UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-31353

EMULEX CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		51-0300558
(State or other jurisdiction		(I.R.S Employer
of incorporation or organization)		Identification No.)
3333 Susan Street
Costa Mesa, California		92626
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

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

As of October 28, 2010, the registrant had 86,864,195 shares of common stock outstanding.

 

 

EMULEX CORPORATION AND SUBSIDIARIES

INDEX

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets September 26, 2010 and June 27, 2010			3
Condensed Consolidated Statements of Operations Three months ended September 26, 2010 and September 27, 2009			4
Condensed Consolidated Statements of Cash Flows Three months ended September 26, 2010 and September 27, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6. Exhibits			49
Signatures			50
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited, in thousands, except share data)

		September 26,				June 27,
		2010				2010
ASSETS
Current assets:
Cash and cash equivalents		$	146,385			$	248,813
Investments			27,128				45,990
Accounts and other receivables, net of allowance for doubtful accounts of $1,681 and $1,653 at September 26, 2010 and June 27, 2010, respectively			69,486				58,479
Inventories			14,372				13,465
Prepaid income taxes			17,563				17,563
Prepaid expenses and other current assets			12,589				12,799
Deferred income taxes			17,222				19,442
Total current assets			304,745				416,551
Property and equipment, net			66,302				63,482
Investments			1,621				—
Goodwill			173,897				94,835
Intangible assets, net			186,168				44,497
Deferred income taxes			4,736				27,658
Other assets			19,121				42,427
Total assets		$	756,590			$	689,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	36,694			$	31,377
Accrued liabilities			44,875				29,053
Total current liabilities			81,569				60,430
Other liabilities			4,081				4,287
Accrued taxes			34,395				33,551
Total liabilities			120,045				98,268
Commitments and contingencies (Note 9)
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; 99,190,068 and 91,217,793 issued at September 26, 2010 and June 27, 2010, respectively			9,919				9,122
Additional paid-in capital			1,215,899				1,123,365
Accumulated deficit			(380,558	)			(372,450	)
Accumulated comprehensive loss			(393	)			(615	)
Treasury stock, at cost; 14,656,242 and 10,550,971 shares at September 26, 2010 and June 27, 2010, respectively			(208,322	)			(168,240	)
Total stockholders’ equity			636,545				591,182
Total liabilities and stockholders’ equity		$	756,590			$	689,450

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

		Three Months Ended
		September 26,				September 27,
		2010				2009
Net revenues		$	103,097			$	85,527
Cost of sales			45,702				33,421
Gross profit			57,395				52,106
Operating expenses:
Engineering and development			38,264				31,399
Selling and marketing			12,709				12,912
General and administrative			17,619				12,279
Amortization of other intangible assets			2,016				1,698
Total operating expenses			70,608				58,288
Operating loss			(13,213	)			(6,182	)
Nonoperating income, net:
Interest income			21				119
Interest expense			(375	)			(2	)
Other (expense) income, net			(153	)			230
Total nonoperating income, net			(507	)			347
Loss before income taxes			(13,720	)			(5,835	)
Income tax benefit			(5,612	)			(9,673	)
Net (loss) income		$	(8,108	)		$	3,838
Net (loss) income per share:
Basic		$	(0.10	)		$	0.05
Diluted		$	(0.10	)		$	0.05
Number of shares used in per share computations:
Basic			82,321				79,797
Diluted			82,321				80,585

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

		Three Months Ended
		September 26,				September 27,
		2010				2009
Cash flows from operating activities:
Net (loss) income		$	(8,108	)		$	3,838
Adjustments to reconcile net (loss) income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation and amortization of property and equipment			5,219				5,438
Share-based compensation expense			15,302				4,937
Amortization of intangible assets			8,209				6,424
Provision for losses on accounts and other receivables			28				(86	)
Accrued interest income, net			—				34
Loss on disposal of property and equipment			263				1,130
Deferred income taxes			(2,617	)			(5,701	)
Excess tax benefit from share-based compensation			(38	)			(15	)
Foreign currency adjustments			260				(246	)
Changes in assets and liabilities:
Accounts and other receivables, net			(5,452	)			12
Inventories			(599	)			14
Prepaid expenses and other assets			(3,262	)			(8,345	)
Accounts payable, accrued liabilities, and other liabilities			1,583				3,034
Accrued taxes			(301	)			556
Income taxes payable and prepaid income taxes			(6	)			(162	)
Net cash provided by operating activities			10,481				10,862
Cash flows from investing activities:
Net proceeds from sale of property and equipment			99				—
Purchases of property and equipment			(4,463	)			(1,811	)
Purchases of intangible assets			(4,000	)			(20,000	)
Payments for the purchase of ServerEngines Corporation, net of cash acquired			(53,066	)			—
Purchases of investments			(31,797	)			—
Maturities of investments			49,038				8,102
Net cash used in investing activities			(44,189	)			(13,709	)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans			273				44
Repurchase of common stock			(40,082	)			(18,240	)
Tax withholding payments reimbursed by common stock			(2,237	)			(1,869	)
Repayment of debt to the founders of ServerEngines Corporation			(26,897	)			—
Excess tax benefit from share-based compensation			38				15
Net cash used in financing activities			(68,905	)			(20,050	)
Effect of exchange rates on cash and cash equivalents			185				(87	)
Net decrease in cash and cash equivalents			(102,428	)			(22,984	)
Cash and cash equivalents at beginning of period			248,813				294,136
Cash and cash equivalents at end of period		$	146,385			$	271,152

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

     In the opinion of management of Emulex Corporation (Emulex or the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows. Interim results for the three months ended September 26, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2011. The accompanying condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010. The preparation of the condensed consolidated financial statements requires the use of estimates and actual results could differ materially from management’s estimates.

Supplemental Cash Flow Information

		Three Months Ended
		September 26,				September 27,
		2010				2009
Cash paid during the period for:
Interest		$	2			$	2
Income taxes		$	239			$	47
Non-cash activities:
Purchases of property and equipment not paid, net		$	492			$	827

Refer to Note 2 for the non-cash activities related to the business combination.

Recently Adopted Accounting Standards

     In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements” amending ASC 820, “Fair Value Measurements and Disclosures,” requiring additional disclosure and clarifying existing disclosure requirements about fair value measurements. ASU 2010-06 requires entities to provide fair value disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in the statement of financial position. The additional requirements also include disclosure regarding the amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. The guidance clarifies existing disclosure requirements regarding the inputs and valuation techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, or the third quarter of the Company’s 2010 fiscal year, except for the disclosures about purchases, sales, issuances and settlements which is effective for fiscal years beginning after December 15, 2010, or the Company’s 2012 fiscal year, and for interim periods within those fiscal years. There was no impact of the Company’s adoption of this guidance and management is currently assessing the impact of the disclosure guidance effective in fiscal 2012.

2. Business Combinations

ServerEngines Corporation

     On August 25, 2010, the Company acquired 100% of the outstanding common stock of ServerEngines Corporation (ServerEngines), a privately-held, fabless semiconductor company located in Sunnyvale, California. It is expected that the combination of Emulex and ServerEngines’ technology will create a unique offering to deliver input/output (I/O) connectivity to our customers as part of their converged networking solutions, including adapters, mezzanine cards and LAN on Motherboard (LOM) solutions. These benefits and additional opportunities were among the factors that contributed to a purchase price resulting in the recognition of preliminary estimated goodwill.

     The Company allocated the purchase price of the acquired company to the net tangible assets and intangible assets acquired based upon their estimated fair values. Acquisition-related transaction costs and acquisition-related restructuring charges are not included as components of consideration transferred but have been accounted for as expenses in the period in which the costs are incurred. Total merger-related transaction costs incurred by the Company were approximately $2.6 million, of which $2.0 million was incurred and recorded in general and administrative expenses in the year ended June 27, 2010, and $0.6 million was incurred and recorded in general and administrative expenses in the quarter ended September 26, 2010.

     The aggregate preliminary purchase price was approximately $136.5 million and was comprised of the following:

		(in thousands)
Cash		$	54,791
Common stock			67,367
Contingent consideration			11,966
Options assumed			2,355
Net assets acquired		$	136,479

     Included in the common stock issued and contingent consideration is approximately 2.0 million shares of Emulex common stock to be held in escrow for up to 18 months from the acquisition date subject to certain standard representations and warranties defined in the merger agreement.

     The contingent consideration relates to 4.0 million shares that are issuable upon achievement of two post-closing milestones. Approximately 2.5 million shares are tied to the employment of certain recipients, and are therefore accounted for as stock-based compensation over the service period. The Company has recognized approximately $10.6 million during the quarter ended September 26, 2010 and expects to recognize another $11.6 million of stock based compensation expense over the next 15 months related to the employment based contingent shares. The first post-closing milestone was met subsequent to the quarter ended September 26, 2010.

     The Company has preliminarily allocated the purchase price to the assets acquired and liabilities assumed at estimated fair values. The excess of the purchase price over the aggregate fair values is recorded as goodwill. This allocation is subject to revision as the estimates of fair value of contingent consideration, inventory, identifiable intangible assets, and deferred taxes are based on preliminary information and the final pre-acquisition tax returns are not yet complete. The Company is in the process of obtaining third party valuations of certain assets. Thus, the allocation of the purchase price is subject to refinement. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

		(in thousands)
Current assets, including cash acquired of $1,725		$	7,457
Property and equipment			3,406
Other noncurrent assets			440
Intangible assets			145,880
Goodwill			79,062
Total assets acquired			236,245
Current liabilities			(70,863	)
Noncurrent deferred tax liability			(27,758	)
Accrued taxes			(1,145	)
Total liabilities assumed			(99,766	)
Total preliminary estimated purchase price allocation		$	136,479

     The current liabilities assumed of $70.9 million included approximately $26.9 million due to the founders of ServerEngines and approximately $26.4 million due to Emulex. These amounts were settled in conjunction with the acquisition.

     The intangible assets acquired of approximately $145.9 million were preliminary determined, in accordance with the authoritative guidance for business combinations, based on the estimated fair values using valuation techniques

consistent with the market approach and income approach to measure fair value. The remaining useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. Of the approximately $145.9 million which was preliminarily assigned to acquired intangible assets, approximately $141.7 million was assigned to developed technology, approximately $1.5 million was assigned to a tradename, approximately $1.5 million was assigned to backlog, approximately $0.6 million was assigned to customer relationships, and approximately $0.6 million was assigned to covenants not to compete.

     Intangible assets with identifiable lives are being amortized on a straight-line basis from the acquisition date over their estimated useful lives as follows:

Developed technology		8 years
Customer relationships		5 years
Covenants not to compete		2.5 years
Tradename		12 years
Backlog		10 months
Weighted-average amortization period		8 years

     The goodwill recognized is not expected to be deductible for income tax purposes.

     The acquisition has been included in the condensed consolidated statements of operations of the Company since the date of acquisition. Since the acquisition date, the Company recorded approximately $2.0 million in revenue with respect to the ServerEngines business in the Company’s condensed consolidated statements of operations.

     Following is the summarized pro forma combined results of operations for the three months ended September 26,2010 and September 27, 2009, assuming the acquisition had taken place at the beginning of each fiscal year. The pro forma combined results of operations for the three months ended September 26, 2010, was prepared based upon the statement of operations of Emulex for the three months ended September 26, 2010 combined with the statement of operations of ServerEngines for period from July 1, 2010 to August 25, 2010 as all operating results of ServerEngines were included in the statement of operations of Emulex since the acquisition date of August 25, 2010. The pro forma combined results of operations for the three months ended September 27, 2009, was prepared based upon the statement of operations of Emulex for the three months ended September 27, 2009 combined with the statement of operations of ServerEngines for the period from July 1, 2009 to September 30, 2009.

