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Table of Contents

 
 
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
For the quarterly period ended December 26, 2010
OR
     
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 January 25, 2011, the registrant had 87,525,122 shares of common stock outstanding.
 
 

 


 

EMULEX CORPORATION AND SUBSIDIARIES
INDEX
         
    PAGE
       
       
    3  
    4  
    5  
    6  
    20  
    35  
    35  
       
    35  
    37  
    51  
    52  
    53  
 EX-31.A
 EX-31.B
 EX-32
 EX-99.1
 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

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share data)
                 
    December 26,     June 27,  
    2010     2010  
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 168,790     $ 248,813  
Investments
    9,804       45,990  
Accounts and other receivables, net of allowance for doubtful accounts of $1,663 and $1,653 at December 26, 2010 and June 27, 2010, respectively
    75,083       59,479  
Inventories
    15,851       13,465  
Prepaid income taxes
          17,563  
Prepaid expenses and other current assets
    10,609       12,799  
Deferred income taxes
    21,297       19,442  
 
           
Total current assets
    301,434       417,551  
Property and equipment, net
    66,744       63,482  
Goodwill
    170,765       93,835  
Intangible assets, net
    175,085       44,497  
Deferred income taxes
    2,932       27,658  
Other assets
    12,820       42,427  
 
           
 
               
Total assets
  $ 729,780     $ 689,450  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 39,501     $ 31,377  
Accrued liabilities
    43,990       29,053  
 
           
Total current liabilities
    83,491       60,430  
Other liabilities
    4,293       4,287  
Accrued taxes
    36,107       33,551  
 
           
Total liabilities
    123,891       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; 101,767,761 and 91,217,793 issued at December 26, 2010 and June 27, 2010, respectively
    10,177       9,122  
Additional paid-in capital
    1,224,834       1,123,365  
Accumulated deficit
    (420,316 )     (372,450 )
Accumulated comprehensive loss
    (484 )     (615 )
Treasury stock, at cost; 14,656,242 and 10,550,971 shares at December 26, 2010 and June 27, 2010, respectively
    (208,322 )     (168,240 )
 
           
Total stockholders’ equity
    605,889       591,182  
 
           
Total liabilities and stockholders’ equity
  $ 729,780     $ 689,450  
 
           
See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
                                 
    Three Months Ended     Six Months Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
Net revenues
  $ 113,998     $ 108,290     $ 217,095     $ 193,817  
Cost of sales
    50,225       41,506       95,927       74,927  
 
                       
Gross profit
    63,773       66,784       121,168       118,890  
 
                       
 
                               
Operating expenses:
                               
Engineering and development
    41,668       31,680       79,932       63,079  
Selling and marketing
    14,226       15,760       26,935       28,672  
General and administrative
    13,663       11,896       31,282       24,175  
Amortization of other intangible assets
    2,457       1,698       4,473       3,396  
 
                       
Total operating expenses
    72,014       61,034       142,622       119,322  
 
                       
 
                               
Operating (loss) income
    (8,241 )     5,750       (21,454 )     (432 )
 
                       
 
                               
Nonoperating (expense) income, net:
                               
Interest income
    21       93       42       212  
Interest expense
    (10 )     (2 )     (385 )     (4 )
Other (expense) income, net
    (45 )     (132 )     (198 )     98  
 
                       
Total nonoperating (expense) income, net
    (34 )     (41 )     (541 )     306  
 
                       
 
                               
(Loss) income before income taxes
    (8,275 )     5,709       (21,995 )     (126 )
 
                               
Income tax provision (benefit)
    31,483       (3,233 )     25,871       (12,906 )
 
                       
 
                               
Net (loss) income
  $ (39,758 )   $ 8,942     $ (47,866 )   $ 12,780  
 
                       
 
                               
Net (loss) income per share:
                               
Basic
  $ (0.46 )   $ 0.11     $ (0.57 )   $ 0.16  
 
                       
Diluted
  $ (0.46 )   $ 0.11     $ (0.57 )   $ 0.16  
 
                       
 
                               
Number of shares used in per share computations:
                               
