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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File No. 0-11007

EMULEX CORPORATION

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

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

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

As of February 7, 2003, the registrant had 82,059,951 shares of common stock outstanding.

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EMULEX CORPORATION AND SUBSIDIARIES
INDEX

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PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

1.		Summary of Significant Accounting Policies and Basis of Presentation
		In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the Company’s financial position as of December 29, 2002, and June 30, 2002, and the condensed consolidated statements of operations for the three and six months ended December 29, 2002, and December 30, 2001, and the condensed consolidated statements of cash flows for the six month periods then ended. Certain reclassifications have been made to the condensed consolidated balance sheet as of June 30, 2002, to conform to the presentation as of December 29, 2002. Interim results for the six months ended December 29, 2002, are not necessarily indicative of the results that may be expected for the year ending June 29, 2003. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
		Effective July 1, 2002, the Company adopted Financial Accounting Standards Board (“FASB”) Statement (“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.
		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 5. Interpretation 45 also requires the recognition of a liability by a guarantor at 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 will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.
		The Emerging Issues Task Force “EITF” recently reached a consensus on its tentative conclusions for EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides accounting guidance for customer solutions where delivery or performance of products, services and/or performance may occur at different points in time or over different periods of time. Companies are required to adopt this consensus for fiscal periods beginning after June 15, 2003. The Company believes the adoption of EITF 00-21 will 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. 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 and, as such, believes the adoption of Statement 148 will not have a material impact on the Company’s financial position, results of operations, or liquidity.

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

		Starting in late September 2001, some of the Company’s major customers made announcements that general economic conditions, exacerbated by the increase in economic uncertainty in the aftermath of the terrorist events of September 11, 2001, were having a negative impact on their financial results. The announcements made, and forecasts received, indicated deteriorating demand for the Company’s one gigabit per second (“Gbps”) products as these customers were expected to migrate to two Gbps products for future purchases. As a result, the Company recorded an excess and obsolete inventory charge totaling $13.6 million during the first quarter of fiscal 2002. Subsequently, as a result of the sale of products for which a reserve had been recorded, the Company recorded a reduction of $1.3 million of this excess and obsolete inventory reserve for the first six months of fiscal 2003 ended December 29, 2002. As of December 29, 2002, the remaining reserve for one Gbps products was $6.8 million. After initially recording its one Gbps reserve in September 2001, as a result of generally improved demand exceeding prior estimates and the resulting sale of products for which a reserve had been recorded, the Company subsequently reduced this reserve by a total of $4.9 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 additional excess and obsolete inventory reserves as forecasted demand changes. As of December 29, 2002, the Company had unreserved inventory on hand of approximately $3.6 million related to its one Gbps products.
3.		Goodwill and Other Intangibles
		Goodwill and other intangibles, net, are as follows:

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 goodwill will be tested for impairment at least annually.

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The intangible assets subject to amortization are being amortized on a straight-line basis over the following estimated useful lives (in years):

Aggregated amortization expense for the six months ended December 29, 2002, was $2.9 million and for the next five fiscal years is expected to be (in thousands):

The following table presents the impact on net income (loss) and net income (loss) per share had Statement 142 been in effect for the six months ended December 30, 2001.

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

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

		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 reserve for warranty costs is provided for at the time of shipment based upon actual historical experience.
		Changes to the warranty reserve for the six months ended December 29, 2002, were:

6.		Convertible Subordinated Notes
		On January 23, 2002, the Company announced a private placement of $300.0 million aggregate principal amount 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. In addition, the Company granted the initial purchasers of the notes a 30-day option, which they exercised, to purchase an additional $45.0 million principal amount of the notes. 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 4). The $345.0 million transaction closed on January 29, 2002.
		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 common stock. The combined program authorizes the repurchase of up to four million shares with three million shares of common stock still available for repurchase at December 29, 2002, 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.

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7.		Commitments and Contingencies
		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 have been 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 have commenced discovery. The court certified the class action by an order dated September 30, 2002. The court has scheduled a trial setting conference on June 6, 2003, with an expectation that the case will be set for trial in July, 2003. As a result of 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 have been 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 plaintiffs in that action filed a motion for reconsideration of that order, which was denied by an order dated June 3, 2002. The above-described litigation could result in substantial costs to the Company and a diversion of management’s attention and resources. While the Company believes that the lawsuits are without legal merit and intends to defend them vigorously, because the lawsuits are at an early stage, it is not possible to predict whether the Company will incur any material liability in connection with such lawsuits. The Company has received inquiries about events giving rise to the lawsuits from the Securities and Exchange Commission and the Nasdaq Stock Market.
		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
		Effective October 14, 2002, the Board of Directors approved authorization of an additional 750 thousand shares for issuance under the Employee Stock Purchase Plan, subject to stockholder approval. This authorization was approved at the annual meeting of stockholders of the Company on November 21, 2002. Since the fair market value of the Company’s stock on November 21, 2002, was higher than the fair market value on October 14, 2002, in the event the fair market value of the Company’s common stock closes above $10.90 (the fair market value as of the close of business on October 14, 2002) on the current purchase period closing date, which is March 31, 2003, the Company will incur a charge against earnings. Because the total amount of such charge depends on employee participation levels as well as the future price of the Company’s common stock on March 31, 2003, the actual amount of any such charge cannot be calculated at this time. The Company recorded estimated pro-rata deferred compensation expense of approximately $0.3 million and an estimated increase in deferred compensation of $1.0 million associated with the authorization of these shares based on a share price of $19.01 as of December 29, 2002.
		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 products for which a reserve had been recorded, the Company recorded a reduction of $1.3 million of this excess and obsolete inventory reserve for the first six months of fiscal 2003 ended December 29, 2002. As of December 29, 2002, the remaining reserve for one Gbps products was $6.8 million. After initially recording its one Gbps reserve in September 2001, as a result of generally improved demand exceeding prior estimates and the resulting sale of products for which a reserve had been recorded, the Company subsequently reduced this reserve by a total of $4.9 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 additional excess and obsolete inventory reserves as forecasted demand changes. As of December 29, 2002, the Company had unreserved inventory on hand of approximately $3.6 million related to its one Gbps products.
		The Company was previously required to enter into an end-of-life purchase agreement for a key inventory component as the sole-source manufacturer of this component announced their discontinued manufacturing of the component. As of December 29, 2002, the Company’s remaining purchase obligation was $7.4 million. In relation to the excess and obsolete inventory charge associated with older generation one Gbps products, the Company has accrued $3.2