     The pro forma information includes adjustments to reflect the amortization and depreciation of intangible and tangible assets acquired, incremental stock-based compensation expense resulting from retention stock options granted to ServerEngines employees, reductions to interest expense for the settlement of ServerEngines debt in connection with the acquisition, elimination of the historical revenues and cost of goods sold between the Company and ServerEngines, and the related estimated tax effects of these adjustments as well as an adjustment to shares outstanding for shares issued for the acquisition. The pro forma results exclude transaction costs of $0.6 million and stock based compensation related to the contingent shares which are tied to the employment of certain recipients of approximately $10.6 million recognized in the Company’s statement of operations for the quarter ended September 26, 2010 as these charges are not expected to have a continuing impact on the statements of operations of the combined entity. The Company expects to recognize additional stock based compensation charges of approximately $11.6 million over the next 15 months related to the stock based compensation charges for the contingent shares tied to the employment of certain recipients.

     The pro forma results are not necessarily indicative of the future results or results that would have been reported had the acquisition taken place when assumed.

		Three Months Ended
		September 26,				September 27,
		2010				2009
		(Unaudited)
		(in thousands, except per share data)
Net revenues		$	104,989			$	91,428
Net loss		$	(2,628	)		$	(3,205	)
Net loss per basic share		$	(0.03	)		$	(0.04	)
Net loss per diluted share		$	(0.03	)		$	(0.04	)

Acquisition in Fiscal 2010

     In May 2010, the Company purchased a business from a privately-held company in the storage networking industry. Total consideration was approximately $13.0 million consisting of cash, cancellation of loans receivable, and a partial return of the Company’s equity investment in the privately-held company. The transaction was accounted for as a business acquisition. The preliminary purchase consideration was allocated to the tangible and intangible assets acquired, including in-process research and development (IPR&D), based on their estimated fair values. The Company preliminarily recorded approximately $6.0 million of IPR&D, $0.9 million of fixed assets and approximately $6.1 million in goodwill as of June 27, 2010. During the first quarter ended September 26, 2010, the Company obtained further information on the valuation of the acquired fixed assets and in accordance the with authoritative guidance for business combinations, retroactively recorded a purchase price adjustment to write down the fixed assets and adjust goodwill for approximately $0.9 million as of June 27, 2010. This purchase price allocation remains preliminary as the purchase consideration continues to being evaluated with regards to the amounts held in escrow. Pro forma results of operations have not been presented as the acquisition was not material to the Company’s consolidated financial statements.

3. Fair Value of Financial Instruments

     Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. A description of the three levels of inputs is as follows:

     Level 1 — Quoted prices in active markets for identical assets or liabilities;

     Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

     Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

     Financial instruments measured at fair value on a recurring basis as of September 26, 2010 and June 27, 2010 are as follows:

		Level 1				Level 2				Level 3				Total
		(in thousands)
September 26, 2010
Cash and cash equivalents		$	146,385			$	—			$	—			$	146,385
Term deposits			2,729				—				—				2,729
U.S. Government securities			13,013				—				—				13,013
U.S. Government sponsored entity securities			11,388				—				—				11,388
Corporate bonds			1,621				—				—				1,621
		$	175,136			$	—			$	—			$	175,136
June 27, 2010
Cash and cash equivalents		$	248,813			$	—			$	—			$	248,813
Municipal bonds			101				—				—				101
Term deposits			3,237				—				—				3,237
U.S. Government securities			23,008				—				—				23,008
U.S. Government sponsored entity securities			19,648				—				—				19,648
		$	294,807			$	—			$	—			$	294,807

     The Company’s other financial instruments consist primarily of an equity investment in a privately-held company and insurance recovery receivable. The Company believes the carrying value of its insurance recovery receivable approximates its current fair value due to its nature and relatively short duration. The fair value of the Company’s equity investment in the privately-held company was based on the income approach, using “Level 3” inputs requiring the use of inputs that are both unobservable and significant to the fair value measurements.

4. Investments

The Company’s portfolio of held-to-maturity investments consists of the following:

						Gross				Gross
						Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(in thousands)
September 26, 2010
Term deposits		$	2,729			$	—			$	—			$	2,729
U.S. Government securities			13,012				1				—				13,013
U.S. Government sponsored entity securities			11,387				1				—				11,388
Corporate bonds			1,621				—				—				1,621
		$	28,749			$	2			$	—			$	28,751
June 27, 2010
Municipal bonds		$	101			$	—			$	—			$	101
Term deposits			3,238				—				(1	)			3,237
U.S. Government securities			23,006				2				—				23,008
U.S. Government sponsored entity securities			19,645				3				—				19,648
		$	45,990			$	5			$	(1	)		$	45,994

     Investments at September 26, 2010 and June 27, 2010 were classified as shown below:

		September 26,				June 27,
		2010				2010
		(in thousands)
Short-term investments (maturities less than one year)		$	27,128			$	45,990
Long-term investments (maturities from one to five years)			1,621				—
		$	28,749			$	45,990

5. Inventories

Inventories are summarized as follows:

		September 26,				June 27,
		2010				2010
		(in thousands)
Raw materials		$	3,775			$	2,717
Finished goods			10,597				10,748
		$	14,372			$	13,465

6. Goodwill and Intangible Assets, net

     The activity in goodwill during the three months ended September 26, 2010 is as follows:

		Carrying
		Amount
		(in thousands)
Goodwill, as of June 27, 2010		$	94,835
Goodwill from acquisition during the period			79,062
Goodwill, as of September 26, 2010		$	173,897

     Purchase price adjustments of approximately $0.9 million during the measurement period were recorded retrospectively pursuant to the authoritative guidance for business combinations.

     Intangible assets, net, are as follows:

		September 26,				June 27,
		2010				2010
		(in thousands)
Intangible assets subject to amortization:
Core technology and patents		$	77,345			$	73,345
Accumulated amortization, core technology and patents			(55,835	)			(53,050	)
Developed technology			210,200				68,500
Accumulated amortization, developed technology			(56,291	)			(51,375	)
Customer relationships			3,810				3,200
Accumulated amortization, customer relationships			(2,569	)			(2,398	)
Tradename			6,139				4,639
Accumulated amortization, tradename			(4,522	)			(4,364	)
Covenants not to compete			550				—
Accumulated amortization, covenants not to compete			(19	)			—
Backlog			1,520				—
Accumulated amortization, backlog			(160	)			—
Total amortizable intangible assets, net			180,168				38,497
In process research and development			6,000				6,000
Total intangible assets, net		$	186,168			$	44,497

     The intangible assets subject to amortization are being amortized on a straight-line basis over original lives ranging from approximately ten months to twelve years. Aggregated amortization expense for intangible assets for the three months ended September 26, 2010 and September 27, 2009, was approximately $8.2 million and $6.4 million, respectively.

     Amortization expense of approximately $6.2 million and $4.7 million related to core and developed technology is included in cost of sales in the accompanying condensed consolidated statements of operations for the three months ended September 26, 2010 and September 27, 2009, respectively.

     The following table presents the estimated future aggregated amortization expense of intangible assets as of September 26, 2010 (in thousands):

2011 (remaining 9 months)		$	30,557
2012			26,087
2013			22,428
2014			22,282
2015			18,282
Thereafter			60,532
		$	180,168

7. Other Assets

     Components of other assets are as follows:

		September 26,				June 27,
		2010				2010
		(in thousands)
Notes receivable		$	—			$	24,256
Equity investment in privately-held company			9,184				9,184
Other			9,937				8,987
		$	19,121			$	42,427

     As described in Note 2, the notes receivable were settled in connection with the Company’s acquisition of ServerEngines on August 25, 2010.

     The Company’s equity investment in a privately-held company is accounted for under the cost method. Under the cost method, investments are carried at cost and are adjusted for other-than-temporary declines in fair value, distributions of earnings, or additional investments. The Company monitors its investment for impairment on a quarterly basis and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. Impairment charges are included in other (expense) income, net in the consolidated statements of operations. Factors used in determining an impairment include, but are not limited to, the current business environment including competition; uncertainty of financial condition; technology and product prospects; results of operations; and current financial position including any going concern considerations such as the rate at which the investee utilizes cash and the investee’s ability to obtain additional financing. The Company has determined that there is no impairment as of September 26, 2010; however, it is considered reasonably possible that the Company’s determination that there is no impairment could change within the next twelve months if the current business environment deteriorates, the investees’ financial condition worsens, or the investee is unable to secure adequate financing to support its business plan and operations.

8. Accrued Liabilities

Components of accrued liabilities are as follows:

		September 26,				June 27,
		2010				2010
		(in thousands)
Payroll and related costs		$	18,642			$	14,387
Warranty liability			1,723				1,637
Deferred revenue and accrued rebates			14,192				4,169
Other			10,318				8,860
		$	44,875			$	29,053

     The Company provides a warranty of between one to five years on its products. The Company records a provision for estimated warranty related costs at the time of sale based on historical product return rates and the Company’s estimates of expected future costs of fulfilling its warranty obligations. Changes to the warranty liability were:

		(in thousands)
Balance at beginning of period		$	1,637
Accrual for warranties issued			446
Changes to pre-existing warranties (including changes in estimates)			(91	)
Settlements made (in cash or in kind)			(269	)
Balance at end of period		$	1,723

9. Commitments and Contingencies

Litigation

     On November 15, 2001, prior to the Company’s acquisition of Vixel Corporation, a securities class action was filed in the United States District Court in the Southern District of New York as Case No. 01 CIV. 10053 (SAS), Master File No. 21 MC92 (SAS) against Vixel and two of its officers and directors (one of which is James M. McCluney, the Company’s current Chief Executive Officer) and certain underwriters who participated in the Vixel initial public offering in late 1999. The amended complaint alleged violations under Section 10(b) of the Exchange Act and Section 11 of the Securities Act and sought unspecified damages on behalf of persons who purchased Vixel stock during the period October 1, 1999 through December 6, 2000. On April 2, 2009, the parties signed a Stipulation and Agreement of Settlement (the 2009 Settlement) to the District Court for preliminary approval. The District Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement “fairness” hearing was held on September 10, 2009. On October 6, 2009, the District Court entered an opinion granting final approval to the settlement and directing that the Clerk of the District Court close these actions. The 2009 Settlement provides for a settlement amount of $586 million, and Emulex has no obligation to pay any part of that amount. Notices of appeal of the opinion granting final approval have been filed by six groups of appellants.

     On January 27, 2009, a patent infringement lawsuit was filed in the United States District Court in the Central District of California as Case No. CV09-00605 R (JWJx) against Emulex by Microprocessor Enhancement Corporation and Michael H. Branigin. The complaint alleges infringement of U.S. Patent No. 5,471,593, and seeks a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs. On March 25, 2009, Emulex filed an answer to the complaint denying allegations and asserting affirmative defenses. Emulex joined a summary judgment motion by Texas Instruments in a related lawsuit. On July 1, 2010, the Court granted summary judgment of noninfringement to Emulex based on prosecution history estoppel of the patent, and the Court subsequently entered final judgment in favor of Emulex on July 13, 2010. MEC filed a notice of appeal of the final judgment to the United States Court of Appeals for the Federal Circuit on August 9, 2010.

     On April 27, 2009, Reid Middleton filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of himself and all other similarly situated stockholders of the Company and derivatively on behalf of the Company. The original complaint named the members of the Board as defendants and the Company as a nominal defendant. The complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of shares of the Company’s common stock (the Shares) and a derivative claim for devaluation of the Company stemming from the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its unsolicited April 21, 2009 takeover proposal to acquire the Company. The original complaint sought declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 7, 2009, Kamwai Fred Chan filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of himself and all other similarly situated stockholders of the Company. The complaint names the members of the Board and the Company as defendants. The complaint asserts a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The complaint seeks declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees.

