencies

Leases

The Company leases certain facilities and equipment under long-term noncancelable operating lease agreements, which expire at various dates through 2008. Rent expense for the Company under operating leases, including month-to-month rentals, totaled $3.8 million, $2.8 million and $1.5 million in 2003, 2002 and 2001, respectively.

Future minimum noncancelable lease commitments are as follows (in thousands):

		Operating
		Leases
Fiscal year:
	2004	$	2,219
	2005		1,793
	2006		921
	2007		97
	2008 and thereafter		31
Total minimum lease payments		$	5,061

In addition to the minimum leases payments illustrated above, the Company begins a lease on its new corporate headquarters with the option to buy the land and buildings during the first six months of the lease term, upon occupation in fiscal 2004. If the Company were to not purchase the land and buildings, its additional lease commitments would be approximately $2.2 million in 2004, depending on occupancy date, $4.5 million per year from fiscal 2005 through fiscal 2007, and $30.2 million, in total, for 2008 and after.

Litigation

Beginning on or about February 20, 2001, the Company and certain of its officers and directors were named as defendants in a number of securities class action lawsuits filed in the United States District Court, Central District of California. The plaintiffs in the actions represent purchasers of the Company’s common stock during various periods ranging from January 18, 2001, through February 9, 2001. The complaints allege that the Company and certain of its officers and directors made misrepresentations and omissions in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints generally seek compensatory damages, costs and attorney’s fees in an unspecified amount. Pursuant to a Stipulation and Court Order, the actions were consolidated. On August 24, 2001, an Amended and Consolidated Complaint was filed. Defendants’ motion to dismiss was denied by way of an order dated March 7, 2002. Defendants’ motion for reconsideration of that order was denied by an order dated May 3, 2002. Plaintiffs commenced discovery. The court certified the class action by an order dated September 30, 2002. Following these class action lawsuits, a number of derivative cases were filed in state courts in California and Delaware, and in federal court in California, alleging that certain officers and directors breached their fiduciary duties to the Company in connection with the events alleged in the class action lawsuits. The derivative cases filed in California state courts were consolidated in Orange County Superior Court and plaintiffs filed a consolidated and amended complaint on January 31, 2002. On May 10, 2002, the Orange County Superior Court ordered that the consolidated actions be stayed pending resolution of the federal class action described above. The derivative suit in Delaware was dismissed on August 28, 2001. On March 15, 2002, the United States District Court for the Central District of California ordered that the federal derivative action be stayed pending resolution of the class action lawsuit described above. The Company has received inquiries about events giving rise to the lawsuits from the Securities and Exchange Commission and the Nasdaq Stock Market. On April 22, 2003, the Company entered into two Memoranda of Understanding (“MOU’s”) agreeing to terms of settlement of both the class action and derivative litigation. The MOU’s call for settlement payments totaling $39.0 million, plus up to $0.5 million of the cost of providing notice to the class members. A Final Order and Judgment was approved by the court in the derivative cases on May 30, 2003, based on a Stipulation of Settlement of Derivative Claims dated as of May 13, 2003. An Order Preliminarily Approving Settlement and Providing for Notice was approved by the court in the federal class action on July 11, 2003, based on a Stipulation of Settlement dated as of July 3, 2003. A Settlement Hearing is scheduled for October 15, 2003, in the federal class action. Insurance proceeds are expected to reimburse the Company for a minimum

59

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

of approximately $12.5 million of the settlement payments, in addition to $2.5 million for legal expenses and the probable net effect of the settlements to the Company, based on the Company’s current minimum estimate of reimbursement from the insurance carriers, is expected to be approximately $27.0 million, or $16.7 million after tax. All amounts were recorded during 2003. We commenced an arbitration proceeding against three of our insurance carriers in June 2003 seeking reimbursement of $30.0 million for the defense and settlement costs.

Additionally, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Other Commitments and Contingencies

The Company recorded an estimated excess and obsolete inventory charge of $13.6 million associated with older-generation one Gbps products during the three months ended September 30, 2001. Subsequently, as a result of the sale of previously reserved products, the Company recorded a reduction of $3.6 million of this excess and obsolete inventory reserve in 2002 and a further reduction of $3.3 million for fiscal 2003. After initially recording its one Gbps reserve in September 2001, the Company has subsequently reduced this reserve by a total of $6.9 million through June 29, 2003, as previously reserved inventory has been sold. Overall, the Company has been able to recover a significant portion of this reserved inventory that was not expected based on the Company’s forecast and the forecasts received from its customers when this excess and obsolete inventory charge was recorded. In addition to the sale of some of this previously reserved product, the Company has also scrapped $3.3 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. As of June 29, 2003, the remaining reserve for one Gbps products was $3.2 million. However, as with all inventory, the Company regularly compares forecasted demand for its one Gbps products against inventory on hand and open purchase commitments and accordingly, the Company may have to record reductions to the carrying value of excess and obsolete inventory if forecasted demand decreases. As of June 29, 2003, the Company had unreserved one Gbps inventory on hand of approximately $0.9 million.

The Company was previously required to enter into end-of-life purchase agreements for two key inventory components as the sole-source manufacturers of these components announced their discontinued manufacturing of the components. As of June 29, 2003, the Company’s remaining purchase obligation for the two components was $13.8 million. In relation to the excess and obsolete inventory charge associated with older generation one Gbps products, the Company has accrued $1.4 million, which represented the Company’s commitment to purchase a key component in excess of forecasted demand and as a result was reserved.

During the third quarter of fiscal 2002, the Company entered into an agreement to relocate its headquarters locally in Costa Mesa, California. The Company will finance the build to suit construction phase of the new facility with its own capital, before beginning a 10-year lease term with an option to buy the land and buildings during the first six months of the lease term. If the Company does not exercise its option to purchase the facility, the landlord will obtain permanent financing and reimburse the Company for the construction costs. Construction on the Company’s new corporate headquarters is progressing. If purchased, the Company believes the total cost, including the land, building and other related capital expenditures, would be approximately $47.0 million. The Company’s total gross undiscounted financial commitment for the 10-year lease term would be approximately $45.9 million. At June 29, 2003, the Company had restricted cash of $9.3 million held in escrow associated with the construction of the headquarters. In addition, the Company has a $1.0 million letter of credit in place in lieu of a rental deposit on one of its other facilities

Note 12 Stockholders’ Equity

Stock Repurchase Program

The Company’s Board of Directors has authorized the repurchase of up to 4.0 million common shares over the two years beginning in September 2001. The repurchase plan authorized the Company to make repurchases in the open market or through privately negotiated transactions with the timing and terms of any purchase to be determined by

60

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

management based on market conditions. In 2002, the Company repurchased 1.0 million common shares, leaving 3.0 million common shares authorized for repurchase at June 29, 2003.

During the three months ended September 29, 2002, the Company’s Board of Directors expanded the Company’s stock repurchase program to include the repurchase of the Company’s convertible subordinated notes as well as shares of the Company’s stock. The combined program authorizes the repurchase of up to an additional $125.0 million to be spent on the repurchase of convertible subordinated notes. In August 2002, the Company bought back at a discount to face value approximately $136.5 million in face value of its convertible subordinated notes, spending $104.2 million. The repurchased notes were cancelled, leaving convertible subordinated notes outstanding with a face value of $208.5 million, which if converted, would result in the issuance of approximately 3.9 million shares. The resulting net pre-tax gain of $28.7 million from the repurchase of the convertible subordinated notes was recorded for the three months ended September 29, 2002. During the three months ended March 30, 2003, the Company’s Board of Directors further expanded the repurchase of convertible subordinated notes up to a total purchase price of $190.0 million, leaving $85.8 million of convertible subordinated notes and three million shares authorized for repurchase at June 29, 2003 (see note 17).

Stock Option Plans

Under the Company’s Employee Stock Option Plan (the “Plan”), which offers stock options to both domestic and international employees, the exercise price of options granted will not be less than the fair market value at the date of grant. The total number of shares of common stock authorized for issuance under the Plan is 33.7 million, and 4.0 million shares were available for grant at June 29, 2003. Unless otherwise provided by the Board of Directors or a committee of the Board administering the Plan, each option granted under the Plan becomes exercisable at the rate of 25 percent one year after the date of grant with an additional 6.25 percent becoming exercisable each three-month interval thereafter.

On October 9, 1997, the Company’s Board of Directors adopted the Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors (the “Director Plan”), which, as amended, allows for a maximum of 1.7 million shares of common stock, and 0.4 million shares were available for grant at June 29, 2003. The Director Plan currently provides that an option to purchase 30 thousand shares of common stock of the Company will be granted to each non-employee director of the Company upon the first date that such director becomes eligible to participate. These options shall be exercisable as to one-third of the shares on each anniversary of the grant if the director is still a director of the Company. In addition, on each yearly anniversary of the date of the initial grant, each eligible director shall automatically be granted an additional option to purchase 10 thousand shares of common stock. These options shall be exercisable as to one-half of the shares on the six month anniversary, one quarter on the nine month anniversary and one quarter on the year anniversary of the grant date. Options granted under the Director Plan are non-qualified stock options. The exercise price per option granted will not be less than the fair market value at the date of grant. No option granted under the Director Plan shall be exercisable after the expiration of the earlier of (i) ten years following the date the option is granted or (ii) one year following the date the optionee ceases to be a director of the Company for any reason. Options to purchase 0.1 million, 0.1 million and 0.3 million shares were granted under the Director Plan in 2003, 2002 and 2001, respectively.

Employee Stock Purchase Plan

In 2001, the Company’s Board of Directors adopted the Employee Stock Purchase Plan (the “Purchase Plan”). Under the Purchase Plan, employees of the Company who elect to participate are granted options to purchase common stock at a 15 percent discount from the lower of the market value of the common stock at the beginning or the end of each six month offering period. The Purchase Plan permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from their salary an amount up to 10 percent of their compensation. The Compensation Committee of the Board of Directors administers the Purchase Plan. The Company has reserved a total of 1.0 million shares of common stock for issuance under the Purchase Plan. A total of 0.3 million shares have been issued by the Plan since its inception and 0.6 million shares were available for purchase at June 29, 2003.

61

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Following is a summary of stock option transactions for 2001, 2002 and 2003:

					Weighted
		Number			average exercise
		of Shares			price per share
Options outstanding at July 2, 2000			6,707,132		$	15.65
	Granted		5,275,356			30.72
	Exercised		(2,587,836	)		3.76
	Canceled		(299,314	)		31.13
Options outstanding at July 1, 2001			9,095,338			27.27
	Granted		1,439,000			23.19
	Exercised		(847,394	)		4.99
	Canceled		(366,590	)		29.76
Options outstanding at June 30, 2002			9,320,354			28.56
	Granted		1,586,500			23.24
	Exercised		(518,358	)		6.96
	Canceled		(292,276	)		28.56
Options outstanding at June 29, 2003			10,096,220		$	28.84

The 5.3 million options granted in 2001 included 1.2 million options that were issued in exchange for the outstanding Giganet options. The majority of the 1.2 million options were originally granted by Giganet below fair market value prior to the Merger. In conjunction with the Agreement and Plan of Merger, the Company recorded deferred compensation of $13.9 million and related amortization of $1.8 million in 2001.

As of June 29, 2003, June 30, 2002, and July 1, 2001, the number of options exercisable was 6.2 million, 3.7 million, and 2.1 million, respectively, and the weighted average exercise price of those options was $28.97, $27.80 and $14.98, respectively.

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			average		average				average
	Outstanding		exercise		remaining		Exercisable		exercise
Range of	as of		price per		contractual		as of		price per
Exercise Prices	June 29, 2003		option		life (years)		June 29, 2003		option
$  0.47 to $      9.94		1,299,540	$	2.87		5.24		1,216,606	$	2.87
$10.90 to $    20.50		2,180,056	$	15.36		7.74		1,046,712	$	14.82
$20.56 to $    25.41		2,408,019	$	23.20		8.19		1,144,641	$	21.49
$25.55 to $    38.75		2,046,837	$	31.73		7.76		1,149,119	$	31.76
$39.14 to $  109.05		2,161,768	$	61.58		7.09		1,605,434	$	61.31
$  0.47 to  $ 109.03		10,096,220	$	28.84		7.39		6,162,512	$	28.97

Shareholder Rights Plan

The Company has a Shareholder Rights Plan that provides for Preferred Stock Purchase Rights (“Rights”) that attach to and transfer with each share of common stock. When the Rights become exercisable, each Right entitles the holder to purchase from the Company one unit consisting of 1/100 of a share of Series A Junior Participating Preferred Stock for $300 per unit, subject to adjustment. The Rights become exercisable if (i) a person or group (“Acquiring Person”) has acquired, or obtained the right to acquire, 20 percent or more of the outstanding shares

62

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

of common stock, (ii) a person becomes the beneficial owner of 30 percent or more of the outstanding shares of common stock, (iii) an Acquiring Person engages in one or more “self-dealing” transactions with the Company or (iv) an event occurs which results in an Acquiring Person’s ownership interest being increased by more than 1 percent. Upon exercise and payment of the purchase price for the Rights, the Rights holder (other than an Acquiring Person) will have the right to receive Company common stock (or, in certain circumstances, cash, property or other securities of the Company) equal to two times the purchase price. The Company is entitled to redeem the Rights at any time prior to the expiration of the Rights in January 2009, or 10 days following the time that a person has acquired beneficial ownership of 20 percent or more of the shares of common stock then outstanding. The Company is entitled to redeem the Rights in whole, but not in part, at a price of $0.01 per Right, subject to adjustment.

Note 13 Income Taxes

         The components of income tax expense (benefit) are as follows:

		2003		2002			2001
		(in thousands)
Federal:
	Current	$	8,105	$	7,776		$	29,277
	Deferred		26,871		(6,539	)		—
State:
	Current		4,609		3,734			2,875
	Deferred		649		(5,314	)		—
Foreign:
	Current		28		50			35
		$	40,262	$	(293	)	$	32,187

The income tax expense in 2003, 2002 and 2001 included a charge-in-lieu of taxes of $4.1 million, $4.3 million and $32.2 million, respectively, for current year tax benefits related to exercises of stock options under the Company’s stock option plans. In 2002, additional charges-in-lieu of taxes relate to the release of valuation allowance directly to goodwill and additional paid-in capital. Tax benefits related to the release of valuation allowance were allocated as follows:

	2003		2002		2001
	(in thousands)
Reported in consolidated statement of operations	$	—	$	17,870	$	—
Goodwill		—		3,838		—
Additional paid-in-capital		—		39,528		—
	$	—	$	61,236	$	—

The valuation allowance, released in 2002, was originally established primarily in relation to net operating loss carryforwards and tax credits. In 2002, the total tax benefits (including both the benefits generated in the year and those that related to the release of the valuation allowance) reflected in income tax expense that related to operating losses and tax credits amounted to $10.0 million and $10.9 million, respectively.

Income before income taxes consists of the following:

		2003		2002			2001
		(in thousands)
Domestic		$	105,857	$	(96,694	)	$	8,484
Foreign			94		167			100
	Total	$	105,951	$	(96,527	)	$	8,584

63

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

			2003		2002
			(in thousands)
Deferred tax assets:
	Capitalization of inventory costs		$	124	$	196
	Depreciation			—		1,144
	Reserves not currently deductible			18,859		9,125
	Deferred compensation			152		293
	Provisions for discontinued operations and consolidation charges			12		13
	Net operating loss carryforwards			5,251		46,764
	General business and state credit carryforwards			16,004		15,748
	Capitalized research and development expenditures			1,479		1,676
	Alternative minimum tax credit carryforwards			4,279		1,185
	Other			111		118
Total gross deferred tax assets				46,271		76,262
Deferred tax liabilities:
	Various state taxes			2,580		2,807
	Intangible – Completed technology			—		3
	Intangible – Assembled workforce			715		715
	Intangible – Core technology and patents			10,827		13,147
	Depreciation			79		—
		Total gross deferred tax liabilities		14,201		16,672
		Net deferred tax assets	$	32,070	$	59,590

Based on the Company’s historical and anticipated future pre-tax results of operations, management believes it is more likely than not that the Company will realize the benefit of the net deferred tax assets existing as of June 29, 2003. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income; however, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement earnings from operations to fully realize recorded tax benefits. The change in the valuation allowance during 2002 was a decrease of $61.2 million.

The effective income tax expense (benefit) on pretax income (loss) differs from expected federal income tax for the following reasons:

	2003			2002			2001
	(in thousands)
Expected income tax expense (benefit) at 35 percent, 35 percent, and 34 percent in 2003, 2002 and 2001, respectively	$	37,083		$	(33,785	)	$	2,919
State income tax expense (benefit), net of federal tax benefit		4,336			(2,102	)		2,875
Amortization of nondeductible goodwill		—			57,271			18,622
In-process research and development expenditures		—			—			8,310
Change in valuation allowance allocated to income tax expense		—			(17,870	)		815
Extraterritorial income exclusion		(681	)		(1,470	)		—
Research and other credits		(2,705	)		(3,077	)		(1,414	)
Other, net		2,229			740			60
	$	40,262		$	(293	)	$	32,187

64

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

In 2003, pretax book income reflects the amortization of intangibles, other than goodwill, related to the acquisition of Giganet, Inc. during 2001. In 2002, pretax book income reflects amortization of goodwill and other intangibles related to the acquisition of Giganet, Inc. during 2001.

At June 29, 2003, the Company had federal and state net operating loss carryforwards of $14.2 million and $3.0 million, respectively, which are available to offset future federal and state taxable income. If unused, the federal net operating loss carryforwards will expire during the years 2011 through 2021, and the state net operating loss carryforwards will begin to expire in 2009. Included in these amounts are a Giganet, Inc. federal net operating loss carryforward of $14.2 million, which was incurred prior to the acquisition by the Company. The utilization of this net operating loss carryforward is limited due to restrictions imposed under federal law due to a change in ownership.

At June 29, 2003, the Company had federal and state research and experimentation credit carryforwards of $11.7 million and $4.0 million, which are available to reduce federal and state income taxes. If unused, the federal carryforwards expire during the years 2009 through 2023, and the state carryforwards are available indefinitely. For federal purposes, the Company has alternative minimum tax credit carryforwards of approximately $4.3 million, which are available for carryforward indefinitely, and $90 thousand of foreign tax credit carryforwards available through 2008. For state purposes, the Company has $0.2 million of other credits available through 2010.

During 2003, the Internal Revenue Service completed an examination of the Company’s Federal Income tax return for its taxable year ended June 28, 1998. The audit was closed with no changes.

Note 14 Revenue by Product Families, Geographic Area and Significant Customers

Revenues by Product Families:

The Company designs and markets three major distinct product families within one industry segment: high-speed Fibre Channel products, IP networking products and the Company’s traditional networking and other products which consist primarily of printer servers and network access products.

			2003		2002			2001
			(in thousands)
Net revenues:
	Fibre Channel		$	304,596	$	247,705		$	234,020
	IP networking			2,408		4,242			1,567
	Traditional networking and other:
		Printer servers		1,098		2,581			5,147
		Network access		10		247			4,422
		Other		96		(34	)		151
		Total traditional networking and other		1,204		2,794			9,720
	Total net revenues		$	308,208	$	254,741		$	245,307

65

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Revenues by Geographic Area:

The Company’s net revenues by geographic area based on bill-to location are:

	2003				2002				2001
	(in thousands)
United States	$	185,195	60	%	$	152,638	60	%		$	154,505	63	%
Europe		101,476	33	%		90,130	35	%			81,645	33	%
Pacific Rim Countries		21,537	7	%		11,973	5	%			9,157	4	%
	$	308,208	100	%	$	254,741	100	%		$	245,307	100	%

In 2003, 2002 and 2001 net revenues to the United Kingdom, based on bill-to location, were 14, 14 and 13 percent, respectively, and no other country in Europe accounted for more than 10 percent of net revenues during these periods.

Significant Customers:

The following table represents direct sales to customers accounting for greater than 10 percent of the Company’s net revenues or customer accounts receivable accounting for greater than 10 percent of the Company’s accounts receivable. Amounts not presented were less than 10 percent.

										Accounts
	Net Revenues									Receivable
	2003			2002			2001			2003			2002
Hewlett-Packard, including Compaq		23	%		25	%		25	%		27	%		26	%
IBM, including Sequent		23	%		20	%		21	%		34	%		39	%
EMC, including Data General		—			—			12	%		—			—
Info-X		—			—			—			13	%		—

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

	Net Revenues
	2003			2002			2001
Hewlett-Packard, including Compaq		23	%		25	%		25	%
IBM, including Sequent		26	%		27	%		30	%
EMC, including Data General		22	%		22	%		22	%
Info-X		—			—			—

66

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 15 Net Income (Loss) per Share

Basic net income (loss) per share and diluted net loss per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the dilutive potential common shares from stock option plans and convertible debt had been issued. The dilutive effect of outstanding stock options is reflected in diluted net income per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted net income (loss) per share:

			2003		2002			2001
			(in thousands, except per share data)
Numerator:
	Net income		$	65,689	$	(96,234	)	$	(23,603	)
Adjustment for interest expense on convertible subordinated notes, net of tax				3,416		—			—
Numerator for diluted net income (loss) per share			$	69,105	$	(96,234	)	$	23,603
Denominator:
	Denominator for basic net income (loss) per share - weighted average shares outstanding			82,051		81,487			76,122
	Effect of dilutive securities:
		Dilutive options outstanding		1,579		—			—
		Dilutive common shares from assumed conversion of outstanding convertible subordinated notes		4,284		—			—
	Denominator for diluted net income (loss) per share - adjusted weighted average shares			87,914		81,487			76,122
Basic net income (loss) per share			$	0.80	$	(1.18	)	$	(0.31	)
Diluted net income (loss) per share			$	0.79	$	(1.18	)	$	(0.31	)
Antidilutive options excluded from the computations				6,696		9,320			9,095
Antidilutive common shares from assumed conversion of outstanding convertible subordinated notes excluded from the calculation				—		6,408			—
Average market price of common stock			$	19.71	$	29.15		$	50.31

As the Company recorded a net loss in 2002 and 2001, all outstanding stock options at June 30, 2002, and July 1, 2001, were excluded from the calculation of diluted net loss per share for those periods then ended because the effect would have been antidilutive. Also, as the Company recorded a net loss in 2002, the common stock equivalents associated with the convertible subordinated notes at June 30, 2002, were excluded from the calculation of diluted net loss for the period then ended because the effect would have been antidilutive. Additionally, the antidilutive options at June 29, 2003, were not included in the computation of diluted earnings per share for the year then ended because the options’ exercise prices were greater than the average market price of the common shares during the period.

67

EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 2003, June 30, 2002, and July 1, 2001

Note 16 Quarterly Financial Data (Unaudited)

Selected quarterly financial data for 2003 and 2002 is as follows:

									Diluted
									income
		Net				Net			(loss)
		revenues		Gross profit		income (loss)			per share
		(in thousands, except per share data)
2003:
	Fourth quarter	$	81,762	$	54,033	$	18,439		$	0.22
	Third quarter		79,573		50,485		(248	)		(0.00	)
	Second quarter		76,448		49,107		15,517			0.19
	First quarter		70,425		42,543		31,981			0.37
	Total	$	308,208	$	196,168	$	65,689
2002:
	Fourth quarter	$	70,195	$	42,110	$	(11,447	)	$	(0.14	)
	Third quarter		69,591		42,126		(16,488	)		(0.20	)
	Second quarter		62,211		33,854		(28,266	)		(0.35	)
	First quarter		52,744		13,780		(40,033	)		(0.49	)
	Total	$	254,741	$	131,870	$	(96,234	)

Note 17 Subsequent Event

Subsequent to the year ended June 29, 2003, the Company’s Board of Directors expanded the Company’s stock repurchase program to include the repurchase of all of the Company’s convertible subordinated notes and extend the entire program to June 2005. The combined program authorizes the repurchase of up to 4.0 million shares of common stock and the repurchase of all of the convertible subordinated notes. Also subsequent to the year ended June 29, 2003, and through August 27, 2003, the Company bought back approximately $93.9 million of its convertible subordinated notes at a discount to face value, spending approximately $87.3 million. The repurchased notes were cancelled, leaving convertible subordinated notes outstanding with a face value of approximately $114.7 million that, if converted, would result in the issuance of approximately 2.1 million shares. The resulting net pre-tax gain of approximately $4.7 million from the repurchase of the convertible subordinated notes will be reported in the first quarter of fiscal 2004.

68

CONSOLIDATED FINANCIAL STATEMENT

SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES

69

Schedule II

EMULEX CORPORATION AND SUBSIDIARIES

Valuation and Qualifying Accounts and Reserves

Years ended June 29, 2003, June 30, 2002, and July 1, 2001
(in thousands)

				Additions				Amounts
		Balance at		Charged to				Charged				Balance
		Beginning		Costs and		Additions-		Against		Reductions-		At End
Classification		of Period		Expenses		Other (1)		Reserve		Other (2)		Of Period
Year ended June 29, 2003:
	Allowance for doubtful accounts	$	1,597	$	248	$	—	$	1	$	—	$	1,844
	Inventory valuation reserves	$	10,247	$	23	$	—	$	5,927	$	—	$	4,343
	Sales returns, allowances and reserves	$	718	$	5,840	$	—	$	4,405	$	—	$	2,153
	Warranty reserve	$	2,244	$	1,642	$	—	$	1,154	$	383	$	2,349
Year ended June 30, 2002:
	Allowance for doubtful accounts	$	1,298	$	510	$	—	$	211	$	—	$	1,597
	Inventory valuation reserves	$	4,483	$	13,850	$	—	$	8,086	$	—	$	10,247
	Sales returns, allowances and reserves	$	961	$	4,293	$	—	$	4,536	$	—	$	718
	Warranty reserve	$	1,474	$	1,394	$	—	$	624	$	—	$	2,244
Year ended July 1, 2001:
	Allowance for doubtful accounts	$	844	$	435	$	95	$	76	$	—	$	1,298
	Inventory valuation reserves	$	2,547	$	2,961	$	182	$	1,207	$	—	$	4,483
	Sales returns, allowances and reserves	$	1,085	$	3,005	$	—	$	3,129	$	—	$	961
	Warranty reserve	$	963	$	1,150	$	46	$	685	$	—	$	1,474

(1)	Represents the acquisition of Giganet, Inc.
(2)	Change in estimate for preexisting warranties, including expirations

70

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EMULEX CORPORATION
Date: September 23,2003	By:	/s/ Paul F. Folino
		Paul F. Folino Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on September 23, 2003.

Signature	Title
Principal Executive Officer:
/s/ Paul F. Folino (Paul F. Folino)	Chairman of the Board and Chief Executive Officer
Principal Financial and Accounting Officer:
/s/ Michael J. Rockenbach	Exec. Vice President, Chief Financial Officer,
(Michael J. Rockenbach)	Secretary and Treasurer
/s/ Fred B. Cox
(Fred B. Cox)	Director and Chairman Emeritus
/s/ Michael P. Downey
(Michael P. Downey)	Director
/s/ Bruce C. Edwards
(Bruce C. Edwards)	Director
/s/ Cornelius A. Ferris
(Cornelius A. Ferris)	Director
/s/ Robert H. Goon
(Robert H. Goon)	Director
(Don M. Lyle)	Director

71

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION OF EXHIBIT
3.1	Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s 1997 Annual Report on Form 10-K).
3.2	Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2000).
3.3	Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.3 to the Company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002).
3.4	Amendment to Bylaws of the Company adopted by the Board of Directors on March 2, 2001 (incorporated by reference to Exhibit 3.4 to the Company’s 2002 Annual Report on Form 10-K).
3.5	Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K filed February 2, 1989).
4.1	Rights Agreement, dated January 19, 1989, as amended (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K filed February 2, 1989).
4.2	Certificate regarding extension of Final Expiration Date of Rights Agreement dated January 18, 1999 (incorporated by reference to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on Form S-3, filed on May 17, 1999).
4.3	Form of 1.75% Convertible Subordinated Note due February 1, 2007 (incorporated by reference to Exhibit 4.8 to the Registration Statement on Form S-3, amended on June 28, 2002).
4.4	Indenture between the Company, as Issuer, and State Street Bank and Trust Company of California, N.A., as Trustee, dated January 29, 2002, related to the Company’s 1.75% Convertible Subordinated Notes due February 1, 2007 (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3, amended on June 28, 2002).
4.5	Registration Rights Agreement between the Company and Credit Suisse First Boston Corporation dated January 29, 2002, related to the Company’s 1.75% Convertible Subordinated Notes due February 1, 2007 (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-3, amended on June 28, 2002).
10.1	Standard Industrial Lease—Net dated April 6, 1982, between C.J. Segerstrom & Sons and the Company and amendments thereto (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 [File No. 2-79466] filed on September 23, 1982, Exhibit 10.8 to the Company’s 1983 Annual Report on Form 10-K, and Exhibit 10.6 to the Company’s 1986 Annual Report on Form 10-K).

72

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION OF EXHIBIT
10.2	1993 Amendment to Standard Industrial Lease - Net dated April 29, 1993, between C.J. Segerstrom & Sons and the Company (incorporated by reference to Exhibit 10.9 to the Company’s 1993 Annual Report on Form 10-K).
10.3	Master Purchase Agreement dated March 12, 1998, between Emulex Corporation and K*TEC Electronics Corporation (incorporated by reference to Exhibit 10.21 to the Company’s 1999 Annual Report on Form 10-K).
10.4	Amendment to Master Purchase Agreement dated March 12, 1998, between Emulex Corporation and K*Tec Electronics Corporation (incorporated by reference to Exhibit 10.22 to the Company’s 1999 Annual Report on Form 10-K).
10.5	Amendment to Master Purchase Agreement effective February 1, 1999, between Emulex Corporation and K*Tec Electronics Corporation (incorporated by reference to Exhibit 10.23 to the Company’s 1999 Annual Report on Form 10-K).
10.6	Giganet, Inc. 1995 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8, filed March 2, 2001).
10.7	Emulex Corporation Employee Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Company’s 2002 Annual Report on Form 10-K).
10.8	Emulex Corporation 1997 Stock Option Plan for Non-Employee Directors, as amended (incorporated by reference to Exhibit 10.8 to the Company’s 2002 Annual Report on Form 10-K).
10.9	Emulex Corporation Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.9 to the Company’s 2002 Annual Report on From 10-K).
10.10	Consulting agreement dated December 7, 2000 between Cornelius A. Ferris and the Company (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2001).
10.11	Manufacturing agreement dated November 2, 2000, between Emulex Corporation and Manufacturers’ Services, Ltd. (incorporated by reference to Exhibit 10.14 to the Company’s 2001 Annual Report on Form 10-K).
10.12	Standard Commercial Lease between the Flatley Company and Giganet, Inc. (incorporated by reference to Exhibit 10.15 to the Company’s 2001 Annual Report on Form 10-K).
10.13	Build to suit lease by and between C.J. Segerstrom & Sons, a California General Partnership, as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-3, amended on June 28, 2002).
10.14	Form of Key Employee Retention Agreement to which the following executive officers of the Company are a party: Paul F. Folino, Kirk D. Roller, Ronald P. Quagliara, William F. Gill, Sadie A. Herrera, Karen Mulvany, Michael J. Rockenbach and Michael E. Smith (incorporated by reference to Exhibit 10.14 to the Company’s 2002 Annual Report on Form 10-K).
10.15	Form of Indemnification Agreement between the Company and each of its directors (incorporated by reference to Exhibit 10.15 to the Company’s 2002 Annual Report on Form 10-K).