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		million, which represented the Company’s commitment to purchase this key component in excess of forecasted demand and as a result was impaired.
		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. The Company’s total gross undiscounted financial commitment for the 10-year lease term would be approximately $46.0 million. At December 29, 2002, the Company had restricted cash of $13.2 million in escrow associated with the construction of the headquarters.
8.		Earnings 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 adjusted net income by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the dilutive potential common shares from stock option plans and convertible subordinated notes had been issued. The dilutive effect of outstanding stock options is reflected in diluted net income per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted net income (loss) per share:

The antidilutive options were excluded from the computation of diluted earnings per share for the three and six month periods ended December 30, 2001, because the options’ exercise prices were greater than the average market price of the common shares during the respective periods. As the Company recorded a net loss for both the three and six

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month periods ended December 29, 2001, all outstanding stock options were excluded from the calculation of diluted net loss per share in those periods because the effect would have been antidilutive.

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

Forward-Looking Statements

Certain statements contained in this Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company 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, the Company’s representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.

Actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below, and, in particular, the subsection entitled “Risk Factors” set forth therein, and in the Company’s most recently filed Annual Report on Form 10-K. 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 and making it impossible to determine if markets will grow or shrink in the short term. In recent years, the Company’s results have been significantly impacted by a widespread slowdown in technology investment that has also pressured the storage networking market that is the mainstay of the Company’s business. A prolonged downturn in information technology spending could adversely affect the Company’s revenues and results of operations. As a result of this uncertainty, the Company is 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 the Company’s Original Equipment Manufacturer (“OEM”) customers to successfully incorporate the Company’s products into their systems; the Company’s 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 as a result of consolidation movements in the market; the timing and market acceptance of the Company’s or the Company’s OEM customers’ new or enhanced products; the variability in the level of the Company’s backlog and the variable booking patterns of the Company’s customers; the effects of terrorist activities and resulting political or economic instability; the highly competitive nature of the markets for the Company’s products as well as pricing pressures that may result from such competitive conditions; the Company’s ability and the ability of the Company’s OEM customers to keep pace with the rapid technological changes in the Company’s industry and gain market acceptance for new products and technologies; the effect of rapid migration of customers towards newer product platforms; possible transitions from board level to application specific integrated circuit (“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 the Company’s products; delays in product development; the Company’s reliance on third-party suppliers and subcontractors for components and assembly; any inadequacy of the Company’s intellectual property protection or the potential for third-party claims of infringement; the Company’s ability to attract and retain key technical personnel; the Company’s dependence on foreign sales; the effect of the Company’s 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-Q, in the Company’s filings with the Securities and Exchange Commission or in materials incorporated therein by reference. The Company cautions the reader, however, that these lists of risk factors may not be exhaustive. The Company expressly disclaims 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. References contained herein to “Emulex,” the “Company,” “our” and “us” refer to Emulex Corporation and its subsidiaries.

Company Overview

Emulex Corporation is a leading designer, developer and supplier of a broad line of storage networking host bus adapters (“HBAs”) and application-specific computer chips (“ASICs”) that provide connectivity solutions for storage area networks

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(“SANs”), network attached storage (“NAS”), and redundant array of independent disks (“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 SAN. The Company’s 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, operating systems, and applications. Emulex’s architecture offers customers a stable applications program interface (“API”), that has been preserved across multiple generations of adapters and to which many of the world’s leading OEMs have customized software for mission-critical server and storage system applications.

Recently, the majority of the Company’s revenues have been comprised of products based on Fibre Channel technology. The Company’s Fibre Channel development efforts began in 1992 and the Company shipped its first Fibre Channel product in volume in 1996. According to IDC and Dataquest, in calendar 2001 the Company was the world’s largest provider of Fibre Channel host bus adapters. In March 2001, the Company acquired Giganet, a leading developer of storage networking products based on Ethernet and Internet Protocol (“IP”) technologies. Effective July 2, 2001, Giganet was merged with and into Emulex Corporation, a California corporation that is the primary operating subsidiary of the Company. Giganet’s technology allowed an extension of the Company’s market-leading HBA APIs into Internet Small Computer Systems Interface (“iSCSI”) and Virtual Interface (“VI”) based portions of the storage networking market. The Company 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, the Company includes industry leaders Brocade, Computer Associates, INRANGE, Intel, Legato, McDATA, Microsoft, and Veritas among its strategic partners. The Company markets to OEMs and end-users through its own worldwide selling organization, as well as to distribution partners. Corporate headquarters are located in Costa Mesa, California. As of December 29, 2002, the Company had a total of 366 employees.

Results of Operations

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