     On May 11, 2009, the Court of Chancery of the State of Delaware granted plaintiff Reid Middleton’s motion to expedite proceedings and set a trial date in the Delaware lawsuits beginning on July 8, 2009. On July 6, 2009, the Court of Chancery continued the July 8, 2009 trial date indefinitely. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 11, 2009, Pipefitters Local No. 636 Defined Benefit Plan filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of itself and all other similarly situated stockholders of the Company and derivatively on behalf of the Company. The original complaint named the members of the Company’s Board as defendants and the Company as a nominal defendant. The complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new shareholder rights plan to replace its expiring rights plan, amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The original complaint also asserted a derivative claim for breach of fiduciary duty based on the same actions. The original complaint sought declaratory and injunctive relief, including mandatory injunctive relief, and costs, including attorneys’ and expert fees. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 12, 2009, Norfolk County Retirement System filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of itself and all other similarly situated stockholders of the Company. The original complaint named the members of the Company’s Board and the Company as defendants. The original complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new shareholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The original complaint sought declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees.

     On August 21, 2009, Reid Middleton, Pipefitters Local No. 636 Defined Benefit Plan and Norfolk County Retirement System (together “Plaintiffs”) filed a motion in the Court of Chancery of the State of Delaware for leave to file an amended complaint. On September 17, 2009, Plaintiffs sent a letter to the Court of Chancery requesting that the Court enter an order permitting Plaintiffs to file the proposed Verified Amended Class Action and Derivative Complaint. The Court of Chancery entered the order on September 17, 2009. The Verified Amended Class Action and Derivative Complaint was brought on behalf of Plaintiffs and all other similarly situated stockholders of the Company and, alternatively, derivatively on behalf of the Company. The complaint named the members of the Board as defendants and the Company as a nominal defendant. The complaint asserted claims for breach of fiduciary duty on behalf of a putative class of holders of Shares and, alternatively, a derivative claim for devaluation of the Company stemming from the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The complaint sought declaratory relief, compensatory damages, interest and costs, including attorneys’ and expert fees. On October 13, 2009, the defendants filed an answer to the amended complaint.

     On December 3, 2009, the plaintiffs’ attorneys filed an application for an award of attorneys’ fees and expenses. The Court rejected the plaintiff’s request for attorneys’ fees as premature on December 18, 2009. On February 4, 2010, the Court of Chancery granted a Scheduling Order setting a trial date for December 6-10, 2010. On July 9, 2010, the parties filed a stipulation of settlement and order of dismissal of action wherein Emulex’s insurance carrier agreed to pay $3.0 million for plaintiffs’ counsel fees and expenses, subject to the Court’s final approval. The Company recorded the $3.0 million potential settlement and related insurance recovery in fiscal 2010. On October 4, 2010, the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On September 14, 2009, Broadcom Corporation filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The original complaint alleged that the Company is infringing 10 Broadcom patents covering certain data and storage networking technologies. On February 23, 2010, Broadcom filed a first amended complaint. The first amended complaint alleges that the Company is infringing 12

Broadcom patents covering certain data and storage networking technologies. The complaint seeks declaratory and injunctive relief, monetary damages, and interest and costs, including attorneys’ and expert fees. On March 25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint alleging that it believes that the Broadcom patents at issue are invalid or not infringed, or both. In addition, the Company has asserted counterclaims for declaratory judgment of invalidity and non-infringement against each of the Broadcom patents at issue, and seeks award of attorneys’ fees, costs, and expenses. On January 11, 2010, the Court set a trial date of September 20, 2011. On February 12, 2010, Broadcom sought permission to amend its complaint to assert an additional patent, making the total patents asserted as 11 instead of 10. On March 25, 2010, Emulex filed an answer to the amended Broadcom complaint. On April 2, 2010, Broadcom filed a “disclosure of infringement contentions.”

     On May 26, 2010, Broadcom Corporation filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The 2010 lawsuit asserts that certain Emulex products are infringing on a Broadcom patent covering certain data and storage networking technologies. Broadcom seeks a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs. On June 30, 2010, the Judge stated that the 2009 and 2010 patent cases would be consolidated into a single lawsuit. On October 14, 2010, the Court issued an order on the parties’ joint stipulation dismissing three patents from the case. The status of this matter does not allow management of the Company to determine whether a loss will occur or estimate the range of such a loss. Accordingly, management has determined that a potential loss is not probable and no amount has been accrued.

     On November 9, 2009, the Company filed a lawsuit against Broadcom Corporation alleging that Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws, as well as made defamatory statements and engaged in acts of unfair competition. The complaint seeks actual and punitive damages, attorneys’ fees and costs, and injunctive relief against Broadcom. On January 4, 2010, the Company filed an amended complaint. The amended complaint alleges that Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws and made defamatory statements. The amended complaint seeks actual and punitive damages, attorneys’ fees and costs, and injunctive relief. On June 7, 2010, the Court denied Broadcom’s motion to dismiss Emulex’s first amended complaint and to strike Emulex’s defamation claim.

     In addition to the ongoing litigation discussed above, 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 the open 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 has approximately $34.4 million of liabilities for uncertain tax positions as of September 26, 2010 for which a reasonably reliable estimate of the period of payment cannot be made.

     The Company has entered into various agreements for professional services, joint-development, non-recurring engineering, and purchases of inventory. As of September 26, 2010, the Company’s obligation associated with such agreements was approximately $63.5 million.

     In addition, the Company provides limited indemnification in selected circumstances within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to the Company’s product infringement of certain intellectual property, and in some limited cases against bodily injury or damage to real or tangible personal property caused by a defective Company product. It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. As of September 26, 2010, the Company has not incurred any significant costs related to indemnification of its customers.

10. Treasury Stock

     In early August 2008, the Company’s Board of Directors authorized a new plan to repurchase up to $100.0 million of its outstanding common stock. In April 2009, upon receipt of an unsolicited acquisition proposal and related tender offer of Broadcom Corporation to acquire the Company, the Company’s Board of Directors

elected to temporarily suspend any activity under the share repurchase plan. In light of Broadcom allowing its tender offer to expire on July 14, 2009, Emulex’s Board of Directors elected to reactivate the $100.0 million share repurchase plan effective July 15, 2009. As of September 26, 2010, the Company has repurchased approximately 6.1 million shares of its common stock for an aggregate purchase price of approximately $58.3 million or an average of $9.55 per share under this plan, of which approximately 4.1 million shares for an aggregate purchase price of approximately $40.1 million or an average of $9.76 was purchased during the quarter ended September 26, 2010. Approximately $41.7 million is available under this program after these repurchases. The Company may repurchase shares from time-to-time in open market purchases or privately negotiated transactions. It is expected that any future share repurchases will be financed by available cash balances and cash from operations. The Company’s Board of Directors has not set an expiration date for the plan.

11. Stock-Based Compensation

     As of September 26, 2010, the Company had three stock-based plans for employees and directors that are open for future awards, the 2005 Equity Incentive Plan (Equity Incentive Plan), the 1997 Stock Award Plan for Non-Employee Directors (Director Plan), and the Emulex Corporation Employee Stock Purchase Plan (Purchase Plan). In addition, the Company had nine stock-based plans (All Other Plans), including seven plans assumed in connection with acquisitions, each of which is closed for future grants but has options outstanding. Available for future awards are 3,159,974 shares under the Equity Incentive Plan, 385,285 shares under the Director Plan, and 678,085 shares under the Purchase Plan.

     In connection with the acquisition of ServerEngines on August 25, 2010, the Company assumed the ServerEngines Corporation Amended and Restated 2008 Stock Option Plan (the ServerEngines Plan). The ServerEngines options were replaced with Emulex options based on the acquisition exchange ratio and continue to be subject to the terms of the ServerEngines Plan. The options have a life of up to 10 years and generally vest over a 4 or 5 year period. The ServerEngines Plan is closed for future grants. There were 472,732 options issued in exchange for the options assumed in the acquisition of ServerEngines.

     Aggregate amounts recognized in the condensed consolidated financial statements with respect to these plans are as follows (in thousands):

		Three Months Ended
		September 26,				September 27,
		2010				2009
Total cost of stock-based payment plans during the period		$	15,318			$	4,903
Amounts capitalized in inventory during the period			(207	)			(120	)
Amounts recognized in income for amounts previously capitalized in inventory			191				154
Amounts charged against income, before income tax benefit		$	15,302			$	4,937
Amount of related income tax benefit recognized in income		$	1,563			$	1,629

     In connection with the ServerEngines acquisition, the Company has recognized approximately $10.6 million of stock-based compensation expense related to employment based contingent shares during the quarter ended September 26, 2010 and expects to recognize another $11.6 million of stock-based compensation expense over the next 15 months.

     The fair value of each stock option award under the Equity Incentive Plan and the Director Plan and purchase under the Purchase Plan is estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the market price of the underlying common stock on the date of grant, expected term, stock price volatility and expected risk-free interest rates. Expected volatilities are based on equal weighting of historical volatilities for periods equal to the expected term and implied volatilities based on traded options to buy the Company’s shares. The fair value of each unvested stock award is determined based on the closing price of the Company’s common stock on the grant date.

     The assumptions used to compute the fair value of stock option grants under the Equity Incentive Plan and the Director Plan for the three months ended September 26, 2010 and September 27, 2009 were:

		Three Months Ended
		September 26,		September 27,
		2010		2009
Expected volatility		42% — 45%		46% — 48%
Weighted average expected volatility		43%		47%
Expected dividends		—		—
Expected term (in years)		3.3 — 5.3		3.0 — 5.0
Weighted average expected term (in years)		4.16		3.81
Risk-free rate		0.69% — 1.36%		1.51% — 2.41%

     The assumptions used to compute the fair value of the compensatory element related to the shares to be purchased under the Purchase Plan for the three months ended September 26, 2010 and September 27, 2009 were:

		Three Months Ended
		September 26,				September 27,
		2010				2009
Weighted average expected volatility			37	%			87	%
Expected dividends			—				—
Weighted average expected term (in years)			0.5				0.5
Risk-free rate			0.24	%			0.30	%

     A summary of option activity under the plans for the three months ended September 26, 2010 is as follows:

										Weighted
										Average
						Weighted				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Options				Exercise Price				Term				Value
										(in years)				(in millions)
Options outstanding at June 27, 2010			7,531,095			$	20.73				2.72			$	0.9
Options granted			1,088,500			$	9.59
Options granted to replace ServerEngines options assumed as part of the acquisition			472,732			$	5.18
Options exercised			(60,191	)		$	4.54
Options canceled			(612,075	)		$	39.50
Options forfeited			(4,575	)		$	14.94
Options outstanding at September 26, 2010			8,415,486			$	17.17				3.35			$	4.94
Options vested and expected to vest at September 26, 2010			8,028,144			$	17.53				3.22			$	4.50
Options exercisable at September 26, 2010			6,502,165			$	19.35				2.59			$	2.51

     A summary of unvested stock awards activity for the three months ended September 26, 2010 is as follows:

						Weighted
						Average Grant
		Number of				Date Fair
		Awards				Value
Awards outstanding and unvested at June 27, 2010			3,437,741			$	10.46
Awards granted			629,993			$	9.84
Awards vested			(613,557	)		$	12.96
Awards forfeited			(58,955	)		$	10.31
Awards outstanding and unvested at September 26, 2010			3,395,222			$	9.89

     As of September 26, 2010, there was approximately $21.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.35 years.