73

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION OF EXHIBIT
10.16	Lease dated June 30, 1999, by and between C.J. Segerstrom & Sons, a California General Partnership, as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.16 to the Company’s 2002 Annual Report on Form 10-K).
10.17	First Amendment to Lease (amendment dated January 21, 2000), by and between C.J. Segerstrom & Sons, a California General Partnership as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.17 to the Company’s 2002 Annual Report on Form 10-K).
10.18	Second Amendment to Lease (amendment dated February 7, 2001), by and between C.J. Segerstrom & Sons, a California General Partnership as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.18 to the Company’s 2002 Annual Report on Form 10-K).
10.19	Third Amendment to Lease (amendment dated February 21, 2002), by and between C.J. Segerstrom & Sons, a California General Partnership as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.19 to the Company’s 2002 Annual Report on Form 10-K).
10.20	Fourth Amendment to Lease (amendment dated May 2, 2002), by and between C.J. Segerstrom & Sons, a California General Partnership as landlord, and the Company, as tenant (incorporated by reference to Exhibit 10.20 to the Company’s 2002 Annual Report on Form 10-K).
10.21	Manufacturing agreement dated June 2, 2003, between Emulex Corporation and Benchmark Electronics Incorporated.
10.22	Real Estate Lease dated September 12, 2000, between LM Venture, LLC and Emulex Corporation.
10.23	First Amendment to Lease (amendment dated February 8, 2001), between LM Venture LLC and Emulex Corporation.
21	List of the Company’s subsidiaries.
23	Independent Auditors’ Consent.
31A	Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14 (a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31B	Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14 (a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

74 EX-10.21 3 a93229exv10w21.txt EXHIBIT 10.21 EXHIBIT 10.21 MANUFACTURING AGREEMENT BETWEEN EMULEX CORPORATION AND BENCHMARK ELECTRONICS INCORPORATED This Agreement is entered into by and between Benchmark Electronics, Inc. ("Benchmark") a Texas corporation having its principal place of business at 3000 Technology Drive, Angleton, Texas 77515, and Emulex Corporation ("Emulex"), a California corporation having its principal place of business at 3535 Harbor Boulevard, Costa Mesa, California 92626, and shall be effective as of the later of the dates on which the parties execute the Agreement ("Effective Date"). Now, therefore, the parties agree as follows: 1. DEFINITIONS 1.1 "Product" means the Emulex product listed in Attachment A, manufactured by Benchmark in accordance with this Agreement. The parties may add other Emulex products to this Agreement in accordance with the Product Quotation Acceptance Methodology described in Section 8. 1.2 "Product Documentation" means information required for the manufacture of the Product, including BOM, AVL, drawings, specifications, packaging requirements, unique test equipment, test procedures, and software code. 1.3 "Purchase Order" or "Order" means Emulex's purchase order, which may be submitted to Benchmark in writing, electronically, or other format mutually agreed to, and any documents incorporated therein by reference. 1.4 "Manufacturing Lead Time" means the total aggregate lead time of the Material of the Product having the longest lead time, plus the time necessary for receiving, inspection, manufacturing, systems integration, test and shipment of the Product, all as agreed by the parties. 1.5 "Materials" means component line items, including but not limited to, long lead time components, minimum and multiple buys, reel quantities, components that are at time of purchase by Benchmark, or become, non-cancelable non-returnable components, on the BOM, which are collectively assembled to produce the Product. 1.6 "BOM" means Emulex's bill of Materials. 1.7 "RMA" means return material authorization. 1.8 "Obsolete Materials" means Materials on hand and/or on order that can no longer be used in the Product. Page 1 of 23 1.9 "Excess Materials" means Materials on hand and/or on order in excess of twelve (12) weeks' forecasted demand (based upon Emulex's Orders and/or then current Forecast) resulting from Emulex's cancellations, reschedules, or other delays or changes. 1.10 "AVL" means Emulex's approved vendor list, updated from time to time, which specifies vendors approved by Emulex to supply Materials specified in a BOM, from which Benchmark may purchase or procure Materials. 1.11 "Delivery" or "Delivery Date" means the date the Product is shipped from Benchmark's place of manufacture. 2. SCOPE OF AGREEMENT Benchmark agrees to manufacture Products for Emulex in accordance with the terms and conditions of this Agreement and at the manufacturing locations listed in Attachment A. This Agreement is non-exclusive and the parties may enter into similar agreements with other parties. Except for Purchase Orders issued to Benchmark, Emulex shall not be obligated to purchase any Products from Benchmark hereunder. Local Contracts: If a subsidiary of Benchmark manufactures Products for Emulex, the sale of such Products shall be subject to the terms and conditions of this Agreement upon the execution by Emulex and the Benchmark subsidiary of a local contract incorporating all of the terms and conditions of this Agreement and adding any additional terms necessary to reflect the manufacturing and business requirements unique to the relationship between Emulex and the Benchmark subsidiary ("Local Contract"). Benchmark's subsidiary reserves the right to review the financial condition of Emulex prior to entering into such Local Contract. The Local Contract shall only be binding if signed by the authorized officers and/or directors of Emulex and the Benchmark subsidiary. 3. TERM AND TERMINATION 3.1 Subject to the provisions of sub-Sections 3.2 and 3.3, below, the initial term of this Agreement shall be for a period of one year from the Effective Date. This Agreement shall automatically renew at the end of the initial term for successive periods of one year each, unless one party notifies the other in writing of its intent to terminate the Agreement. Such notice shall be delivered no later than ninety days prior to the end of the initial or renewal term then in effect. 3.2 Emulex may terminate this Agreement and/or an Order for convenience at any time by giving Benchmark at least ninety days' prior written notice. Termination of the Agreement will not relieve the parties of any obligations incurred prior to the date of termination. 3.3 In addition to the termination rights specified in sub-Section 3.2, above, either party may immediately terminate this Agreement and/or an Order if the other party: (a) becomes insolvent or bankrupt, files or has filed against it a petition in bankruptcy, or undergoes a reorganization pursuant to a petition in bankruptcy filed with respect to it; or Page 2 of 23 (b) is dissolved or liquidated, or has a petition for dissolution or liquidation filed with respect to it; or (c) is subject to property attachment, court injunction, or court order which substantially and negatively affects its operations; or (d) makes an assignment for the benefit of creditors; or (e) ceases to function as a going concern or to conduct its operations in the normal course of business. 3.4 Either party may immediately terminate this Agreement and/or an Order if the other party fails to perform any of the material obligations imposed upon it under the terms of this Agreement so as to be in default hereunder and fails to cure such default, or to give adequate assurance of performance, within thirty days after receiving written notice thereof, except in the case of payment-related defaults, for which the cure period shall be ten business days. 3.5 In the event either party terminates or cancels this Agreement or an Order for any reason, Emulex shall pay Benchmark, within thirty (30) days of Benchmark's invoice setting forth the following termination charges: (1) the price for all finished Products existing (a) for termination by Benchmark, on the date that the termination notice is sent to Emulex, and (b) for termination by Emulex, on the date Benchmark receives the termination notice; (2) Benchmark's actual and documented cost (including labor, Materials and a reasonable mark-up) for all work in process; (3) Benchmark's Delivered Cost (defined as Benchmark's actual cost of the Materials plus a six percent (6%) handling charge for freight in, importation costs, receiving and inspection, stocking, cycle count, pick and pack, attrition, etc.) for Materials purchased pursuant to Section 7 (Forecast) herein; and (4) any vendor cancellation and restocking charges, provided that Benchmark makes commercially reasonable efforts to minimize the quantities of such items and the amounts of such cancellation and restocking fees. 3.6 The parties hereby agree to negotiate in good faith to resolve any other costs associated with the termination of the Agreement or an Order that are in addition to those costs specified above in Section 3.5. 4. EMULEX PROPERTY 4.1 Information Required for Product Manufacture Subject to the provisions of Sections 5 and 16, Emulex will provide Benchmark with the Product Documentation. Emulex reserves the right to change the content of the Product Documentation at any time, provided such changes are made pursuant to the process for engineering changes in Section 12.1. 4.2 Emulex-Provided Equipment and Tools (a) All Emulex owned equipment and tools (collectively "Equipment") will be marked with Emulex's control numbers prior to shipment to Benchmark. If Benchmark purchases such Equipment on Emulex's behalf, Emulex will provide Benchmark with the appropriate control numbers and labels to identify it as Equipment. Benchmark is authorized to use such Equipment at no charge in concert with Product Documentation to produce Product, and shall only be Page 3 of 23 responsible for damage to such Equipment caused by Benchmark's negligence or willful misconduct. Damage due to normal wear and tear and replacement of the Equipment or worn or defective parts thereof and maintenance or calibration of such Equipment shall be the sole responsibility of Emulex unless otherwise agreed by the parties. (b) Benchmark will notify Emulex if it reasonably believes that Equipment is required to meet Emulex's Product manufacturing requirements or schedules, and will obtain Emulex's approval before purchasing such Equipment. This Equipment may consist of in-circuit test equipment, functional test equipment, special component tooling, special assembly tooling, PCBA pallets and/or other items as agreed between the parties. Emulex will reimburse Benchmark for such Equipment according to the terms of Section 8.2. Any Equipment purchased under this Section 4.2 will become the property of Emulex, and Benchmark shall ship, Ex Works (Incoterm 2000) Benchmark's plant, all such Equipment at the sole cost and direction of Emulex upon the termination or expiration of this Agreement. Notwithstanding the Ex Works shipment term, Benchmark shall be responsible for loading the Equipment onto the carrier's truck at Benchmark's plant and shall have risk of loss for the Equipment until such Equipment is loaded onto the carrier's truck. 5. INTELLECTUAL PROPERTY RIGHTS 5.1 During the term of this Agreement, Emulex grants Benchmark only those specific rights and licenses under Emulex's applicable patents, copyrights, trademarks, trade names, logos, and other intellectual property rights necessary for Benchmark to manufacture the Products for Emulex under this Agreement. Benchmark's rights and licenses granted hereunder end upon termination of this Agreement. 5.2 Benchmark shall not publicize or use the name or trademark of Emulex in any manner related to this Agreement without Emulex's prior written consent. 6. APPROVAL OF VENDORS AND MATERIALS Emulex is responsible for any change in AVL, Materials or Product. Benchmark will purchase Materials only from the AVL, which will be provided to Benchmark by Emulex and updated as changes warrant. Emulex shall provide Benchmark with all updated AVL lists. Upon Benchmark's receipt of an updated AVL list, Benchmark will provide Emulex with an impact statement on any impact on the Product price, including price for BOM, and/or the Delivery Date of Products, and the parties shall mutually agree upon any necessary adjustment to Product pricing and/or Delivery Dates. Any changes in vendors proposed by Benchmark are subject to Emulex's advance written consent. If Emulex refuses to give such consent or fails to respond to a change in vendor proposed by Benchmark within five days, and if Benchmark has used commercially reasonable efforts to purchase Materials from approved vendors but shortages or allocations exist, Benchmark shall not be liable for failing to deliver affected Products on time. 7. FORECASTS Emulex will make commercially reasonable efforts to provide Benchmark with a twelve-month rolling forecast, updated monthly ("Forecast"); however, the parties acknowledge that, due to the Page 4 of 23 end of life status of the Products, such Forecasts may be unavailable or inaccurate. Emulex authorizes Benchmark to procure Materials in accordance with component lead time for Orders, net of yield losses, and to support Forecasts. These actions may result in Excess Materials, which may be subject to the terms of Section 14. Emulex may limit its liability hereunder by specifying in writing a maximum amount of purchases of Materials by Benchmark in excess of Material required for Orders. If Emulex elects to specify a maximum amount, Benchmark will purchase only to that amount and will notify Emulex of the impact to Emulex's Orders and will not be liable for failure to deliver Products on time if such failure results directly from Emulex's Materials purchase limitations. 8. PRICING AND PAYMENT TERMS 8.1 The prices to be paid by Emulex for any Products ordered pursuant to this Agreement shall be listed in Attachment A. Any price changes to Products, or addition of new Products and its prices, will be agreed to between the parties in accordance with the following methodology: To introduce revised prices for current Products or to add new Products and its prices, Benchmark shall provide a product quotation ("Product Quotation") to Emulex listing the Product and the new or revised prices for each assembly of the Product. To indicate Emulex's acceptance of the Product Quotation, Emulex shall either provide Benchmark with written acceptance by email or fax, or issue an Order or revise an existing Order, to reflect the revised prices for the current Products or the new Product and its prices as specified in the Product Quotation ("Product Quotation Acceptance Methodology"). All accepted Product Quotations shall be incorporated herein by reference and made a part of this Agreement. All prices and fees described or contemplated under this Agreement are in U.S. dollars. Product pricing does not include federal, state, or local excise, sales, or use taxes; export licensing of the Product, or payment of broker's fees, duties, tariffs or other similar charges; cost of compliance with any environmental legislation which relates to the return of end of life Product from Emulex to Benchmark for disposal; setup, tooling, or non-recurring engineering activities (collectively "Charges"). If such Charges are applicable, they shall be set out as a separate line item on Benchmark's invoice. Emulex agrees to provide to Benchmark a valid Reseller's Certificate for exemption from any potentially applicable sales and use taxes. 8.2 Payment terms shall be net forty-five (45) days from the date of Benchmark's invoice. On any invoice not paid by maturity date, Benchmark has the right to charge Emulex interest from maturity to date of payment at the rate of four percent (4%) per annum, or the maximum amount permitted by law, whichever is the lesser. Benchmark's invoice shall be contain the following information: 1) description of the Product, 2) unit price of the Product, 3) total quantity of the Product, 4) any applicable Charges as a separate line item, 5) total amount of the invoice, 6) date Product is shipped, 7) location Product is shipped to, 8) Emulex's billing address, 9) Benchmark's payment address. If the invoice contains the foregoing information, it shall be deemed a correct invoice unless Emulex notifies Benchmark in writing of an error in the invoice within ten (10) calendar days of Emulex's receipt of such invoice. If Emulex notifies Benchmark in writing of an error in an invoice within such ten day period and Benchmark agrees that the error specified by Emulex error exists, Benchmark shall issue a revised invoice to correct the error within ten (10) calendar days of Benchmark's receipt of Emulex's notice. Payment of an invoice shall not constitute or imply acceptance of the Product or relieve Benchmark of any Page 5 of 23 obligations assumed under this Agreement, nor prevent Emulex from asserting any other rights it may have under this Agreement. 8.3 During the term of this Agreement, the parties may make price adjustments for documented Materials price variances occurring as a result of, without limitation, schedule adjustments, worldwide supply of Materials, BOM changes, engineering changes, process changes, or changes to Forecasts. Benchmark shall permit Emulex to conduct an audit, at Emulex's expense, of actual costs incurred by Benchmark for Product Orders at the end of each quarter, provided Emulex gives Benchmark at least five (5) days prior written notice and such audit is conducted during normal business hours and does not unduly interfere with Benchmark's business operations. Benchmark will provide, upon Emulex's reasonable request, financial and other information necessary to substantiate Product prices and to assist the parties in identifying areas where price reductions may be achieved, provided that Benchmark is not restricted from doing so under applicable securities laws and/or confidentiality agreements with third parties. If Benchmark is subject to such confidentiality agreements, Benchmark shall make all commercially reasonable efforts to obtain permission to disclose the relevant information to Emulex, including without limitation, requesting the relevant parties to sign three-party confidentiality agreements. 8.4 Benchmark will obtain Emulex's approval prior to procurement of any Material when the actual per unit cost of any Material exceeds Benchmark's quoted per unit cost for such Material (as specified in Benchmark's Product Quotation) by more than 1% only when Benchmark intends to increase the Product price by the increased cost in the Material. Upon Emulex's approval, Benchmark will invoice Emulex for the difference between the actual and quoted cost of the Material, and Emulex agrees to pay for all such approved costs. 9. PURCHASE ORDERS 9.1 Emulex will provide Benchmark with Purchase Orders in the form of hard copy, by facsimile, or by electronic transfer. Purchase Orders will specify part numbers, quantity, prices, Product revisions, and requested Delivery Dates and locations. The parties acknowledge that the Manufacturing Lead Time will change due to reasons beyond Benchmark's reasonable control; therefore, Benchmark will exercise commercially reasonable efforts to notify Emulex immediately of any change in Manufacturing Lead Time. Benchmark has the right to accept or reject the Purchase Order within five (5) business days of receiving the Purchase Order. If Benchmark does not accept or reject the Purchase Order within the five day period, the Purchase Order shall be deemed accepted provided that Benchmark has actually received the Purchase Order from Emulex. In the event Benchmark is unable to meet the delivery schedule set forth in a proposed Purchase Order, or finds the schedule to be unacceptable for some other reason, the parties shall negotiate in good faith to resolve the disputed matter(s). 9.2 Benchmark will use commercially reasonable efforts to meet Product quantity increases within the Manufacturing Lead Time, subject to Materials availability, other scheduled manufacturing, and manufacturing capacity. Any premium, expediting, or other increased charges that are required in order to meet Emulex's increased requirements must be approved in advance by Emulex. Emulex agrees to pay for all such approved costs. Page 6 of 23 9.3 Emulex shall have the right to reschedule delivery for each Purchase Order or partial Purchase Order without Benchmark's consent under the following conditions: (i) in accordance with the chart specified below; (ii) the original Delivery Date for Products in each Purchase Order may only be rescheduled by Emulex up to three (3) times, unless otherwise consented by Benchmark; (iii) the rescheduled Delivery Date for each reschedule permitted in subsection (ii) herein shall not exceed the reschedule period below.

- ----------------------------------------------------------------------------------------- Days Before Scheduled Purchase Order Percentage Allowed To Extend Delivery Date Delivery Date Reschedule Period - ----------------------------------------------------------------------------------------- 0 - 29 25% 30 days - ----------------------------------------------------------------------------------------- 30 - 59 50% 60 days - ----------------------------------------------------------------------------------------- 60 - 89 75% 90 days - ----------------------------------------------------------------------------------------- > 90 100% No limit - -----------------------------------------------------------------------------------------