Basic
    86,565       79,667       84,485       79,563  
 
                       
Diluted
    86,565       80,734       84,485       80,505  
 
                       
See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
                 
    Six Months Ended  
    December 26,     December 27,  
    2010     2009  
Cash flows from operating activities:
               
Net (loss) income
  $ (47,866 )   $ 12,780  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment
    10,625       10,567  
Share-based compensation expense
    23,956       8,564  
Amortization of intangible assets
    19,448       12,847  
Provision for losses on accounts and other receivables
    10       58  
Accrued interest income, net
    23       37  
Loss on disposal of property and equipment
    194       769  
Deferred income taxes
    (5,577 )     (8,447 )
Excess tax benefit from share-based compensation
    (485 )     (206 )
Foreign currency adjustments
    324       (86 )
Changes in assets and liabilities, net of effects from acquisitions:
               
Accounts and other receivables
    (12,220 )     (16,697 )
Inventories
    (2,110 )     (123 )
Prepaid expenses and other assets
    4,953       (5,971 )
Accounts payable, accrued liabilities, and other liabilities
    (3,089 )     4,684  
Accrued taxes
    1,190       1,258  
Income taxes payable and prepaid income taxes
    27,636       (223 )
 
           
Net cash provided by operating activities
    17,012       19,811  
 
           
 
               
Cash flows from investing activities:
               
Net proceeds from sale of property and equipment
    99       168  
Purchases of property and equipment
    (8,999 )     (4,685 )
Purchases of intangible assets
    (4,000 )     (20,000 )
Payments for the purchase of ServerEngines Corporation, net of cash acquired
    (53,068 )      
Investment in and loans to privately-held companies
    (1,000 )     (10,000 )
Cash received from escrow for prior business acquisition
    1,000        
Purchases of investments
    (36,528 )     (24,585 )
Maturities of investments
    72,691       16,751  
 
           
Net cash used in investing activities
    (29,805 )     (42,351 )
 
           
 
               
Cash flows from financing activities:
               
Repurchase of common stock
    (40,082 )     (18,240 )
Tax withholding payments reimbursed by common stock
    (4,231 )     (3,468 )
Repayment of debt to the Founders of ServerEngines Corporation
    (26,897 )      
Proceeds from issuance of common stock under stock plans
    3,384       2,687  
Excess tax benefit from share-based compensation expense
    485       206  
 
           
Net cash used in financing activities
    (67,341 )     (18,815 )
 
           
 
               
Effect of exchange rates on cash and cash equivalents
    111       (44 )
 
           
 
               
Net decrease in cash and cash equivalents
    (80,023 )     (41,399 )
Cash and cash equivalents at beginning of period
    248,813       294,136  
 
           
Cash and cash equivalents at end of period
  $ 168,790     $ 252,737  
 
           
See accompanying notes to condensed consolidated financial statements.

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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 and six months ended December 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.
  The Company has a 52 to 53 week fiscal year that ends on the Sunday nearest to June 30. Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2011 is a 53-week fiscal year.
  Supplemental Cash Flow Information
                 
    Six Months Ended
    December 26,   December 27,
    2010   2009
    (in thousands)
Cash paid during the period for:
               
Interest
  $ 13     $ 3  
Income taxes
  $ 2,444     $ 247  
 
               
Non-cash activities:
               
Purchases of property and equipment not paid, net
  $ 3,778     $ 1,016  
Recently Issued Accounting Standards
     In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements,” amending Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures,” requiring additional disclosures 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.
     In December 2010, the FASB issued ASU No. 2010-28, which was a consensus of the Emerging Issues Task Force (EITF). Under ASC Topic 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The EITF reached a final Consensus that the carrying amount of a reporting unit should be calculated as the difference between the total assets and total liabilities assigned to the reporting unit; however, it did not prescribe the use of a specific approach, such as the equity-value-based or enterprise-value-based premise. The Task Force also concluded that the Step 2 test should be performed in circumstances where a reporting unit has a