     The weighted average grant date fair value of options granted during the three months ended September 26, 2010 and September 27, 2009 was approximately $3.39 per share and $3.70 per share, respectively. The weighted average

grant date fair value of unvested stock awards granted during the three months ended September 26, 2010 and September 27, 2009 was approximately $9.84 per share and $7.81 per share, respectively. The total intrinsic value of stock options exercised was approximately $0.3 million and $0.1 million for the three months ended September 26, 2010 and September 27, 2009, respectively. The total fair value of unvested stock awards vested was approximately $6.0 million and $5.2 million for the three months ended September 26, 2010 and September 27, 2009, respectively. Cash received from stock option exercises under stock-based plans and shares purchased under the Purchase Plan was approximately $0.3 million for the three months ended September 26, 2010 and approximately $0.1 million for the three months ended September 27, 2009. The actual tax benefit realized for the tax deductions from option exercise and vested stock awards of stock-based plans was approximately $2.3 million and $2.0 million for the three months ended September 26, 2010 and September 27, 2009, respectively.

     The Board of Directors recently approved, subject to ratification and approval by the stockholders, to increase the number of shares authorized under the Purchase Plan by 1.5 million shares and 2.0 million shares under the Equity Incentive Plan. As of September 26, 2010, including the shares newly authorized subject to approval by stockholders, the Company anticipates that the number of shares authorized under the Equity Incentive Plan, the Director Plan, the Purchase Plan, and All Other Plans are sufficient to cover future stock option exercises and shares that will be purchased during the current six month option period from May 1, 2010 to October 31, 2010 and the next six month option period from November 1, 2010 to April 30, 2011 under the Purchase Plan.

12. Income Taxes

     The Company recorded an income tax benefit of approximately $5.6 million and $9.7 million in the three months ended September 26, 2010 and September 27, 2009, respectively. In addition, the effective tax benefit rate was approximately 41% and 166% for the three months ended September 26, 2010 and September 27, 2009, respectively, primarily due to a non-recurring benefit of approximately $4.0 million related to the stock option exchange program during the three months ended September 27, 2009. The Company’s effective income tax rate depends on various factors, such as tax legislation, the mix of domestic and international pre-tax income, and research and development credits as a percentage of aggregate pre-tax income, and the effectiveness of the Company’s tax planning strategies. The tax benefits from the Company’s global initiatives were offset by the non-deductible stock-based compensation expense for the contingent shares related to the ServerEngines acquisition recognized during the three months ended September 27, 2010. The Company and its domestic subsidiaries file federal, state and local income / franchise tax returns in the U.S. Our international subsidiaries file income tax returns in various non-U.S. jurisdictions. Fiscal years 2008 and 2009 are under audit by the Internal Revenue Service (IRS). The Company is currently responding to Information Document Requests that have been received. No adjustments are proposed at this time. The Company does not expect that the results of the exam will have a material adverse effect on its financial condition or results of operations.

13. Net (Loss) Income Per Share

     In June 2008, the FASB issued authoritative guidance for whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in previously issued guidance for EPS. This guidance was effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2008, which was the Company’s fiscal year beginning June 29, 2009.

     The following table sets forth the computation of basic and diluted net (loss) income per share:

		Three Months Ended
		September 26,				September 27,
		2010				2009
		(in thousands, except per
		share data)
Numerator — Net (loss) income		$	(8,108	)		$	3,838
Less: Undistributed earnings allocated to participating securities			—				(78	)
Undistributed earnings allocated to common shareholders for basic net (loss) income per share		$	(8,108	)		$	3,760
Undistributed earnings allocated to common shareholders for diluted net (loss) income per share		$	(8,108	)		$	3,761
Denominator:
Denominator for basic net (loss) income per share — weighted average shares outstanding			82,321				79,797

		Three Months Ended
		September 26,				September 27,
		2010				2009
		(in thousands, except per
		share data)
Dilutive options outstanding, unvested stock units and ESPP			—				788
Denominator for diluted net income (loss) per share — adjusted weighted average shares outstanding			82,321				80,585
Basic net (loss) income per share		$	(0.10	)		$	0.05
Diluted net (loss) income per share		$	(0.10	)		$	0.05
Antidilutive options and unvested stock awards excluded from the computations			9,467				10,758
Average market price of common stock		$	9.47			$	9.63

     The antidilutive stock options and unvested stock were excluded from the computation of diluted net (loss) income per share due to the assumed proceeds from the award’s exercise or vesting being greater than the average market price of the common shares or due to the Company incurring a net loss for the periods presented.

14. Comprehensive (Loss) Income

     Components of comprehensive (loss) income are as follows:

		Three Months Ended
		September 26,				September 27,
		2010				2009
		(in thousands)
Net (loss) income		$	(8,108	)		$	3,838
Other comprehensive income (loss):
Change in foreign currency translation adjustments, net of income taxes			222				(93	)
		$	(7,886	)		$	3,745

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. 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, those in the section entitled “Risk Factors” in Part II, Item 1A of this Form 10-Q included elsewhere herein. 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. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the ability to realize the anticipated benefits of the acquisition of ServerEngines Corporation (ServerEngines) on a timely basis or at all, and the Company’s ability to integrate the technology, operations and personnel of ServerEngines into its existing operations in a timely and efficient manner. The fact that the economy generally, and the technology and storage segments specifically, have been in a state of uncertainty makes it difficult to determine if past experience is a good guide to the future and makes it impossible to determine if markets will grow or shrink in the short term. The current economic downturn and the resulting economic uncertainty for our customers and the storage networking market as a whole has and could continue to adversely affect our revenues and results of operations. Furthermore, the effect of any actual or potential unsolicited offers to acquire us may have an adverse effect on our 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: faster than anticipated decline in the storage networking market, slower than expected growth of the converged networking market or the failure of our Original Equipment Manufacturer (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 timely payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our or our OEM customers’ new or enhanced products; costs associated with expansion into new areas of the storage technology market; the effects of changes in our business model to separately charge for software; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; impairment charges, including but not limited to goodwill, intangible assets, and equity investments recorded under the cost method; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities, natural disasters and any 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; the effect of rapid migration of customers towards newer, lower cost product platforms; possible transitions from board or box level to application specific integrated circuit (ASIC) solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a faster than anticipated 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 that third-party claims of infringement and any related indemnity obligations; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities; our dependence on international sales and internationally produced products; changes in accounting standards; and the potential effects of global warming and any resulting regulatory changes on our business. These and other factors could cause actual results to differ materially from those in the forward-looking statements and are discussed elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

     Executive Overview

     Emulex creates enterprise-class products that connect storage, servers and networks. We are a leading supplier of a broad range of advanced storage networking convergence solutions. The world’s leading server and storage providers depend on our products to help build high performance, highly reliable, and scalable storage and converged networking solutions. Our products and technologies leverage flexible multi protocol architectures that extend from deep within the storage array to the server edge of storage area networks (SANs and 10Gb converged networks).

     Our Company operates within a single business segment that has two market focused product lines — Host Server Products (HSP) and Embedded Storage Products (ESP). HSP connect servers and storage to networks using industry standard protocols including Internet Protocol (IP) and fibre channe, Transmission Control Protocol (TCP)/IP, Internet Small Computer System Interface (iSCSI), Network Attached Storage (NAS) and Fibre Channel over Ethernet (FCoE). Our Ethernet based products include OneConnect Universal Converged Network Adapters (UCNAs) that enable network convergence. Our Fibre Channel based products include LightPulse^® HBAs, custom form factor solutions for OEM blade servers and ASICs. These products enable servers to efficiently connect to local area networks (LANs), SANs, and NAS by offloading data communication processing tasks from the server as information is delivered and sent to the network.

     ESP includes our InSpeed, FibreSpy^®, Input/Output Controllers (IOC) solutions, switch-on-a-chip (SOC), bridge products, and router products. Embedded storage switches, bridges, routers, and IOCs are deployed inside storage arrays, tape libraries, and other storage appliances, connect storage controllers to storage capacity delivering improved performance, reliability, and storage connectivity.

     Our Other category primarily consists of contract engineering services, legacy and other products.

     We rely almost exclusively on OEMs and sales through distribution channels for our revenue. Our OEM customers include the world’s leading server and storage providers, including Cisco Systems, Inc. (Cisco), Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Groupe Bull (Bull), Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Hitachi Limited (Hitachi), Huawei Technologies Company Ltd. (Huawei), International Business Machines Corporation (IBM), LSI Corporation (LSI), NEC Corporation (NEC), Network Appliance, Inc. (NetApp), Oracle America, Inc. (Oracle), Quantum Corporation (Quantum), Unisys Corporation (Unisys), and Xyratex Ltd. (Xyratex). Our distribution partners include Arrow ECS Denmark A/S (Arrow), Avnet, Inc. (Avnet), Bell Microproducts, Ltd. (Bell), Info X Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro), Macnica Networks Corporation (Macnica), Netmarks Inc. (Netmarks), Tech Data Corporation (Tech Data), and Tokyo Electron Device Ltd. (TED). The market for networking infrastructure solutions is concentrated among large OEMs, and as such, a significant portion of our revenues are generated from sales to a limited number of customers.

     As of September 26, 2010, we had a total of 964 employees.

     Our corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626. 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 (www.emulex.com) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. References contained herein to “Emulex,” the “Company,” the “Registrant,” “we,” “our,” and “us” refer to Emulex Corporation and its subsidiaries.

Global Initiatives

     As part of our global initiatives, we created an Irish subsidiary to expand our international operations by providing local customer service and support to our customers outside of the United States in the fourth quarter of fiscal 2008. In addition, Emulex granted an intellectual property license and entered into a research and development cost sharing agreement with its subsidiary in the Isle of Man. The terms of the license require that the subsidiary make prepayments of expected royalties to a U.S. subsidiary, the first of which was paid before the end of fiscal 2008 in the amount of approximately $131.0 million for expected royalties relating to fiscal 2009 through 2015. In

the fourth quarter of fiscal 2010, the subsidiary made the second prepayment of approximately $6.5 million for expected royalties relating to fiscal 2011 through 2015. These global initiatives are expected to continue to reduce our effective tax rate.

     Our cash balances and investments are held in numerous locations throughout the world. The cash and investments held outside of the U.S. are expected to increase primarily in our Isle of Man and Ireland subsidiaries. Substantially all of the amounts held outside of the U.S. will be available for repatriation at any time, but under current law, repatriated funds would be subject to U.S. federal income taxes, less applicable foreign tax credits.

Business Combination

     On August 25, 2010, we acquired 100% of the outstanding common shares of ServerEngines Corporation (ServerEngines), a privately-held, fabless semiconductor company located in Sunnyvale, California. The combination of Emulex and ServerEngines’ technology creates a unique offering to deliver I/O connectivity for converged networking solutions, including adapters, mezzanine cards and LAN on Motherboard (LOM) solutions. In addition, the acquisition will add the ServerEngines’ Pilot^TM facility of Serves Management Controllers, which reside on the motherboard, enabling remote IP based “lights out” management capabilities.

Results of Operations

     The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements included elsewhere herein.

		Percentage of Net Revenues
		Three Months Ended
		September 26,				September 27,
		2010				2009
Net revenues			100	%			100	%
Cost of sales			44				39
Gross profit			56				61
Operating expenses:
Engineering and development			37				37
Selling and marketing			13				15
General and administrative			17				14
Amortization of other intangible assets			2				2
Total operating expenses			69				68
Operating loss			(13	)			(7	)
Nonoperating income, net:
Interest income			—				—
Interest expense			—				—
Other income (expense), net			—				—
Total nonoperating income, net			—				—
Loss before income taxes			(13	)			(7	)
Income tax benefit			(5	)			(11	)
Net (loss) income			(8	%)			4	%

Three months ended September 26, 2010, compared to three months ended September 27, 2009

     Net Revenues. Net revenues for the first quarter of fiscal 2011 ended September 26, 2010, increased by approximately $17.6 million, or 21%, to approximately $103.1 million, compared to approximately $85.5 million for the same quarter of fiscal 2010 ended September 27, 2009.