9.4 Emulex shall have the right to cancel delivery of a Purchase Order without Benchmark's consent, provided however, that Benchmark must be notified in writing of the cancellation at least thirty days prior to the scheduled delivery date, and Emulex shall be responsible for any cancellation charges specified in Section 3.5. 10. DELIVERY 10.1 Benchmark shall follow all instructions contained in Emulex's routing instructions, which Emulex will provide to Benchmark and which will be specified on each Order. Emulex may modify its routing instructions from time to time and will provide Benchmark with an updated version of any such modified instructions. Emulex is responsible for all freight charges for Products that are shipped in accordance with Emulex's routing instructions. Benchmark shall be responsible for any freight charges incurred for Product shipped outside the routing instructions to include, but not be limited to, use of other than Emulex's preferred carriers. If there are any conflicts between the current version of routing instructions provided to Benchmark and the contents of this Section 10, the current routing instructions will prevail. Benchmark and Emulex will review freight forwarders for cost reduction opportunities. Any changes in freight carriers will require Emulex's approval. 10.2 Deliveries will be considered on time if they are shipped no more than three business days earlier or no days later than the Delivery Date specified in the Emulex Purchase Order. If Emulex agrees to take partial delivery of any Order, each such partial delivery shall be deemed a separate sale. 10.3 If Benchmark anticipates or becomes aware that it will not supply the Product on the delivery date committed by Benchmark, for any reason to include but not be limited to Material shortage, process changes, capacity limitations or causes due to common carriers, Benchmark shall notify Emulex immediately after Benchmark has knowledge of the situation. The notification may be communicated by facsimile, telephone, electronic mail or any other method agreed to by the parties, provided that Benchmark shall obtain Emulex's actual acknowledgment of the notice of anticipated delay. Emulex and Benchmark will jointly develop alternatives to resolve any late delivery of the Product, Page 7 of 23 including use of premium routing. Benchmark will develop recovery plans with new committed Delivery Dates and communicate such plans to Emulex within 24 hours of missed deliveries. If Benchmark is unable to ship the Product on the committed Delivery Date due to Benchmark's fault that is not excused by force majeure or that results from Benchmark's negligence or willful misconduct, Emulex may require Benchmark to pay for any additional charge or premium beyond the normal freight fees for expedited delivery. 10.4 Except as provided for otherwise in Sections 10.1 and 10.3, above, the terms of sale are Ex Works Benchmark's place of manufacture as specified in Attachment A. All shipments shall be uninsured unless otherwise specified by Emulex's procurement agents. Prepay and bill shipment shall be used only when specified by Emulex's procurement agents. In the event that prepay and bill is used, Benchmark shall indicate the number of shipping containers, weight of each shipment and carrier name on the invoice. Notwithstanding the Ex Works shipment term, Benchmark shall be responsible for loading the Products onto the carrier's truck and risk of loss and title shall pass to Emulex after the Products have been loaded onto the carrier's truck at Benchmark's facility. 10.5 Each shipment of the Product by Benchmark shall include a packing slip which contains, at a minimum, (i) Benchmark's name, (ii) box number (e.g., 1 of 3, 2 of 3), (iii) receiving address, (iv) Emulex's purchase order number, (v) Emulex's part number, (vi) shipping quantity, (vii) date of shipment, and (viii) RMA number when applicable. 10.6 All Products shall be packaged, marked and otherwise prepared in accordance with Product Documentation, and if none are specified or required, with good commercial practices. In packaging Products, Benchmark shall also take any additional steps needed to ensure reasonable protection from damage due to rough handling and other hazards that might occur during transit. Packaging for export/import shipments may also be subject to specific instructions, which Emulex will provide to Benchmark in writing in the form of Product Documentation pursuant to Section 4.1. 10.7 Emulex will provide the following information about its Products in writing to Benchmark: (i) country of origin; (ii) Harmonized Tariff Schedule of the United States ("HTSUS") , and (iii) Export Control Classification Number ("ECCN"). Emulex will provide the commercial invoice. Benchmark will prepare all international shipping documentation, including NAFTA certificate, including NAFTA preference criteria (as applicable), Shipper's Letter of Instruction, Shipper's Export Declaration and any other necessary documentation for international shipments. Emulex will be the exporter of record. 11. WARRANTY 11.1 Benchmark warrants that Products provided under this Agreement will be free of Benchmark's workmanship defects for a period of three (3) years from date of Delivery. For the purpose of this Section, "workmanship" shall mean manufacture in accordance with IPC-A-610, Class 2 or Emulex's workmanship standards set forth in the Product Documentation and/or Quality Plan. In addition, Benchmark will pass on to Emulex all manufacturer's Material warranties to the extent that they are transferable, but will not independently warrant any Materials. Page 8 of 23 11.2 Subject to Section 11.3 below, Emulex's sole remedy and Benchmark's sole obligation shall be to repair or replace, at Benchmark's option, Product found to be defective in accordance with Section 11.1. The warranty period for any Product returned for repair or replacement shall be the greater of the remainder of the original warranty period or sixty (60) days from the date that the repaired or replaced Product is Delivered to the Product owner. 11.3 Benchmark's warranty shall be void if the Product has been subjected to abuse, misuse, accident, disaster, neglect, improper handling, testing, storage or installation (including improper handling in accordance with static sensitive electronic device handling requirements) and/or operation outside the parameters or environment identified in Emulex's Product specifications, or unauthorized repair or alterations by anyone other than Benchmark. Benchmark's warranty does not cover Products that have defects or failures resulting from Emulex's design, specification, Product Documentation, or Emulex Equipment or test software. 11.4 Emulex shall contact Benchmark for an RMA prior to returning any Product for repair. Benchmark will provide the RMA within two business days of receipt (one business day for priority requests) of Emulex's request. Benchmark shall pay all transportation costs for valid returns of the Products to Benchmark. Benchmark will exercise commercially reasonable efforts to ship the repaired or replaced Product to Emulex freight prepaid, Ex Works Benchmark's manufacturing facility, as quickly as is practical, with the goal of shipping it by no later than five days from the date Benchmark received the defective Product. If Benchmark reasonably determines there is an excessive number of invalid or "no defect found" ("NDF") returns, Benchmark will notify Emulex and the parties shall in good faith work together to resolve NDF returns and any associated costs. Notwithstanding the Ex Works shipment term, Benchmark shall be responsible for loading the repaired or replacement Product onto the carrier's truck at Benchmark's plant and shall have risk of loss for the Product until such Product is loaded onto the carrier's truck. 11.5 Out of Warranty Product Repair Benchmark shall provide out of warranty Product repair during the term of the Agreement and for a period of not less than seven years following the last date of Benchmark's Product manufacture under this Agreement, provided Materials and/or custom test equipment are available to Benchmark and the parties agree on pricing for such repair work. Charges for out of warranty Product repair will be quoted and mutually agreed to by the parties. Transportation costs to ship the out-of-warranty Product to Benchmark and for Benchmark to ship the repaired Product to Emulex shall be at Emulex's sole expense. Benchmark's repair activities shall include, but not be limited to Product (i) testing, (ii) repair, (iii) failure analysis, (iv) root cause analysis, and (v) corrective actions. Out of warranty Products repaired by Benchmark shall be subject to all of the provisions applicable to in-warranty Product set out in this Section 11 solely with respect to the repair work; such warranty shall not apply to the entire Product. 11.6 THESE WARRANTY PROVISIONS ARE THE EXCLUSIVE WARRANTIES FOR ANY PRODUCT PROVIDED BY BENCHMARK HEREUNDER AND SETS OUT THE EXCLUSIVE REMEDIES FOR CLAIMS BASED ON DEFECTS IN Page 9 of 23 OR FAILURE OF ANY PRODUCT. NO OTHER WARRANTY, EXPRESS OR IMPLIED, SHALL APPLY. BENCHMARK SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE. BENCHMARK FURTHER MAKES NO WARRANTY THAT THE PRODUCTS WILL MEET ANY SPECIFICATIONS NOT MADE KNOWN TO AND/OR EXPRESSLY AGREED TO BY BENCHMARK OR RECEIVE THE APPROVAL OF OR BE CERTIFIED BY ANY FEDERAL, STATE, LOCAL, OR FOREIGN GOVERNMENT AGENCY OR ANY OTHER PERSON OR CERTIFYING ENTITY AND BENCHMARK ASSUMES NO RESPONSIBILITY FOR OBTAINING SUCH APPROVALS OR CERTIFICATIONS. 12. ENGINEERING CHANGES 12.1 Emulex Requested Changes (a) In the event that changes are required to make the Product conform to safety and/or regulatory agency requirements or for design improvements or other factors, Benchmark shall use its commercially reasonable efforts to implement the proposed engineering changes in existing inventory, work in process, new production of the Product, and into Product going through Benchmark's repair process as instructed by Emulex. Emulex shall provide Benchmark with written notice of any proposed engineering change, including new Product Documentation, as soon as possible after Emulex knows of such change. Upon Benchmark's receipt of Emulex's notice of such proposed engineering change, Benchmark shall provide Emulex with an impact statement, including but not limited to, the effect such change may have on Product costs, Material (such as the BOM, Excess and/or Obsolete Material), and/or Delivery Dates of affected Products, and the parties shall mutually agree upon such items before Benchmark implements the proposed change. (b) For implementing engineering changes on previously delivered Product, Emulex will request an RMA number and return, or cause the return of, the affected Product to Benchmark or an authorized repair facility for repair or replacement at Emulex's expense. Upon such repair or replacement, Benchmark shall ship, at Emulex's expense, the repair or replacement Product back to the Product's owner under the shipment terms specified in Section 10. 12.2 Benchmark Requested Changes Benchmark may request, in writing, that Emulex evaluate an engineering change to the Product or a change in the method of packing, packaging, or shipment of the Product. Such request will include a description of the proposed change sufficient to permit Emulex to evaluate its feasibility, including the impact, if any, on the Product price and Product quality resulting from the proposed change. 12.3 Cost Reductions The parties agree that competitive pressures necessitate a program of continuous improvement. Each party shall cooperate in good faith to implement a Product cost Page 10 of 23 reduction program involving new technologies, Material cost reduction, productivity, quality and reliability improvements, and manufacturing processes (including cycle time and assembly costs). The parties shall conduct quarterly program reviews with specific emphasis on quality, delivery, and cost improvements. Any cost savings which are achieved by Benchmark as a result of implementing cost reductions proposed solely by Emulex (without any input from Benchmark) shall reduce the price of Products by the entire amount of Benchmark's cost savings. Any cost savings which are achieved jointly by the parties or by Benchmark as a result of changes proposed solely by Benchmark shall be shared equally by the parties for a period of twelve (12) months and shall be retained exclusively by Emulex after twelve months. Notwithstanding the foregoing, cost reductions arising out of a reduction in Material costs will commence only after all current Purchase Orders have been closed and all on-hand Materials have been consumed by Benchmark. 12.4 Any changed Product resulting from application of this Section 12 shall be considered added to this Agreement and subject to its terms and conditions. 13. PRODUCT QUALITY Emulex Quality Management and Benchmark shall jointly develop and implement a mutually acceptable quality plan for the manufacture of the Product ("Quality Plan") s by using the guidelines set forth in Attachment B. Benchmark shall use commercially reasonable efforts, acceptable to Emulex, to continually meet or exceed the quality and reliability requirements outlined in the Quality Plan. The current approved master revision Quality Plan shall be retained by Emulex Quality Management. The Quality Plan will pay particular attention to: (a) Quality system design, maintenance and reporting (b) Supplier management (c) Continuous (process) improvement (d) Preventive actions (e) Process and change control (f) Product and process traceability (as defined in Emulex's General Traceability Requirements) (g) Customer satisfaction and timely complaint resolution The effective execution of the Quality Plan will be reviewed at the quarterly business reviews described in Section 15. 14. INVENTORY MANAGEMENT 14.1 If, at any time, Materials on hand and/or on order become Excess and/or Obsolete Materials, and Benchmark has procured said Materials in accordance with this Agreement and used commercially reasonable efforts to minimize the quantities on hand and/or on order of such Excess and/or Obsolete Materials, Benchmark may require Emulex to purchase such Materials at the Delivered Cost price. Emulex will provide to Benchmark an Order within ten days of being notified by Benchmark of Materials on Page 11 of 23 hand and/or on order that are Excess or Obsolete, and will pay Benchmark within thirty days of the date of Benchmark's invoice. 14.2 If Emulex desires to store Excess or Obsolete Materials at Benchmark, Benchmark will provide a consignment service to Emulex for a consignment fee to be mutually agreed to by Emulex and Benchmark. On a monthly basis, Benchmark will provide Emulex with a purchase order summarizing the quantity and Delivered Cost of Materials utilized by Benchmark in the previous month to manufacture Products. Upon Emulex's receipt of such purchase order, Emulex shall invoice Benchmark no later than thirty (30) days from such receipt. Benchmark shall pay Emulex within thirty (30) days of the date of Emulex's invoice. 14.3 If Emulex elects not to store Excess or Obsolete Materials at Benchmark and instead elects to have such Materials shipped to Emulex or another destination designated by Emulex, Benchmark will ship, at Emulex's expense, such Materials Ex Works Benchmark's location. Notwithstanding the Ex Works shipment term, Benchmark shall be responsible for loading the Materials onto the carrier's truck at Benchmark's plant and shall have risk of loss for the Materials until such Materials are loaded onto the carrier's truck. 15. REVIEW AND PLANNING MEETINGS 15.1 Emulex hereby appoints its Director of Manufacturing as its liaison to monitor Benchmark's performance and delivery of Product under this Agreement. Benchmark hereby appoints its designated Supplier Business Manager as its liaison to monitor Emulex's performance hereunder. These liaisons will also be responsible for coordinating meetings and discussions and reports provided for in this Agreement. The names, telephone and facsimile numbers of the liaisons will be provided by the parties to each other and the liaisons may be changed by written notice from one party to the other. 15.2 Emulex's designated liaison will conduct a quarterly performance and planning review with Benchmark's account management team. The location and times for these meetings will be determined by Benchmark and Emulex. The purposes of these meetings are listed below: (a) Review Benchmark's performance over the previous quarter; (b) Review action items and resolution; (c) Identify opportunities and areas of improvement; (d) Agreement on commitments, set target dates and define "persons" responsible; (e) Review appropriate Benchmark reports; (f) Review Benchmark's quality and reliability improvement plans; and (g) Publish minutes to EMULEX and Benchmark. 16. CONFIDENTIAL INFORMATION 16.1 Both parties may, in connection with this Agreement, disclose to the other party information considered confidential and proprietary information of the disclosing party ("Confidential Information"). Information shall be considered Confidential Information if identified as confidential in nature by the disclosing party at the time of disclosure, or which by its nature is normally and reasonably considered confidential, such as Page 12 of 23 information related to past, present or future research, development, or business affairs, any proprietary products, materials or methodologies, manufacturing processes or designs, or any other information which provides the disclosing party with a competitive advantage. Neither party shall disclose such Confidential Information to any third party without the prior written consent of the disclosing party (except that Benchmark may disclose Emulex's Confidential Information to Benchmark's suppliers solely to fulfill the purpose of this Agreement provided Benchmark binds such supplier to substantially similar terms of confidentiality and restricted use herein) nor use such Confidential Information other than to fulfill the purpose of this Agreement. The receiving party shall protect the disclosing party's Confidential Information with the same degree of care that it regularly uses to protect its own Confidential Information from unauthorized use or disclosure. No rights or licenses under patents, trademarks, trade secrets, or copyrights are granted or implied by any disclosure of Confidential Information. 16.2 The obligations of confidentiality imposed by this Agreement shall not apply to any Confidential Information that: (a) is rightfully received from a third party without accompanying markings or disclosure restrictions; (b) is independently developed by employees of the receiving party who have not had access to such Confidential Information; (c) is or becomes publicly available through no wrongful act of the receiving party; (d) is already known by the receiving party as evidenced by documentation bearing a date prior to the date of disclosure; or, (e) is approved for release in writing by an authorized representative of the disclosing party. In addition, each party shall be entitled to disclose the other party's Confidential Information to the extent such disclosure is required by the order of a court of competent jurisdiction, administrative agency, or other governmental body, provided that the party required to make the disclosure shall provide prompt, advance notice thereof to enable the other party to seek a protective order or otherwise prevent such disclosure. 16.3 The terms and conditions of this Agreement, but not its existence, are considered Confidential Information. 17. INDEMNIFICATION 17.1 Emulex agrees, at its expense, to defend and indemnify Benchmark in any suit or action brought or any claim asserted (collectively, a "Claim") against Benchmark alleging that any Product or any part thereof manufactured pursuant to this Agreement and in material compliance with Emulex's specifications, Product Documentation and directions, and/or Benchmark's use of Emulex Equipment: (i) directly or indirectly infringes any patent, copyright, trademark or service mark; or (ii) has caused injury to the property or person of any third party, except to the extent directly attributable to Benchmark's manufacturing processes. Emulex will indemnify and hold Benchmark harmless from and against any loss, cost, damage or expense, including without limitation reasonable attorneys' fees (collectively, "Costs"), incurred by Benchmark as a direct result of, including defense against, any such Claim. 17.2 Benchmark agrees, at its expense, to defend and indemnify Emulex with respect to any Claim against Emulex to the extent such Claim alleges that Benchmark's manufacturing processes (i) directly or indirectly infringe any patent, copyright, trademark or service mark; or (ii) have caused injury to the property or person of any third party, provided that such Claim does not relate to Emulex's specifications or written instructions to Page 13 of 23 Benchmark. Benchmark will indemnify and hold Emulex harmless from and against any Costs incurred by Emulex as a direct result of, including defense against, any such Claim. 17.3 Emulex will indemnify Benchmark with respect to any Claim which results from or arises out of: (i) the presence of Emulex, or Equipment, or Benchmark's equipment, tools, or facilities ("Tools") used by Emulex in the performance of this Agreement on Benchmark's property; (ii) the performance by Emulex or its personnel of services for or on behalf of Benchmark; (iii) the acts, errors, omissions, or negligence of Emulex or Emulex's personnel that occur on Benchmark's property in performance of Emulex's obligations under this Agreement; or (iv) the use by Emulex of Benchmark's Tools, except to the extent that any Claim is based upon the condition of the Tools or Benchmark's, its agent's, or its employee's alleged negligence in permitting such Tools' use. 17.4 The indemnities in this section are provided on the condition that: (i) the indemnified party promptly notifies the indemnifying party in writing of any Claim; (ii) the indemnifying party has sole control of the defense and all related settlement negotiations (except that the indemnifying party shall not settle any Claim affecting the indemnified party's interest without the indemnified party's prior written consent); and (iii) the indemnified party gives the indemnifying party full and complete authority, information and assistance to defend against such Claim and fully cooperates in the defense and furnishes all related evidence in its control at the indemnifying party's expense. 18. LIMITATION OF LIABILITY EXCEPT WITH RESPECT TO DAMAGES TO THIRD PARTIES UNDER INDEMNIFICATION OBLIGATIONS OR DAMAGES PROXIMATELY CAUSED BY A BREACH OF CONFIDENTIALITY OBLIGATIONS SOLELY DUE TO THE BREACHING PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER THEORY FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST PROFITS, IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT OR ANY PURCHASE ORDER EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER FOR BREACH OF CONFIDENTIALITY OBLIGATIONS ARISING UNDER THIS AGREEMENT EXCEED ONE MILLION U.S. DOLLARS ($1,000,000.00), WITHOUT LIMITING INJUNCTIVE REMEDIES. 19. INSURANCE 19.1 Benchmark shall maintain insurance against fire, theft and damage to any Emulex property held by Benchmark, including without limitation consigned Materials, in-circuit test fixtures, capital equipment, returned Materials and other Emulex Product and property in Benchmark's possession. Benchmark shall also maintain commercial general liability insurance, which covers contractual liability and product liability, in the amounts of $5 million per occurrence and $10 million in the aggregate for Benchmark's manufacturing defects. Such insurance will name Emulex as an additional insured with Page 14 of 23 respect to claims of bodily injury, including death, and property damage to the extent such claims arise from Benchmark's negligent manufacturing of the Products or is proximately caused by the negligent and/or intentional acts or omissions of Benchmark, and will remain in effect for a period of three years after termination of this Agreement. Benchmark will provide Emulex with a certificate of insurance evidencing such coverage. 19.2 Emulex shall maintain errors and omissions insurance in the amounts of $5 million per occurrence and $10 million in the aggregate for product liability. Such insurance will name Benchmark as an additional insured and will remain in effect for a period of three years after termination of this agreement. Emulex will provide Benchmark with a certificate of insurance evidencing such coverage. 20. MISCELLANEOUS 20.1 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the state of California, without regard for its rules concerning the conflicts of law. The United Nations Convention on Contracts for the International Sales of Goods is hereby expressly excluded from application to this Agreement. 20.2 Remedies Both parties acknowledge and agree that monetary damages may not be a sufficient remedy for breach of this Agreement. Benchmark further acknowledges that its breach of Sections 5 and/or 16 of this Agreement would cause irreparable harm to Emulex. Emulex also acknowledges that its breach of Section 16 of this Agreement would cause irreparable harm to Benchmark. Therefore, the non-breaching party shall be entitled, without waiving any other rights or remedies, to such injunctive relief as may be deemed proper by a court of competent jurisdiction. 20.3 Relationship of the Parties The parties are and shall remain at all times, independent contractors in the performance of this Agreement and nothing herein shall be deemed to create a joint venture, partnership or agency relationship between the parties. Neither party shall have the right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of the other except as may be expressly provided otherwise in this Agreement. Each party shall be solely responsible for the performance of its employees hereunder and for all costs and expenses of its employees, to include but not be limited to employee benefits. 20.4 Waiver The failure of either party to insist upon or enforce strict conformance by the other party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as a waiver or relinquishment of such party's right unless made in writing and shall not constitute any subsequent waiver or relinquishment. Page 15 of 23 20.5 Amendment and Modification To be valid, amendments or modifications to the Agreement must be in writing and signed by authorized representatives of both parties. Any verbal agreements, discussions, and understandings, expressed or implied, shall not constitute an amendment to this Agreement. 20.6 Invalid Provisions If any provision of this Agreement is finally held by a court of competent jurisdiction to be illegal or unenforceable, the legality, validity, and enforceability of the remaining provisions of this Agreement shall not be affected or impaired. 20.7 Survivorship The provisions of this Agreement which by their nature survive termination or expiration of the Agreement, including but not limited to the provisions of Section 5 (Intellectual Property Rights, Section 11 (Warranty), Section 16 (Confidential Information), Section 17 (Indemnification), Section 18 (Limitation of Liability), Section 19 (Insurance), Section 20.1 (Governing Law), Section 20.2 (Remedies) of this Agreement shall survive the termination or expiration of this Agreement. Outstanding Purchase Orders shall survive the termination of this Agreement, unless Emulex or Benchmark cancels the Purchase Orders in accordance with this Agreement. 20.8 Force Majeure Neither party shall be responsible for any delay in performing this Agreement to the extent that such delay is caused by the occurrence of unforeseen circumstances beyond a party's control and without such party's negligence or intentional misconduct, including, but not limited to, fire, flood, hurricane, earthquake, explosion, war, acts of terrorism, strike, boycott, shortage, riot, lockout, labor dispute, civil commotion, embargo, government law or regulation, act by any governmental authority, action of civil or military authority, act of God, or act or inaction of the other party, including but not limited to, failure to timely provide Equipment, Product Documentation, or approval of purchase of Materials under Section 4 herein. 20.9 Successors and Assigns Neither party may assign any rights hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. Any assignment of rights shall not work as a novation of obligations hereunder without written agreement. Any attempt to assign any rights, duties or obligations hereunder without the other party's written consent will be void. Notwithstanding the above, either party may assign this Agreement to a surviving entity in connection with any merger, acquisition or consolidation of not less than a majority ownership in the merged, acquired or consolidated company by the surviving entity. Page 16 of 23 20.10 Notices Unless otherwise expressly provided for, all notices, requests, demands, consents or other communications required or pertaining to this Agreement shall be sent by next business day courier, fax followed by confirmation by mail, e-mail, or some other method that provides proof of delivery, to the address set forth below: EMULEX: Emulex Corporation 3535 Harbor Blvd. Costa Mesa, CA 92626 Attn: Contracts Administration Benchmark: Benchmark Electronics Huntsville, Inc. 4807 Bradford Drive Huntsville, AL 35805 Attn: Central Group President With a copy to: Benchmark Electronics, Inc. 3000 Technology Drive Angleton, Texas 77515 Attn: Legal Department In case of mailing, the effective date of delivery of any notice, demand, or consent shall be considered to be five days after proper mailing. 20.11 Headings The section and paragraph headings of this Agreement are intended as a convenience only, and shall not affect the interpretation of its provisions. 20.12 Conflicting Terms The parties agree that the terms and conditions of this Agreement shall prevail, notwithstanding any contrary or additional terms in any Purchase Order, sales acknowledgment, confirmation or any other document issued by either party effecting the purchase and/or sale of Products ("Documents"). When interpreting this Agreement, precedence shall be given to the respective parts in the following descending order: (a) this Agreement; (b) Attachments to this Agreement; (c) Benchmark's Product Quotation accepted by Emulex and (d) if Orders are used to release product, those portions of the Order that are not pre-printed and which are accepted by Benchmark. The Parties acknowledge that the preprinted provisions on the reverse side of any Document shall be deemed deleted and of no effect whatsoever. 21. ENTIRE AGREEMENT This Agreement, including all Attachments, constitutes the entire Agreement between the parties and supersedes all prior or contemporaneous agreements, discussions, and understandings between the parties, either express or implied. The following Attachments are part of this Agreement and are incorporated herein by this reference. Page 17 of 23 A Product and Price Schedule B Product Quality IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. EMULEX CORPORATION BENCHMARK ELECTRONICS, INC. By: /s/ Paul Folino By: /s/ Cary Fu ----------------------- -------------------------------------- (Signature) (Signature) Name: Paul Folino Name: Cary Fu Title: Chairman and CEO Title: President & Chief Operating Officer Date: 6/2/03 Date: 6/2/03 Page 18 of 23 ATTACHMENT A INITIAL PRODUCTS AND PRICE SCHEDULE 1. PRODUCT AND PRICE SCHEDULE The following table sets forth the Products, and Product price, which may be changed from time to time pursuant to Sections 8.1 and 8.3 of the Agreement.

- -------------------------------------------------------------------- PRODUCT NUMBER DESCRIPTION AND ANNUAL VOLUME QUOTED INITIAL PRICE - -------------------------------------------------------------------- - -------------------------------------------------------------------- LP9802-F2 HBA - 100,000 units TBD* - -------------------------------------------------------------------- - -------------------------------------------------------------------- - -------------------------------------------------------------------- - -------------------------------------------------------------------- - --------------------------------------------------------------------