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zero or negative carrying amount of equity and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists. These qualitative factors include those used to determine whether a triggering event would require an interim goodwill impairment test. Entities with multiple reporting units may continue to allocate assets and liabilities to individual reporting units consistent with current practice. In addition, single reporting unit entities would not be required to allocate all liabilities to the reporting unit when the enterprise-value-based approach is used. The transition approach would require companies to perform the Step 2 test on adoption for reporting units with a zero or negative carrying amount for which qualitative factors exist on the adoption date that indicate that it is more likely than not that a goodwill impairment exists. Any resulting impairment charge would be recorded through a cumulative-effect adjustment to beginning retained earnings. The final Consensus is effective for annual reporting periods beginning after December 15, 2010, which is the Company’s 2012 fiscal year. Early adoption is prohibited. The Company does not expect any impact upon adoption of this guidance as the Company has a single reporting unit, which does not have a zero or negative carrying amount of equity.
     In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations.” This amendment affects any public entity that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, or the Company’s 2012 fiscal year. The Company does not expect that there will be any financial impact of adopting this guidance and will apply this guidance to future acquisitions.
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 has preliminarily 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 $3.1 million, of which $2.0 million was incurred and recorded in general and administrative expenses in the year ended June 27, 2010, and $1.1 million was incurred and recorded in general and administrative expenses during the six months ended December 26, 2010.
     The aggregate preliminary purchase price was approximately $135.7 million and was comprised of the following:
         
    (in thousands)  
Cash
  $ 54,793  
Common stock
    67,367  
Contingent consideration
    11,500  
Options assumed
    1,995  
 
     
Net assets acquired
  $ 135,655  
 
     

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     Included in the common stock issued and contingent consideration is approximately 2.2 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 the three months ended September 26, 2010, $3.2 million during the three months ended December 26, 2010, and $13.8 million during the six months ended December 26, 2010 and expects to recognize approximately another $8.3 million of stock based compensation expense through fiscal 2012 related to the employment based contingent shares. The first post-closing milestone was met during the quarter ended December 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, in-process research and development (IPR&D), 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 preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition and acquisition related charges:
         
    (in thousands)  
Current assets, including cash acquired of $1,725
  $ 8,445  
Property and equipment
    1,378  
Other noncurrent assets
    234  
Intangible assets
    145,880  
Goodwill
    76,930  
 
     
Total assets acquired
    232,867  
 
     
Current liabilities
    (68,650 )
Noncurrent deferred tax liability
    (28,023 )
Accrued taxes
    (940 )
 
     
Total liabilities assumed
    (97,613 )
 
     
Acceleration of ServerEngines restricted stock included in stock based compensation expense
    48  
Settlement of pre-existing contractual agreement included in interest expense
    353  
 
     
Total acquisition related charges
    401  
 
     
Total preliminary estimated purchase price allocation
  $ 135,655  
 
     
     The current liabilities assumed of approximately $68.7 million included approximately $26.9 million due to the founders of ServerEngines and approximately $24.5 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.

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     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 $5.6 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 and six months ended December 26, 2010 and December 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 December 26, 2010, was prepared based upon the statement of operations of Emulex for the three months ended December 26, 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 December 27, 2009, was prepared based upon the statement of operations of Emulex for the three months ended December 27, 2009, combined with the statement of operations of ServerEngines for the period from October 1, 2009 to December 31, 2009. The pro forma combined results of operations for the six months ended December 26, 2010, was prepared based upon the statement of operations of Emulex for the six months ended December 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 six months ended December 27, 2009, was prepared based upon the statement of operations of Emulex for the six months ended December 27, 2009 combined with the statement of operations of ServerEngines for the period from July 1, 2009 to December 31, 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 approximately $0.5 million and $1.1 million and stock based compensation related to the contingent shares which are tied to the employment of certain recipients of approximately $3.2 million and $13.8 million recognized in the Company’s statement of operations for the three and six months ended December 26, 2010, respectively, 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 $8.3 million through fiscal 2012 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     Six Months Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
    (in thousands)     (in thousands)  
Net revenues
  $ 113,998     $ 113,429     $ 218,987     $ 204,817  
 
                       
Net (loss) income
  $ (36,189 )   $ 790     $ (38,944 )   $ (2,412 )
 