Net Revenues by Product Line

     Net revenues by product line were as follows:

		Net Revenues by Product Line
		Three Months								Three Months
		Ended				Percentage				Ended				Percentage
		September 26,				of Net				September 27,				of Net				Increase/				Percentage
(in thousands)		2010				Revenues				2009				Revenues				(Decrease)				Change
Host Server Products		$	79,214				77	%		$	64,145				75	%		$	15,069				23	%
Embedded Storage Products			23,825				23	%			21,274				25	%			2,551				12	%
Other			58				—				108				—				(50	)		nm
Total net revenues		$	103,097				100	%		$	85,527				100	%		$	17,570				21	%

nm — not meaningful

     HSP primarily consists of HBAs, mezzanine cards, input/output (I/O) ASICs, and UCNAs. For the three months ended September 26, 2010, our Fibre Channel based products accounted for approximately 90% of our HSP revenues. The increase in our HSP net revenue for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was mainly due to an increase of approximately 130% in units shipped, partially offset by a decrease of approximately 46% in average selling price. The significant increase in units shipped and decrease in average selling price was primarily due to the inclusion of sales resulting from the acquisition of ServerEngines on August 25, 2010, which accounted for no revenues in the same quarter in the prior year and had a significantly lower average selling price compared to other Emulex products.

     ESP primarily consists of our InSpeed^®, FibreSpy^®, I/O controller solutions, and bridge and router products. The increase in our ESP net revenue for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was primarily due to an increase in units shipped of approximately 52% offset by a decrease in average selling price of approximately 26%. The significant increase in units shipped and decrease in average selling price was primarily due to the launch of new bridge products that had lower average selling prices.

     Our Other category primarily consists of contract engineering services, legacy and other products.

Net Revenues by Major Customers

     In addition to direct sales, some of our larger OEM customers purchase or market products indirectly through distributors, resellers or other third parties. If these indirect sales are purchases of customer-specific models, we are able to track these sales. However, if these indirect sales are purchases of our standard models, we are not able to distinguish them by OEM customer. Customers whose direct net revenues, or total direct and indirect net revenues (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties), exceeded 10% of our net revenues were as follows:

		Net Revenues by Major Customers
		Direct Revenues								Total Direct and Indirect Revenues (2)
		Three Months				Three Months				Three Months				Three Months
		Ended				Ended				Ended				Ended
		September 26,				September 27,				September 26,				September 27,
		2010				2009				2010				2009
Net revenue percentage (1):
OEM:
IBM			22	%			24	%			31	%			34	%
Hewlett-Packard			15	%			14	%			17	%			15	%
EMC			—				—				14	%			11	%

     Direct sales to our top five customers accounted for approximately 58% of total net revenues for the three months ended September 26, 2010, compared to approximately 60% for the three months ended September 27, 2009. Direct and indirect sales to our top five customers accounted for approximately 75% of total net revenues for the three months ended September 26, 2010, compared to approximately 74% for the three months ended September 27, 2009. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.

Net Revenues by Sales Channel

     Net revenues by sales channel were as follows:

		Net Revenues by Sales Channel
		Three Months Ended				Percentage				Three Months Ended				Percentage
		September 26,				of Net				September 27,				of Net				Increase/				Percentage
(in thousands)		2010				Revenues				2009				Revenues				(Decrease)				Change
OEM		$	86,306				84	%		$	72,287				85	%		$	14,019				19	%
Distribution			16,774				16	%			13,211				15	%			3,563				27	%
Other			17				—				29				—				(12	)			(41	%)
Total net revenues		$	103,097				100	%		$	85,527				100	%		$	17,570				21	%

     The increase in total revenues is due to the overall increase in demand for both HSP and ESP products. The increase in OEM net revenues for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was primarily due to an increase of approximately 22% in HSP revenues generated through our OEMs. The increase in distribution net revenues for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was primarily due to an increase of approximately 29% in HSP net revenues generated through our distribution partners. We believe that our net revenues are being generated primarily as a result of product certifications and qualifications with our OEM customers, which take products directly and indirectly through distribution and contract manufacturers. We view product certifications and qualifications as an important indicator of future revenue opportunities and growth for the Company. However, product certifications and qualifications do not necessarily ensure continued market acceptance of our products by our OEM customers. It is also very difficult to determine the future impact, if any, of product certifications and qualifications on our revenues.

Net Revenues by Geographic Territory

     Our net revenues by geographic territory based on billed-to location were as follows:

		Net revenues by Geographic Territory
		Three Months								Three Months
		Ended				Percentage				Ended				Percentage
		September 26,				of Net				September 27,				of Net				Increase/				Percentage
(in thousands)		2010				Revenues				2009				Revenues				(Decrease)				Change
Asia Pacific		$	43,427				42	%		$	29,166				34	%		$	14,261				49	%
United States			33,420				32	%			26,766				31	%			6,654				25	%
Europe, Middle East, and Africa			24,752				24	%			28,115				33	%			(3,363	)			(12	%)
Rest of the world			1,498				2	%			1,480				2	%			18				1	%
Total net revenues		$	103,097				100	%		$	85,527				100	%		$	17,570				21	%

     We believe the increase in Asia Pacific net revenues and decrease in Europe, Middle East, and Africa (EMEA) net revenues as a percentage of total net revenues for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was primarily due to our OEM customers migrating towards using contract manufacturers that are predominately located in Asia Pacific. The United States net revenues as a percentage of total net revenues essentially remained unchanged. However, as 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. Gross profit consists of net revenues less cost of sales. Our gross profit was as follows (in thousands):

Gross Profit
Three Months						Three Months
Ended September 26,		Percentage of				Ended September 27,				Percentage of				Increase/				Percentage
2010		Net Revenues				2009				Net Revenues				(Decrease)				Points Change
$57,395			56	%		$	52,106				61	%		$	5,289				(5	)%

     Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $6.2 and $5.0 million of amortization of technology intangible assets for the three months ended September 26, 2010 and September 27, 2009, respectively. Approximately $1.5 million of the approximately $6.2 million of amortization of technology intangible assets in the three months ended September 26, 2010 was related to the ServerEngines acquisition. Approximately $0.4 million of share-based compensation expense was included in cost of sales for both the three months ended September 26, 2010 and September 27, 2009. Gross margin dollars increased primarily as a result of the increase in net revenues of approximately 21% for the three months ended September 26, 2010 compared to the three months ended September 27, 2009. Gross margin as a percentage of net revenues in the current three month period ended September 26, 2010 was negatively impacted by approximately 2% as a result of the higher cost for application specific integrated circuit (ASIC) inventory purchases prior to the close of the ServerEngines acquisition in the current period.

     Engineering and Development. Engineering and development expenses consisted primarily of salaries and related expenses for personnel engaged in the design, development, and support of our products. These expenses included third-party fees paid to consultants, prototype development expenses, and computer service costs related to supporting computer tools used in the design process. Engineering and development expenses were as follows (in thousands):

Engineering and Development
Three Months Ended		Percentage of				Three Months Ended				Percentage of				Increase/				Percentage
September 26, 2010		Net Revenues				September 27, 2009				Net Revenues				(Decrease)				Points Change
$38,264			37	%		$	31,399				37	%		$	6,865			—%

     Engineering and development expenses for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 increased approximately $6.9 million, or 22%. Approximately $6.1 million and $2.5 million of share-based compensation expense were included in engineering and development costs for the three months ended September 26, 2010 and September 27, 2009, respectively. The increase in share-based compensation expense during the three months ended September 26, 2010 was primarily due to the ServerEngines acquisition. Engineering and development headcount increased to 619 at September 26, 2010 from 455 at September 27, 2009 primarily due to the acquisition of ServerEngines. The increase in headcount resulted in a net increase of approximately $1.9 million in salary and related expenses as compared to the same period in fiscal 2010. The remaining increase in expenses during the three months ended September 26, 2010 was primarily due to an increase in nonrecurring engineering, prototypes, and related costs associated with new product development of approximately $1.1 million.

     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. Sales and marketing expenses were as follows (in thousands):

Selling and Marketing
Three Months Ended		Percentage of Net				Three Months Ended				Percentage of Net								Percentage Points
September 26, 2010		Revenues				September 27, 2009				Revenues				Increase/ (Decrease)				Change
$12,709			13	%		$	12,912				15	%		$	(203	)			(2	)%

     Selling and marketing expenses for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 decreased approximately $0.2 million, or 2%. Approximately $1.1 million and $0.5 million of share-based compensation expense were included in selling and marketing costs for the three months ended September 26, 2010 and September 27, 2009, respectively. Selling and marketing headcount increased to 133

at September 26, 2010 from 122 at September 27, 2009. The increase in headcount resulted in a net increase of approximately $0.3 million in salary and related expenses as compared to the same period in fiscal 2010. The decrease in selling and marketing expenses during the three months ended September 26, 2010 was primarily due to a decrease in performance based compensation of approximately $0.7 million and a decrease in outside services and advertising expenses of approximately $0.3 million. We will continue to closely manage and target advertising, market promotions, and heighten brand awareness of our new and existing products in an effort to provide overall revenue growth.

     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 corporate expenses. General and administrative expenses were as follows (in thousands):

General and Administrative
Three Months Ended		Percentage of Net				Three Months Ended				Percentage of Net								Percentage Points
September 26, 2010		Revenues				September 27, 2009				Revenues				Increase/ (Decrease)				Change
$17,619			17	%		$	12,279				14	%		$	5,340				3	%

     General and administrative expenses for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 increased approximately $5.3 million, or 43%. Approximately $7.7 million and $1.6 million of share-based compensation expense were included in general and administrative costs for the three months ended September 26, 2010 and September 27, 2009, respectively. Approximately $6.6 million of the share-based compensation expense in the three months ended September 26, 2010 was related to the ServerEngines acquisition. General and administrative headcount increased to 140 at September 26, 2010 from 129 at September 27, 2009. Salaries and related expenses decreased by approximately $0.8 million due to a decrease in performance based compensation of approximately $0.5 million and non-recurring severance charges in the comparable period in the prior year. The increase in general and administrative expenses is also due to an increase in legal and other fees associated with our patent litigation of approximately $0.7 million and an increase in outside services of approximately $0.4 million, partially offset by a decrease due to non-recurring charges in the same period in the prior year of approximately $1.0 million related to the abandonment of an expansion project.

     Amortization of Other Intangible Assets. Amortization of other intangible assets consisted of amortization of intangible assets such as patents, customer relationships, tradenames with estimable lives, covenants not to compete, and backlog. Amortization expense was as follows (in thousands):

Amortization of Other Intangible Assets
Three Months Ended		Percentage of Net				Three Months Ended				Percentage of Net								Percentage Points
September 26, 2010		Revenues				September 27, 2009				Revenues				Increase/ (Decrease)				Change
$2,016			2	%		$	1,698				2	%		$	318			—%

     Amortization of other intangible assets for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 increased by approximately $0.3 million, or 19%. The increase was primarily due to amortization expense of approximately $0.2 million related to intangible assets acquired from ServerEngines.

     Nonoperating Income, net. Nonoperating income, net, consisted primarily of interest income, interest expense, and other non-operating income and expense items. Our nonoperating income, net, was as follows (in thousands):

Nonoperating Income, net
Three Months Ended		Percentage of Net		Three Months Ended				Percentage of Net						Percentage Points
September 26, 2010		Revenues		September 27, 2009				Revenues		Increase/ (Decrease)				Change
$(507)		—%		$	347			—%		$	(854	)		—%

     Our nonoperating income, net, for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 decreased approximately $0.9 million, or 246%. The net decrease was primarily due to a charge recorded for the settlement of our notes receivable from ServerEngines in connection with the acquisition, as required by the authoritative guidance for business combinations, combined with a lower balance of investments and lower interest rates on investments.