*TBD means to be determined by mutual agreement of the parties. This is a non-binding forecast of annual volumes. 2. Manufacturing Locations: 4807 Bradford Drive, Huntsville, Alabama 35805; Circuito de Productividad #132, Parque Industrial, Guadalajara Las Pintas, El Salto, Jal. 45690, Mexico; 94 Moo 1, Hitech Industrial Estate, Banlane, Bang Pa-in, Ayudhaya 13160, Thailand; and others as agreed between the parties. Page 19 of 23 ATTACHMENT B GUIDELINES FOR DEVELOPING A PRODUCT QUALITY PLAN 1. PURPOSE: To define the methods and controls to manufacture and deliver all Emulex Products. 2. SCOPE: All Emulex Products produced by Benchmark. 3. RELATED DOCUMENTS: (a) ISO 9000: 2000 (Quality Systems - Model for quality assurance). (b) ANSI/IPC-R-700C Modification, Rework, Repairs of Printed Boards and Assemblies (c) ANSI/IPC-A-610 Workmanship Standards (d) IPC-A-600 Acceptability of Printed Boards 4. RESPONSIBILITY: Implementation and control of the quality plan is the responsibility of Benchmark's quality department in conjunction with Benchmark engineering and production management. 5. MANUFACTURING QUALITY PLAN CHANGES: Changes to the Manufacturing Quality Plan will be agreed in writing between Emulex and Benchmark. 6. DOCUMENT CONTROL: Benchmark will, through the relevant product engineer, ensure all Product changes are reviewed internally. All Product changes must be handled through Benchmark's ECO Procedure. 7. ESD: These requirements apply to the storage, packaging, handling and assembly of all ESD-sensitive Materials. They also apply to items such as PWB's, tools, and packaging material which come into contact with ESD-sensitive Materials. Direct handling of ESD sensitive parts, including assemblies and Products, shall be by grounded personnel at static safe workstations. ESD sensitive Materials should be kept in static shielding containers/Metro's. Wrist straps and heel straps are the preferred personal grounding device. They are required when components or boards are handled. Straps are to be tested daily (before handling ESD sensitive items) and replaced if they do not pass. A daily log of test results must be current and visible. Page 20 of 23 Static dissipative smocks shall be worn in areas which contain ESD sensitive components. These areas include production, test, shipping, inspection and warehouses. They should be kept clean and always be worn fastened with the sleeves down, touching the skin. Power tools, including soldering irons, need to be grounded (three prong plugs). Work stations and tables at which components or boards are not in protective packaging must have grounded surfaces. 8. PURCHASING: All Materials used in the production of Emulex's Products will be sourced as per the AVL supplied by Emulex. 9. GOODS RECEIVING: All Materials received for production of the Emulex Products will be inspected against the Emulex-supplied AVL. Alternative sources or parts may only be accepted through concession from Emulex. Customized parts in incoming inspection will be inspected as follows: visual inspection of the parts for workmanship defects, verification of certificate of conformity ("COC") and ensuring all parts are as per Emulex-supplied AVL (AQL as mutually agreed). Records will be maintained for the above part, verifying the COC received is appropriate to the specification. These records will be maintained by Benchmark Receiving. 10. STORES OPERATION: 10.1 Received goods checked against carrier paperwork to confirm correct amount of packages and with no transportation damage and signed for accordingly. For any discrepancy with shipment, the receiving personnel ensures courier acknowledges, adjusts paperwork and signed by receiving personnel and courier. Copy of this paper is sent by receiving to relevant buyer at Benchmark. Goods are unpacked and checked against Purchase Order and against supplier documentation. Any discrepancy is reported directly to the relevant buyer at Benchmark. The discrepancy is also recorded and is sent to relevant buyer, and the Material is held until the "action" section is compiled by the buyer and returned to receiving. PO received quantity is confirmed Cleared Materials are identified and marked accordingly. 10.2 Material is put away by locations by stores personnel. Accountability for the warehouse locations is by warehouse personal individual ownership. This ownership includes, stock accuracy, housekeeping, and cycle count. 10.3 FIFO process will be maintained. Page 21 of 23 11. NON CONFORMING MATERIAL REVIEW: Process related non-conforming material ("NCM") is reviewed and dispositioned in manufacturing by the appropriate engineer. Supplier related NCM is dispositioned at least weekly by the supplier quality engineer and quality, and Supplier corrective action measures are applied where deemed necessary. A secure MRB room is located the warehouse. 12.0 CONTROL AND MAINTENANCE OF MANUFACTURING, INSPECTION, MEASURING AND TEST EQUIPMENT: All manufacturing equipment shall be maintained on a regular basis and is included in a preventative maintenance schedule. All inspection, measuring and test equipment used to check conformance of the Product to specified requirements is subjected to a planned calibration program. 13. PROCESS INSTRUCTIONS: Standard operating procedures are available for all automated assembly stages and for each PCB, placement programs and reflow/wave profiles are uniquely identified. In addition, process documentation is available for all component prework operations, manual assembly, box build and packing operations. 14. PRODUCT IDENTIFICATION: All Products will be fitted with an assembly number and a serial number (which includes Product revision). 15. MARKING AND LABELLING: All Products prior to shipment will have the following labels attached: the Emulex label, as per process instruction document. 16. INSPECTION AND TESTING: All products will be 100% inspected and tested at the intervals shown in the process flow by production personnel. The results of this test are logged and retained for a minimum of two years in the Quality Department. 17. REPAIR: The standard to be used for all rework resulting from inspection or test rejection will be ANSI/IPC-R-700-C, "Modification, Rework, Repairs of Printed Boards and Assemblies." Page 22 of 23 18. DATA COLLECTION AND REPORTING: REFERENCED PROCEDURES: SPC Data Collection & Corrective Action Procedures: Doc 115 0108. Weekly quality reports will be provided to Emulex detailing the following: - Inspection process stages - In-circuit test - Functional test - Outgoing QA inspection This information will be provided in DPU, DPMO and % yield format The results from all inspection and test stations will be recorded and reviewed. Quality meetings will be conducted to review the SPC process data and corrective actions required. 19. CUSTOMER COMPLAINTS: All customer complaints must be directed to the quality director who will immediately acknowledge the complaint by means of fax or E-mail. This complaint is then submitted by the quality department and all relevant people are automatically notified through e-mail for input to the CLCA system. Once the complaint has been submitted it is then assigned to the person responsible for identifying root cause and corrective/preventive action. This may include a short term and long tern solution also effective date. The status of a complaint is closed upon satisfactory completion of these actions and its effectiveness checked by quality. Each new customer complaint will automatically receive a new tracking number from the database system. All records are filed in quality. Customer complaints will be reviewed by site management at least weekly. 20. RETURNS (RMA): All field returns will be returned to Benchmark in accordance with Benchmark's returns procedure. This procedure operates a full comprehensive RMA facility. 21. RELEASE AUDITING: All units will be the subject of a sample audit inspection carried out by the quality department prior to shipment to the customer. The release audit consists of a visual inspection. Sample sizes will based on AQL as mutually agreed. Page 23 of 23 EX-10.22 4 a93229exv10w22.txt EXHIBIT 10.22 EXHIBIT 10.22 REAL ESTATE LEASE (MULTIPLE TENANT BUILDING) ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Lease Agreement between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01 DATE OF LEASE: September 12, 2000. Section 1.02 LANDLORD: LM Venture, LLC, a Delaware limited liability company having its principal place of business at 600 Grant St., Suite 620, Denver, CO 80203, as further described in Section 13.01(a). Section 1.03 TENANT: Emulex Corporation, a California corporation having its principal place of business at 3535 Harbor Boulevard, Costa Mesa, CA 92626. Section 1.04 PREMISES: The Premises consist of approximately 10,000 rentable square feet of space as delineated on the preliminary site plan attached hereto as Exhibit A (the "Site Plan") in a multi-tenant building (the "Building") to be known as 1921 Corporate Center Circle in Longmont, Boulder County, Colorado, located on certain real property more particularly described on Exhibit B attached hereto (the "Property"). The actual measurement of such rentable square feet shall be determined exactly by Landlord's architect using industry standard methods and shall be measured from the outside surface of outside walls to the center of any demising walls. The Building is the second of several buildings to be constructed on the Property and certain adjacent property owned by Landlord (the "Project"), with the first two of such buildings containing approximately 185,000 square feet in the aggregate. Section 1.05 LEASE TERM: Five (5) years beginning on the Commencement Date (as defined in Section 2.03 below), subject to the right of Tenant to extend the term as set forth in Section 2.01 below. Section 1.06 PERMITTED USES: General office and administrative purposes, manufacturing, assembly and distribution of products. Section 1.07 TENANT'S GUARANTOR: None. Section 1.08 BROKERS: Grubb and Ellis Company (Norm Blum), representing Landlord, and Prudential LTM Realtors (Tim Hill), representing Tenant. Section 1.09 COMMISSIONS: Six percent (6%) of the total net rent for the primary term, which commission shall be split equally between Landlord's broker and Tenant's broker. Section 1.10 INITIAL SECURITY DEPOSIT: None. Section 1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: None assigned. Section 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT: Tenant shall pay to Landlord monthly Base Rent in a variable amount based on the following annual per-square-foot rental rates for the Premises: $12.00 for the first year of the Lease Term; $12.36 for the second year of the Lease Term; $12.73 for the third year of the Lease Term; $13.11 for the fourth year of the Lease Term; and $13.50 for the fifth year of the Lease Term. Tenant shall also pay Tenant's Portion of Real Property Taxes (see Section 4.02), Utilities (see Section 4.03), Insurance Premiums (see Section 4.04), Common Area Expenses (see Section 4.05), Impounds for Insurance Premiums and Property Taxes (see Section 4.08), and Maintenance, Repairs and Alterations (see Article Six). Tenant's Portion of any particular item of expense which is separately attributable to the Premises (such as metered utilities) will be 100%. As used herein, the term "Tenant's Portion" shall mean any item of expense which relates to the Property payable by Tenant, which shall initially be calculated based on the ratio obtained by dividing the leasable area of the Premises by the leasable area of the first two buildings. After completion of other buildings in the Project from time to time, Tenant's Portion of any such expense shall be calculated based on the ratio obtained by dividing the leasable area of the Premises by the leasable area of all such completed buildings. For purposes of this calculation, leasable areas shall be determined by Landlord's architect and shall be measured from the outside surface of outside walls to the center of any demising walls. Section 1.13 RIDERS: The following Riders are attached to and made a part of this Lease: Exhibit A (Preliminary Site Plan, including delineation of Premises); Exhibit B (Legal Description); Exhibit C (Landlord's Work). ARTICLE TWO: LEASE TERM; CONSTRUCTION OBLIGATIONS. Section 2.01 LEASE OF PROPERTY FOR LEASE TERM; OPTION TO EXTEND. Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord for the Lease Term specified in Section 1.05 above. In addition, Landlord hereby grants to Tenant the option ("Option") to extend the term of this Lease for one or two additional terms of five years each (an "Option Term"). The Option may only be exercised in the event that Tenant is not currently in default under any of the provisions of this Lease beyond applicable cure periods. In order to exercise an Option, Tenant must provide written notice of its exercise of the Option to Landlord (an "Extension Notice") at least six months prior to the expiration of the initial Lease Term (or previously extended Lease Term, if applicable). All terms and conditions of this Lease shall remain in full force and effect during the Option Term (if an Option is exercised by Tenant in accordance with this Section 2.01) except that Base Rent during the Option Term shall be increased as set forth in Section 3.02 below. In the event that Tenant fails to timely provide the Extension Notice, then Tenant's right to exercise the Option shall automatically terminate. After exercise of the second Option as set forth above, Tenant shall have no further right to extend the term of this Lease. Section 2.02 CONSTRUCTION OBLIGATIONS. Tenant or its architect, with the assistance of Landlord's architect, shall, within thirty (30) days after execution of this Lease, provide to Landlord a copy of an initial space plan for the Premises ("Tenant's Specifications"). Tenant's Specifications shall include all elements necessary for the design of the Tenant Improvements, as defined below, and be in sufficient detail to allow for preparation of the Premises Construction Documents. Landlord shall then instruct its architect to prepare a full set of documents for construction of the Premises in accordance with Tenant's Specifications (the "Premises Construction Documents"). Within a reasonable time after preparation of the Premises Construction Documents, Landlord shall complete construction of the Building and the Premises substantially as shown on the Site Plan in accordance with the Premises Construction Documents and Exhibit C ("Landlord's Work"). Tenant shall be responsible for payment of all costs relating to the design and construction of Tenant's interior finish of the Premises ("Tenant Improvements") beyond that set forth on Exhibit C (subject to the provisions of Section 2.04 below). 2 Section 2.03 SUBSTANTIAL COMPLETION; COMMENCEMENT DATE. The term "Substantial Completion" as used herein shall mean that Landlord's Work is substantially complete (as confirmed in writing by Landlord or its architect), Tenant Improvements have been completed, and a temporary certificate of occupancy has been issued for the Premises by the necessary governmental authorities. Within ten (10) days after Substantial Completion, Landlord and Tenant shall agree on a final punchlist of items to be completed or repaired. Landlord's contractor shall complete or repair the items denoted on the punchlist within thirty (30) days thereafter. As used in this Lease, the term "Commencement Date" shall mean the date of Substantial Completion; provided, however, that to the extent that Substantial Completion is delayed by any failure of Tenant to meet the timelines for approval set forth in this Article II, the Commencement Date shall be the date that Substantial Completion would have been achieved absent such failure. Section 2.04 CONSTRUCTION ALLOWANCE. (a) Landlord shall contribute an amount equal to $21.00 multiplied by the actual area of the Premises (the "Tenant Allowance") to cover costs associated with design and construction of Tenant Improvements in the Premises (including electrical and engineering costs beyond Landlord's Work described in Exhibit C and architectural costs beyond preparation of the initial space plan). Landlord shall prepare and submit to Tenant for its review and approval a budget consistent with local market costs for all Tenant Improvements and related items before work is commenced. If such budget reasonably reflects Tenant's Improvements and local market costs, Tenant shall approve such budget within seven (7) days after submission. If Tenant reasonably demonstrates deficiencies for either cause, Tenant and Landlord shall negotiate in good faith to resolve such deficiencies. Landlord shall use reasonable efforts in consultation with Tenant to maximize the efficiency and economy of construction of the Premises. When all Tenant Improvements have been completed and paid for, Landlord and Tenant shall compare the total expenditures for Tenant Improvements with the total amount of the Tenant Allowance. If such expenditures are less than the Tenant Allowance, Base Rent shall be reduced by the amount of such difference amortized over the initial Lease Term at the rate of 12% per annum. If such expenditures are in excess of the Tenant Allowance, Base Rent shall be increased by an amount equal to such excess costs (not exceeding $7.00 per square foot of the actual Premises) at the rate of 12% per annum ($.12 per square foot per dollar of excess costs). For example, if the total cost of Tenant Improvements is $24.00 per square foot, Base Rent for the first Lease Year shall be increased by $.36 to $12.36 per square foot, which would be increased at an annual rate of 3% to determine Base Rent for subsequent Lease Years. (b) If, based on the approved budget, the cost of all Tenant Improvements will exceed $28.00 per square foot, the amount of the excess shall be divided by the total cost of Tenant Improvements to determine the portion ("Tenant's Percentage") which shall be the sole responsibility of Tenant. During the course of construction of the Tenant Improvements, Tenant shall pay to Landlord, within 10 days after receipt of a statement of the cost of the Tenant Improvements during any month, an amount equal to Tenant's Percentage of such monthly costs. When all Tenant Improvements have been completed and paid for, Landlord and Tenant shall reconcile the total expenditures for Tenant Improvements to the total amount of the Tenant Allowance. Tenant shall be solely responsible for promptly paying (or reimbursing Landlord for) all expenses for Tenant Improvements in excess of $28.00 per square foot. Section 2.05 HOLDING OVER. Tenant shall vacate the Premises upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all 3 damages which Landlord incurs from Tenant's delay in vacating the Premises. If Tenant does not vacate the Premises upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Premises shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%). ARTICLE THREE: BASE RENT Section 3.01 TIME AND MANNER OF PAYMENT. Tenant shall pay Base Rent to Landlord in the amount stated in Paragraph 1.12 (prorated for any partial month at the beginning or end of the Lease Term) on the Commencement Date and on the first day of each month thereafter during the Lease Term, in advance, without offset, deduction or prior demand. Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 3.02 BASE RENT DURING OPTION TERMS. Base Rent for each Option Term (if exercised) shall be based on the then-prevailing market rental rate for terms of like duration for space comparable to the Premises in the Longmont metropolitan area prevailing at the time such Option Term commences. Landlord shall determine such rate in good faith and advise Tenant in writing of its proposed Base Rent for an Option Term within thirty (30) days after receipt of the Extension Notice. In the event that Tenant disagrees with Landlord's determination, Tenant shall so notify Landlord in writing and the parties shall attempt in good faith to resolve the difference. In the event that the parties do not agree upon Base Rent for an Option Term within sixty (60) days after Landlord's receipt of the Extension Notice, the parties shall submit the issue to mediation by a sole mediator acceptable to both parties. The direct expenses of the mediation, including the compensation and expenses of the mediator, shall be borne equally by the parties. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.01 ADDITIONAL RENT. All charges payable by Tenant under this Lease other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "Rent" shall mean Base Rent and Additional Rent. Section 4.02 PROPERTY TAXES. (a) REAL PROPERTY TAXES. Tenant shall pay Tenant's Portion of all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed in the Premises by or for the benefit of Tenant) attributable to the Lease Term, as well as an equitable portion of the real property taxes assessed against Outlot A, CREEKSIDE BUSINESS PARK FILING NO. 1, which consists of open space and detention areas for the Property, as provided in Section 4.08 below. Landlord shall furnish Tenant with written evidence of annual payment of the real property taxes on the Property promptly after receipts are available, if requested by Tenant. (b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on Landlord's right to receive rent from the Property or against Landlord's business of leasing the Property, in lieu of ad valorem property tax; (iii) any tax or charge for fire protection, streets, sidewalks, road 4 maintenance, refuse or other services provided to the Property by any governmental agency; (iv) any increase in taxes resulting from any reassessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. (c) PERSONAL PROPERTY TAXES. Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant, and shall try to have personal property taxed separately from the Premises. Section 4.03 UTILITIES. Tenant shall pay directly to the appropriate supplier (or to Landlord on the basis of reasonable proration, as to any utilities not separately metered to the Premises by the supplier) the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. Section 4.04 INSURANCE POLICIES. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the use or occupancy of the Premises, specifically including Tenant's use of chemicals at the Premises. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be One Million Dollars ($1,000,000) per occurrence and shall be subject to reasonable periodic increases based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisors and other relevant factors, provided such periodic increases are not more than those amounts found in comparable buildings in the immediate area. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary and non-contributing, and (ii) contain cross-liability endorsements. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance. (b) PROPERTY AND BUSINESS INTERRUPTION INSURANCE. During the Lease Term, Landlord shall maintain a policy of insurance covering loss of or damage to the Property in the full amount of its replacement value and including business interruption insurance in an amount sufficient to pay one year's rent from the Property plus estimated real property taxes and insurance premiums. Landlord and Landlord's mortgagee shall be named loss payee under such policy, as their interests may appear. This policy shall cover the fixtures, equipment and leasehold improvements in the Premises which are customarily insured as part of the realty (such as electric wiring and panels, lighting fixtures and HVAC ducts and equipment), but Tenant shall be solely responsible at its expense and under its management for separately insuring Tenant's movable tenant improvements, equipment and personal property located in the Premises. Such policy shall contain an Inflation Guard endorsement, shall not provide for any deductible amount greater than $10,000, and shall provide protection against all perils included within the classification of fire, extended coverage (including any perils arising from Tenant's use of chemicals at the Premises), vandalism, malicious mischief, special extended perils (all risk), 5 sprinkler leakage and any other perils which Landlord deems reasonably necessary (including flood and earthquake insurance, if required by any lender holding a security interest in the Property). Tenant shall not do or permit anything to be done which invalidates any such insurance policies. (c) PAYMENT OF PREMIUMS. Tenant shall pay its pro rata share of all premiums for the insurance policies covering loss or damage to the Property described in subsection 4.04(b) as provided in Section 4.08 below. Before the Commencement Date, Tenant shall deliver to Landlord a copy of each policy of insurance which Tenant is required to maintain under Section 4.04(a). At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord with a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under Section 4.04(a) is in full force and effect and containing such other information which Landlord reasonably requires. (d) NOTICE OF CANCELLATION. Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord written notice of any cancellation or modification of coverage not less than ten (10) days prior to the effective date of change. If any insurance policy is cancelled on account of the business or activities of Tenant, Tenant shall immediately cease such activities or secure a replacement policy acceptable to Landlord. (e) FAILURE TO OBTAIN OR CONFIRM COVERAGE. If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is cancelled or modified during the Lease Term without Landlord's consent, Landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance. (f) MINIMUM STANDARDS. Tenant shall maintain all insurance required under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide." If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant's type of business, as that coverage may change from time to time. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. (g) WAIVER OF SUBROGATION. Tenant hereby waives any and all rights of recovery against Landlord, or against the officers, employees, agents or representatives of Landlord, for loss of or damage to property, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Landlord hereby waives any and all rights of recovery against Tenant, or against the officers, employees, agents, contractors, invitees, or representatives of Tenant, for loss of or damage to property, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. 6 Section 4.05 COMMON AREAS; USE, MAINTENANCE AND COSTS. (a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean Outlot A, CREEKSIDE BUSINESS PARK FILING NO. 1, which consists of open space and detention areas for the Property, and all other all areas of Building and the rest of the Project which are available from time to time for the common use of (or otherwise benefit) tenants of the Building and which are not leased or held for the exclusive use of Tenant or other tenants, including without limitation parking areas, driveways, sidewalks, loading areas, access roads, corridors, all landscaped or planted areas (including open space and detention areas) and signs. Landlord may from time to time change the size, location, nature and use of any of the Common Areas, convert Common Areas to leasable areas, construct additional parking facilities (including parking structures) in the Common Areas, and increase or decrease Common Area land and/or facilities, so long as such activities and changes do not materially impair Tenant's use of the Premises or the redefined Common Areas. (b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in common with other tenants and all others to whom Landlord has reasonably granted or may reasonably grant such rights) to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations as Landlord may establish from time to time (the "Rules and Regulations"). Tenant shall abide by the Rules and Regulations and shall use its best effort to cause others who use the Common Areas with Tenant's express or implied permission to abide by the Rules and Regulations. At any time, Landlord may close any Common Areas to perform any acts in the Common Areas which, in Landlord's judgment, are desirable to maintain the Property. Tenant shall not interfere with the rights of Landlord, other tenants or any other person entitled to use the Common Areas, provided such closures or acts do not materially impair Tenant's use of the Premises and Common Areas. (c) VEHICLE PARKING. Tenant's parking in the parking areas of the Property shall not be reserved, and shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. There will be unreserved parking spaces available to Tenant at a ratio of 4:1. Temporary parking of delivery trucks and other large vehicles on the Property shall only be permitted as contemplated in the Site Plan and in accordance with the Rules and Regulations. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. Handicapped spaces shall only be used by those legally permitted to use them. (d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas in good order, condition and repair, and shall operate the Property as a first-class office/warehouse/industrial real property. Tenant shall pay Tenant's Portion of all reasonable and necessary costs incurred by Landlord for the operation and maintenance of the Common Areas. Common Area costs include, without limitation, costs and expenses for the following: gardening and landscaping; utilities, water and storm sewer charges; maintenance of signs (other than tenant's signs); premiums for liability, property damage, fire and other types of casualty insurance on the Common Areas and worker's compensation insurance; all property taxes and assessments levied on or attributable to the Common Areas and all Common Area improvements; all personal property taxes levied on or attributable to personal property used in connection with the Common Areas; straight-line depreciation on personal property owned by Landlord which is consumed in the operation or maintenance of the Common Areas; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Common Areas; fees for required licenses and permits; repairing, resurfacing, painting, lighting, 7 cleaning, refuse removal, security and similar items; reserves for roof replacement and exterior painting and other appropriate reserves; and a reasonable allowance to Landlord or Landlord's agent (which may include Chandelle Development LLC, an affiliate of Landlord) for management and supervision of the Common Areas (not to exceed market rates for similar properties in the Longmont, Colorado, metropolitan area). Landlord may cause any or all of such services to be provided by third parties, and the cost of such services shall be included in Common Area costs. Common Area costs shall not include depreciation of real property which forms part of the Common Areas. (e) PAYMENT OF COMMON AREA COSTS. Landlord shall estimate in advance all Common Area costs payable by Tenant hereunder for each calendar year during the term of this Lease, and shall provide statements of such estimated costs to Tenant annually (provided, however, that Landlord may adjust such estimates at any time based upon Landlord's experience and reasonable anticipation of costs). Tenant shall pay Tenant's annual pro rata share of all Common Area costs (prorated for any fractional month) in monthly installments concurrently with payment of Base Rent. Within ninety (90) days after the end of each calendar year of the Lease term, Landlord shall deliver to Tenant a statement prepared in accordance with generally accepted accounting principles setting forth, in reasonable detail, the actual Common Area costs paid or incurred by Landlord during the preceding calendar year and Tenant's Portion thereof. Upon receipt of such statement, there shall be an adjustment between Landlord and Tenant, with payment to or credit given by Landlord (as the case may be) so that Landlord shall receive the entire amount of Tenant's Portion of such costs and expenses for such period. Section 4.06 LATE CHARGES. Tenant's failure to pay Rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any Rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.07 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of ten percent (10%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. Section 4.08 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, exclusive of those premiums payable by Tenant under Section 4.04(a), together with each payment of Base Rent. ARTICLE FIVE: USE OF PROPERTY Section 5.01 PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above. 8 Section 5.02 MANNER OF USE. Tenant shall not cause or permit the Premises to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which interferes with the rights of owners or occupants of adjacent properties, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Premises and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Premises, including the Occupational Safety and Health Act and all laws and regulations regarding the use, storage and disposal of anything used in its manufacturing or otherwise. Section 5.03 HAZARDOUS MATERIALS. As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Notwithstanding the foregoing, materials commonly used as office supplies, including without limitation items such as printer toner, shall not be considered to be Hazardous Materials. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property. Tenant shall bear no liability for any Hazardous Materials present or discovered on the Property prior to the commencement of this Lease. Section 5.04 SIGNS AND AUCTIONS. Tenant shall be entitled to install signage conforming to building standard guidelines on the outside of the Building near the main entrance to the Premises and to be identified on the Building monument sign, but shall not place any other signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. Section 5.05 INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from (i) Tenant's use of the Premises, (ii) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any adjacent property resulting from the presence or use of Hazardous Material caused or permitted by Tenant, (iii) any breach or default in the performance of Tenant's obligations under this Lease, (iv) any misrepresentation or breach of warranty by Tenant under this Lease, or (v) other acts or omissions of Tenant in violation of this Lease. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord. As a material part of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury in the Premises to Tenant's employees, agents, contractors, or invitees arising from any cause unrelated to Landlord's responsibilities hereunder, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's negligence, willful misconduct, or breach of this Lease. For purposes of this Section 5.05, the term "Tenant" shall include Tenant's employees, agents, assignees, and contractors, except to the extent such definition creates personal obligations or liabilities for such persons and/or entities. 9 Section 5.06 LANDLORD'S ACCESS. Landlord or its agents may enter the Premises at all reasonable times to show the Premises to potential buyers, investors, or, during the last six (6) months of the Lease Term, to prospective lessees, to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material, or for any other purpose Landlord deems necessary. Except in the case of an emergency, Landlord shall give Tenant prior notice of such entry and Tenant shall have the right, if it has reasonable suspicions, to approve who may tour or inspect the Premises, to designate an agent of Tenant to accompany Landlord on any inspection, or to devise reasonable procedures to ensure that no trade secrets or confidential information is being misappropriated or taken. Section 5.07 QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Premises for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS Section 6.01 CONDITION OF PREMISES. Tenant understands and agrees that Tenant shall make its own inspection of and inquiry regarding the condition of the Premises upon Substantial Completion and shall accept the Premises in its condition at that time, subject to Landlord's obligation to have completed Landlord's Work in good and workmanlike manner and to complete all punch list items identified at that time. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Premises for Tenant's intended use. Section 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, or Tenant's employees, invitees, or customers in or about the Property, whether such damage or injury is caused by or results from (i) fire, steam, electricity, water, gas or rain, (ii) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause, or (iii) conditions arising in or about the Property, or from other sources or places. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's negligence or willful misconduct, or breaches of its obligations under this Lease. Section 6.03 LANDLORD'S OBLIGATIONS. Except as provided in Article Seven (Damage and Destruction) and Article Eight (Condemnation), Landlord shall maintain in good condition and repair the foundations, exterior walls and roof of the Building (including painting the exterior surface of the exterior walls of the Building not more frequently than once every five years if necessary) and all components of electrical, mechanical, plumbing, heating and air conditioning systems and facilities located in the Building which are concealed or used in common by tenants of the Building. Landlord shall not be obligated to maintain or repair the windows, doors, plate glass or the interior surfaces of exterior walls of the Premises, or any HVAC system or other system which serves only the Premises. Landlord shall make repairs under this Section 6.03 within a reasonable time after receipt of written notice from Tenant of the need for such repairs. Tenant shall pay or reimburse Landlord for all reasonable costs Landlord incurs under this Section 6.03 as Common Area costs as provided in Section 4.05 above. Tenant waives the benefit of any statute in effect now or in the future which might give Tenant the right to make repairs at Landlord's expense. 10 Section 6.04 TENANT'S OBLIGATIONS. (a) Except as provided in Section 6.03, Article Seven (Damage and Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Premises in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Premises or any system or equipment in the Premises which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Premises or systems or equipment in the Premises, and any capital replacement required shall be amortized over its useful life. Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. If any part of the Property is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Premises which Tenant is obligated to maintain in an attractive, first-class and fully operative condition. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Premises as required by this Section 6.04, Landlord may, upon ten (10) days prior written notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Premises and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all reasonable costs incurred in performing such maintenance or repair immediately upon demand. Section 6.05 ALTERATIONS, ADDITIONS AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions or improvements to the Premises without Landlord's prior written consent, except for non-structural alterations which do not exceed Twenty Thousand Dollars ($20,000) in cost annually and which are not visible from the outside of the Building. Landlord may require Tenant to provide lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans. (b) Tenant shall pay when due all valid claims for labor and material furnished to the Premises. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Premises, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Premises. In the event that any lien or notice of lien is recorded against the Property as a result of any work performed by or at the request of Tenant, Tenant shall, within thirty (30) days thereafter, cause such lien or notice of lien to be released of record; provided, however, that Tenant shall have the right to contest such lien or notice of lien by appropriate proceedings if Tenant establishes a bond or other customary security in favor of Landlord within such time. (c) Upon termination of this Lease, Tenant shall not have the right to remove any equipment or fixtures installed at the Property unless, prior to installation of any such equipment 11 or fixtures, Tenant shall notify Landlord in writing of such installation and of Tenant's intent to retain ownership of such equipment or fixtures and Landlord agrees in writing that such equipment may be installed at the Premises and shall remain the property of Tenant. Any such equipment or fixtures so installed at the Premises with the written agreement of Landlord shall be considered to be "Tenant's Equipment" for purposes of Section 6.06 below. Section 6.06 CONDITION UPON TERMINATION. Upon the termination of the Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements prior to the expiration of the Lease and to restore the Premises to its prior condition, all at Tenant's expense, provided that Landlord notifies Tenant at the time of Landlord's consent to such alterations, additions, or improvements that they must be removed upon termination of the Lease. All alterations, additions and improvements which Landlord has not, at the time of approval, required Tenant to remove shall be Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant's Equipment which can be removed without material damage to the Premises. Tenant shall repair, at Tenant's expense, any damage to the Premises caused by the removal of any of Tenant's Equipment. In no event shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners (except supplemental HVAC equipment not included in the Premises Construction Documents that has been installed in the Premises and paid for by Tenant) or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.01 PARTIAL DAMAGE TO PREMISES. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Premises. If the Premises is only partially damaged (that is, less than thirty three percent (33%) of the Premises is untenantable as a result of such damage or less than thirty three percent (33%) of Tenant's operations are materially impaired) and can be repaired within six months, and if insurance proceeds are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage to the Premises (including Tenant's fixtures, equipment and improvements, to the extent of available insurance proceeds) as soon as reasonably possible. (b) If the insurance proceeds are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall (subject to the terms of this Lease) pay Landlord the "deductible amount" (if any) under Tenant's insurance policies and, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, 12 contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. (c) If the damage to the Premises occurs during the last six (6) months of the Lease Term or any Option Term and such damage will require more than sixty (60) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage. Section 7.02 SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is substantially or totally destroyed by any cause whatsoever, or if damage to the Premises is greater than partial damage as described in Section 7.01, this Lease shall terminate as of the date the destruction occurred, regardless of whether Landlord receives any insurance proceeds. Notwithstanding the preceding sentence, if the Property can be rebuilt within six months after the date of destruction, Landlord may elect to rebuild the Property at no expense to Tenant, the parties may agree that this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense, except that if the destruction was caused by an unpermitted act or omission of Tenant under this Lease, or Tenant's employees, agents, contractors or invitees, Tenant shall pay Landlord the difference between the actual cost of repair and any insurance proceeds received by Landlord. Section 7.03 TEMPORARY REDUCTION OF RENT. If the Premises are destroyed or damaged and Landlord or Tenant repairs or restores the Premises pursuant to the provisions of this Article Seven, Base Rent and Additional Rent shall be equitably abated, as of the date of the casualty, based on the extent to which the Premises are unusable by Tenant. Tenant shall not be entitled to any compensation, reduction or reimbursement from Landlord as a result of any damage, destruction, repair or restoration of or to the Premises. Section 7.04 WAIVER. Tenant waives the protection of any statute, code or judicial provision which grants a tenant the right to terminate a lease in the event of a substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction of the Property. ARTICLE EIGHT: CONDEMNATION If all or any portion of the Premises is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the Premises is taken or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or, in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Premises not taken, except that the Rent shall be reduced in proportion to the reduction (if any) in the floor area of the Premises. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award 13 specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Premises or the remainder of the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.01 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.05 below. Any attempted transfer without consent shall be void. Section 9.02 TENANT AFFILIATE. Tenant may assign this Lease or sublease the Premises, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. Section 9.03 NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the Rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Section 9.04 OFFER TO TERMINATE. If Tenant desires to assign the Lease or sublease the Premises, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. Section 9.05 LANDLORD'S CONSENT. Tenant's request for consent to any transfer described in Section 9.01 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (such as the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee and the proposed use of the Premises; (ii) the net worth and financial reputation of the proposed assignee; and (iii) Tenant's compliance with all of its obligations under the Lease. If Landlord objects to a proposed assignment solely because of the net worth and/or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign) all or a portion of the Premises to the proposed transferee, but only on the other terms of the proposed transfer. 14 Section 9.06 NO MERGER. No merger shall result from Tenant's sublease of the Premises under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all sub-tenancies or succeed to the interest of Tenant as sub-landlord under any or all sub-tenancies. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.01 COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02 DEFAULTS. Tenant shall be in material default under this Lease: (a) if Tenant fails to pay Base Rent within ten days after receipt of written notice from Landlord that payment is due hereunder, or fails to pay any Additional Rent hereunder within ten (10) days after written notice from Landlord that such payment is due; (b) if Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord (provided, however, that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the 30-day period and thereafter diligently pursues its completion); or (c) if (i) Tenant makes a general assignment or general arrangement for the benefit of creditors, (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days, (iii) a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease and possession is not restored to Tenant within thirty (30) days, or (iv) substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. Any notice required by this Section 10.02 is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. Section 10.03 REMEDIES. On the occurrence of any material uncured default by Tenant, Landlord may take any of the following actions at any time thereafter, with notice and without limiting Landlord in the exercise of any right or remedy which Landlord may have. (a) Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease, at Landlord's option and election, shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent and all Additional Rent and other charges which Landlord has earned at the time of the termination, (ii) the worth at the time of the award of the amount by which the unpaid Base Rent and all Additional Rent and other charges which Landlord would have earned after termination until the 15 time of the award exceed the amount of such rental loss that Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent and all Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of the award exceeds the amount of such rental loss that Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Premises after such default, the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation or alteration of the Premises, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of ten percent (10%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). (b) Landlord may maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Premises. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due. (c) Landlord may pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. If Tenant has performed a material default beyond any cure periods and has abandoned the Premises, Landlord shall have the option of retaking possession of the Premises and recovering from Tenant the amount specified in subparagraph (a) above, or proceeding under subparagraph (b) above. All rights and remedies provided to Landlord hereunder are cumulative with all other rights and remedies provided hereunder or otherwise available at law or in equity, and Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. Section 10.04 AUTOMATIC TERMINATION. At Landlord's election, this Lease shall terminate on the occurrence of any act to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to the Lease; the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Premises. All such damages suffered (apart from Base Rent and Additional Rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. Section 10.05 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy hereunder shall not preclude it from exercising any other available right or remedy. 16 ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.01 SUBORDINATION. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Premises during the Lease Term shall not be disturbed if Tenant pays the Rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of such ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior to subsequent to the date of such ground lease, deed of trust or mortgage or the date of recording thereof. Section 11.02 ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Premises upon the transfer of Landlord's interest, provided that Tenant's right to quiet possession of the Premises during the Lease Term shall not be disturbed if Tenant pays the Rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. Section 11.03 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) business days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04 ESTOPPEL CERTIFICATES. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and Additional Rent and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) business days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property, who may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten business day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms or provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one 17 month's Base Rent or Additional Rent have been paid in advance; and (iv) that Landlord is not in default under this Lease. In such event, Tenant shall be estopped from denying the truth of such facts. Section 11.05 TENANT'S FINANCIAL CONDITION. Tenant hereby warrants, represents, and agrees that it has the financial ability to perform all obligations and covenants hereunder. Tenant shall, if requested by Landlord, provide reasonable current financial statements to be provided to prospective lenders or purchasers to facilitate the financing, refinancing or sale of the Property. Tenant represents and warrants to Landlord that each such financial statement will be a true and accurate statement as of the date thereof. ARTICLE TWELVE: LEGAL COSTS Section 12.01 LEGAL PROCEEDINGS. If Tenant or Landlord shall be adjudged to be in breach or default under this Lease, and, if in any action for breach of or to enforce the provisions of this Lease, the court in such action awards to the party in whose favor a judgment is entered a reasonable sum as attorneys' fees and costs, the losing party in such action shall pay such reasonable attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability that Landlord may incur if Landlord becomes or is made a party to any claim or action which is: (a) instituted by Tenant against any third party, or by any third party against Tenant for matters unrelated to the Property, or by or against any person, other than Landlord, holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant; (c) otherwise arising out of or resulting from any act or transaction of Tenant; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord. Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.01 LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Tenant shall be notified within 30 days of any change in Landlord. Each Landlord is obligated to perform the obligations of Landlord under the Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. 18 (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address has been furnished to Tenant in writing. Notwithstanding the preceding sentence, Tenant's notice to Landlord shall be sufficient, and Tenant's failure to give notice to all parties listed in the preceding sentence due to unavailability of such names and addresses to Tenant shall not impair or invalidate such notice. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such 30-day period and thereafter diligently pursued to completion. (c) Notwithstanding any term of provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property, and neither the Landlord nor its partners, shareholders, officers, members, managers or other principals shall have any personal liability under this Lease. Section 13.02 SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.03 INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the others. Section 13.04 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the final agreement between the parties pertaining to the lease of the Premises and supersedes all prior negotiations and agreements relating thereto. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.05 NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Premises, the Premises shall be Tenant's address for notice purposes, with a copy of all such notices to be sent simultaneously to the following address: Emulex Corporation, 3535 Harbor Boulevard, Costa Mesa, CA 92626, Attention: Contracts Administration. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.06 WAIVERS. All waivers must be in writing and signed by the waiving party. Either party's failure to enforce any provision of this Lease, or Landlord's acceptance of Rent, shall not be a waiver and shall not prevent such party from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.07 NO RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" 19 memorandum of this Lease executed by both parties be recorded. The party requesting such recording shall pay all transfer taxes and recording fees. Section 13.08 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of Colorado shall govern this Lease, and the exclusive venue for any action relating to this Lease shall be in Colorado. Section 13.09 CORPORATE, COMPANY OR PARTNERSHIP AUTHORITY. If Tenant is an entity, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation, company or partnership, as the case may be. If Landlord so requests, Tenant shall promptly deliver to Landlord written evidence of such authority, in form and substance reasonably acceptable to Landlord. Section 13.11 FORCE MAJEURE. If either party cannot perform any of its obligations due to events beyond its control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond a party's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.12 EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. ARTICLE FOURTEEN: RIGHT OF REFUSAL. If, at any time during the Lease Term, Landlord receives a bona fide acceptable offer from any third party to lease space adjacent to the Premises in the Building, Landlord shall promptly provide to Tenant a written summary of the terms of such offer (including all Landlord concessions). Subject to any prior rights of other tenants in the Project, Tenant shall have the right, exercisable by written notice to that effect delivered to Landlord within five business days after receipt of the summary of terms, to elect to lease all (but not less than all) of the space which is the subject of the offer on the terms set forth in the summary. If Tenant declines to lease such space, or does not respond to such notice within the five business day period, Landlord may proceed to lease such space to such third party substantially on the terms set forth in such summary, free of any rights of Tenant. The right of refusal granted to Tenant in this Article Fourteen shall continue if Landlord does not lease the affected space to a third party, and shall be reinstated during the Lease Term from time to time as any lease of the affected space expires. ARTICLE FIFTEEN: BROKERS Tenant warrants that Tenant has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease other than the brokers identified in Section 1.08 above, and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 20 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date set forth in Section 1.01 above. LANDLORD: LM VENTURE, LLC, a Delaware limited liability company By WWG LONGMONT DEVELOPMENT, LLC, a Colorado limited liability company Manager By /s/ Robert C. Goltermann ------------------------ TENANT: EMULEX CORPORATION, a California corporation By /s/ Paul F. Folino ------------------- 21 EXHIBIT A PRELIMINARY SITE PLAN Depiction of preliminary site plan 22 EXHIBIT B LEGAL DESCRIPTION Lots 1 - 3, Block 1 CREEKSIDE BUSINESS PART FILING NO. 1 County of Boulder, State of Colorado 23 EXHIBIT C LANDLORD'S WORK Landlord's work shall include construction of a shell building together with on-site landscaping and parking, including the following: 1. Masonry insulated exterior walls, grey tinted insulated store front system, steel bar joist metal deck roof framing with ballasted 45 ml. EPDM roof over R-19 roof insulation. Slab on grade is 5" reinforced concrete. 2. Six-inch (6") sanitary sewer line within Tenant's Premises ready for Tenant connection. 3. Domestic water service to the Building is 1" meter with 1-1/2" line run to bar joists within the Premises. 4. Electrical service to the Building is a 4,000 amp bussed gutter system, of which 400 amps is available for distribution to the Premises. 5. Fire alarm control panel for Tenant connection. 6. Fire protection sprinkler system designed to meet ordinary hazard coverage. Any alterations to the base system shall be the responsibility of Tenant. 7. Base exterior building lighting (includes no interior lighting for the Building). 8. One ton HVAC per 350 square feet of the Premises mounted on roof and stubbed through the roof structure but not distributed. 9. All exterior site work required by the development plan approved by applicable governmental authorities, including landscaping, parking lot and sidewalks. 10. One single storefront door 11. Demising wall for Premises. All additional work on the Premises, including distribution of electrical and HVAC, shall be at Tenant's expense (except to the extent covered by the Tenant Allowance). EX-10.23 5 a93229exv10w23.txt EXHIBIT 10.23 EXHIBIT 10.23 FIRST AMENDMENT TO LEASE LM VENTURE, LLC, a Delaware limited liability company ("Landlord") and EMULEX CORPORATION, a California corporation ("Tenant"), hereby amend that certain Real Estate Lease between them dated September 12, 2000 (the "Lease") as set forth below. Unless otherwise indicated, capitalized terms used in this Amendment shall have the meanings set forth in the Lease. 1. LEASE OF ADDITIONAL PREMISES. Subject to the terms of the Lease as amended hereby, Landlord leases to Tenant, and Tenant leases from Landlord, the 13,587 square feet of space in the Building which is adjacent to the Premises on the west as delineated on Exhibit A attached hereto (referred to herein separately from the original Premises as the "Additional Premises"). The Additional Premises shall be added to the original Premises for all purposes of the Lease. THE COMMENCEMENT DATE FOR THE ORIGINAL PREMISES AND THE ADDITIONAL PREMISES SHALL BE THE DATE OF SUBSTANTIAL COMPLETION AS DEFINED IN SECTION 2.03 OF THE LEASE. LANDLORD ACKNOWLEDGES THAT, AS OF THE DATE OF THE MUTUAL EXECUTION OF THIS AMENDMENT, TENANT HAS NOT DELAYED OR IN ANY WAY FAILED TO MEET THE TIMELINES FOR APPROVAL SET FORTH IN ARTICLE II OF THE LEASE. 2. BASE RENT. Base Rent for the Additional Premises shall be $12.75 per square foot per annum for the first year of the Lease Term; $13.13 per square foot per annum for the second year of the Lease Term; $13.53 per square foot per annum for the third year of the Lease Term; $13.93 per square foot per annum for the fourth year of the Lease Term; and $14.35 per square foot per annum for the fifth year of the Lease Term. 3. SUBMISSION OF SPACE PLAN; CONSTRUCTION. Tenant shall, as soon as reasonably possible but in any event within 30 days after full execution of this Amendment, provide Tenant's Specifications for the Premises to Landlord for preparation of Premises Construction Documents and construction by Landlord of the Premises in accordance with the Lease. Promptly after construction plans for the Premises are prepared and approved as provided in the Lease, Landlord shall complete construction of the Premises in accordance with the approved plans. 4. FINISH ALLOWANCE. (a) Landlord shall contribute an amount equal to $20.00 per square foot of the Additional Premises (the "Additional Allowance") to cover costs associated with design and construction of Tenant Improvements to the Additional Premises (including electrical and engineering costs beyond Landlord's Work described in Exhibit C to the Lease and architectural costs beyond preparation of the initial space plan). Landlord and Tenant shall compare the total expenditures for these Tenant Improvements with the total amount of the Additional Allowance. If such expenditures are less than the Additional Allowance, Base Rent for the Additional Premises shall be reduced by the amount of such difference amortized over the initial Lease Term at the rate of 12% per annum. (b) To the extent that costs associated with design and construction exceed $20.00 per square foot (as to the Additional Premises) or $21.00 (as to the original such expenditures are in excess of the Additional Allowance, Tenant may in each case elect to have Base Rent increased by an amount equal to all or a portion of such excess costs (not exceeding $7.00 per square foot) at the rate of 12% per annum ($.12 per square foot per dollar of excess costs). Tenant shall be solely responsible for paying all such excess costs which are not incorporated into Base Rent pursuant to the previous sentence. For example, if the total cost of Tenant Improvements to the Additional Premises is $23.00 per square foot, Base Rent for the Additional Premises for the first Lease Year may, at Tenant's election, be increased by $.36 to $13.11 per square foot, which would be increased at an annual rate of 3% to determine Base Rent for the Additional Premises for subsequent Lease Years. (c) If, based on the approved budget, any portion of the cost of Tenant Improvements to the Premises will exceed the Tenant Allowance or the Additional Allowance (as applicable) and will not be incorporated into Base Rent pursuant to subparagraph (b) above, such portion shall be divided by the total cost of the Tenant Improvements to the applicable space to determine the portion ("Tenant's Percentage") which shall be the sole responsibility of Tenant. During the course of construction of the Tenant Improvements, Tenant shall pay to Landlord, within 10 days after receipt of a statement of the cost of the Tenant Improvements during any month, an amount equal to Tenant's Percentage of such monthly costs which are attributable to the space involved. When all Tenant Improvements have been completed and paid for, Landlord and Tenant shall reconcile the total expenditures for the Tenant Improvements to the total amount of the Tenant Allowance and the Additional Allowance. Tenant shall be solely responsible for promptly paying (or reimbursing Landlord for) the remaining balance (if any) of all expenses of the Tenant Improvements which are in excess of $21.00 per square foot (as to the original Premises) and $20.00 per square foot (as to the Additional Premises) and which are not to be incorporated into Base Rent pursuant to the provisions of subparagraph (b) above. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the 8th day of February, 2001. Except as expressly modified herein, the terms and conditions of the Lease remain in full force and effect. LANDLORD: TENANT: LM VENTURE, LLC, EMULEX CORPORATION, a Delaware limited liability company a California corporation By WGG LONGMONT DEVELOPMENT, LLC, a Colorado limited liability company, By /s/ Sadie A. Herrera Manager -------------------- By /s/ Robert C. Goltermann ------------------------ 2 EXHIBIT A Depiction of Premises 3 EX-21 6 a93229exv21.htm EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

Following is a list of the subsidiaries of the Company:

	Jurisdiction of
Name of Subsidiary	Incorporation
Emulex Corporation	California
Hyland Enterprise Development, Inc.	California
InterConnections, Inc. (inactive)	California
Emulex Caribe, Inc. (in process of liquidation)	Delaware
InterConnections, Inc. (inactive)	Washington
Emulex Europe Limited (inactive)	United Kingdom

EXHIBIT 21

EX-23 7 a93229exv23.htm EXHIBIT 23

INDEPENDENT AUDITORS’ CONSENT

The Board of Directors and Stockholders
Emulex Corporation:

We consent to incorporation by reference in the registration statements (Nos. 33-40959, 333-56440, 333-87090, 333-01533, 333-52842 and 333-101657) on Form S-8 and Form S-3 of Emulex Corporation of our report dated August 1, 2003, except as to note 17, which is as of August 27, 2003, with respect to the consolidated balance sheets of Emulex Corporation and subsidiaries as of June 29, 2003, and June 30, 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended June 29, 2003, and the related schedule, which report appears in the June 29, 2003, annual report on Form 10-K of Emulex Corporation. Our report refers to a change in method of accounting for goodwill and intangible assets effective July 1, 2002.