                       
Net (loss) income per basic share
  $ (0.42 )   $ 0.01     $ (0.45 )   $ (0.03 )
 
                       
Net (loss) income per diluted share
  $ (0.42 )   $ 0.01     $ (0.45 )   $ (0.03 )
 
                       

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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 purchase consideration was allocated to the tangible and intangible assets acquired, including IPR&D, based on their estimated fair values. The Company 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 with the authoritative guidance for business combinations, retroactively recorded a purchase price adjustment to write down the fixed assets and adjust goodwill of approximately $0.9 million as of June 27, 2010. During the three months ended December 26, 2010, the Company received $1.0 million from escrow for standard representations and warranties not met and adjusted preliminary consideration and goodwill retrospectively as of June 27, 2010. The purchase price allocation is final as of December 26, 2010. 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 December 26, 2010 and June 27, 2010 are as follows:
                                 
    Level 1     Level 2     Level 3     Total  
    (in thousands)  
December 26, 2010
                               
Cash and cash equivalents
  $ 168,790     $     $     $ 168,790  
Term deposits
    4,234                   4,234  
U.S. Government securities
    2,000                   2,000  
U.S. Government sponsored entity securities
    1,967                   1,967  
Corporate bonds
    1,603                   1,603  
 
                       
 
  $ 178,594     $     $     $ 178,594  
 
                       

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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 of approximately $9.2 million, insurance recovery receivable of approximately $2.4 million, and a note receivable of approximately $1.0 million. 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. 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 note receivable is based on management judgment using market-based interest rates and is believed to approximate fair value.
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)  
December 26, 2010
                               
Term deposits
  $ 4,234     $     $     $ 4,234  
U.S. Government securities
    2,000                   2,000  
U.S. Government sponsored entity securities
    1,967                   1,967  
Corporate bonds
    1,603                   1,603  
 
                       
 
  $ 9,804     $     $     $ 9,804  
 
                       
 
                               
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 December 26, 2010 and June 27, 2010 were classified as short-term investments due to the investments having maturity dates of less than one year.
5. Inventories
     Inventories are summarized as follows:
                 
    December 26,     June 27,  
    2010     2010  
    (in thousands)  
Raw materials
  $ 5,667     $ 2,717  
Finished goods
    10,184       10,748  
 
           
 
  $ 15,851     $ 13,465  
 
             

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6. Goodwill and Intangible Assets, net
     The activity in goodwill during the six months ended December 26, 2010 is as follows:
         
    Carrying  
    Amount  
    (in thousands)  
Goodwill, as of June 27, 2010 (a)
  $ 93,835  
Goodwill from ServerEngines acquisition during the period
    76,930  
 
     
Goodwill, as of December 26, 2010
  $ 170,765  
 
     
 
(a)   Purchase price allocation adjustments, net, of approximately $0.1 million during the measurement period were recorded retrospectively to June 27, 2010 pursuant to the authoritative guidance for business combinations.
     Intangible assets, net, are as follows:
                 
    December 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
    (58,532 )     (53,050 )
Developed technology
    210,200       68,500  
Accumulated amortization, developed technology
    (63,965 )     (51,375 )
Customer relationships
    3,810       3,200  
Accumulated amortization, customer relationships
    (2,760 )     (2,398 )
Tradename
    6,139       4,639  
Accumulated amortization, tradename
    (4,681 )     (4,364 )
Covenants not to compete
    550        
Accumulated amortization, covenants not to compete
    (74 )      
Backlog
    1,520        
Accumulated amortization, backlog
    (613 )      
Perpetual licenses
    157        
Accumulated amortization, perpetual licenses
    (11 )      
 
           
Total amortizable intangible assets, net
    169,085       38,497  
In process research and development
    6,000       6,000  
 
           
Total intangible assets, net
  $ 175,085     $ 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. Aggregate amortization expense for intangible assets for the three months ended December 26, 2010 and December 27, 2009, was approximately $11.3 million and $6.4 million, respectively. Aggregated amortization expense for intangible assets for the six months ended December 26, 2010 and December 27, 2009, was approximately $19.5 million and $12.8 million, respectively.
     Amortization expense of approximately $8.8 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 December 26, 2010 and December 27, 2009, respectively. Amortization expense of approximately $15.0 million and $9.5 million related to core and developed technology is included in cost of sales in the accompanying condensed consolidated statements of operations for the six months ended December 26, 2010 and December 27, 2009, respectively.