     Income Taxes. Income taxes were as follows (in thousands):

Income Taxes
Three Months Ended		Percentage of Net				Three Months Ended				Percentage of Net								Percentage Points
September 26, 2010		Revenues				September 27, 2009				Revenues				Increase/ (Decrease)				Change
$(5,612)			(5	%)		$	(9,673	)			(11	%)		$	4,061				6	%

     Income taxes for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 increased approximately $4.1 million, or 42%. The increase in income taxes, in the form of decreased income tax benefits, for the three months ended September 26, 2010 compared to the three months ended September 27, 2009 was primarily due to a non-recurring tax benefit in the prior year of approximately $4.0 million related to the stock option exchange program. The tax benefits from our global initiatives were offset by the non-deductible stock-based compensation expense for the contingent shares related to the ServerEngines acquisition recognized during the three months ended September 27, 2010.

Critical Accounting Policies

     The preparation of the consolidated financial statements requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets, and liabilities in accordance with accounting principles generally accepted in the United States. 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.

     We believe the following are critical accounting policies and require us to make significant judgments and estimates in the preparation of our consolidated financial statements: revenue recognition; warranty; allowance for doubtful accounts; intangible assets and other long-lived assets; inventories; goodwill; income taxes; stock-based compensation; and litigation costs. Changes in judgments and uncertainties could potentially result in materially different results under different assumptions and conditions. If these estimates differ significantly from actual results, the impact to the consolidated financial statements may be material.

     Revenue Recognition. We generally recognize revenue at the time of shipment when title and risk of loss have passed, evidence of an arrangement has been obtained, pricing is fixed or determinable, and collectibility has been reasonably assured (Basic Revenue Recognition Criteria). We make certain sales through two tier distribution channels and have various distribution agreements with selected distributors and Master Value Added Resellers (collectively, the Distributors). These distribution agreements may be terminated upon written notice by either party. Additionally, these Distributors are generally given privileges to return a portion of inventory and to participate in price protection and cooperative marketing programs. Therefore, we recognize revenue on our standard products sold to our Distributors based on data received from the Distributors and management’s estimates to approximate the point that these products have been resold by the Distributors. 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 for OEM specific products shipped to the Distributors when the Basic Revenue Recognition Criteria have been met. Additionally, we maintain accruals and allowances for price protection and various other marketing programs. We classify the costs of these incentive programs based on the benefit received, if applicable, as either a reduction of revenue, a cost of sale, or an operating expense.

     Warranty. We provide a warranty of between one and five years on our products. We record a provision for estimated warranty related costs at the time of sale based on historical product return rates and management’s estimates of expected future costs to fulfill our warranty obligations. We evaluate our ongoing warranty obligation on a quarterly basis.

     Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based upon historical write-offs as a percentage of net revenues and management’s review of outstanding accounts receivable. Amounts due from customers are charged against the allowance for doubtful accounts when management believes that collectability of the amount is unlikely. Although we have not historically experienced significant losses on accounts receivable, our accounts receivable are concentrated with a small number of customers. Consequently, any write-off associated with one of these customers could have a significant impact on our allowance for doubtful accounts and results of operations.

     Intangible Assets and Other Long-Lived Assets. Intangible assets resulting from acquisitions or licensing agreements are carried at cost less accumulated amortization and impairment charges, if any. 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 five to seven years. Furthermore, we assess whether our long-lived assets, including intangible assets and equity investment in a privately-held company recorded under the cost method, should be tested for recoverability periodically and whenever events or circumstances indicate that their carrying value may not be recoverable. 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 selling costs.

     Inventories. Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. We use a standard cost system to determine cost. The standard costs are adjusted periodically to 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 that the carrying value of inventory does not exceed net realizable value. Accordingly, we may have to reduce the carrying value of excess and obsolete inventory if forecasted demand decreases.

     Goodwill. Goodwill is not amortized, but instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired. Management considers our business as a whole to be its reporting unit for purposes of testing for impairment. This impairment test is performed annually during the fourth fiscal quarter. As of September 26, 2010, the fair value of the reporting unit substantially exceeded its carrying value.

     A two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.

     A preliminary purchase price allocation was recorded during the three months ended September 26, 2010 related to the ServerEngines acquisition that was completed on August 25, 2010, adding approximately $79.1 million to goodwill. We will continue to monitor for potential indicators of impairment.

     Income Taxes. We account for income taxes using the asset and liability method, under which we recognize 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 and for net operating loss and tax credit carryforwards. Tax positions that meet a more-likely-than-not recognition threshold are recognized in the financial statements.

     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. As a multinational corporation, we are subject to complex tax laws and regulations in various jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional liabilities or potentially to reverse previously recorded tax liabilities.

     Stock-Based Compensation. We account for our stock-based awards to employees and non-employees using the fair value method. Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The fair value of each unvested stock award is determined based on the closing price of our common stock at grant date. For stock options, the measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term, stock price volatility, dividend rate, risk free interest rate, and award forfeiture rate. The input factors used in the valuation model are based on subjective future expectations combined with management judgment. If there is a difference between the forfeiture assumptions used in determining stock-based compensation costs and the actual forfeitures, which become known over time, we may

change the assumptions used in determining stock-based compensation costs. These changes may materially impact our results of operations in the period such changes are made. See Note 11 in the accompanying notes to consolidated financial statements contained elsewhere herein for additional information and related disclosures.

     Litigation Costs. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Legal and other litigation related costs are recognized as the services are provided. We record insurance recoveries for litigation costs for which both conditions are met: (i) the recovery is probable and (ii) collectability is reasonably assured. The insurance recoveries recorded are only to the extent the litigation costs have been incurred and recognized in the financial statements; however, it is reasonably possible that the actual recovery may be significantly different from our estimates. There are many uncertainties associated with any litigation, and we cannot provide assurance that any actions or other third party claims against us will be resolved without costly litigation or substantial settlement charges. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected.

Recently Adopted and Recently Issued Accounting Standards

     See Note 1 in the accompanying notes to consolidated financial statements for a description of the recently adopted accounting standards.

Liquidity and Capital Resources

     At September 26, 2010, we had approximately $223.2 million in working capital and approximately $173.5 million in cash and cash equivalents and current investments. At June 27, 2010, we had approximately $356.1 million in working capital and approximately $294.8 million in cash and cash equivalents and current investments. We maintain an investment portfolio of various security holdings, types, and maturities. We invest in instruments that meet credit quality standards in accordance with our investment guidelines. We limit our exposure to any one issuer or type of investment with the exception of U.S. Government issued or U.S. Government sponsored entity securities. Our investments consisted mostly of U.S. Government issued or U.S. Government sponsored entity securities as of September 26, 2010 and we did not hold any auction rate securities or direct investments in mortgage-backed securities. We have primarily funded our cash needs from continuing operations. As part of our global initiatives, we currently plan to continue our strategic investment in research and development, sales and marketing, capital equipment, and facilities. We may also consider internal and external investment opportunities in order to achieve our growth and market leadership goals, including licensing and joint-development agreements with our suppliers, customers, and other third parties.

     In early August 2008, our Board of Directors authorized a plan to repurchase up to $100.0 million of our outstanding common stock. In April 2009, upon receipt of an unsolicited takeover proposal and related tender offer of Broadcom Corporation to acquire us, our Board of Directors elected to temporarily suspend any activity under the share repurchase plan. In light of Broadcom allowing its tender offer to expire on July 14, 2009, Emulex’s Board of Directors elected to reactivate the $100.0 million share repurchase plan effective July 15, 2009. As of September 26, 2010, the Company has repurchased 6.1 million shares of its common stock for an aggregate purchase price of approximately $58.3 million or an average of $9.55 per share under this plan, of which approximately 4.1 million shares for an aggregate purchase price of approximately $40.1 million or an average of $9.76 was purchased during the quarter ended September 26, 2010.

     We believe that our existing cash and cash equivalents, current 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. We currently do not have any outstanding lines of credit or other borrowings.

     Cash provided by operating activities during the three months ended September 26, 2010 was approximately $10.5 million compared to approximately $10.9 million during the three months ended September 27, 2009. The current period cash provided by operating activities was primarily due to a net loss of approximately $8.1 million before adjustments for share-based compensation expense of approximately $15.3 million , amortization of

intangible assets of approximately $8.2 million and depreciation and amortization of approximately $5.2 million, offset by an increase in accounts and other receivables of approximately $5.5 million, an increase in prepaid expenses and other assets of approximately $3.3 million, and a decrease in deferred income taxes of approximately $2.6 million.

     Cash used in investing activities during the three months ended September 26, 2010 was approximately $44.2 million compared to approximately $13.7 million during the three months ended September 27, 2009. The current period usage of cash was primarily due to approximately $53.1 million paid in to the shareholders of ServerEngines in connection with the acquisition, net of cash acquired, approximately $4.5 million in purchases of property and equipment, approximately $4.0 million paid pursuant to a licensing arrangement with a third party, partially offset by maturities of investments that were not reinvested.

     Cash used in financing activities for the three months ended September 26, 2010 was approximately $68.9 million compared to approximately $20.1 million for the three months ended September 27, 2009. The current period usage of cash was primarily due to the purchase of treasury stock of approximately $40.1 million compared to approximately $18.2 million in the same period in the prior year, and the retirement of debt to the founders of ServerEngines in connection with the acquisition of approximately $26.9 million.

     We have disclosed outstanding legal proceedings in Note 9 to our condensed consolidated financial statements. Although we cannot be certain of the outcome of any litigation, we currently believe the final resolution of outstanding litigation will not have a material adverse effect on the Company’s liquidity or capital resources.

     The following summarizes our contractual obligations as of September 26, 2010, and the effect such obligations are expected to have on our liquidity in future periods. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table.

		Payments Due by Period
		(in thousands)
						Remaining
		Total				2011				2012				2013				2014				2015				Thereafter
Leases (1)		$	11,102			$	5,048			$	4,346			$	1,708			$	—			$	—			$	—
Purchase commitments			47,595				47,595				—				—				—				—				—
Other commitments (2)			15,933				14,667				1,265				1				—				—				—
Total		$	74,630			$	67,310			$	5,611			$	1,709			$	—			$	—			$	—

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Our cash and cash equivalents are not subject to significant interest rate risk due to their short terms to maturity. As of September 26, 2010, the carrying value of our cash and cash equivalents approximated fair value.

     As of September 26, 2010, our investment portfolio consisted primarily of fixed income securities of approximately $28.7 million. We have the positive intent and ability to hold these securities to maturity. We did not hold any auction rate securities or direct investments in mortgage-backed securities as of September 26, 2010.

     The fair market value of our investment portfolio 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% from the levels existing as of September 26, 2010, 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 were re-invested in securities with lower interest rates, interest income would decrease in the future.

Item 4. Controls and Procedures

     Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

     There were no changes in our internal control over financial reporting that occurred during the three months ended September 26, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

     On November 15, 2001, prior to the Company’s acquisition of Vixel Corporation, a securities class action was filed in the United States District Court in the Southern District of New York as Case No. 01 CIV. 10053 (SAS), Master File No. 21 MC92 (SAS) against Vixel and two of its officers and directors (one of which is James M. McCluney, the Company’s current Chief Executive Officer) and certain underwriters who participated in the Vixel initial public offering in late 1999. The amended complaint alleged violations under Section 10(b) of the Exchange Act and Section 11 of the Securities Act and sought unspecified damages on behalf of persons who purchased Vixel stock during the period October 1, 1999 through December 6, 2000. On April 2, 2009, the parties signed a Stipulation and Agreement of Settlement (the 2009 Settlement) to the District Court for preliminary approval. The District Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement “fairness” hearing was held on September 10, 2009. On October 6, 2009, the District Court entered an opinion granting final approval to the settlement and directing that the Clerk of the District Court close these actions. The 2009 Settlement provides for a settlement amount of $586 million, and Emulex has no obligation to pay any part of that amount. Notices of appeal of the opinion granting final approval have been filed by six groups of appellants.