	KPMG LLP
Costa Mesa, California September 23, 2003

EXHIBIT 23

EX-31.A 8 a93229exv31wa.htm EXHIBIT 31.A

CERTIFICATIONS

I, Paul F. Folino, certify that:

     1.     I have reviewed this annual report on Form 10-K of Emulex Corporation;

     2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report in being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: September 23, 2003

/s/ Paul F. Folino

Paul F. Folino
Chief Executive Officer

EXHIBIT 31A

EX-31.B 9 a93229exv31wb.htm EXHIBIT 31.B

CERTIFICATIONS

I, Michael J. Rockenbach, certify that:

     1.     I have reviewed this annual report on Form 10-K of Emulex Corporation;

     2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report in being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: September 23, 2003

/s/ Michael J. Rockenbach

Michael J. Rockenbach
Chief Financial Officer

EXHIBIT 31B

EX-32 10 a93229exv32.htm EXHIBIT 32

EMULEX CORPORATION

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Emulex Corporation (the “Company”) on Form 10-K for the period ended June 29, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul F. Folino, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paul F. Folino

Paul F. Folino
Chief Executive Officer
September 23, 2003

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Emulex Corporation (the “Company”) on Form 10-K for the period ended June 29, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Rockenbach, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

     (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael J. Rockenbach

Michael J. Rockenbach
Chief Financial Officer
September 23, 2003

EXHIBIT 32

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.21

                                                                   EXHIBIT 10.21

                             MANUFACTURING AGREEMENT

                                     BETWEEN

                               EMULEX CORPORATION

                                       AND

                       BENCHMARK ELECTRONICS INCORPORATED

This Agreement is entered into by and between Benchmark Electronics, Inc.
("Benchmark") a Texas corporation having its principal place of business at 3000
Technology Drive, Angleton, Texas 77515, and Emulex Corporation ("Emulex"), a
California corporation having its principal place of business at 3535 Harbor
Boulevard, Costa Mesa, California 92626, and shall be effective as of the later
of the dates on which the parties execute the Agreement ("Effective Date").

Now, therefore, the parties agree as follows:

1.       DEFINITIONS

         1.1      "Product" means the Emulex product listed in Attachment A,
                  manufactured by Benchmark in accordance with this Agreement.
                  The parties may add other Emulex products to this Agreement in
                  accordance with the Product Quotation Acceptance Methodology
                  described in Section 8.

         1.2      "Product Documentation" means information required for the
                  manufacture of the Product, including BOM, AVL, drawings,
                  specifications, packaging requirements, unique test equipment,
                  test procedures, and software code.

         1.3      "Purchase Order" or "Order" means Emulex's purchase order,
                  which may be submitted to Benchmark in writing,
                  electronically, or other format mutually agreed to, and any
                  documents incorporated therein by reference.

         1.4      "Manufacturing Lead Time" means the total aggregate lead time
                  of the Material of the Product having the longest lead time,
                  plus the time necessary for receiving, inspection,
                  manufacturing, systems integration, test and shipment of the
                  Product, all as agreed by the parties.

         1.5      "Materials" means component line items, including but not
                  limited to, long lead time components, minimum and multiple
                  buys, reel quantities, components that are at time of purchase
                  by Benchmark, or become, non-cancelable non-returnable
                  components, on the BOM, which are collectively assembled to
                  produce the Product.

         1.6      "BOM" means Emulex's bill of Materials.

         1.7      "RMA" means return material authorization.

         1.8      "Obsolete Materials" means Materials on hand and/or on order
                  that can no longer be used in the Product.

                                                                    Page 1 of 23



         1.9      "Excess Materials" means Materials on hand and/or on order in
                  excess of twelve (12) weeks' forecasted demand (based upon
                  Emulex's Orders and/or then current Forecast) resulting from
                  Emulex's cancellations, reschedules, or other delays or
                  changes.

         1.10     "AVL" means Emulex's approved vendor list, updated from time
                  to time, which specifies vendors approved by Emulex to supply
                  Materials specified in a BOM, from which Benchmark may
                  purchase or procure Materials.

         1.11     "Delivery" or "Delivery Date" means the date the Product is
                  shipped from Benchmark's place of manufacture.

2.       SCOPE OF AGREEMENT

         Benchmark agrees to manufacture Products for Emulex in accordance with
         the terms and conditions of this Agreement and at the manufacturing
         locations listed in Attachment A. This Agreement is non-exclusive and
         the parties may enter into similar agreements with other parties.
         Except for Purchase Orders issued to Benchmark, Emulex shall not be
         obligated to purchase any Products from Benchmark hereunder.

         Local Contracts: If a subsidiary of Benchmark manufactures Products for
         Emulex, the sale of such Products shall be subject to the terms and
         conditions of this Agreement upon the execution by Emulex and the
         Benchmark subsidiary of a local contract incorporating all of the terms
         and conditions of this Agreement and adding any additional terms
         necessary to reflect the manufacturing and business requirements unique
         to the relationship between Emulex and the Benchmark subsidiary ("Local
         Contract"). Benchmark's subsidiary reserves the right to review the
         financial condition of Emulex prior to entering into such Local
         Contract. The Local Contract shall only be binding if signed by the
         authorized officers and/or directors of Emulex and the Benchmark
         subsidiary.

3.       TERM AND TERMINATION

         3.1      Subject to the provisions of sub-Sections 3.2 and 3.3, below,
                  the initial term of this Agreement shall be for a period of
                  one year from the Effective Date. This Agreement shall
                  automatically renew at the end of the initial term for
                  successive periods of one year each, unless one party notifies
                  the other in writing of its intent to terminate the Agreement.
                  Such notice shall be delivered no later than ninety days prior
                  to the end of the initial or renewal term then in effect.

         3.2      Emulex may terminate this Agreement and/or an Order for
                  convenience at any time by giving Benchmark at least ninety
                  days' prior written notice. Termination of the Agreement will
                  not relieve the parties of any obligations incurred prior to
                  the date of termination.

         3.3      In addition to the termination rights specified in sub-Section
                  3.2, above, either party may immediately terminate this
                  Agreement and/or an Order if the other party:

                  (a)      becomes insolvent or bankrupt, files or has filed
                           against it a petition in bankruptcy, or undergoes a
                           reorganization pursuant to a petition in bankruptcy
                           filed with respect to it; or

                                                                    Page 2 of 23



                  (b)      is dissolved or liquidated, or has a petition for
                           dissolution or liquidation filed with respect to it;
                           or

                  (c)      is subject to property attachment, court injunction,
                           or court order which substantially and negatively
                           affects its operations; or

                  (d)      makes an assignment for the benefit of creditors; or

                  (e)      ceases to function as a going concern or to conduct
                           its operations in the normal course of business.

         3.4      Either party may immediately terminate this Agreement and/or
                  an Order if the other party fails to perform any of the
                  material obligations imposed upon it under the terms of this
                  Agreement so as to be in default hereunder and fails to cure
                  such default, or to give adequate assurance of performance,
                  within thirty days after receiving written notice thereof,
                  except in the case of payment-related defaults, for which the
                  cure period shall be ten business days.

         3.5      In the event either party terminates or cancels this Agreement
                  or an Order for any reason, Emulex shall pay Benchmark, within
                  thirty (30) days of Benchmark's invoice setting forth the
                  following termination charges: (1) the price for all finished
                  Products existing (a) for termination by Benchmark, on the
                  date that the termination notice is sent to Emulex, and (b)
                  for termination by Emulex, on the date Benchmark receives the
                  termination notice; (2) Benchmark's actual and documented cost
                  (including labor, Materials and a reasonable mark-up) for all
                  work in process; (3) Benchmark's Delivered Cost (defined as
                  Benchmark's actual cost of the Materials plus a six percent
                  (6%) handling charge for freight in, importation costs,
                  receiving and inspection, stocking, cycle count, pick and
                  pack, attrition, etc.) for Materials purchased pursuant to
                  Section 7 (Forecast) herein; and (4) any vendor cancellation
                  and restocking charges, provided that Benchmark makes
                  commercially reasonable efforts to minimize the quantities of
                  such items and the amounts of such cancellation and restocking
                  fees.

         3.6      The parties hereby agree to negotiate in good faith to resolve
                  any other costs associated with the termination of the
                  Agreement or an Order that are in addition to those costs
                  specified above in Section 3.5.

4.       EMULEX PROPERTY

         4.1      Information Required for Product Manufacture

                  Subject to the provisions of Sections 5 and 16, Emulex will
                  provide Benchmark with the Product Documentation. Emulex
                  reserves the right to change the content of the Product
                  Documentation at any time, provided such changes are made
                  pursuant to the process for engineering changes in Section
                  12.1.

         4.2      Emulex-Provided Equipment and Tools

                  (a)      All Emulex owned equipment and tools (collectively
                           "Equipment") will be marked with Emulex's control
                           numbers prior to shipment to Benchmark. If Benchmark
                           purchases such Equipment on Emulex's behalf, Emulex
                           will provide Benchmark with the appropriate control
                           numbers and labels to identify it as Equipment.
                           Benchmark is authorized to use such Equipment at no
                           charge in concert with Product Documentation to
                           produce Product, and shall only be

                                                                    Page 3 of 23



                           responsible for damage to such Equipment caused by
                           Benchmark's negligence or willful misconduct. Damage
                           due to normal wear and tear and replacement of the
                           Equipment or worn or defective parts thereof and
                           maintenance or calibration of such Equipment shall be
                           the sole responsibility of Emulex unless otherwise
                           agreed by the parties.

                  (b)      Benchmark will notify Emulex if it reasonably
                           believes that Equipment is required to meet Emulex's
                           Product manufacturing requirements or schedules, and
                           will obtain Emulex's approval before purchasing such
                           Equipment. This Equipment may consist of in-circuit
                           test equipment, functional test equipment, special
                           component tooling, special assembly tooling, PCBA
                           pallets and/or other items as agreed between the
                           parties. Emulex will reimburse Benchmark for such
                           Equipment according to the terms of Section 8.2. Any
                           Equipment purchased under this Section 4.2 will
                           become the property of Emulex, and Benchmark shall
                           ship, Ex Works (Incoterm 2000) Benchmark's plant, all
                           such Equipment at the sole cost and direction of
                           Emulex upon the termination or expiration of this
                           Agreement. Notwithstanding the Ex Works shipment
                           term, Benchmark shall be responsible for loading the
                           Equipment onto the carrier's truck at Benchmark's
                           plant and shall have risk of loss for the Equipment
                           until such Equipment is loaded onto the carrier's
                           truck.

5.       INTELLECTUAL PROPERTY RIGHTS

         5.1      During the term of this Agreement, Emulex grants Benchmark
                  only those specific rights and licenses under Emulex's
                  applicable patents, copyrights, trademarks, trade names,
                  logos, and other intellectual property rights necessary for
                  Benchmark to manufacture the Products for Emulex under this
                  Agreement. Benchmark's rights and licenses granted hereunder
                  end upon termination of this Agreement.

         5.2      Benchmark shall not publicize or use the name or trademark of
                  Emulex in any manner related to this Agreement without
                  Emulex's prior written consent.

6.       APPROVAL OF VENDORS AND MATERIALS

         Emulex is responsible for any change in AVL, Materials or Product.
         Benchmark will purchase Materials only from the AVL, which will be
         provided to Benchmark by Emulex and updated as changes warrant. Emulex
         shall provide Benchmark with all updated AVL lists. Upon Benchmark's
         receipt of an updated AVL list, Benchmark will provide Emulex with an
         impact statement on any impact on the Product price, including price
         for BOM, and/or the Delivery Date of Products, and the parties shall
         mutually agree upon any necessary adjustment to Product pricing and/or
         Delivery Dates. Any changes in vendors proposed by Benchmark are
         subject to Emulex's advance written consent. If Emulex refuses to give
         such consent or fails to respond to a change in vendor proposed by
         Benchmark within five days, and if Benchmark has used commercially
         reasonable efforts to purchase Materials from approved vendors but
         shortages or allocations exist, Benchmark shall not be liable for
         failing to deliver affected Products on time.

7.       FORECASTS

         Emulex will make commercially reasonable efforts to provide Benchmark
         with a twelve-month rolling forecast, updated monthly ("Forecast");
         however, the parties acknowledge that, due to the

                                                                    Page 4 of 23



         end of life status of the Products, such Forecasts may be unavailable
         or inaccurate. Emulex authorizes Benchmark to procure Materials in
         accordance with component lead time for Orders, net of yield losses,
         and to support Forecasts. These actions may result in Excess Materials,
         which may be subject to the terms of Section 14. Emulex may limit its
         liability hereunder by specifying in writing a maximum amount of
         purchases of Materials by Benchmark in excess of Material required for
         Orders. If Emulex elects to specify a maximum amount, Benchmark will
         purchase only to that amount and will notify Emulex of the impact to
         Emulex's Orders and will not be liable for failure to deliver Products
         on time if such failure results directly from Emulex's Materials
         purchase limitations.

8.       PRICING AND PAYMENT TERMS

         8.1      The prices to be paid by Emulex for any Products ordered
                  pursuant to this Agreement shall be listed in Attachment A.
                  Any price changes to Products, or addition of new Products and
                  its prices, will be agreed to between the parties in
                  accordance with the following methodology: To introduce
                  revised prices for current Products or to add new Products and
                  its prices, Benchmark shall provide a product quotation
                  ("Product Quotation") to Emulex listing the Product and the
                  new or revised prices for each assembly of the Product. To
                  indicate Emulex's acceptance of the Product Quotation, Emulex
                  shall either provide Benchmark with written acceptance by
                  email or fax, or issue an Order or revise an existing Order,
                  to reflect the revised prices for the current Products or the
                  new Product and its prices as specified in the Product
                  Quotation ("Product Quotation Acceptance Methodology"). All
                  accepted Product Quotations shall be incorporated herein by
                  reference and made a part of this Agreement. All prices and
                  fees described or contemplated under this Agreement are in
                  U.S. dollars. Product pricing does not include federal, state,
                  or local excise, sales, or use taxes; export licensing of the
                  Product, or payment of broker's fees, duties, tariffs or other
                  similar charges; cost of compliance with any environmental
                  legislation which relates to the return of end of life Product
                  from Emulex to Benchmark for disposal; setup, tooling, or
                  non-recurring engineering activities (collectively "Charges").
                  If such Charges are applicable, they shall be set out as a
                  separate line item on Benchmark's invoice. Emulex agrees to
                  provide to Benchmark a valid Reseller's Certificate for
                  exemption from any potentially applicable sales and use taxes.

         8.2      Payment terms shall be net forty-five (45) days from the date
                  of Benchmark's invoice. On any invoice not paid by maturity
                  date, Benchmark has the right to charge Emulex interest from
                  maturity to date of payment at the rate of four percent (4%)
                  per annum, or the maximum amount permitted by law, whichever
                  is the lesser. Benchmark's invoice shall be contain the
                  following information: 1) description of the Product, 2) unit
                  price of the Product, 3) total quantity of the Product, 4) any
                  applicable Charges as a separate line item, 5) total amount of
                  the invoice, 6) date Product is shipped, 7) location Product
                  is shipped to, 8) Emulex's billing address, 9) Benchmark's
                  payment address. If the invoice contains the foregoing
                  information, it shall be deemed a correct invoice unless
                  Emulex notifies Benchmark in writing of an error in the
                  invoice within ten (10) calendar days of Emulex's receipt of
                  such invoice. If Emulex notifies Benchmark in writing of an
                  error in an invoice within such ten day period and Benchmark
                  agrees that the error specified by Emulex error exists,
                  Benchmark shall issue a revised invoice to correct the error
                  within ten (10) calendar days of Benchmark's receipt of
                  Emulex's notice. Payment of an invoice shall not constitute or
                  imply acceptance of the Product or relieve Benchmark of any

                                                                    Page 5 of 23



                  obligations assumed under this Agreement, nor prevent Emulex
                  from asserting any other rights it may have under this
                  Agreement.

         8.3      During the term of this Agreement, the parties may make price
                  adjustments for documented Materials price variances occurring
                  as a result of, without limitation, schedule adjustments,
                  worldwide supply of Materials, BOM changes, engineering
                  changes, process changes, or changes to Forecasts. Benchmark
                  shall permit Emulex to conduct an audit, at Emulex's expense,
                  of actual costs incurred by Benchmark for Product Orders at
                  the end of each quarter, provided Emulex gives Benchmark at
                  least five (5) days prior written notice and such audit is
                  conducted during normal business hours and does not unduly
                  interfere with Benchmark's business operations. Benchmark will
                  provide, upon Emulex's reasonable request, financial and other
                  information necessary to substantiate Product prices and to
                  assist the parties in identifying areas where price reductions
                  may be achieved, provided that Benchmark is not restricted
                  from doing so under applicable securities laws and/or
                  confidentiality agreements with third parties. If Benchmark is
                  subject to such confidentiality agreements, Benchmark shall
                  make all commercially reasonable efforts to obtain permission
                  to disclose the relevant information to Emulex, including
                  without limitation, requesting the relevant parties to sign
                  three-party confidentiality agreements.

         8.4      Benchmark will obtain Emulex's approval prior to procurement
                  of any Material when the actual per unit cost of any Material
                  exceeds Benchmark's quoted per unit cost for such Material (as
                  specified in Benchmark's Product Quotation) by more than 1%
                  only when Benchmark intends to increase the Product price by
                  the increased cost in the Material. Upon Emulex's approval,
                  Benchmark will invoice Emulex for the difference between the
                  actual and quoted cost of the Material, and Emulex agrees to
                  pay for all such approved costs.

9.       PURCHASE ORDERS

         9.1      Emulex will provide Benchmark with Purchase Orders in the form
                  of hard copy, by facsimile, or by electronic transfer.
                  Purchase Orders will specify part numbers, quantity, prices,
                  Product revisions, and requested Delivery Dates and locations.
                  The parties acknowledge that the Manufacturing Lead Time will
                  change due to reasons beyond Benchmark's reasonable control;
                  therefore, Benchmark will exercise commercially reasonable
                  efforts to notify Emulex immediately of any change in
                  Manufacturing Lead Time. Benchmark has the right to accept or
                  reject the Purchase Order within five (5) business days of
                  receiving the Purchase Order. If Benchmark does not accept or
                  reject the Purchase Order within the five day period, the
                  Purchase Order shall be deemed accepted provided that
                  Benchmark has actually received the Purchase Order from
                  Emulex. In the event Benchmark is unable to meet the delivery
                  schedule set forth in a proposed Purchase Order, or finds the
                  schedule to be unacceptable for some other reason, the parties
                  shall negotiate in good faith to resolve the disputed
                  matter(s).

         9.2      Benchmark will use commercially reasonable efforts to meet
                  Product quantity increases within the Manufacturing Lead Time,
                  subject to Materials availability, other scheduled
                  manufacturing, and manufacturing capacity. Any premium,
                  expediting, or other increased charges that are required in
                  order to meet Emulex's increased requirements must be approved
                  in advance by Emulex. Emulex agrees to pay for all such
                  approved costs.

                                                                    Page 6 of 23



         9.3      Emulex shall have the right to reschedule delivery for each
                  Purchase Order or partial Purchase Order without Benchmark's
                  consent under the following conditions: (i) in accordance with
                  the chart specified below; (ii) the original Delivery Date for
                  Products in each Purchase Order may only be rescheduled by
                  Emulex up to three (3) times, unless otherwise consented by
                  Benchmark; (iii) the rescheduled Delivery Date for each
                  reschedule permitted in subsection (ii) herein shall not
                  exceed the reschedule period below.



- -----------------------------------------------------------------------------------------
 Days Before Scheduled Purchase Order   Percentage Allowed To Extend
            Delivery Date                       Delivery Date          Reschedule Period
- -----------------------------------------------------------------------------------------
                                                                 
                0 - 29                               25%                    30 days
- -----------------------------------------------------------------------------------------
               30 - 59                               50%                    60 days
- -----------------------------------------------------------------------------------------
               60 - 89                               75%                    90 days
- -----------------------------------------------------------------------------------------
                 > 90                               100%                   No limit
- -----------------------------------------------------------------------------------------


         9.4      Emulex shall have the right to cancel delivery of a Purchase
                  Order without Benchmark's consent, provided however, that
                  Benchmark must be notified in writing of the cancellation at
                  least thirty days prior to the scheduled delivery date, and
                  Emulex shall be responsible for any cancellation charges
                  specified in Section 3.5.

10.      DELIVERY

         10.1     Benchmark shall follow all instructions contained in Emulex's
                  routing instructions, which Emulex will provide to Benchmark
                  and which will be specified on each Order. Emulex may modify
                  its routing instructions from time to time and will provide
                  Benchmark with an updated version of any such modified
                  instructions. Emulex is responsible for all freight charges
                  for Products that are shipped in accordance with Emulex's
                  routing instructions. Benchmark shall be responsible for any
                  freight charges incurred for Product shipped outside the
                  routing instructions to include, but not be limited to, use of
                  other than Emulex's preferred carriers. If there are any
                  conflicts between the current version of routing instructions
                  provided to Benchmark and the contents of this Section 10, the
                  current routing instructions will prevail. Benchmark and
                  Emulex will review freight forwarders for cost reduction
                  opportunities. Any changes in freight carriers will require
                  Emulex's approval.

         10.2     Deliveries will be considered on time if they are shipped no
                  more than three business days earlier or no days later than
                  the Delivery Date specified in the Emulex Purchase Order. If
                  Emulex agrees to take partial delivery of any Order, each such
                  partial delivery shall be deemed a separate sale.

         10.3     If Benchmark anticipates or becomes aware that it will not
                  supply the Product on the delivery date committed by
                  Benchmark, for any reason to include but not be limited to
                  Material shortage, process changes, capacity limitations or
                  causes due to common carriers, Benchmark shall notify Emulex
                  immediately after Benchmark has knowledge of the situation.
                  The notification may be communicated by facsimile, telephone,
                  electronic mail or any other method agreed to by the parties,
                  provided that Benchmark shall obtain Emulex's actual
                  acknowledgment of the notice of anticipated delay. Emulex and
                  Benchmark will jointly develop alternatives to resolve any
                  late delivery of the Product,

                                                                    Page 7 of 23



                  including use of premium routing. Benchmark will develop
                  recovery plans with new committed Delivery Dates and
                  communicate such plans to Emulex within 24 hours of missed
                  deliveries. If Benchmark is unable to ship the Product on the
                  committed Delivery Date due to Benchmark's fault that is not
                  excused by force majeure or that results from Benchmark's
                  negligence or willful misconduct, Emulex may require Benchmark
                  to pay for any additional charge or premium beyond the normal
                  freight fees for expedited delivery.

         10.4     Except as provided for otherwise in Sections 10.1 and 10.3,
                  above, the terms of sale are Ex Works Benchmark's place of
                  manufacture as specified in Attachment A. All shipments shall
                  be uninsured unless otherwise specified by Emulex's
                  procurement agents. Prepay and bill shipment shall be used
                  only when specified by Emulex's procurement agents. In the
                  event that prepay and bill is used, Benchmark shall indicate
                  the number of shipping containers, weight of each shipment and
                  carrier name on the invoice. Notwithstanding the Ex Works
                  shipment term, Benchmark shall be responsible for loading the
                  Products onto the carrier's truck and risk of loss and title
                  shall pass to Emulex after the Products have been loaded onto
                  the carrier's truck at Benchmark's facility.

         10.5     Each shipment of the Product by Benchmark shall include a
                  packing slip which contains, at a minimum, (i) Benchmark's
                  name, (ii) box number (e.g., 1 of 3, 2 of 3), (iii) receiving
                  address, (iv) Emulex's purchase order number, (v) Emulex's
                  part number, (vi) shipping quantity, (vii) date of shipment,
                  and (viii) RMA number when applicable.

         10.6     All Products shall be packaged, marked and otherwise prepared
                  in accordance with Product Documentation, and if none are
                  specified or required, with good commercial practices. In
                  packaging Products, Benchmark shall also take any additional
                  steps needed to ensure reasonable protection from damage due
                  to rough handling and other hazards that might occur during
                  transit. Packaging for export/import shipments may also be
                  subject to specific instructions, which Emulex will provide to
                  Benchmark in writing in the form of Product Documentation
                  pursuant to Section 4.1.

         10.7     Emulex will provide the following information about its
                  Products in writing to Benchmark: (i) country of origin; (ii)
                  Harmonized Tariff Schedule of the United States ("HTSUS") ,
                  and (iii) Export Control Classification Number ("ECCN").
                  Emulex will provide the commercial invoice. Benchmark will
                  prepare all international shipping documentation, including
                  NAFTA certificate, including NAFTA preference criteria (as
                  applicable), Shipper's Letter of Instruction, Shipper's Export
                  Declaration and any other necessary documentation for
                  international shipments. Emulex will be the exporter of
                  record.

11.      WARRANTY

         11.1     Benchmark warrants that Products provided under this Agreement
                  will be free of Benchmark's workmanship defects for a period
                  of three (3) years from date of Delivery. For the purpose of
                  this Section, "workmanship" shall mean manufacture in
                  accordance with IPC-A-610, Class 2 or Emulex's workmanship
                  standards set forth in the Product Documentation and/or
                  Quality Plan. In addition, Benchmark will pass on to Emulex
                  all manufacturer's Material warranties to the extent that they
                  are transferable, but will not independently warrant any
                  Materials.

                                                                    Page 8 of 23



         11.2     Subject to Section 11.3 below, Emulex's sole remedy and
                  Benchmark's sole obligation shall be to repair or replace, at
                  Benchmark's option, Product found to be defective in
                  accordance with Section 11.1. The warranty period for any
                  Product returned for repair or replacement shall be the
                  greater of the remainder of the original warranty period or
                  sixty (60) days from the date that the repaired or replaced
                  Product is Delivered to the Product owner.

         11.3     Benchmark's warranty shall be void if the Product has been
                  subjected to abuse, misuse, accident, disaster, neglect,
                  improper handling, testing, storage or installation (including
                  improper handling in accordance with static sensitive
                  electronic device handling requirements) and/or operation
                  outside the parameters or environment identified in Emulex's
                  Product specifications, or unauthorized repair or alterations
                  by anyone other than Benchmark. Benchmark's warranty does not
                  cover Products that have defects or failures resulting from
                  Emulex's design, specification, Product Documentation, or
                  Emulex Equipment or test software.

         11.4     Emulex shall contact Benchmark for an RMA prior to returning
                  any Product for repair. Benchmark will provide the RMA within
                  two business days of receipt (one business day for priority
                  requests) of Emulex's request. Benchmark shall pay all
                  transportation costs for valid returns of the Products to
                  Benchmark. Benchmark will exercise commercially reasonable
                  efforts to ship the repaired or replaced Product to Emulex
                  freight prepaid, Ex Works Benchmark's manufacturing facility,
                  as quickly as is practical, with the goal of shipping it by no
                  later than five days from the date Benchmark received the
                  defective Product. If Benchmark reasonably determines there is
                  an excessive number of invalid or "no defect found" ("NDF")
                  returns, Benchmark will notify Emulex and the parties shall in
                  good faith work together to resolve NDF returns and any
                  associated costs. Notwithstanding the Ex Works shipment term,
                  Benchmark shall be responsible for loading the repaired or
                  replacement Product onto the carrier's truck at Benchmark's
                  plant and shall have risk of loss for the Product until such
                  Product is loaded onto the carrier's truck.

         11.5     Out of Warranty Product Repair

                  Benchmark shall provide out of warranty Product repair during
                  the term of the Agreement and for a period of not less than
                  seven years following the last date of Benchmark's Product
                  manufacture under this Agreement, provided Materials and/or
                  custom test equipment are available to Benchmark and the
                  parties agree on pricing for such repair work. Charges for out
                  of warranty Product repair will be quoted and mutually agreed
                  to by the parties. Transportation costs to ship the
                  out-of-warranty Product to Benchmark and for Benchmark to ship
                  the repaired Product to Emulex shall be at Emulex's sole
                  expense. Benchmark's repair activities shall include, but not
                  be limited to Product (i) testing, (ii) repair, (iii) failure
                  analysis, (iv) root cause analysis, and (v) corrective
                  actions. Out of warranty Products repaired by Benchmark shall
                  be subject to all of the provisions applicable to in-warranty
                  Product set out in this Section 11 solely with respect to the
                  repair work; such warranty shall not apply to the entire
                  Product.