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     The following table presents the estimated future aggregated amortization expense of intangible assets as of December 26, 2010 (in thousands):
         
2011 (remaining 6 months)
  $ 19,344  
2012
    26,118  
2013
    22,460  
2014
    22,313  
2015
    18,313  
Thereafter
    60,537  
 
     
 
  $ 169,085  
 
     
7. Other Assets
     Components of other assets are as follows:
                 
    December 26,     June 27,  
    2010     2010  
    (in thousands)  
Note receivable
  $ 1,000     $ 24,256  
Equity investment in privately-held company
    9,184       9,184  
Other
    2,636       8,987  
 
           
 
  $ 12,820     $ 42,427  
 
           
     In November 2010, the Company loaned $1.0 million to a privately-held company. The note receivable bears simple interest at 8.0% per annum with the maturity date being the earlier of June 30, 2011 or certain defined events such as consummation of financing, change in control, or default. The note receivable is collateralized by substantially all of the assets of the privately-held company.
     As described in Note 2, notes receivable from ServerEngines were settled in connection with the acquisition 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 December 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:
                 
    December 26,     June 27,  
    2010     2010  
    (in thousands)  
Payroll and related costs
  $ 17,797     $ 14,387  
Warranty liability
    1,754       1,637  
Deferred revenue and accrued rebates
    13,628       4,169  
Income taxes payable
    5,090        
Other
    5,721       8,860  
 
           
 
  $ 43,990     $ 29,053  
 
           

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     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
    853  
Changes to pre-existing warranties (including changes in estimates)
    (79 )
Settlements made (in cash or in kind)
    (657 )
 
     
Balance at end of period
  $ 1,754  
 
     
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 were originally filed by six groups of appellants, four of whom have settled with plaintiffs.
     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. Emulex was told that a settlement was reached between the plaintiffs and ARM Ltd. (the original supplier of the alleged infringing product), the terms of which are not known by Emulex. A dismissal of the action was filed with the court on about December 8, 2010.
     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

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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 separate 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. On November 1, 2010, the Court issued an order allowing Broadcom to make infringement assertions against additional Emulex products. In a Court ruling dated December 17, 2010, there are interpretations of certain terms contained in the claims of the patents being asserted by Broadcom. 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 $36.1 million of liabilities for uncertain tax positions as of December 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 December 26, 2010, the Company’s obligation associated with such agreements was approximately $71.1 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 December 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 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 December 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

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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 six months ended December 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 December 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 2,775,697 shares under the Equity Incentive Plan, 480,905 shares under the Director Plan, and 373,399 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 lives 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:
                                 
    Three Months     Three Months     Six Months     Six Months  
    Ended     Ended     Ended     Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
    (in thousands)  
Total cost of stock-based payment plans during the period
  $ 8,620     $ 3,590     $ 23,938     $ 8,493  
Amounts capitalized in inventory during the period
    (173 )     (83 )     (380 )     (203 )
Amounts recognized in income for amounts previously capitalized in inventory
    207       120       398       274  
 
                       
Amounts charged against income, before income tax benefit
  $ 8,654     $ 3,627     $ 23,956     $ 8,564  
 
                       
Amount of related income tax benefit recognized in income, excluding tax impact of stock option exchange program (see Note 12)
  $ 2,303     $ 1,438     $ 3,866     $ 3,067  
 
                       
     In connection with the ServerEngines acquisition, the Company has recognized approximately $13.8 million of stock-based compensation expense related to employment based contingent shares during the six months ended December 26, 2010 and expects to recognize approximately another $8.3 million of stock-based compensation expense through fiscal 2012.
     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.