     On January 27, 2009, a patent infringement lawsuit was filed in the United States District Court in the Central District of California as Case No. CV09-00605 R (JWJx) against Emulex by Microprocessor Enhancement Corporation and Michael H. Branigin. The complaint alleges infringement of U.S. Patent No. 5,471,593, and seeks a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs. On March 25, 2009, Emulex filed an answer to the complaint denying allegations and asserting affirmative defenses. Emulex joined a summary judgment motion by Texas Instruments in a related lawsuit. On July 1, 2010, the Court granted summary judgment of noninfringement to Emulex based on prosecution history estoppel of the patent, and the Court subsequently entered final judgment in favor of Emulex on July 13, 2010. MEC filed a notice of appeal of the final judgment to the United States Court of Appeals for the Federal Circuit on August 9, 2010.

     On April 27, 2009, Reid Middleton filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of himself and all other similarly situated stockholders of the Company and derivatively on behalf of the Company. The original complaint named the members of the Board as defendants and the Company as a nominal defendant. The complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of shares of the Company’s common stock (the Shares) and a derivative claim for devaluation of the Company stemming from the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its unsolicited April 21, 2009 takeover proposal to acquire the Company. The original complaint sought declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 7, 2009, Kamwai Fred Chan filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of himself and all other similarly situated stockholders of the Company. The complaint names the members of the Board and the Company as defendants. The complaint asserts a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The complaint seeks declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees.

     On May 11, 2009, the Court of Chancery of the State of Delaware granted plaintiff Reid Middleton’s motion to expedite proceedings and set a trial date in the Delaware lawsuits beginning on July 8, 2009. On July 6, 2009, the Court of Chancery continued the July 8, 2009 trial date indefinitely. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 11, 2009, Pipefitters Local No. 636 Defined Benefit Plan filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of itself and all other similarly situated stockholders of the Company and derivatively on behalf of the Company. The original complaint named the members of the Company’s Board as defendants and the Company as a nominal defendant. The complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new shareholder rights plan to replace its expiring rights plan, amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The original complaint also asserted a derivative claim for breach of fiduciary duty based on the same actions. The original complaint sought declaratory and injunctive relief, including mandatory injunctive relief, and costs, including attorneys’ and expert fees. On October 4, 2010 the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and

Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On May 12, 2009, Norfolk County Retirement System filed a lawsuit in the Court of Chancery of the State of Delaware on behalf of itself and all other similarly situated stockholders of the Company. The original complaint named the members of the Company’s Board and the Company as defendants. The original complaint asserted a claim for breach of fiduciary duty on behalf of a putative class of holders of Shares relating to the Company’s January 2009 amendments to its Bylaws, adoption of a new shareholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The original complaint sought declaratory and injunctive relief, compensatory damages, interest and costs, including attorneys’ and expert fees.

     On August 21, 2009, Reid Middleton, Pipefitters Local No. 636 Defined Benefit Plan and Norfolk County Retirement System (together “Plaintiffs”) filed a motion in the Court of Chancery of the State of Delaware for leave to file an amended complaint. On September 17, 2009, Plaintiffs sent a letter to the Court of Chancery requesting that the Court enter an order permitting Plaintiffs to file the proposed Verified Amended Class Action and Derivative Complaint. The Court of Chancery entered the order on September 17, 2009. The Verified Amended Class Action and Derivative Complaint was brought on behalf of Plaintiffs and all other similarly situated stockholders of the Company and, alternatively, derivatively on behalf of the Company. The complaint named the members of the Board as defendants and the Company as a nominal defendant. The complaint asserted claims for breach of fiduciary duty on behalf of a putative class of holders of Shares and, alternatively, a derivative claim for devaluation of the Company stemming from the Company’s January 2009 amendments to its Bylaws, adoption of a new stockholder rights plan to replace its expiring rights plan, and amendments to its Key Employee Retention Agreements, and actions in response to Broadcom’s announcement of its proposal to acquire the Company. The complaint sought declaratory relief, compensatory damages, interest and costs, including attorneys’ and expert fees. On October 13, 2009, the defendants filed an answer to the amended complaint.

     On December 3, 2009, the plaintiffs’ attorneys filed an application for an award of attorneys’ fees and expenses. The Court rejected the plaintiff’s request for attorneys’ fees as premature on December 18, 2009. On February 4, 2010, the Court of Chancery granted a Scheduling Order setting a trial date for December 6-10, 2010. On July 9, 2010, the parties filed a stipulation of settlement and order of dismissal of action wherein Emulex’s insurance carrier agreed to pay $3.0 million for plaintiffs’ counsel fees and expenses, subject to the Court’s final approval. The Company recorded the $3.0 million potential settlement and related insurance recovery in fiscal 2010. On October 4, 2010, the Vice Chancellor Judge signed an Order of Dismissal awarding $3.0 million to the counsel for the shareholder plaintiffs, subject to the terms set forth in a Stipulation and Agreement of Dismissal of Certain Claims as Being Moot and of All Other Claims, and as to Award of Attorneys’ Fees. That Stipulation concerns the In re Emulex Shareholder Litigation, as well as the litigation with the named plaintiffs Reid Middleton, Kamwai Fred Chan, Pipefitters Local No. 636 Defined Benefit Plan, and Norfolk County Retirement Systems.

     On September 14, 2009, Broadcom Corporation filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The original complaint alleged that the Company is infringing 10 Broadcom patents covering certain data and storage networking technologies. On February 23, 2010, Broadcom filed a first amended complaint. The first amended complaint alleges that the Company is infringing 12 Broadcom patents covering certain data and storage networking technologies. The complaint seeks declaratory and injunctive relief, monetary damages, and interest and costs, including attorneys’ and expert fees. On March 25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint alleging that it believes that the Broadcom patents at issue are invalid or not infringed, or both. In addition, the Company has asserted counterclaims for declaratory judgment of invalidity and non-infringement against each of the Broadcom patents at issue, and seeks award of attorneys’ fees, costs, and expenses. On January 11, 2010, the Court set a trial date of September 20, 2011. On February 12, 2010, Broadcom sought permission to amend its complaint to assert an additional patent, making the total patents asserted as 11 instead of 10. On March 25, 2010, Emulex filed an answer to the amended Broadcom complaint. On April 2, 2010, Broadcom filed a “disclosure of infringement contentions.”

     On May 26, 2010, Broadcom Corporation filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The 2010 lawsuit asserts that certain Emulex products are infringing on a Broadcom patent covering certain data and storage networking technologies. Broadcom seeks a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs. On June 30, 2010, the Judge stated that the 2009 and 2010 patent cases would be consolidated into a single lawsuit. On October 14, 2010, the Court issued an order on the parties’ joint stipulation dismissing three patents from the case. With respect to this matter, management has determined that a potential loss is not probable and accordingly, no amount has been accrued. The status of this matter does not allow management of the Company to determine whether a loss will occur or estimate the range of such a loss. Accordingly, management has determined that a potential loss is not probable and no amount has been accrued.

     On November 9, 2009, the Company filed a lawsuit against Broadcom Corporation alleging that Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws, as well as made defamatory statements and engaged in acts of unfair competition. The complaint seeks actual and punitive damages, attorneys’ fees and costs, and injunctive relief against Broadcom. On January 4, 2010, the Company filed an amended complaint. The amended complaint alleges that Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws and made defamatory statements. The amended complaint seeks actual and punitive damages, attorneys’ fees and costs, and injunctive relief. On June 7, 2010, the Court denied Broadcom’s motion to dismiss Emulex’s first amended complaint and to strike Emulex’s defamation claim.

In addition to the ongoing litigation discussed above, 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 the open matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Item 1A. Risk Factors

Any failure to successfully integrate our recent acquisition of ServerEngines Corporation (ServerEngines) and any future strategic acquisitions could adversely affect our business.

     Our future performance will depend in part on whether we can successfully integrate our recently acquired ServerEngines business in an effective and efficient manner. Integrating our business with ServerEngines business will be a complex, time-consuming and expensive process and involve a number of risks and uncertainties. In addition, in order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, other strategic acquisitions that involve significant risks and uncertainties. The risks and uncertainties relating to the ServerEngines acquisition and future acquisitions include, but are not limited to:

	•		The difficulty in integrating the ServerEngines business and any other newly acquired businesses and operations in an efficient and effective manner;
	•		The challenges in achieving strategic objectives, cost savings and other benefits expected from the ServerEngines acquisition and any future acquisitions;
	•		The risk of diverting our resources and the attention of our senior management from the operations of our business;
	•		Additional demands on management related to the increase in the size and scope of our company following the acquisition;
	•		The risk that our markets do not evolve as anticipated and the technologies acquired do not prove to be those needed to be successful in those markets;
	•		Difficulties in combining corporate cultures;
	•		Difficulties in the assimilation and retention of key employees;
	•		Difficulties in maintaining relationships with present and potential customers, distributors and suppliers of the acquired business;
	•		Costs and expenses associated with any undisclosed or potential liabilities of ServerEngines or any future acquired business;
	•		Difficulties in converting the acquired business information systems to our systems;
	•		Delays, difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, systems, functions, technologies and infrastructure to support the combined business, as well as maintaining uniform standards, controls (including internal accounting controls), procedures and policies;
	•		The risk that the returns on acquisitions will not support the expenditures incurred to acquire such businesses or the capital expenditures needed to develop such businesses;
	•		The risks of entering markets in which we have less experience;
	•		Unknown defects of an acquired company’s products or assets that may not be identified due to the inherent limitations involved in the due diligence process of an acquisition; and
	•		The risks of potential disputes concerning indemnities and other obligations that could result in substantial costs.

     Mergers and acquisitions are inherently risky and subject to many factors outside of our control, and we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. We do not know whether we will be able to successfully integrate the businesses, products, technologies or personnel that we might acquire in the future or that any strategic investments we make will meet our financial or other investment objectives. Any failure to do so could significantly harm our business, financial condition and results of operations. Even if we are able to integrate the ServerEngines business or any future acquisition successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, revenue enhancements, growth, operational efficiencies and other benefits that we expect. We cannot assure you that we will successfully integrate the ServerEngines business or any future acquisition with our business or achieve the desired benefits from the ServerEngines acquisition or any future acquisition within a reasonable period of time or at all.

     Furthermore, to complete future acquisitions we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.

The current economic downturn has resulted in a reduction in information technology spending in general, or spending on computer and storage systems in particular, that will adversely affect our revenues and results of operations in the near term and possibly beyond.

     The demand for our network storage products has been driven by the demand for high performance storage networking products and solutions that support enterprise computing applications, including on-line transaction processing, data mining, data warehousing, multimedia, and Internet applications. The current economic downturn and related disruptions in world credit and equity markets as well as the related failures of several large financial institutions have resulted in a global downturn in spending on information technology. If the downturn in the

economy results in a significant downturn in demand for such products, solutions, and applications, it will adversely affect our business, results of operations, and financial condition in the near term and possibly beyond. 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 markets are highly competitive and our business and results of operations may be adversely affected by entry of new competitors into the markets, aggressive pricing, and the introduction or expansion of competitive products and technologies.

     The markets for our products are highly competitive and are characterized by rapid technological advances, price erosion, frequent new product introductions, and evolving industry standards. We expect that our markets will continue to attract new competition. Our current and potential competition consists of major domestic and international companies, some of which have substantially greater financial, technical, marketing, and distribution resources than we have. Additional companies, including but not limited to our suppliers, strategic partners, Original Equipment Manufacturer (OEM) customers, and emerging companies, may enter the markets in which we compete and new or stronger competitors may emerge as a result of consolidation in the marketplace. Additionally, our existing competitors continue to introduce products with improved price/performance characteristics, and we may have to do the same to remain competitive. Furthermore, competitors may introduce new products to the market before we do, and thus obtain a first to market advantage over us. Increased competition could result in increased price competition, reduced revenues, lower profit margins or loss of market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.