         11.6     THESE WARRANTY PROVISIONS ARE THE EXCLUSIVE WARRANTIES FOR ANY
                  PRODUCT PROVIDED BY BENCHMARK HEREUNDER AND SETS OUT THE
                  EXCLUSIVE REMEDIES FOR CLAIMS BASED ON DEFECTS IN

                                                                    Page 9 of 23



                  OR FAILURE OF ANY PRODUCT. NO OTHER WARRANTY, EXPRESS OR
                  IMPLIED, SHALL APPLY. BENCHMARK SPECIFICALLY DISCLAIMS THE
                  IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A
                  PARTICULAR PURPOSE. BENCHMARK FURTHER MAKES NO WARRANTY THAT
                  THE PRODUCTS WILL MEET ANY SPECIFICATIONS NOT MADE KNOWN TO
                  AND/OR EXPRESSLY AGREED TO BY BENCHMARK OR RECEIVE THE
                  APPROVAL OF OR BE CERTIFIED BY ANY FEDERAL, STATE, LOCAL, OR
                  FOREIGN GOVERNMENT AGENCY OR ANY OTHER PERSON OR CERTIFYING
                  ENTITY AND BENCHMARK ASSUMES NO RESPONSIBILITY FOR OBTAINING
                  SUCH APPROVALS OR CERTIFICATIONS.

12.      ENGINEERING CHANGES

         12.1     Emulex Requested Changes

                  (a)      In the event that changes are required to make the
                           Product conform to safety and/or regulatory agency
                           requirements or for design improvements or other
                           factors, Benchmark shall use its commercially
                           reasonable efforts to implement the proposed
                           engineering changes in existing inventory, work in
                           process, new production of the Product, and into
                           Product going through Benchmark's repair process as
                           instructed by Emulex. Emulex shall provide Benchmark
                           with written notice of any proposed engineering
                           change, including new Product Documentation, as soon
                           as possible after Emulex knows of such change. Upon
                           Benchmark's receipt of Emulex's notice of such
                           proposed engineering change, Benchmark shall provide
                           Emulex with an impact statement, including but not
                           limited to, the effect such change may have on
                           Product costs, Material (such as the BOM, Excess
                           and/or Obsolete Material), and/or Delivery Dates of
                           affected Products, and the parties shall mutually
                           agree upon such items before Benchmark implements the
                           proposed change.

                  (b)      For implementing engineering changes on previously
                           delivered Product, Emulex will request an RMA number
                           and return, or cause the return of, the affected
                           Product to Benchmark or an authorized repair facility
                           for repair or replacement at Emulex's expense. Upon
                           such repair or replacement, Benchmark shall ship, at
                           Emulex's expense, the repair or replacement Product
                           back to the Product's owner under the shipment terms
                           specified in Section 10.

         12.2     Benchmark Requested Changes

                  Benchmark may request, in writing, that Emulex evaluate an
                  engineering change to the Product or a change in the method of
                  packing, packaging, or shipment of the Product. Such request
                  will include a description of the proposed change sufficient
                  to permit Emulex to evaluate its feasibility, including the
                  impact, if any, on the Product price and Product quality
                  resulting from the proposed change.

         12.3     Cost Reductions

                  The parties agree that competitive pressures necessitate a
                  program of continuous improvement. Each party shall cooperate
                  in good faith to implement a Product cost

                                                                   Page 10 of 23



                  reduction program involving new technologies, Material cost
                  reduction, productivity, quality and reliability improvements,
                  and manufacturing processes (including cycle time and assembly
                  costs). The parties shall conduct quarterly program reviews
                  with specific emphasis on quality, delivery, and cost
                  improvements. Any cost savings which are achieved by Benchmark
                  as a result of implementing cost reductions proposed solely by
                  Emulex (without any input from Benchmark) shall reduce the
                  price of Products by the entire amount of Benchmark's cost
                  savings. Any cost savings which are achieved jointly by the
                  parties or by Benchmark as a result of changes proposed solely
                  by Benchmark shall be shared equally by the parties for a
                  period of twelve (12) months and shall be retained exclusively
                  by Emulex after twelve months. Notwithstanding the foregoing,
                  cost reductions arising out of a reduction in Material costs
                  will commence only after all current Purchase Orders have been
                  closed and all on-hand Materials have been consumed by
                  Benchmark.

         12.4     Any changed Product resulting from application of this Section
                  12 shall be considered added to this Agreement and subject to
                  its terms and conditions.

13.      PRODUCT QUALITY

         Emulex Quality Management and Benchmark shall jointly develop and
         implement a mutually acceptable quality plan for the manufacture of the
         Product ("Quality Plan") s by using the guidelines set forth in
         Attachment B. Benchmark shall use commercially reasonable efforts,
         acceptable to Emulex, to continually meet or exceed the quality and
         reliability requirements outlined in the Quality Plan.

         The current approved master revision Quality Plan shall be retained by
         Emulex Quality Management.

         The Quality Plan will pay particular attention to:

         (a)      Quality system design, maintenance and reporting

         (b)      Supplier management

         (c)      Continuous (process) improvement

         (d)      Preventive actions

         (e)      Process and change control

         (f)      Product and process traceability (as defined in Emulex's
                  General Traceability Requirements)

         (g)      Customer satisfaction and timely complaint resolution

         The effective execution of the Quality Plan will be reviewed at the
         quarterly business reviews described in Section 15.

14.      INVENTORY MANAGEMENT

         14.1     If, at any time, Materials on hand and/or on order become
                  Excess and/or Obsolete Materials, and Benchmark has procured
                  said Materials in accordance with this Agreement and used
                  commercially reasonable efforts to minimize the quantities on
                  hand and/or on order of such Excess and/or Obsolete Materials,
                  Benchmark may require Emulex to purchase such Materials at the
                  Delivered Cost price. Emulex will provide to Benchmark an
                  Order within ten days of being notified by Benchmark of
                  Materials on

                                                                   Page 11 of 23



                  hand and/or on order that are Excess or Obsolete, and will pay
                  Benchmark within thirty days of the date of Benchmark's
                  invoice.

         14.2     If Emulex desires to store Excess or Obsolete Materials at
                  Benchmark, Benchmark will provide a consignment service to
                  Emulex for a consignment fee to be mutually agreed to by
                  Emulex and Benchmark. On a monthly basis, Benchmark will
                  provide Emulex with a purchase order summarizing the quantity
                  and Delivered Cost of Materials utilized by Benchmark in the
                  previous month to manufacture Products. Upon Emulex's receipt
                  of such purchase order, Emulex shall invoice Benchmark no
                  later than thirty (30) days from such receipt. Benchmark shall
                  pay Emulex within thirty (30) days of the date of Emulex's
                  invoice.

         14.3     If Emulex elects not to store Excess or Obsolete Materials at
                  Benchmark and instead elects to have such Materials shipped to
                  Emulex or another destination designated by Emulex, Benchmark
                  will ship, at Emulex's expense, such Materials Ex Works
                  Benchmark's location. Notwithstanding the Ex Works shipment
                  term, Benchmark shall be responsible for loading the Materials
                  onto the carrier's truck at Benchmark's plant and shall have
                  risk of loss for the Materials until such Materials are loaded
                  onto the carrier's truck.

15.      REVIEW AND PLANNING MEETINGS

         15.1     Emulex hereby appoints its Director of Manufacturing as its
                  liaison to monitor Benchmark's performance and delivery of
                  Product under this Agreement. Benchmark hereby appoints its
                  designated Supplier Business Manager as its liaison to monitor
                  Emulex's performance hereunder. These liaisons will also be
                  responsible for coordinating meetings and discussions and
                  reports provided for in this Agreement. The names, telephone
                  and facsimile numbers of the liaisons will be provided by the
                  parties to each other and the liaisons may be changed by
                  written notice from one party to the other.

         15.2     Emulex's designated liaison will conduct a quarterly
                  performance and planning review with Benchmark's account
                  management team. The location and times for these meetings
                  will be determined by Benchmark and Emulex. The purposes of
                  these meetings are listed below:

                  (a)      Review Benchmark's performance over the previous
                           quarter;

                  (b)      Review action items and resolution;

                  (c)      Identify opportunities and areas of improvement;

                  (d)      Agreement on commitments, set target dates and define
                           "persons" responsible;

                  (e)      Review appropriate Benchmark reports;

                  (f)      Review Benchmark's quality and reliability
                           improvement plans; and

                  (g)      Publish minutes to EMULEX and Benchmark.

16.      CONFIDENTIAL INFORMATION

         16.1     Both parties may, in connection with this Agreement, disclose
                  to the other party information considered confidential and
                  proprietary information of the disclosing party ("Confidential
                  Information"). Information shall be considered Confidential
                  Information if identified as confidential in nature by the
                  disclosing party at the time of disclosure, or which by its
                  nature is normally and reasonably considered confidential,
                  such as

                                                                   Page 12 of 23



                  information related to past, present or future research,
                  development, or business affairs, any proprietary products,
                  materials or methodologies, manufacturing processes or
                  designs, or any other information which provides the
                  disclosing party with a competitive advantage. Neither party
                  shall disclose such Confidential Information to any third
                  party without the prior written consent of the disclosing
                  party (except that Benchmark may disclose Emulex's
                  Confidential Information to Benchmark's suppliers solely to
                  fulfill the purpose of this Agreement provided Benchmark binds
                  such supplier to substantially similar terms of
                  confidentiality and restricted use herein) nor use such
                  Confidential Information other than to fulfill the purpose of
                  this Agreement. The receiving party shall protect the
                  disclosing party's Confidential Information with the same
                  degree of care that it regularly uses to protect its own
                  Confidential Information from unauthorized use or disclosure.
                  No rights or licenses under patents, trademarks, trade
                  secrets, or copyrights are granted or implied by any
                  disclosure of Confidential Information.

         16.2     The obligations of confidentiality imposed by this Agreement
                  shall not apply to any Confidential Information that: (a) is
                  rightfully received from a third party without accompanying
                  markings or disclosure restrictions; (b) is independently
                  developed by employees of the receiving party who have not had
                  access to such Confidential Information; (c) is or becomes
                  publicly available through no wrongful act of the receiving
                  party; (d) is already known by the receiving party as
                  evidenced by documentation bearing a date prior to the date of
                  disclosure; or, (e) is approved for release in writing by an
                  authorized representative of the disclosing party. In
                  addition, each party shall be entitled to disclose the other
                  party's Confidential Information to the extent such disclosure
                  is required by the order of a court of competent jurisdiction,
                  administrative agency, or other governmental body, provided
                  that the party required to make the disclosure shall provide
                  prompt, advance notice thereof to enable the other party to
                  seek a protective order or otherwise prevent such disclosure.

         16.3     The terms and conditions of this Agreement, but not its
                  existence, are considered Confidential Information.

17.      INDEMNIFICATION

         17.1     Emulex agrees, at its expense, to defend and indemnify
                  Benchmark in any suit or action brought or any claim asserted
                  (collectively, a "Claim") against Benchmark alleging that any
                  Product or any part thereof manufactured pursuant to this
                  Agreement and in material compliance with Emulex's
                  specifications, Product Documentation and directions, and/or
                  Benchmark's use of Emulex Equipment: (i) directly or
                  indirectly infringes any patent, copyright, trademark or
                  service mark; or (ii) has caused injury to the property or
                  person of any third party, except to the extent directly
                  attributable to Benchmark's manufacturing processes. Emulex
                  will indemnify and hold Benchmark harmless from and against
                  any loss, cost, damage or expense, including without
                  limitation reasonable attorneys' fees (collectively, "Costs"),
                  incurred by Benchmark as a direct result of, including defense
                  against, any such Claim.

         17.2     Benchmark agrees, at its expense, to defend and indemnify
                  Emulex with respect to any Claim against Emulex to the extent
                  such Claim alleges that Benchmark's manufacturing processes
                  (i) directly or indirectly infringe any patent, copyright,
                  trademark or service mark; or (ii) have caused injury to the
                  property or person of any third party, provided that such
                  Claim does not relate to Emulex's specifications or written
                  instructions to

                                                                   Page 13 of 23



                  Benchmark. Benchmark will indemnify and hold Emulex harmless
                  from and against any Costs incurred by Emulex as a direct
                  result of, including defense against, any such Claim.

         17.3     Emulex will indemnify Benchmark with respect to any Claim
                  which results from or arises out of: (i) the presence of
                  Emulex, or Equipment, or Benchmark's equipment, tools, or
                  facilities ("Tools") used by Emulex in the performance of this
                  Agreement on Benchmark's property; (ii) the performance by
                  Emulex or its personnel of services for or on behalf of
                  Benchmark; (iii) the acts, errors, omissions, or negligence of
                  Emulex or Emulex's personnel that occur on Benchmark's
                  property in performance of Emulex's obligations under this
                  Agreement; or (iv) the use by Emulex of Benchmark's Tools,
                  except to the extent that any Claim is based upon the
                  condition of the Tools or Benchmark's, its agent's, or its
                  employee's alleged negligence in permitting such Tools' use.

         17.4     The indemnities in this section are provided on the condition
                  that: (i) the indemnified party promptly notifies the
                  indemnifying party in writing of any Claim; (ii) the
                  indemnifying party has sole control of the defense and all
                  related settlement negotiations (except that the indemnifying
                  party shall not settle any Claim affecting the indemnified
                  party's interest without the indemnified party's prior written
                  consent); and (iii) the indemnified party gives the
                  indemnifying party full and complete authority, information
                  and assistance to defend against such Claim and fully
                  cooperates in the defense and furnishes all related evidence
                  in its control at the indemnifying party's expense.

18.      LIMITATION OF LIABILITY

         EXCEPT WITH RESPECT TO DAMAGES TO THIRD PARTIES UNDER INDEMNIFICATION
         OBLIGATIONS OR DAMAGES PROXIMATELY CAUSED BY A BREACH OF
         CONFIDENTIALITY OBLIGATIONS SOLELY DUE TO THE BREACHING PARTY'S GROSS
         NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE
         OTHER UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER THEORY
         FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING
         WITHOUT LIMITATION LOST PROFITS, IN CONNECTION WITH THE SUBJECT MATTER
         OF THIS AGREEMENT OR ANY PURCHASE ORDER EVEN IF ADVISED OF THE
         POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY
         HEREIN, IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER FOR
         BREACH OF CONFIDENTIALITY OBLIGATIONS ARISING UNDER THIS AGREEMENT
         EXCEED ONE MILLION U.S. DOLLARS ($1,000,000.00), WITHOUT LIMITING
         INJUNCTIVE REMEDIES.

19.      INSURANCE

         19.1     Benchmark shall maintain insurance against fire, theft and
                  damage to any Emulex property held by Benchmark, including
                  without limitation consigned Materials, in-circuit test
                  fixtures, capital equipment, returned Materials and other
                  Emulex Product and property in Benchmark's possession.
                  Benchmark shall also maintain commercial general liability
                  insurance, which covers contractual liability and product
                  liability, in the amounts of $5 million per occurrence and $10
                  million in the aggregate for Benchmark's manufacturing
                  defects. Such insurance will name Emulex as an additional
                  insured with

                                                                   Page 14 of 23



                  respect to claims of bodily injury, including death, and
                  property damage to the extent such claims arise from
                  Benchmark's negligent manufacturing of the Products or is
                  proximately caused by the negligent and/or intentional acts or
                  omissions of Benchmark, and will remain in effect for a period
                  of three years after termination of this Agreement. Benchmark
                  will provide Emulex with a certificate of insurance evidencing
                  such coverage.

         19.2     Emulex shall maintain errors and omissions insurance in the
                  amounts of $5 million per occurrence and $10 million in the
                  aggregate for product liability. Such insurance will name
                  Benchmark as an additional insured and will remain in effect
                  for a period of three years after termination of this
                  agreement. Emulex will provide Benchmark with a certificate of
                  insurance evidencing such coverage.

20.      MISCELLANEOUS

         20.1     Governing Law

                  This Agreement shall be governed by and construed in
                  accordance with the laws of the state of California, without
                  regard for its rules concerning the conflicts of law. The
                  United Nations Convention on Contracts for the International
                  Sales of Goods is hereby expressly excluded from application
                  to this Agreement.

         20.2     Remedies

                  Both parties acknowledge and agree that monetary damages may
                  not be a sufficient remedy for breach of this Agreement.
                  Benchmark further acknowledges that its breach of Sections 5
                  and/or 16 of this Agreement would cause irreparable harm to
                  Emulex. Emulex also acknowledges that its breach of Section 16
                  of this Agreement would cause irreparable harm to Benchmark.
                  Therefore, the non-breaching party shall be entitled, without
                  waiving any other rights or remedies, to such injunctive
                  relief as may be deemed proper by a court of competent
                  jurisdiction.

         20.3     Relationship of the Parties

                  The parties are and shall remain at all times, independent
                  contractors in the performance of this Agreement and nothing
                  herein shall be deemed to create a joint venture, partnership
                  or agency relationship between the parties. Neither party
                  shall have the right or authority to assume or to create any
                  obligation or responsibility, express or implied, on behalf of
                  the other except as may be expressly provided otherwise in
                  this Agreement. Each party shall be solely responsible for the
                  performance of its employees hereunder and for all costs and
                  expenses of its employees, to include but not be limited to
                  employee benefits.

         20.4     Waiver

                  The failure of either party to insist upon or enforce strict
                  conformance by the other party of any provision of this
                  Agreement or to exercise any right under this Agreement shall
                  not be construed as a waiver or relinquishment of such party's
                  right unless made in writing and shall not constitute any
                  subsequent waiver or relinquishment.

                                                                   Page 15 of 23



         20.5     Amendment and Modification

                  To be valid, amendments or modifications to the Agreement must
                  be in writing and signed by authorized representatives of both
                  parties. Any verbal agreements, discussions, and
                  understandings, expressed or implied, shall not constitute an
                  amendment to this Agreement.

         20.6     Invalid Provisions

                  If any provision of this Agreement is finally held by a court
                  of competent jurisdiction to be illegal or unenforceable, the
                  legality, validity, and enforceability of the remaining
                  provisions of this Agreement shall not be affected or
                  impaired.

         20.7     Survivorship

                  The provisions of this Agreement which by their nature survive
                  termination or expiration of the Agreement, including but not
                  limited to the provisions of Section 5 (Intellectual Property
                  Rights, Section 11 (Warranty), Section 16 (Confidential
                  Information), Section 17 (Indemnification), Section 18
                  (Limitation of Liability), Section 19 (Insurance), Section
                  20.1 (Governing Law), Section 20.2 (Remedies) of this
                  Agreement shall survive the termination or expiration of this
                  Agreement. Outstanding Purchase Orders shall survive the
                  termination of this Agreement, unless Emulex or Benchmark
                  cancels the Purchase Orders in accordance with this Agreement.

         20.8     Force Majeure

                  Neither party shall be responsible for any delay in performing
                  this Agreement to the extent that such delay is caused by the
                  occurrence of unforeseen circumstances beyond a party's
                  control and without such party's negligence or intentional
                  misconduct, including, but not limited to, fire, flood,
                  hurricane, earthquake, explosion, war, acts of terrorism,
                  strike, boycott, shortage, riot, lockout, labor dispute, civil
                  commotion, embargo, government law or regulation, act by any
                  governmental authority, action of civil or military authority,
                  act of God, or act or inaction of the other party, including
                  but not limited to, failure to timely provide Equipment,
                  Product Documentation, or approval of purchase of Materials
                  under Section 4 herein.

         20.9     Successors and Assigns

                  Neither party may assign any rights hereunder without the
                  prior written consent of the other party, which consent shall
                  not be unreasonably withheld. Any assignment of rights shall
                  not work as a novation of obligations hereunder without
                  written agreement. Any attempt to assign any rights, duties or
                  obligations hereunder without the other party's written
                  consent will be void. Notwithstanding the above, either party
                  may assign this Agreement to a surviving entity in connection
                  with any merger, acquisition or consolidation of not less than
                  a majority ownership in the merged, acquired or consolidated
                  company by the surviving entity.

                                                                   Page 16 of 23



         20.10    Notices

                  Unless otherwise expressly provided for, all notices,
                  requests, demands, consents or other communications required
                  or pertaining to this Agreement shall be sent by next business
                  day courier, fax followed by confirmation by mail, e-mail, or
                  some other method that provides proof of delivery, to the
                  address set forth below:

                          EMULEX:         Emulex Corporation
                                          3535 Harbor Blvd.
                                          Costa Mesa, CA  92626
                                          Attn:  Contracts Administration

                          Benchmark:      Benchmark Electronics Huntsville, Inc.
                                          4807 Bradford Drive
                                          Huntsville, AL 35805
                                          Attn: Central Group President

                          With a copy to: Benchmark Electronics, Inc.
                                          3000 Technology Drive
                                          Angleton, Texas 77515
                                          Attn: Legal Department

                  In case of mailing, the effective date of delivery of any
                  notice, demand, or consent shall be considered to be five days
                  after proper mailing.

         20.11    Headings

                  The section and paragraph headings of this Agreement are
                  intended as a convenience only, and shall not affect the
                  interpretation of its provisions.

         20.12    Conflicting Terms

                  The parties agree that the terms and conditions of this
                  Agreement shall prevail, notwithstanding any contrary or
                  additional terms in any Purchase Order, sales acknowledgment,
                  confirmation or any other document issued by either party
                  effecting the purchase and/or sale of Products ("Documents").
                  When interpreting this Agreement, precedence shall be given to
                  the respective parts in the following descending order: (a)
                  this Agreement; (b) Attachments to this Agreement; (c)
                  Benchmark's Product Quotation accepted by Emulex and (d) if
                  Orders are used to release product, those portions of the
                  Order that are not pre-printed and which are accepted by
                  Benchmark. The Parties acknowledge that the preprinted
                  provisions on the reverse side of any Document shall be deemed
                  deleted and of no effect whatsoever.

21.      ENTIRE AGREEMENT

         This Agreement, including all Attachments, constitutes the entire
         Agreement between the parties and supersedes all prior or
         contemporaneous agreements, discussions, and understandings between the
         parties, either express or implied. The following Attachments are part
         of this Agreement and are incorporated herein by this reference.

                                                                   Page 17 of 23



         A        Product and Price Schedule

         B        Product Quality

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.

EMULEX CORPORATION                   BENCHMARK ELECTRONICS, INC.

By: /s/ Paul Folino                  By: /s/ Cary Fu
    -----------------------              --------------------------------------
(Signature)                          (Signature)

Name:   Paul Folino                  Name: Cary Fu

Title:   Chairman and CEO            Title:  President & Chief Operating Officer

Date: 6/2/03                         Date: 6/2/03

                                                                   Page 18 of 23



                                  ATTACHMENT A

                       INITIAL PRODUCTS AND PRICE SCHEDULE

1.       PRODUCT AND PRICE SCHEDULE

         The following table sets forth the Products, and Product price, which
         may be changed from time to time pursuant to Sections 8.1 and 8.3 of
         the Agreement.



- --------------------------------------------------------------------
 PRODUCT
 NUMBER      DESCRIPTION AND ANNUAL VOLUME QUOTED     INITIAL PRICE
- --------------------------------------------------------------------
                                                

- --------------------------------------------------------------------
LP9802-F2             HBA - 100,000 units                  TBD*
- --------------------------------------------------------------------

- --------------------------------------------------------------------

- --------------------------------------------------------------------

- --------------------------------------------------------------------

- --------------------------------------------------------------------


         *TBD means to be determined by mutual agreement of the parties. This is
         a non-binding forecast of annual volumes.

2.       Manufacturing Locations: 4807 Bradford Drive, Huntsville, Alabama
         35805; Circuito de Productividad #132, Parque Industrial, Guadalajara
         Las Pintas, El Salto, Jal. 45690, Mexico; 94 Moo 1, Hitech Industrial
         Estate, Banlane, Bang Pa-in, Ayudhaya 13160, Thailand; and others as
         agreed between the parties.

                                                                   Page 19 of 23



                                  ATTACHMENT B

                GUIDELINES FOR DEVELOPING A PRODUCT QUALITY PLAN

1.       PURPOSE:

         To define the methods and controls to manufacture and deliver all
         Emulex Products.

2.       SCOPE:

         All Emulex Products produced by Benchmark.

3.       RELATED DOCUMENTS:

         (a)      ISO 9000: 2000      (Quality Systems - Model for quality
                                      assurance).

         (b)      ANSI/IPC-R-700C     Modification, Rework, Repairs of Printed
                                      Boards and Assemblies

         (c)      ANSI/IPC-A-610      Workmanship Standards

         (d)      IPC-A-600           Acceptability of Printed Boards

4.       RESPONSIBILITY:

         Implementation and control of the quality plan is the responsibility of
         Benchmark's quality department in conjunction with Benchmark
         engineering and production management.

5.       MANUFACTURING QUALITY PLAN CHANGES:

         Changes to the Manufacturing Quality Plan will be agreed in writing
         between Emulex and Benchmark.

6.       DOCUMENT CONTROL:

         Benchmark will, through the relevant product engineer, ensure all
         Product changes are reviewed internally. All Product changes must be
         handled through Benchmark's ECO Procedure.

7.       ESD:

         These requirements apply to the storage, packaging, handling and
         assembly of all ESD-sensitive Materials. They also apply to items such
         as PWB's, tools, and packaging material which come into contact with
         ESD-sensitive Materials.

         Direct handling of ESD sensitive parts, including assemblies and
         Products, shall be by grounded personnel at static safe workstations.
         ESD sensitive Materials should be kept in static shielding
         containers/Metro's.

         Wrist straps and heel straps are the preferred personal grounding
         device. They are required when components or boards are handled.

         Straps are to be tested daily (before handling ESD sensitive items) and
         replaced if they do not pass. A daily log of test results must be
         current and visible.

                                                                   Page 20 of 23



         Static dissipative smocks shall be worn in areas which contain ESD
         sensitive components. These areas include production, test, shipping,
         inspection and warehouses. They should be kept clean and always be worn
         fastened with the sleeves down, touching the skin.

         Power tools, including soldering irons, need to be grounded (three
         prong plugs). Work stations and tables at which components or boards
         are not in protective packaging must have grounded surfaces.

8.       PURCHASING:

         All Materials used in the production of Emulex's Products will be
         sourced as per the AVL supplied by Emulex.

9.       GOODS RECEIVING:

         All Materials received for production of the Emulex Products will be
         inspected against the Emulex-supplied AVL. Alternative sources or parts
         may only be accepted through concession from Emulex.

         Customized parts in incoming inspection will be inspected as follows:
         visual inspection of the parts for workmanship defects, verification of
         certificate of conformity ("COC") and ensuring all parts are as per
         Emulex-supplied AVL (AQL as mutually agreed). Records will be
         maintained for the above part, verifying the COC received is
         appropriate to the specification. These records will be maintained by
         Benchmark Receiving.

10.      STORES OPERATION:

         10.1     Received goods checked against carrier paperwork to confirm
                  correct amount of packages and with no transportation damage
                  and signed for accordingly.

                  For any discrepancy with shipment, the receiving personnel
                  ensures courier acknowledges, adjusts paperwork and signed by
                  receiving personnel and courier. Copy of this paper is sent by
                  receiving to relevant buyer at Benchmark.

                  Goods are unpacked and checked against Purchase Order and
                  against supplier documentation. Any discrepancy is reported
                  directly to the relevant buyer at Benchmark. The discrepancy
                  is also recorded and is sent to relevant buyer, and the
                  Material is held until the "action" section is compiled by the
                  buyer and returned to receiving.

                  PO received quantity is confirmed

                  Cleared Materials are identified and marked accordingly.

         10.2     Material is put away by locations by stores personnel.
                  Accountability for the warehouse locations is by warehouse
                  personal individual ownership. This ownership includes, stock
                  accuracy, housekeeping, and cycle count.

         10.3     FIFO process will be maintained.

                                                                   Page 21 of 23



11.      NON CONFORMING MATERIAL REVIEW:

         Process related non-conforming material ("NCM") is reviewed and
         dispositioned in manufacturing by the appropriate engineer. Supplier
         related NCM is dispositioned at least weekly by the supplier quality
         engineer and quality, and Supplier corrective action measures are
         applied where deemed necessary.

         A secure MRB room is located the warehouse.

12.0     CONTROL AND MAINTENANCE OF MANUFACTURING, INSPECTION, MEASURING AND
         TEST EQUIPMENT:

         All manufacturing equipment shall be maintained on a regular basis and
         is included in a preventative maintenance schedule.

         All inspection, measuring and test equipment used to check conformance
         of the Product to specified requirements is subjected to a planned
         calibration program.

13.      PROCESS INSTRUCTIONS:

         Standard operating procedures are available for all automated assembly
         stages and for each PCB, placement programs and reflow/wave profiles
         are uniquely identified.

         In addition, process documentation is available for all component
         prework operations, manual assembly, box build and packing operations.

14.      PRODUCT IDENTIFICATION:

         All Products will be fitted with an assembly number and a serial number
         (which includes Product revision).

15.      MARKING AND LABELLING:

         All Products prior to shipment will have the following labels attached:
         the Emulex label, as per process instruction document.

16.      INSPECTION AND TESTING:

         All products will be 100% inspected and tested at the intervals shown
         in the process flow by production personnel. The results of this test
         are logged and retained for a minimum of two years in the Quality
         Department.

17.      REPAIR:

         The standard to be used for all rework resulting from inspection or
         test rejection will be ANSI/IPC-R-700-C, "Modification, Rework, Repairs
         of Printed Boards and Assemblies."

                                                                   Page 22 of 23



18.      DATA COLLECTION AND REPORTING:

         REFERENCED PROCEDURES: SPC Data Collection & Corrective Action
         Procedures: Doc 115 0108.

         Weekly quality reports will be provided to Emulex detailing the
         following:

         -        Inspection process stages

         -        In-circuit test

         -        Functional test

         -        Outgoing QA inspection

         This information will be provided in DPU, DPMO and % yield format

         The results from all inspection and test stations will be recorded and
         reviewed. Quality meetings will be conducted to review the SPC process
         data and corrective actions required.

19.      CUSTOMER COMPLAINTS:

         All customer complaints must be directed to the quality director who
         will immediately acknowledge the complaint by means of fax or E-mail.

         This complaint is then submitted by the quality department and all
         relevant people are automatically notified through e-mail for input to
         the CLCA system.

         Once the complaint has been submitted it is then assigned to the person
         responsible for identifying root cause and corrective/preventive
         action. This may include a short term and long tern solution also
         effective date.

         The status of a complaint is closed upon satisfactory completion of
         these actions and its effectiveness checked by quality.

         Each new customer complaint will automatically receive a new tracking
         number from the database system. All records are filed in quality.

         Customer complaints will be reviewed by site management at least
         weekly.

20.      RETURNS (RMA):

         All field returns will be returned to Benchmark in accordance with
         Benchmark's returns procedure. This procedure operates a full
         comprehensive RMA facility.

21.      RELEASE AUDITING:

         All units will be the subject of a sample audit inspection carried out
         by the quality department prior to shipment to the customer. The
         release audit consists of a visual inspection. Sample sizes will based
         on AQL as mutually agreed.

                                                                   Page 23 of 23

EX-10.22

                                                                   EXHIBIT 10.22

                                REAL ESTATE LEASE
                           (MULTIPLE TENANT BUILDING)

ARTICLE ONE:      BASIC TERMS

         This Article One contains the Basic Terms of this Lease Agreement
between the Landlord and Tenant named below. Other Articles, Sections and
Paragraphs of the Lease referred to in this Article One explain and define the
Basic Terms and are to be read in conjunction with the Basic Terms.

         Section 1.01 DATE OF LEASE: September 12, 2000.

         Section 1.02 LANDLORD: LM Venture, LLC, a Delaware limited liability
company having its principal place of business at 600 Grant St., Suite 620,
Denver, CO 80203, as further described in Section 13.01(a).

         Section 1.03 TENANT: Emulex Corporation, a California corporation
having its principal place of business at 3535 Harbor Boulevard, Costa Mesa, CA
92626.

         Section 1.04 PREMISES: The Premises consist of approximately 10,000
rentable square feet of space as delineated on the preliminary site plan
attached hereto as Exhibit A (the "Site Plan") in a multi-tenant building (the
"Building") to be known as 1921 Corporate Center Circle in Longmont, Boulder
County, Colorado, located on certain real property more particularly described
on Exhibit B attached hereto (the "Property"). The actual measurement of such
rentable square feet shall be determined exactly by Landlord's architect using
industry standard methods and shall be measured from the outside surface of
outside walls to the center of any demising walls. The Building is the second of
several buildings to be constructed on the Property and certain adjacent
property owned by Landlord (the "Project"), with the first two of such buildings
containing approximately 185,000 square feet in the aggregate.

         Section 1.05 LEASE TERM: Five (5) years beginning on the Commencement
Date (as defined in Section 2.03 below), subject to the right of Tenant to
extend the term as set forth in Section 2.01 below.

         Section 1.06 PERMITTED USES: General office and administrative
purposes, manufacturing, assembly and distribution of products.

         Section 1.07 TENANT'S GUARANTOR: None.

         Section 1.08 BROKERS: Grubb and Ellis Company (Norm Blum), representing
Landlord, and Prudential LTM Realtors (Tim Hill), representing Tenant.

         Section 1.09 COMMISSIONS: Six percent (6%) of the total net rent for
the primary term, which commission shall be split equally between Landlord's
broker and Tenant's broker.

         Section 1.10 INITIAL SECURITY DEPOSIT: None.

         Section 1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: None assigned.

         Section 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT: Tenant shall pay
to Landlord monthly Base Rent in a variable amount based on the following annual
per-square-foot rental rates for the



Premises: $12.00 for the first year of the Lease Term; $12.36 for the second
year of the Lease Term; $12.73 for the third year of the Lease Term; $13.11 for
the fourth year of the Lease Term; and $13.50 for the fifth year of the Lease
Term. Tenant shall also pay Tenant's Portion of Real Property Taxes (see Section
4.02), Utilities (see Section 4.03), Insurance Premiums (see Section 4.04),
Common Area Expenses (see Section 4.05), Impounds for Insurance Premiums and
Property Taxes (see Section 4.08), and Maintenance, Repairs and Alterations (see
Article Six). Tenant's Portion of any particular item of expense which is
separately attributable to the Premises (such as metered utilities) will be
100%. As used herein, the term "Tenant's Portion" shall mean any item of expense
which relates to the Property payable by Tenant, which shall initially be
calculated based on the ratio obtained by dividing the leasable area of the
Premises by the leasable area of the first two buildings. After completion of
other buildings in the Project from time to time, Tenant's Portion of any such
expense shall be calculated based on the ratio obtained by dividing the leasable
area of the Premises by the leasable area of all such completed buildings. For
purposes of this calculation, leasable areas shall be determined by Landlord's
architect and shall be measured from the outside surface of outside walls to the
center of any demising walls.

         Section 1.13 RIDERS: The following Riders are attached to and made a
part of this Lease: Exhibit A (Preliminary Site Plan, including delineation of
Premises); Exhibit B (Legal Description); Exhibit C (Landlord's Work).

ARTICLE TWO:      LEASE TERM; CONSTRUCTION OBLIGATIONS.

         Section 2.01 LEASE OF PROPERTY FOR LEASE TERM; OPTION TO EXTEND.
Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the
Premises from Landlord for the Lease Term specified in Section 1.05 above. In
addition, Landlord hereby grants to Tenant the option ("Option") to extend the
term of this Lease for one or two additional terms of five years each (an
"Option Term"). The Option may only be exercised in the event that Tenant is not
currently in default under any of the provisions of this Lease beyond applicable
cure periods. In order to exercise an Option, Tenant must provide written notice
of its exercise of the Option to Landlord (an "Extension Notice") at least six
months prior to the expiration of the initial Lease Term (or previously extended
Lease Term, if applicable). All terms and conditions of this Lease shall remain
in full force and effect during the Option Term (if an Option is exercised by
Tenant in accordance with this Section 2.01) except that Base Rent during the
Option Term shall be increased as set forth in Section 3.02 below. In the event
that Tenant fails to timely provide the Extension Notice, then Tenant's right to
exercise the Option shall automatically terminate. After exercise of the second
Option as set forth above, Tenant shall have no further right to extend the term
of this Lease.

         Section 2.02 CONSTRUCTION OBLIGATIONS. Tenant or its architect, with
the assistance of Landlord's architect, shall, within thirty (30) days after
execution of this Lease, provide to Landlord a copy of an initial space plan for
the Premises ("Tenant's Specifications"). Tenant's Specifications shall include
all elements necessary for the design of the Tenant Improvements, as defined
below, and be in sufficient detail to allow for preparation of the Premises
Construction Documents. Landlord shall then instruct its architect to prepare a
full set of documents for construction of the Premises in accordance with
Tenant's Specifications (the "Premises Construction Documents"). Within a
reasonable time after preparation of the Premises Construction Documents,
Landlord shall complete construction of the Building and the Premises
substantially as shown on the Site Plan in accordance with the Premises
Construction Documents and Exhibit C ("Landlord's Work"). Tenant shall be
responsible for payment of all costs relating to the design and construction of
Tenant's interior finish of the Premises ("Tenant Improvements") beyond that set
forth on Exhibit C (subject to the provisions of Section 2.04 below).

                                       2


         Section 2.03 SUBSTANTIAL COMPLETION; COMMENCEMENT DATE. The term
"Substantial Completion" as used herein shall mean that Landlord's Work is
substantially complete (as confirmed in writing by Landlord or its architect),
Tenant Improvements have been completed, and a temporary certificate of
occupancy has been issued for the Premises by the necessary governmental
authorities. Within ten (10) days after Substantial Completion, Landlord and
Tenant shall agree on a final punchlist of items to be completed or repaired.
Landlord's contractor shall complete or repair the items denoted on the
punchlist within thirty (30) days thereafter. As used in this Lease, the term
"Commencement Date" shall mean the date of Substantial Completion; provided,
however, that to the extent that Substantial Completion is delayed by any
failure of Tenant to meet the timelines for approval set forth in this Article
II, the Commencement Date shall be the date that Substantial Completion would
have been achieved absent such failure.

         Section 2.04 CONSTRUCTION ALLOWANCE.

                  (a)      Landlord shall contribute an amount equal to $21.00
         multiplied by the actual area of the Premises (the "Tenant Allowance")
         to cover costs associated with design and construction of Tenant
         Improvements in the Premises (including electrical and engineering
         costs beyond Landlord's Work described in Exhibit C and architectural
         costs beyond preparation of the initial space plan). Landlord shall
         prepare and submit to Tenant for its review and approval a budget
         consistent with local market costs for all Tenant Improvements and
         related items before work is commenced. If such budget reasonably
         reflects Tenant's Improvements and local market costs, Tenant shall
         approve such budget within seven (7) days after submission. If Tenant
         reasonably demonstrates deficiencies for either cause, Tenant and
         Landlord shall negotiate in good faith to resolve such deficiencies.
         Landlord shall use reasonable efforts in consultation with Tenant to
         maximize the efficiency and economy of construction of the Premises.
         When all Tenant Improvements have been completed and paid for, Landlord
         and Tenant shall compare the total expenditures for Tenant Improvements
         with the total amount of the Tenant Allowance. If such expenditures are
         less than the Tenant Allowance, Base Rent shall be reduced by the
         amount of such difference amortized over the initial Lease Term at the
         rate of 12% per annum. If such expenditures are in excess of the Tenant
         Allowance, Base Rent shall be increased by an amount equal to such
         excess costs (not exceeding $7.00 per square foot of the actual
         Premises) at the rate of 12% per annum ($.12 per square foot per dollar
         of excess costs). For example, if the total cost of Tenant Improvements
         is $24.00 per square foot, Base Rent for the first Lease Year shall be
         increased by $.36 to $12.36 per square foot, which would be increased
         at an annual rate of 3% to determine Base Rent for subsequent Lease
         Years.

                  (b)      If, based on the approved budget, the cost of all
         Tenant Improvements will exceed $28.00 per square foot, the amount of
         the excess shall be divided by the total cost of Tenant Improvements to
         determine the portion ("Tenant's Percentage") which shall be the sole
         responsibility of Tenant. During the course of construction of the
         Tenant Improvements, Tenant shall pay to Landlord, within 10 days after
         receipt of a statement of the cost of the Tenant Improvements during
         any month, an amount equal to Tenant's Percentage of such monthly
         costs. When all Tenant Improvements have been completed and paid for,
         Landlord and Tenant shall reconcile the total expenditures for Tenant
         Improvements to the total amount of the Tenant Allowance. Tenant shall
         be solely responsible for promptly paying (or reimbursing Landlord for)
         all expenses for Tenant Improvements in excess of $28.00 per square
         foot.

         Section 2.05 HOLDING OVER. Tenant shall vacate the Premises upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all

                                       3


damages which Landlord incurs from Tenant's delay in vacating the Premises. If
Tenant does not vacate the Premises upon the expiration or earlier termination
of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's
occupancy of the Premises shall be a "month-to-month" tenancy, subject to all of
the terms of this Lease applicable to a month-to-month tenancy, except that the
Base Rent then in effect shall be increased by twenty-five percent (25%).

ARTICLE THREE:    BASE RENT

         Section 3.01 TIME AND MANNER OF PAYMENT. Tenant shall pay Base Rent to
Landlord in the amount stated in Paragraph 1.12 (prorated for any partial month
at the beginning or end of the Lease Term) on the Commencement Date and on the
first day of each month thereafter during the Lease Term, in advance, without
offset, deduction or prior demand. Base Rent shall be payable at Landlord's
address or at such other place as Landlord may designate in writing.

         Section 3.02 BASE RENT DURING OPTION TERMS. Base Rent for each Option
Term (if exercised) shall be based on the then-prevailing market rental rate for
terms of like duration for space comparable to the Premises in the Longmont
metropolitan area prevailing at the time such Option Term commences. Landlord
shall determine such rate in good faith and advise Tenant in writing of its
proposed Base Rent for an Option Term within thirty (30) days after receipt of
the Extension Notice. In the event that Tenant disagrees with Landlord's
determination, Tenant shall so notify Landlord in writing and the parties shall
attempt in good faith to resolve the difference. In the event that the parties
do not agree upon Base Rent for an Option Term within sixty (60) days after
Landlord's receipt of the Extension Notice, the parties shall submit the issue
to mediation by a sole mediator acceptable to both parties. The direct expenses
of the mediation, including the compensation and expenses of the mediator, shall
be borne equally by the parties.

ARTICLE FOUR:     OTHER CHARGES PAYABLE BY TENANT

         Section 4.01 ADDITIONAL RENT. All charges payable by Tenant under this
Lease other than Base Rent are called "Additional Rent." Unless this Lease
provides otherwise, Tenant shall pay all Additional Rent then due with the next
monthly installment of Base Rent. The term "Rent" shall mean Base Rent and
Additional Rent.

         Section 4.02 PROPERTY TAXES.

                  (a)      REAL PROPERTY TAXES. Tenant shall pay Tenant's
         Portion of all real property taxes on the Property (including any fees,
         taxes or assessments against, or as a result of, any tenant
         improvements installed in the Premises by or for the benefit of Tenant)
         attributable to the Lease Term, as well as an equitable portion of the
         real property taxes assessed against Outlot A, CREEKSIDE BUSINESS PARK
         FILING NO. 1, which consists of open space and detention areas for the
         Property, as provided in Section 4.08 below. Landlord shall furnish
         Tenant with written evidence of annual payment of the real property
         taxes on the Property promptly after receipts are available, if
         requested by Tenant.

                  (b)      DEFINITION OF "REAL PROPERTY TAX." "Real property
         tax" means: (i) any fee, license fee, license tax, business license
         fee, commercial rental tax, levy, charge, assessment, penalty or tax
         imposed by any taxing authority against the Property; (ii) any tax on
         Landlord's right to receive rent from the Property or against
         Landlord's business of leasing the Property, in lieu of ad valorem
         property tax; (iii) any tax or charge for fire protection, streets,
         sidewalks, road

                                       4


         maintenance, refuse or other services provided to the Property by any
         governmental agency; (iv) any increase in taxes resulting from any
         reassessment of the Property due to a change of ownership, as defined
         by applicable law, or other transfer of all or part of Landlord's
         interest in the Property; and (v) any charge or fee replacing any tax
         previously included within the definition of real property tax. "Real
         property tax" does not, however, include Landlord's federal or state
         income, franchise, inheritance or estate taxes.

                  (c)      PERSONAL PROPERTY TAXES. Tenant shall pay all taxes
         charged against trade fixtures, furnishings, equipment or any other
         personal property belonging to Tenant, and shall try to have personal
         property taxed separately from the Premises.

         Section 4.03 UTILITIES. Tenant shall pay directly to the appropriate
supplier (or to Landlord on the basis of reasonable proration, as to any
utilities not separately metered to the Premises by the supplier) the cost of
all natural gas, heat, light, power, sewer service, telephone, water, refuse
disposal and other utilities and services supplied to the Premises.

         Section 4.04 INSURANCE POLICIES.

                  (a)      LIABILITY INSURANCE. During the Lease Term, Tenant
         shall maintain a policy of commercial general liability insurance
         (sometimes known as broad form comprehensive general liability
         insurance) insuring Tenant against liability for bodily injury,
         property damage (including loss of use of property) and personal injury
         arising out of the use or occupancy of the Premises, specifically
         including Tenant's use of chemicals at the Premises. Tenant shall name
         Landlord as an additional insured under such policy. The initial amount
         of such insurance shall be One Million Dollars ($1,000,000) per
         occurrence and shall be subject to reasonable periodic increases based
         upon inflation, increased liability awards, recommendation of
         Landlord's professional insurance advisors and other relevant factors,
         provided such periodic increases are not more than those amounts found
         in comparable buildings in the immediate area. The liability insurance
         obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary
         and non-contributing, and (ii) contain cross-liability endorsements.
         The amount and coverage of such insurance shall not limit Tenant's
         liability nor relieve Tenant of any other obligation under this Lease.
         Landlord may also obtain comprehensive public liability insurance in an
         amount and with coverage determined by Landlord insuring Landlord
         against liability arising out of ownership, operation, use or occupancy
         of the Property. The policy obtained by Landlord shall not be
         contributory and shall not provide primary insurance.

                  (b)      PROPERTY AND BUSINESS INTERRUPTION INSURANCE. During
         the Lease Term, Landlord shall maintain a policy of insurance covering
         loss of or damage to the Property in the full amount of its replacement
         value and including business interruption insurance in an amount
         sufficient to pay one year's rent from the Property plus estimated real
         property taxes and insurance premiums. Landlord and Landlord's
         mortgagee shall be named loss payee under such policy, as their
         interests may appear. This policy shall cover the fixtures, equipment
         and leasehold improvements in the Premises which are customarily
         insured as part of the realty (such as electric wiring and panels,
         lighting fixtures and HVAC ducts and equipment), but Tenant shall be
         solely responsible at its expense and under its management for
         separately insuring Tenant's movable tenant improvements, equipment and
         personal property located in the Premises. Such policy shall contain an
         Inflation Guard endorsement, shall not provide for any deductible
         amount greater than $10,000, and shall provide protection against all
         perils included within the classification of fire, extended coverage
         (including any perils arising from Tenant's use of chemicals at the
         Premises), vandalism, malicious mischief, special extended perils (all
         risk),

                                       5


         sprinkler leakage and any other perils which Landlord deems reasonably
         necessary (including flood and earthquake insurance, if required by any
         lender holding a security interest in the Property). Tenant shall not
         do or permit anything to be done which invalidates any such insurance
         policies.

                  (c)      PAYMENT OF PREMIUMS. Tenant shall pay its pro rata
         share of all premiums for the insurance policies covering loss or
         damage to the Property described in subsection 4.04(b) as provided in
         Section 4.08 below. Before the Commencement Date, Tenant shall deliver
         to Landlord a copy of each policy of insurance which Tenant is required
         to maintain under Section 4.04(a). At least thirty (30) days prior to
         the expiration of any such policy, Tenant shall deliver to Landlord a
         renewal of such policy. As an alternative to providing a policy of
         insurance, Tenant shall have the right to provide Landlord with a
         certificate of insurance, executed by an authorized officer of the
         insurance company, showing that the insurance which Tenant is required
         to maintain under Section 4.04(a) is in full force and effect and
         containing such other information which Landlord reasonably requires.

                  (d)      NOTICE OF CANCELLATION. Any insurance which Tenant is
         required to maintain under this Lease shall include a provision which
         requires the insurance carrier to give Landlord written notice of any
         cancellation or modification of coverage not less than ten (10) days
         prior to the effective date of change. If any insurance policy is
         cancelled on account of the business or activities of Tenant, Tenant
         shall immediately cease such activities or secure a replacement policy
         acceptable to Landlord.

                  (e)      FAILURE TO OBTAIN OR CONFIRM COVERAGE. If Tenant
         fails to deliver any policy, certificate or renewal to Landlord
         required under this Lease within the prescribed time period or if any
         such policy is cancelled or modified during the Lease Term without
         Landlord's consent, Landlord may obtain such insurance, in which case
         Tenant shall reimburse Landlord for the cost of such insurance within
         fifteen (15) days after receipt of a statement that indicates the cost
         of such insurance.

                  (f)      MINIMUM STANDARDS. Tenant shall maintain all
         insurance required under this Lease with companies holding a "General
         Policy Rating" of A-12 or better, as set forth in the most current
         issue of "Best Key Rating Guide." If at any time during the Lease Term,
         Tenant is unable to maintain the insurance required under the Lease,
         Tenant shall nevertheless maintain insurance coverage which is
         customary and commercially reasonable in the insurance industry for
         Tenant's type of business, as that coverage may change from time to
         time. Landlord makes no representation as to the adequacy of such
         insurance to protect Landlord's or Tenant's interests.

                  (g)      WAIVER OF SUBROGATION. Tenant hereby waives any and
         all rights of recovery against Landlord, or against the officers,
         employees, agents or representatives of Landlord, for loss of or damage
         to property, if such loss or damage is covered by any insurance policy
         in force (whether or not described in this Lease) at the time of such
         loss or damage. Landlord hereby waives any and all rights of recovery
         against Tenant, or against the officers, employees, agents,
         contractors, invitees, or representatives of Tenant, for loss of or
         damage to property, if such loss or damage is covered by any insurance
         policy in force (whether or not described in this Lease) at the time of
         such loss or damage. Upon obtaining the required policies of insurance,
         Landlord and Tenant shall give notice to the insurance carriers of this
         mutual waiver of subrogation.

                                       6


         Section 4.05 COMMON AREAS; USE, MAINTENANCE AND COSTS.

                  (a)      COMMON AREAS. As used in this Lease, "Common Areas"
         shall mean Outlot A, CREEKSIDE BUSINESS PARK FILING NO. 1, which
         consists of open space and detention areas for the Property, and all
         other all areas of Building and the rest of the Project which are
         available from time to time for the common use of (or otherwise
         benefit) tenants of the Building and which are not leased or held for
         the exclusive use of Tenant or other tenants, including without
         limitation parking areas, driveways, sidewalks, loading areas, access
         roads, corridors, all landscaped or planted areas (including open space
         and detention areas) and signs. Landlord may from time to time change
         the size, location, nature and use of any of the Common Areas, convert
         Common Areas to leasable areas, construct additional parking facilities
         (including parking structures) in the Common Areas, and increase or
         decrease Common Area land and/or facilities, so long as such activities
         and changes do not materially impair Tenant's use of the Premises or
         the redefined Common Areas.

                  (b)      USE OF COMMON AREAS. Tenant shall have the
         nonexclusive right (in common with other tenants and all others to whom
         Landlord has reasonably granted or may reasonably grant such rights) to
         use the Common Areas for the purposes intended, subject to such
         reasonable rules and regulations as Landlord may establish from time to
         time (the "Rules and Regulations"). Tenant shall abide by the Rules and
         Regulations and shall use its best effort to cause others who use the
         Common Areas with Tenant's express or implied permission to abide by
         the Rules and Regulations. At any time, Landlord may close any Common
         Areas to perform any acts in the Common Areas which, in Landlord's
         judgment, are desirable to maintain the Property. Tenant shall not
         interfere with the rights of Landlord, other tenants or any other
         person entitled to use the Common Areas, provided such closures or acts
         do not materially impair Tenant's use of the Premises and Common Areas.

                  (c)      VEHICLE PARKING. Tenant's parking in the parking
         areas of the Property shall not be reserved, and shall be limited to
         vehicles no larger than standard size automobiles or pickup utility
         vehicles. There will be unreserved parking spaces available to Tenant
         at a ratio of 4:1. Temporary parking of delivery trucks and other large
         vehicles on the Property shall only be permitted as contemplated in the
         Site Plan and in accordance with the Rules and Regulations. Vehicles
         shall be parked only in striped parking spaces and not in driveways,
         loading areas or other locations not specifically designated for
         parking. Handicapped spaces shall only be used by those legally
         permitted to use them.

                  (d)      MAINTENANCE OF COMMON AREAS. Landlord shall maintain
         the Common Areas in good order, condition and repair, and shall operate
         the Property as a first-class office/warehouse/industrial real
         property. Tenant shall pay Tenant's Portion of all reasonable and
         necessary costs incurred by Landlord for the operation and maintenance
         of the Common Areas. Common Area costs include, without limitation,
         costs and expenses for the following: gardening and landscaping;
         utilities, water and storm sewer charges; maintenance of signs (other
         than tenant's signs); premiums for liability, property damage, fire and
         other types of casualty insurance on the Common Areas and worker's
         compensation insurance; all property taxes and assessments levied on or
         attributable to the Common Areas and all Common Area improvements; all
         personal property taxes levied on or attributable to personal property
         used in connection with the Common Areas; straight-line depreciation on
         personal property owned by Landlord which is consumed in the operation
         or maintenance of the Common Areas; rental or lease payments paid by
         Landlord for rented or leased personal property used in the operation
         or maintenance of the Common Areas; fees for required licenses and
         permits; repairing, resurfacing, painting, lighting,

                                       7


         cleaning, refuse removal, security and similar items; reserves for roof
         replacement and exterior painting and other appropriate reserves; and a
         reasonable allowance to Landlord or Landlord's agent (which may include
         Chandelle Development LLC, an affiliate of Landlord) for management and
         supervision of the Common Areas (not to exceed market rates for similar
         properties in the Longmont, Colorado, metropolitan area). Landlord may
         cause any or all of such services to be provided by third parties, and
         the cost of such services shall be included in Common Area costs.
         Common Area costs shall not include depreciation of real property which
         forms part of the Common Areas.

                  (e)      PAYMENT OF COMMON AREA COSTS. Landlord shall estimate
         in advance all Common Area costs payable by Tenant hereunder for each
         calendar year during the term of this Lease, and shall provide
         statements of such estimated costs to Tenant annually (provided,
         however, that Landlord may adjust such estimates at any time based upon
         Landlord's experience and reasonable anticipation of costs). Tenant
         shall pay Tenant's annual pro rata share of all Common Area costs
         (prorated for any fractional month) in monthly installments
         concurrently with payment of Base Rent. Within ninety (90) days after
         the end of each calendar year of the Lease term, Landlord shall deliver
         to Tenant a statement prepared in accordance with generally accepted
         accounting principles setting forth, in reasonable detail, the actual
         Common Area costs paid or incurred by Landlord during the preceding
         calendar year and Tenant's Portion thereof. Upon receipt of such
         statement, there shall be an adjustment between Landlord and Tenant,
         with payment to or credit given by Landlord (as the case may be) so
         that Landlord shall receive the entire amount of Tenant's Portion of
         such costs and expenses for such period.

         Section 4.06 LATE CHARGES. Tenant's failure to pay Rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any Rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.

         Section 4.07 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
ten percent (10%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.

         Section 4.08 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
exclusive of those premiums payable by Tenant under Section 4.04(a), together
with each payment of Base Rent.

ARTICLE FIVE:     USE OF PROPERTY

         Section 5.01 PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.

                                       8


         Section 5.02 MANNER OF USE. Tenant shall not cause or permit the
Premises to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which interferes with the rights
of owners or occupants of adjacent properties, or which constitutes a nuisance
or waste. Tenant shall obtain and pay for all permits, including a Certificate
of Occupancy, required for Tenant's occupancy of the Premises and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Premises, including the Occupational Safety and Health Act and all laws and
regulations regarding the use, storage and disposal of anything used in its
manufacturing or otherwise.

         Section 5.03 HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Notwithstanding the foregoing, materials commonly used as
office supplies, including without limitation items such as printer toner, shall
not be considered to be Hazardous Materials. Tenant shall not cause or permit
any Hazardous Material to be generated, produced, brought upon, used, stored,
treated or disposed of in or about the Property by Tenant, its agents,
employees, contractors, sublessees or invitees without the prior written consent
of Landlord. Landlord shall be entitled to take into account such other factors
or facts as Landlord may reasonably determine to be relevant in determining
whether to grant or withhold consent to Tenant's proposed activity with respect
to Hazardous Material. In no event, however, shall Landlord be required to
consent to the installation or use of any storage tanks on the Property. Tenant
shall bear no liability for any Hazardous Materials present or discovered on the
Property prior to the commencement of this Lease.

         Section 5.04 SIGNS AND AUCTIONS. Tenant shall be entitled to install
signage conforming to building standard guidelines on the outside of the
Building near the main entrance to the Premises and to be identified on the
Building monument sign, but shall not place any other signs on the Property
without Landlord's prior written consent. Tenant shall not conduct or permit any
auctions or sheriff's sales at the Property.

         Section 5.05 INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from
(i) Tenant's use of the Premises, (ii) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any adjacent property resulting
from the presence or use of Hazardous Material caused or permitted by Tenant,
(iii) any breach or default in the performance of Tenant's obligations under
this Lease, (iv) any misrepresentation or breach of warranty by Tenant under
this Lease, or (v) other acts or omissions of Tenant in violation of this Lease.
Tenant shall defend Landlord against any such cost, claim or liability at
Tenant's expense with counsel reasonably acceptable to Landlord. As a material
part of the consideration to Landlord, Tenant hereby assumes all risk of damage
to property or injury in the Premises to Tenant's employees, agents,
contractors, or invitees arising from any cause unrelated to Landlord's
responsibilities hereunder, and Tenant hereby waives all claims in respect
thereof against Landlord, except for any claim arising out of Landlord's
negligence, willful misconduct, or breach of this Lease. For purposes of this
Section 5.05, the term "Tenant" shall include Tenant's employees, agents,
assignees, and contractors, except to the extent such definition creates
personal obligations or liabilities for such persons and/or entities.

                                       9


         Section 5.06 LANDLORD'S ACCESS. Landlord or its agents may enter the
Premises at all reasonable times to show the Premises to potential buyers,
investors, or, during the last six (6) months of the Lease Term, to prospective
lessees, to inspect and conduct tests in order to monitor Tenant's compliance
with all applicable environmental laws and all laws governing the presence and
use of Hazardous Material, or for any other purpose Landlord deems necessary.
Except in the case of an emergency, Landlord shall give Tenant prior notice of
such entry and Tenant shall have the right, if it has reasonable suspicions, to
approve who may tour or inspect the Premises, to designate an agent of Tenant to
accompany Landlord on any inspection, or to devise reasonable procedures to
ensure that no trade secrets or confidential information is being
misappropriated or taken.

         Section 5.07 QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Premises for
the full Lease Term, subject to the provisions of this Lease.

ARTICLE SIX:      CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS

         Section 6.01 CONDITION OF PREMISES. Tenant understands and agrees that
Tenant shall make its own inspection of and inquiry regarding the condition of
the Premises upon Substantial Completion and shall accept the Premises in its
condition at that time, subject to Landlord's obligation to have completed
Landlord's Work in good and workmanlike manner and to complete all punch list
items identified at that time. Except as provided herein, Tenant acknowledges
that neither Landlord nor any agent of Landlord has made any representation as
to the condition of the Property or the suitability of the Premises for Tenant's
intended use.

         Section 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant, or
Tenant's employees, invitees, or customers in or about the Property, whether
such damage or injury is caused by or results from (i) fire, steam, electricity,
water, gas or rain, (ii) the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures or any other cause, or (iii) conditions arising in or about the
Property, or from other sources or places. Landlord shall not be liable for any
such damage or injury even though the cause of or the means of repairing such
damage or injury are not accessible to Tenant. The provisions of this Section
6.02 shall not, however, exempt Landlord from liability for Landlord's
negligence or willful misconduct, or breaches of its obligations under this
Lease.

         Section 6.03 LANDLORD'S OBLIGATIONS. Except as provided in Article
Seven (Damage and Destruction) and Article Eight (Condemnation), Landlord shall
maintain in good condition and repair the foundations, exterior walls and roof
of the Building (including painting the exterior surface of the exterior walls
of the Building not more frequently than once every five years if necessary) and
all components of electrical, mechanical, plumbing, heating and air conditioning
systems and facilities located in the Building which are concealed or used in
common by tenants of the Building. Landlord shall not be obligated to maintain
or repair the windows, doors, plate glass or the interior surfaces of exterior
walls of the Premises, or any HVAC system or other system which serves only the
Premises. Landlord shall make repairs under this Section 6.03 within a
reasonable time after receipt of written notice from Tenant of the need for such
repairs. Tenant shall pay or reimburse Landlord for all reasonable costs
Landlord incurs under this Section 6.03 as Common Area costs as provided in
Section 4.05 above. Tenant waives the benefit of any statute in effect now or in
the future which might give Tenant the right to make repairs at Landlord's
expense.

                                       10


         Section 6.04 TENANT'S OBLIGATIONS.

                  (a)      Except as provided in Section 6.03, Article Seven
         (Damage and Destruction) and Article Eight (Condemnation), Tenant shall
         keep all portions of the Premises in good order, condition and repair
         (including interior repainting and refinishing, as needed). If any
         portion of the Premises or any system or equipment in the Premises
         which Tenant is obligated to repair cannot be fully repaired or
         restored, Tenant shall promptly replace such portion of the Premises or
         systems or equipment in the Premises, and any capital replacement
         required shall be amortized over its useful life. Tenant shall maintain
         a preventive maintenance contract providing for the regular inspection
         and maintenance of the heating and air conditioning system by a
         licensed heating and air conditioning contractor. If any part of the
         Property is damaged by any act or omission of Tenant, Tenant shall pay
         Landlord the cost of repairing or replacing such damaged property,
         whether or not Landlord would otherwise be obligated to pay the cost of
         maintaining or repairing such property. It is the intention of Landlord
         and Tenant that at all times Tenant shall maintain the portions of the
         Premises which Tenant is obligated to maintain in an attractive,
         first-class and fully operative condition.