A significant portion of our business depends upon the continued growth of the networking market and our business will be adversely affected if such growth does not occur, occurs more slowly than we anticipate, or declines.

     The size of our potential market is largely dependent on the overall demand for networking products and in particular upon the broadening acceptance of our converged network technologies. We believe that our investment in multi protocol solutions that address the high performance needs of the converged networking market provides the greatest opportunity for our revenue growth and profitability for the future. However, the market for converged networking products may not gain broader acceptance and customers may choose alternative technologies that we are not investing in, and/or products supplied by other companies. Interest continues for other storage networking technologies such as Internet Small Computer Systems Interface (iSCSI), which may satisfy some Input/Output (I/O) connectivity requirements through standard Ethernet adapters and software at little to no incremental cost to end users. These software only iSCSI solutions compete with our Host Server Products, particularly in the low end of the market. We have also launched Converged Network Adapters (CNAs) using Fibre Channel over Ethernet (FCoE) or iSCSI protocols which may be used by the same customers impacting our Storage Area Networking revenues more than we anticipate. Furthermore, since our products are sold as parts of integrated systems, demand for our products is driven by the demand for these integrated systems, including other companies’ complementary products. A lack of demand for the integrated systems or a lack of complementary products required for these integrated systems to be deployed could have a material adverse effect on our business, results of operations, and financial condition. If the converged networking market does not grow, grows more slowly than we anticipate, declines, attracts more competitors than we expect as discussed above, or if our products do not achieve continued market acceptance, our business, results of operations, and financial condition could be materially adversely affected.

Because a significant portion of our revenues is generated from sales to a limited number of customers, none of which are subject to exclusive or long-term contracts, the loss of one or more of these customers, or our customers’ failure to make timely payments to us, could adversely affect our business.

     We rely almost exclusively on OEMs and sales through distribution channels for our revenue. For the three months ended September 26, 2010 and September 27, 2009, respectively, we derived approximately 84% and 85% of our net revenues from sales to OEM customers and approximately 16% and 15% from sales through distribution. Furthermore, as some of our sales through distribution channels consist of OEM products, OEM customers

effectively generated approximately 92% and 93% of our revenue for the three months ended September 26, 2010 and September 27, 2009, respectively. Moreover, direct sales to our top five customers accounted for approximately 58% and 60% of our net revenues for the three months ended September 26, 2010 and September 27, 2009, respectively. Direct and indirect sales to our top five customers (including customer-specific models purchased or marketed indirectly through distributors, resellers and other third parties) accounted for approximately 75% and 74% of our net revenues for the three months ended September 26, 2010 and September 27, 2009, respectively. If we are unable to retain our current OEM and distributor customers or to recruit additional or replacement customers, our business, results of operations, and financial condition could be materially 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. As a result, to the extent that sales to any of our significant customers do not increase in accordance with our expectations or are reduced or delayed, our business, results of operations, and financial condition could be materially adversely affected.

     As is common in the technology industry, our agreements with OEMs and distributors are typically non-exclusive, have no volume commitments, and often may be terminated by either party without cause. It is increasingly commonplace for our OEM and distributor customers to utilize or carry competing product lines. If we were to lose business from one or more significant OEM or distributor customers to a competitor, our business, results of operations, and financial condition could be materially adversely affected. In addition, our OEMs may elect to change their business practices in ways that affect the timing of our revenues, which may materially adversely affect our business, results of operations, and financial condition.

Our operating results are difficult to forecast and could be adversely affected by many factors and our stock price may decline if our results fail to meet expectations.

     Our revenues and results of operations have varied on a quarterly basis in the past and may vary significantly in the future. Accordingly, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and you should not rely on such comparisons as indications of our future performance. We may be unable to maintain our current levels of growth or profitability in the future. Our revenues and results of operations are difficult to forecast and could be adversely affected by many factors, including, but not limited to:

	•		Changes in the size, mix, timing and terms of OEM and/or other customer orders;
	•		Changes in the sales and deployment cycles for our products and/or desired inventory levels for our products;
	•		Acquisitions or strategic investments by our customers, competitors or us;
	•		Timing and market acceptance of new or enhanced product introductions by us, our OEM customers and/or competitors;
	•		Market share losses or difficulty in gaining incremental market share;
	•		Fluctuations in product development, procurement, resource utilization and other operating expenses;
	•		Anticipated efficiencies resulting from increased revenues may be less than expected or not achieved at all;
	•		Difficulties controlling unanticipated costs, including operating expenses, as revenues increase;
	•		Reduced demand from our customers if there is a shortage of, or difficulties in acquiring, components or other products, such as disk drives, switches, and optical modules, used in conjunction with our products in the deployment of systems;
	•		Inability of our electronics manufacturing service providers or suppliers to produce and distribute our products in a timely fashion;
	•		Difficulties with updates, changes or additions to our information technology systems;
	•		Breaches of our network security, including viruses;

	•		Changes in general social and economic conditions, including but not limited to natural disasters, terrorism, public health crises, slower than expected market growth, reduced economic activity, delayed economic recovery, loss of consumer confidence, increased energy costs, adverse business conditions and liquidity concerns, concerns about inflation or deflation, recession, and reduced business profits and capital spending, with resulting changes in customer technology budgeting and spending; and
	•		Seasonality.

     As a result of these and other unexpected factors or developments, future operating results may be, from time to time, below the expectations of investors or market analysts, which would have a material adverse effect on our stock price.

A number of factors including relatively small backlog of unfilled orders, possible customer delays or deferrals and our tendency to generate a large percentage of our quarterly sales near the end of the quarter contribute to possible fluctuations in our operating results that could have an adverse impact on our results of operations and stock price.

     Historically, we have generally shipped products quickly after receiving orders, meaning that we do not always have a significant backlog of unfilled orders, in particular for our HSP products. As a result, our revenues in a given quarter may depend substantially on orders received during that quarter. Alternatively, orders already in backlog may be deferred or cancelled. As a result of our expense levels being largely based on our expectations of future sales and continued investment in research and development, in the event we experience unexpected decreases in sales, our expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. A material shortfall in sales in relation to our quarterly expectations or any delay, deferral, or cancellation of customer orders would likely have an immediate and adverse impact on our results of operations and may adversely affect our stock price.

Our industry is subject to rapid technological change, thus our results of operations could be adversely affected if we are unable to keep pace with the changes to successfully compete.

     The markets for our products are characterized by rapidly changing technology, evolving industry standards, and the frequent introduction of new products and enhancements. Our future success depends in large part on our ability to enhance our existing products and to introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards. Currently, new and proposed technologies such as eight and 16 Gb/s Fibre Channel solutions; FCoE; Enhanced Ethernet; 10GbE solutions; low latency Ethernet solutions; Data Center Ethernet; Infiniband; iSCSI; PCI-X 2.0; PCI Express Gen one, two, and three; PCI Express Advanced Switching; SATA; SAS; and Remote Direct Memory Access (RDMA); are in development by many companies and their ultimate acceptance and deployment in the market is uncertain. We are developing some, but not all of these technologies, and we cannot be sure that the technologies we chose to develop will achieve market acceptance, or that technologies that we chose not to develop will be available to purchase or license from third parties or will be immaterial to our business. Furthermore, if our products are not available in time for the qualification cycle at an OEM, we may be forced to wait for the next qualification cycle, which is typically three years if at all. In addition, new products and enhancements developed by us may not be backwards compatible to existing equipment already installed in the market. If we are unable, for technological or other reasons, to develop new products, enhance or sell existing products, or consume raw materials 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.

If we do not successfully expand into new segments of the storage and server technology market, our business and results of operations may be adversely affected.

     To remain a significant supplier of networking technologies, we will need to continue to expand the range of products and solutions offered to our OEM customers. Expansion into other areas of the storage and server technology market, whether by acquisition or through internal growth, and the resulting increases in expenditures to support these new areas may be greater than anticipated. If we fail to successfully expand into new areas of the storage and server technology market with products that we do not currently offer, and effectively address these new market opportunities, we may lose market share and revenue opportunities to our competitors. Any such loss of

opportunities or any failure by us to effectively manage the costs associated with expanding into new markets may have an adverse effect on our business and financial condition.

The costs associated with our expansion into new segments of the storage technology market may be greater than anticipated.

     Although most of our revenues have historically been derived from products based on fibre channel technology, we expect to continue to grow our business of offering converged networking solutions following our recent acquisition of ServerEngines. We believe that our fibre channel products and our converged networking solutions will, at least initially, have similar customers and other marketing requirements that should produce certain synergies and cost savings as we expand our converged network solutions business. However, if the expansion of our converged networking solutions business does not produce the synergies and cost savings with our core fibre channel business that we anticipate, our marketing and other business expenses relating to our converged network solutions business could be greater than anticipated and our financial condition could be adversely affected

We have experienced losses in our history and may experience losses in our future that may adversely affect our financial condition.

     We have experienced losses in our history, which may be caused by a downturn in the economy or an impairment of long-lived assets and/or goodwill. We may experience losses in the future due to an impairment of our long-lived assets, goodwill, and/or equity investments recorded under the cost method. To the extent that we are unable to generate positive operating profits or positive cash flow from operations, our financial condition may be materially adversely affected.

The timing of migration of our customers toward newer product platforms varies and may have a significant adverse effect.

     As our customers migrate from one platform to the enhanced price/performance of the next platform, we may experience reduced revenue, gross profit, or gross margin levels associated with lower average selling prices or higher relative product costs associated with improved performance. While we regularly compare forecasted demand for our products against inventory on hand and open purchase commitments, to the extent that customers migrate more quickly than anticipated, the corresponding reduction in demand for older product platforms may result in excess or obsolete inventory and related charges which could have a material adverse effect on our financial condition and results of operations.

The migration of our customers from purchasing our products through the distribution channel and toward OEM server manufacturers may have a significant adverse effect.

     As our customers migrate from purchasing our products through the distribution channel toward purchasing our products through OEM server manufacturers, which have a lower average selling price, our financial condition and results of operations may be materially adversely affected.

Any failure of our OEM customers to keep up with rapid technological change and to successfully market and sell systems that incorporate new technologies could adversely affect our business.

     Our revenues depend significantly upon the ability and willingness of our OEM customers to commit significant resources to develop, promote, and deliver products that incorporate our technology. In addition, if our customers’ products are not commercially successful, it would have a materially 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 board level solutions to lower priced ASIC solutions, could adversely affect our business.

     Historically, the electronics industry has developed higher performance application specific integrated circuits (ASICs) that create chip level solutions that replace selected board level or box level solutions at a significantly lower average selling price. We have previously experienced this trend and expect it to continue in the future. If this

transition is more abrupt or is more widespread than anticipated, there can be no assurance that we will be able to modify our business model in a timely manner, if at all, in order to mitigate the effects of this transition on our business, results of operations, and financial position.

If customers elect to use lower-end HBAs in higher-end environments or applications, our business and financial condition could be negatively affected.

     We supply three families of HBAs that target separate high-end, midrange and small to medium sized business user (SMB) markets. Historically, the majority of our storage networking revenues has come from our high-end server and storage solutions. In the future, increased revenues are expected to come from dual channel adapters and midrange server and storage solutions, which have lower average selling prices per port. If customers elect to utilize midrange HBAs in higher-end environments or applications, or migrate to dual channel adapters faster than we anticipate, our business and financial condition could be negatively affected.

Advancement of storage device capacity technology may not allow for additional revenue growth.