                  (b)      Tenant shall fulfill all of Tenant's obligations
         under this Section 6.04 at Tenant's sole expense. If Tenant fails to
         maintain, repair or replace the Premises as required by this Section
         6.04, Landlord may, upon ten (10) days prior written notice to Tenant
         (except that no notice shall be required in the case of an emergency),
         enter the Premises and perform such maintenance or repair (including
         replacement, as needed) on behalf of Tenant. In such case, Tenant shall
         reimburse Landlord for all reasonable costs incurred in performing such
         maintenance or repair immediately upon demand.

         Section 6.05 ALTERATIONS, ADDITIONS AND IMPROVEMENTS.

                  (a)      Tenant shall not make any alterations, additions or
         improvements to the Premises without Landlord's prior written consent,
         except for non-structural alterations which do not exceed Twenty
         Thousand Dollars ($20,000) in cost annually and which are not visible
         from the outside of the Building. Landlord may require Tenant to
         provide lien and completion bonds in form and amount satisfactory to
         Landlord. Tenant shall promptly remove any alterations, additions or
         improvements constructed in violation of this Paragraph 6.05(a) upon
         Landlord's written request. All alterations, additions and improvements
         shall be done in a good and workmanlike manner, in conformity with all
         applicable laws and regulations, and by a contractor approved by
         Landlord. Upon completion of any such work, Tenant shall provide
         Landlord with "as built" plans.

                  (b)      Tenant shall pay when due all valid claims for labor
         and material furnished to the Premises. Tenant shall give Landlord at
         least twenty (20) days' prior written notice of the commencement of any
         work on the Premises, regardless of whether Landlord's consent to such
         work is required. Landlord may elect to record and post notices of
         non-responsibility on the Premises. In the event that any lien or
         notice of lien is recorded against the Property as a result of any work
         performed by or at the request of Tenant, Tenant shall, within thirty
         (30) days thereafter, cause such lien or notice of lien to be released
         of record; provided, however, that Tenant shall have the right to
         contest such lien or notice of lien by appropriate proceedings if
         Tenant establishes a bond or other customary security in favor of
         Landlord within such time.

                  (c)      Upon termination of this Lease, Tenant shall not have
         the right to remove any equipment or fixtures installed at the Property
         unless, prior to installation of any such equipment

                                       11


         or fixtures, Tenant shall notify Landlord in writing of such
         installation and of Tenant's intent to retain ownership of such
         equipment or fixtures and Landlord agrees in writing that such
         equipment may be installed at the Premises and shall remain the
         property of Tenant. Any such equipment or fixtures so installed at the
         Premises with the written agreement of Landlord shall be considered to
         be "Tenant's Equipment" for purposes of Section 6.06 below.

         Section 6.06 CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements prior to the
expiration of the Lease and to restore the Premises to its prior condition, all
at Tenant's expense, provided that Landlord notifies Tenant at the time of
Landlord's consent to such alterations, additions, or improvements that they
must be removed upon termination of the Lease. All alterations, additions and
improvements which Landlord has not, at the time of approval, required Tenant to
remove shall be Landlord's property and shall be surrendered to Landlord upon
the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's Equipment which can be removed without material damage to
the Premises. Tenant shall repair, at Tenant's expense, any damage to the
Premises caused by the removal of any of Tenant's Equipment. In no event shall
Tenant remove any of the following materials or equipment (which shall be deemed
Landlord's property) without Landlord's prior written consent: any power wiring
or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds
or other window coverings; carpets or other floor coverings; heaters, air
conditioners (except supplemental HVAC equipment not included in the Premises
Construction Documents that has been installed in the Premises and paid for by
Tenant) or any other heating or air conditioning equipment; fencing or security
gates; or other similar building operating equipment and decorations.

ARTICLE SEVEN:    DAMAGE OR DESTRUCTION

         Section 7.01 PARTIAL DAMAGE TO PREMISES.

                  (a)      Tenant shall notify Landlord in writing immediately
         upon the occurrence of any damage to the Premises. If the Premises is
         only partially damaged (that is, less than thirty three percent (33%)
         of the Premises is untenantable as a result of such damage or less than
         thirty three percent (33%) of Tenant's operations are materially
         impaired) and can be repaired within six months, and if insurance
         proceeds are sufficient to pay for the necessary repairs, this Lease
         shall remain in effect and Landlord shall repair the damage to the
         Premises (including Tenant's fixtures, equipment and improvements, to
         the extent of available insurance proceeds) as soon as reasonably
         possible.

                  (b)      If the insurance proceeds are not sufficient to pay
         the entire cost of repair, or if the cause of the damage is not covered
         by the insurance policies which Landlord maintains under Paragraph
         4.04(b), Landlord may elect either to (i) repair the damage as soon as
         reasonably possible, in which case this Lease shall remain in full
         force and effect, or (ii) terminate this Lease as of the date the
         damage occurred. Landlord shall notify Tenant within thirty (30) days
         after receipt of notice of the occurrence of the damage whether
         Landlord elects to repair the damage or terminate the Lease. If
         Landlord elects to repair the damage, Tenant shall (subject to the
         terms of this Lease) pay Landlord the "deductible amount" (if any)
         under Tenant's insurance policies and, if the damage was due to an act
         or omission of Tenant, or Tenant's employees, agents,

                                       12


         contractors or invitees, the difference between the actual cost of
         repair and any insurance proceeds received by Landlord.

                  (c)      If the damage to the Premises occurs during the last
         six (6) months of the Lease Term or any Option Term and such damage
         will require more than sixty (60) days to repair, either Landlord or
         Tenant may elect to terminate this Lease as of the date the damage
         occurred, regardless of the sufficiency of any insurance proceeds. The
         party electing to terminate this Lease shall give written notification
         to the other party of such election within thirty (30) days after
         Tenant's notice to Landlord of the occurrence of the damage.

         Section 7.02 SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever, or if damage to the
Premises is greater than partial damage as described in Section 7.01, this Lease
shall terminate as of the date the destruction occurred, regardless of whether
Landlord receives any insurance proceeds. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six months after the date of
destruction, Landlord may elect to rebuild the Property at no expense to Tenant,
the parties may agree that this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after the
occurrence of total or substantial destruction. If Landlord so elects, Landlord
shall rebuild the Property at Landlord's sole expense, except that if the
destruction was caused by an unpermitted act or omission of Tenant under this
Lease, or Tenant's employees, agents, contractors or invitees, Tenant shall pay
Landlord the difference between the actual cost of repair and any insurance
proceeds received by Landlord.

         Section 7.03 TEMPORARY REDUCTION OF RENT. If the Premises are destroyed
or damaged and Landlord or Tenant repairs or restores the Premises pursuant to
the provisions of this Article Seven, Base Rent and Additional Rent shall be
equitably abated, as of the date of the casualty, based on the extent to which
the Premises are unusable by Tenant. Tenant shall not be entitled to any
compensation, reduction or reimbursement from Landlord as a result of any
damage, destruction, repair or restoration of or to the Premises.

         Section 7.04 WAIVER. Tenant waives the protection of any statute, code
or judicial provision which grants a tenant the right to terminate a lease in
the event of a substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction of the Property.

ARTICLE EIGHT:    CONDEMNATION

         If all or any portion of the Premises is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the Premises is taken or
such part thereof as shall substantially interfere with Tenant's use and
occupancy of the Premises, either Landlord or Tenant may terminate this Lease as
of the date the condemning authority takes title or possession, by delivering
written notice to the other within ten (10) days after receipt of written notice
of such taking (or, in the absence of such notice, within ten (10) days after
the condemning authority takes title or possession). If neither Landlord nor
Tenant terminates this Lease, this Lease shall remain in effect as to the
portion of the Premises not taken, except that the Rent shall be reduced in
proportion to the reduction (if any) in the floor area of the Premises. Any
Condemnation award or payment shall be distributed in the following order: (a)
first, to any ground lessor, mortgagee or beneficiary under a deed of trust
encumbering the Property, the amount of its interest in the Property; (b)
second, to Tenant, only the amount of any award

                                       13


specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and (c) third, to Landlord, the remainder of such
award, whether as compensation for reduction in the value of the leasehold, the
taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall
repair any damage to the Premises or the remainder of the Property caused by the
Condemnation, except that Landlord shall not be obligated to repair any damage
for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.

ARTICLE NINE:     ASSIGNMENT AND SUBLETTING

         Section 9.01 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void.

         Section 9.02 TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Premises, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.

         Section 9.03 NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the Rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee.

         Section 9.04 OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Premises, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until terminated and the
provisions of Section 9.05 with respect to any proposed transfer shall continue
to apply.

         Section 9.05 LANDLORD'S CONSENT. Tenant's request for consent to any
transfer described in Section 9.01 shall set forth in writing the details of the
proposed transfer, including the name, business and financial condition of the
prospective transferee, financial details of the proposed transfer (such as the
term of and the rent and security deposit payable under any proposed assignment
or sublease), and any other information Landlord deems relevant. Landlord shall
have the right to withhold consent, if reasonable, or to grant consent, based on
the following factors: (i) the business of the proposed assignee and the
proposed use of the Premises; (ii) the net worth and financial reputation of the
proposed assignee; and (iii) Tenant's compliance with all of its obligations
under the Lease. If Landlord objects to a proposed assignment solely because of
the net worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign) all or a portion of the Premises to the
proposed transferee, but only on the other terms of the proposed transfer.

                                       14


         Section 9.06 NO MERGER. No merger shall result from Tenant's sublease
of the Premises under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all sub-tenancies or succeed to the interest of Tenant as
sub-landlord under any or all sub-tenancies.

ARTICLE TEN:      DEFAULTS; REMEDIES

         Section 10.01 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.

         Section 10.02 DEFAULTS. Tenant shall be in material default under this
Lease:

                  (a)      if Tenant fails to pay Base Rent within ten days
         after receipt of written notice from Landlord that payment is due
         hereunder, or fails to pay any Additional Rent hereunder within ten
         (10) days after written notice from Landlord that such payment is due;

                  (b)      if Tenant fails to perform any of Tenant's
         non-monetary obligations under this Lease for a period of thirty (30)
         days after written notice from Landlord (provided, however, that if
         more than thirty (30) days are required to complete such performance,
         Tenant shall not be in default if Tenant commences such performance
         within the 30-day period and thereafter diligently pursues its
         completion); or

                  (c)      if (i) Tenant makes a general assignment or general
         arrangement for the benefit of creditors, (ii) if a petition for
         adjudication of bankruptcy or for reorganization or rearrangement is
         filed by or against Tenant and is not dismissed within thirty (30)
         days, (iii) a trustee or receiver is appointed to take possession of
         substantially all of Tenant's assets located at the Premises or of
         Tenant's interest in the Lease and possession is not restored to Tenant
         within thirty (30) days, or (iv) substantially all of Tenant's assets
         located at the Premises or of Tenant's interest in the Lease is
         subjected to attachment, execution or other judicial seizure which is
         not discharged within thirty (30) days.

Any notice required by this Section 10.02 is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in addition to any
such requirement.

         Section 10.03 REMEDIES. On the occurrence of any material uncured
default by Tenant, Landlord may take any of the following actions at any time
thereafter, with notice and without limiting Landlord in the exercise of any
right or remedy which Landlord may have.

                  (a)      Landlord may terminate Tenant's right to possession
         of the Premises by any lawful means, in which case this Lease, at
         Landlord's option and election, shall terminate and Tenant shall
         immediately surrender possession of the Premises to Landlord. In such
         event, Landlord shall be entitled to recover from Tenant all damages
         incurred by Landlord by reason of Tenant's default, including (i) the
         worth at the time of the award of the unpaid Base Rent and all
         Additional Rent and other charges which Landlord has earned at the time
         of the termination, (ii) the worth at the time of the award of the
         amount by which the unpaid Base Rent and all Additional Rent and other
         charges which Landlord would have earned after termination until the

                                       15



         time of the award exceed the amount of such rental loss that Landlord
         could have reasonably avoided; (iii) the worth at the time of the award
         of the amount by which the unpaid Base Rent and all Additional Rent and
         other charges which Tenant would have paid for the balance of the Lease
         Term after the time of the award exceeds the amount of such rental loss
         that Landlord could have reasonably avoided; and (iv) any other amount
         necessary to compensate Landlord for all the detriment proximately
         caused by Tenant's failure to perform its obligations under the Lease
         or which in the ordinary course of things would be likely to result
         therefrom, including, but not limited to, any costs or expenses
         Landlord incurs in maintaining or preserving the Premises after such
         default, the cost of recovering possession of the Premises, expenses of
         reletting, including necessary renovation or alteration of the
         Premises, Landlord's reasonable attorneys' fees incurred in connection
         therewith, and any real estate commission paid or payable. As used in
         subparts (i) and (ii) above, the "worth at the time of the award" is
         computed by allowing interest on unpaid amounts at the rate of ten
         percent (10%) per annum, or such lesser amount as may then be the
         maximum lawful rate. As used in subpart (iii) above, the "worth at the
         time of the award" is computed by discounting such amount at the
         discount rate of the Federal Reserve Bank of San Francisco at the time
         of the award plus one percent (1%).

                  (b)      Landlord may maintain Tenant's right to possession,
         in which case this Lease shall continue in effect whether or not Tenant
         has abandoned the Premises. In such event, Landlord shall be entitled
         to enforce all of Landlord's rights and remedies under this Lease,
         including the right to recover the rent as it becomes due.

                  (c)      Landlord may pursue any other remedy now or hereafter
         available to Landlord under the laws or judicial decisions of the state
         in which the Property is located.

If Tenant has performed a material default beyond any cure periods and has
abandoned the Premises, Landlord shall have the option of retaking possession of
the Premises and recovering from Tenant the amount specified in subparagraph (a)
above, or proceeding under subparagraph (b) above. All rights and remedies
provided to Landlord hereunder are cumulative with all other rights and remedies
provided hereunder or otherwise available at law or in equity, and Landlord's
exercise of any right or remedy shall not prevent it from exercising any other
right or remedy.

         Section 10.04 AUTOMATIC TERMINATION. At Landlord's election, this Lease
shall terminate on the occurrence of any act to terminate the Lease as provided
in Section 10.03 hereof, including the filing of an unlawful detainer action
against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Premises. All such damages suffered (apart from Base Rent and
Additional Rent payable hereunder) shall constitute pecuniary damages which must
be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.

         Section 10.05 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy hereunder shall not preclude it from exercising any other available right
or remedy.



                                       16



ARTICLE ELEVEN:   PROTECTION OF LENDERS

         Section 11.01 SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Premises during the Lease Term shall
not be disturbed if Tenant pays the Rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
such ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior to subsequent to the date of such
ground lease, deed of trust or mortgage or the date of recording thereof.

         Section 11.02 ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Premises upon the transfer
of Landlord's interest, provided that Tenant's right to quiet possession of the
Premises during the Lease Term shall not be disturbed if Tenant pays the Rent
and performs all of Tenant's obligations under this Lease and is not otherwise
in default.

         Section 11.03 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
business days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.

         Section 11.04 ESTOPPEL CERTIFICATES.

                  (a)      Upon Landlord's written request, Tenant shall
         execute, acknowledge and deliver to Landlord a written statement
         certifying: (i) that none of the terms or provisions of this Lease have
         been changed (or if they have been changed, stating how they have been
         changed); (ii) that this Lease has not been cancelled or terminated;
         (iii) the last date of payment of the Base Rent and Additional Rent and
         the time period covered by such payment; (iv) that Landlord is not in
         default under this Lease (or, if Landlord is claimed to be in default,
         stating why); and (v) such other representations or information with
         respect to Tenant or the Lease as Landlord may reasonably request or
         which any prospective purchaser or encumbrancer of the Property may
         require. Tenant shall deliver such statement to Landlord within ten
         (10) business days after Landlord's request. Landlord may give any such
         statement by Tenant to any prospective purchaser or encumbrancer of the
         Property, who may rely conclusively upon such statement as true and
         correct.

                  (b)      If Tenant does not deliver such statement to Landlord
         within such ten business day period, Landlord, and any prospective
         purchaser or encumbrancer, may conclusively presume and rely upon the
         following facts: (i) that the terms or provisions of this Lease have
         not been changed except as otherwise represented by Landlord; (ii) that
         this Lease has not been cancelled or terminated except as otherwise
         represented by Landlord; (iii) that not more than one

                                       17



         month's Base Rent or Additional Rent have been paid in advance; and
         (iv) that Landlord is not in default under this Lease. In such event,
         Tenant shall be estopped from denying the truth of such facts.

         Section 11.05 TENANT'S FINANCIAL CONDITION. Tenant hereby warrants,
represents, and agrees that it has the financial ability to perform all
obligations and covenants hereunder. Tenant shall, if requested by Landlord,
provide reasonable current financial statements to be provided to prospective
lenders or purchasers to facilitate the financing, refinancing or sale of the
Property. Tenant represents and warrants to Landlord that each such financial
statement will be a true and accurate statement as of the date thereof.

ARTICLE TWELVE:   LEGAL COSTS

         Section 12.01 LEGAL PROCEEDINGS. If Tenant or Landlord shall be
adjudged to be in breach or default under this Lease, and, if in any action for
breach of or to enforce the provisions of this Lease, the court in such action
awards to the party in whose favor a judgment is entered a reasonable sum as
attorneys' fees and costs, the losing party in such action shall pay such
reasonable attorneys' fees and costs. Tenant shall also indemnify Landlord
against and hold Landlord harmless from all costs, expenses, demands and
liability that Landlord may incur if Landlord becomes or is made a party to any
claim or action which is: (a) instituted by Tenant against any third party, or
by any third party against Tenant for matters unrelated to the Property, or by
or against any person, other than Landlord, holding any interest under or using
the Property by license of or agreement with Tenant; (b) for foreclosure of any
lien for labor or material furnished to or for Tenant; (c) otherwise arising out
of or resulting from any act or transaction of Tenant; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord.

         Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.

ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS

         Section 13.01 LANDLORD'S LIABILITY; CERTAIN DUTIES.

                  (a)      As used in this Lease, the term "Landlord" means only
         the current owner or owners of the fee title to the Property or the
         leasehold estate under a ground lease of the Property at the time in
         question. Tenant shall be notified within 30 days of any change in
         Landlord. Each Landlord is obligated to perform the obligations of
         Landlord under the Lease only during the time such Landlord owns such
         interest or title. Any Landlord who transfers its title or interest is
         relieved of all liability with respect to the obligations of Landlord
         under this Lease to be performed on or after the date of transfer.
         However, each Landlord shall deliver to its transferee all funds that
         Tenant previously paid if such funds have not yet been applied under
         the terms of this Lease.

                                       18



                  (b)      Tenant shall give written notice of any failure by
         Landlord to perform any of its obligations under this Lease to Landlord
         and to any ground lessor, mortgagee or beneficiary under any deed of
         trust encumbering the Property whose name and address has been
         furnished to Tenant in writing. Notwithstanding the preceding sentence,
         Tenant's notice to Landlord shall be sufficient, and Tenant's failure
         to give notice to all parties listed in the preceding sentence due to
         unavailability of such names and addresses to Tenant shall not impair
         or invalidate such notice. Landlord shall not be in default under this
         Lease unless Landlord (or such ground lessor, mortgagee or beneficiary)
         fails to cure such non-performance within thirty (30) days after
         receipt of Tenant's notice. However, if such non-performance reasonably
         requires more than thirty (30) days to cure, Landlord shall not be in
         default if such cure is commenced within such 30-day period and
         thereafter diligently pursued to completion.

                  (c)      Notwithstanding any term of provision herein to the
         contrary, the liability of Landlord for the performance of its duties
         and obligations under this Lease is limited to Landlord's interest in
         the Property, and neither the Landlord nor its partners, shareholders,
         officers, members, managers or other principals shall have any personal
         liability under this Lease.

         Section 13.02 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.

         Section 13.03 INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
others.

         Section 13.04 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the final agreement between the parties pertaining to the lease of the
Premises and supersedes all prior negotiations and agreements relating thereto.
All amendments to this Lease shall be in writing and signed by all parties. Any
other attempted amendment shall be void.

         Section 13.05 NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Premises, the Premises shall be Tenant's
address for notice purposes, with a copy of all such notices to be sent
simultaneously to the following address: Emulex Corporation, 3535 Harbor
Boulevard, Costa Mesa, CA 92626, Attention: Contracts Administration. Notices to
Landlord shall be delivered to the address specified in Section 1.02 above. All
notices shall be effective upon delivery. Either party may change its notice
address upon written notice to the other party.

         Section 13.06 WAIVERS. All waivers must be in writing and signed by the
waiving party. Either party's failure to enforce any provision of this Lease, or
Landlord's acceptance of Rent, shall not be a waiver and shall not prevent such
party from enforcing that provision or any other provision of this Lease in the
future. No statement on a payment check from Tenant or in a letter accompanying
a payment check shall be binding on Landlord. Landlord may, with or without
notice to Tenant, negotiate such check without being bound to the conditions of
such statement.

         Section 13.07 NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form"

                                       19



memorandum of this Lease executed by both parties be recorded. The party
requesting such recording shall pay all transfer taxes and recording fees.

         Section 13.08 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of Colorado shall govern this Lease, and the
exclusive venue for any action relating to this Lease shall be in Colorado.

         Section 13.09 CORPORATE, COMPANY OR PARTNERSHIP AUTHORITY. If Tenant is
an entity, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation, company or partnership, as the case may be. If Landlord so
requests, Tenant shall promptly deliver to Landlord written evidence of such
authority, in form and substance reasonably acceptable to Landlord.

         Section 13.11 FORCE MAJEURE. If either party cannot perform any of its
obligations due to events beyond its control, the time provided for performing
such obligations shall be extended by a period of time equal to the duration of
such events. Events beyond a party's control include, but are not limited to,
acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other
casualty, shortages of labor or material, government regulation or restriction
and weather conditions.

         Section 13.12 EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.

ARTICLE FOURTEEN: RIGHT OF REFUSAL.

         If, at any time during the Lease Term, Landlord receives a bona fide
acceptable offer from any third party to lease space adjacent to the Premises in
the Building, Landlord shall promptly provide to Tenant a written summary of the
terms of such offer (including all Landlord concessions). Subject to any prior
rights of other tenants in the Project, Tenant shall have the right, exercisable
by written notice to that effect delivered to Landlord within five business days
after receipt of the summary of terms, to elect to lease all (but not less than
all) of the space which is the subject of the offer on the terms set forth in
the summary. If Tenant declines to lease such space, or does not respond to such
notice within the five business day period, Landlord may proceed to lease such
space to such third party substantially on the terms set forth in such summary,
free of any rights of Tenant. The right of refusal granted to Tenant in this
Article Fourteen shall continue if Landlord does not lease the affected space to
a third party, and shall be reinstated during the Lease Term from time to time
as any lease of the affected space expires.

ARTICLE FIFTEEN:  BROKERS

         Tenant warrants that Tenant has had no dealings with any real estate
broker or agents in connection with the negotiation of this Lease other than the
brokers identified in Section 1.08 above, and that it knows of no other real
estate broker or agent who is entitled to a commission in connection with this
Lease.

                                       20



         IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date set forth in Section 1.01 above.

                                         LANDLORD:

                                         LM VENTURE, LLC,
                                         a Delaware limited liability company

                                         By WWG LONGMONT DEVELOPMENT, LLC,
                                            a Colorado limited liability company
                                            Manager

                                            By /s/ Robert C. Goltermann
                                               ------------------------

                                         TENANT:

                                         EMULEX CORPORATION,
                                         a California corporation

                                            By /s/ Paul F. Folino
                                               -------------------

                                       21



                                    EXHIBIT A

                              PRELIMINARY SITE PLAN

Depiction of preliminary site plan

                                       22



                                    EXHIBIT B

                                LEGAL DESCRIPTION

Lots 1 - 3, Block 1
CREEKSIDE BUSINESS PART FILING NO. 1
County of Boulder,
State of Colorado

                                       23



                                    EXHIBIT C

                                 LANDLORD'S WORK

         Landlord's work shall include construction of a shell building together
with on-site landscaping and parking, including the following:

                  1.       Masonry insulated exterior walls, grey tinted
         insulated store front system, steel bar joist metal deck roof framing
         with ballasted 45 ml. EPDM roof over R-19 roof insulation. Slab on
         grade is 5" reinforced concrete.

                  2.       Six-inch (6") sanitary sewer line within Tenant's
         Premises ready for Tenant connection.

                  3.       Domestic water service to the Building is 1" meter
         with 1-1/2" line run to bar joists within the Premises.

                  4.       Electrical service to the Building is a 4,000 amp
         bussed gutter system, of which 400 amps is available for distribution
         to the Premises.

                  5.       Fire alarm control panel for Tenant connection.

                  6.       Fire protection sprinkler system designed to meet
         ordinary hazard coverage. Any alterations to the base system shall be
         the responsibility of Tenant.

                  7.       Base exterior building lighting (includes no interior
         lighting for the Building).

                  8.       One ton HVAC per 350 square feet of the Premises
         mounted on roof and stubbed through the roof structure but not
         distributed.

                  9.       All exterior site work required by the development
         plan approved by applicable governmental authorities, including
         landscaping, parking lot and sidewalks.

                  10.      One single storefront door

                  11.      Demising wall for Premises.

All additional work on the Premises, including distribution of electrical and
HVAC, shall be at Tenant's expense (except to the extent covered by the Tenant
Allowance).

EX-10.23

                                                                   EXHIBIT 10.23

                            FIRST AMENDMENT TO LEASE

         LM VENTURE, LLC, a Delaware limited liability company ("Landlord") and
EMULEX CORPORATION, a California corporation ("Tenant"), hereby amend that
certain Real Estate Lease between them dated September 12, 2000 (the "Lease") as
set forth below. Unless otherwise indicated, capitalized terms used in this
Amendment shall have the meanings set forth in the Lease.

         1.       LEASE OF ADDITIONAL PREMISES. Subject to the terms of the
Lease as amended hereby, Landlord leases to Tenant, and Tenant leases from
Landlord, the 13,587 square feet of space in the Building which is adjacent to
the Premises on the west as delineated on Exhibit A attached hereto (referred to
herein separately from the original Premises as the "Additional Premises"). The
Additional Premises shall be added to the original Premises for all purposes of
the Lease. THE COMMENCEMENT DATE FOR THE ORIGINAL PREMISES AND THE ADDITIONAL
PREMISES SHALL BE THE DATE OF SUBSTANTIAL COMPLETION AS DEFINED IN SECTION 2.03
OF THE LEASE. LANDLORD ACKNOWLEDGES THAT, AS OF THE DATE OF THE MUTUAL EXECUTION
OF THIS AMENDMENT, TENANT HAS NOT DELAYED OR IN ANY WAY FAILED TO MEET THE
TIMELINES FOR APPROVAL SET FORTH IN ARTICLE II OF THE LEASE.

         2.       BASE RENT. Base Rent for the Additional Premises shall be
$12.75 per square foot per annum for the first year of the Lease Term; $13.13
per square foot per annum for the second year of the Lease Term; $13.53 per
square foot per annum for the third year of the Lease Term; $13.93 per square
foot per annum for the fourth year of the Lease Term; and $14.35 per square foot
per annum for the fifth year of the Lease Term.

         3.       SUBMISSION OF SPACE PLAN; CONSTRUCTION. Tenant shall, as soon
as reasonably possible but in any event within 30 days after full execution of
this Amendment, provide Tenant's Specifications for the Premises to Landlord for
preparation of Premises Construction Documents and construction by Landlord of
the Premises in accordance with the Lease. Promptly after construction plans for
the Premises are prepared and approved as provided in the Lease, Landlord shall
complete construction of the Premises in accordance with the approved plans.

         4.       FINISH ALLOWANCE.

                  (a)      Landlord shall contribute an amount equal to $20.00
         per square foot of the Additional Premises (the "Additional Allowance")
         to cover costs associated with design and construction of Tenant
         Improvements to the Additional Premises (including electrical and
         engineering costs beyond Landlord's Work described in Exhibit C to the
         Lease and architectural costs beyond preparation of the initial space
         plan). Landlord and Tenant shall compare the total expenditures for
         these Tenant Improvements with the total amount of the Additional
         Allowance. If such expenditures are less than the Additional Allowance,
         Base Rent for the Additional Premises shall be reduced by the amount of
         such difference amortized over the initial Lease Term at the rate of
         12% per annum.

                  (b)      To the extent that costs associated with design and
         construction exceed $20.00 per square foot (as to the Additional
         Premises) or $21.00 (as to the original such expenditures are in excess
         of the Additional Allowance, Tenant may in each case elect to



         have Base Rent increased by an amount equal to all or a portion of such
         excess costs (not exceeding $7.00 per square foot) at the rate of 12%
         per annum ($.12 per square foot per dollar of excess costs). Tenant
         shall be solely responsible for paying all such excess costs which are
         not incorporated into Base Rent pursuant to the previous sentence. For
         example, if the total cost of Tenant Improvements to the Additional
         Premises is $23.00 per square foot, Base Rent for the Additional
         Premises for the first Lease Year may, at Tenant's election, be
         increased by $.36 to $13.11 per square foot, which would be increased
         at an annual rate of 3% to determine Base Rent for the Additional
         Premises for subsequent Lease Years.

                  (c)      If, based on the approved budget, any portion of the
         cost of Tenant Improvements to the Premises will exceed the Tenant
         Allowance or the Additional Allowance (as applicable) and will not be
         incorporated into Base Rent pursuant to subparagraph (b) above, such
         portion shall be divided by the total cost of the Tenant Improvements
         to the applicable space to determine the portion ("Tenant's
         Percentage") which shall be the sole responsibility of Tenant. During
         the course of construction of the Tenant Improvements, Tenant shall pay
         to Landlord, within 10 days after receipt of a statement of the cost of
         the Tenant Improvements during any month, an amount equal to Tenant's
         Percentage of such monthly costs which are attributable to the space
         involved. When all Tenant Improvements have been completed and paid
         for, Landlord and Tenant shall reconcile the total expenditures for the
         Tenant Improvements to the total amount of the Tenant Allowance and the
         Additional Allowance. Tenant shall be solely responsible for promptly
         paying (or reimbursing Landlord for) the remaining balance (if any) of
         all expenses of the Tenant Improvements which are in excess of $21.00
         per square foot (as to the original Premises) and $20.00 per square
         foot (as to the Additional Premises) and which are not to be
         incorporated into Base Rent pursuant to the provisions of subparagraph
         (b) above.

         IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as
of the 8th day of February, 2001. Except as expressly modified herein, the terms
and conditions of the Lease remain in full force and effect.

LANDLORD:                                    TENANT:

LM VENTURE, LLC,                                      EMULEX CORPORATION,
a Delaware limited liability company                  a California corporation

By WGG LONGMONT DEVELOPMENT,
     LLC,

   a Colorado limited liability company,          By /s/ Sadie A. Herrera
   Manager                                           --------------------

   By /s/ Robert C. Goltermann
      ------------------------

                                       2



                                    EXHIBIT A

Depiction of Premises

                                       3

EX-21

exv21

EX-23

exv23

EX-31.A

exv31wa

EX-31.B

exv31wb

EX-32

exv32