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The assumptions utilized to compute the fair value of stock option grants under the Equity Incentive Plan and the Director Plan for the three and six months ended December 26, 2010 and December 27, 2009 were:
                 
    Three Months Ended   Six Months Ended
    December 26,   December 27,   December 26,   December 27,
    2010   2009   2010   2009
Expected volatility
  39% – 42%   46% – 49%   39% – 45%   46% – 49%
Weighted average expected volatility
  40%   48%   43%   47%
Expected dividends
       
Expected term (in years)
  3.34 – 5.34   2.97 – 4.97   3.34 – 5.34   2.97 – 4.97
Weighted average expected term (in years)
  4.18   3.81   4.16   3.81
Risk-free rate
  0.92% – 1.80%   1.49% – 2.50%   0.69% – 1.80%   1.49% – 2.50%
     The assumptions utilized to compute the fair value of the compensatory element related to the shares to be purchased under the Purchase Plan for the three and six months ended December 26, 2010 and December 27, 2009 were:
                                 
    Three Months Ended   Six Months Ended
    December 26,   December 27,   December 26,   December 27,
    2010   2009   2010   2009
Expected volatility
    37 %     43 %     37 %     43 %
Expected dividends
                       
Expected term (in years)
    0.49       0.49       0.49       0.49  
Risk-free rate
    0.18 %     0.17 %     0.18 %     0.17 %
     A summary of option activity under the plans for the six months ended December 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
    1,103,500     $ 9.61                  
Options granted to replace ServerEngines options assumed as part of the acquisition
    472,732     $ 5.18                  
Options exercised
    (86,106 )   $ 5.02                  
Options canceled
    (1,113,027 )   $ 37.28                  
Options forfeited
    (73,852 )   $ 11.10                  
 
                               
Options outstanding at December 26, 2010
    7,834,342     $ 16.14       3.27     $ 8.3  
 
                               
Options vested and expected to vest at December 26, 2010
    7,505,864     $ 16.43       3.15     $ 7.5  
 
                               
Options exercisable at December 26, 2010
    6,102,749     $ 17.99       2.56     $ 4.1  
 
                               
     A summary of unvested stock awards activity for the six months ended December 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
    1,578,418     $ 10.77  
Awards vested
    (1,107,701 )   $ 11.87  
Awards forfeited
    (175,980 )   $ 9.77  
 
               
Awards outstanding and unvested at December 26, 2010
    3,732,478     $ 10.21  
 
               
     As of December 26, 2010, there was approximately $26.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of approximately 1.4 years.

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     The weighted average grant date fair value of options granted during the six months ended December 26, 2010 and December 27, 2009 was approximately $3.40 per share and $3.69 per share, respectively. The weighted average grant date fair value of unvested stock awards granted during the six months ended December 26, 2010 and December 27, 2009 was approximately $10.77 per share and $8.66 per share, respectively. The total intrinsic value of stock options exercised was approximately $0.5 million and $0.2 million for the six months ended December 26, 2010 and December 27, 2009, respectively. The total fair value of unvested stock awards that vested during the six months ended December 26, 2010 and December 27, 2009 was approximately $11.7 million and $9.8 million, respectively. Cash received from stock option exercises under stock-based plans and shares purchased under the Purchase Plan was approximately $3.4 million for the six months ended December 26, 2010 and approximately $2.7 million for the six months ended December 27, 2009. The actual tax benefit realized for tax deductions from option exercises was approximately $4.6 million and $3.8 million for the six months ended December 26, 2010 and December 27, 2009, respectively.
     At Emulex’s Annual Shareholders Meeting on November 23, 2010, the shareholders approved an increase in the number of shares authorized under the Purchase Plan by 1.5 million shares and an increase under the Equity Incentive Plan by 2.0 million shares. As of December 26, 2010, including the shares newly authorized, 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 next six month option period from November 1, 2010 to April 30, 2011 under the Purchase Plan.
12.Income Taxes
     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 Company and its domestic subsidiaries file federal, state and local income / franchise tax returns in the U.S. The Company’s international subsidiaries file income tax returns in various non-U.S. jurisdictions. The Company recorded an income tax provision of approximately $25.9 million in the six months ended December 26, 2010 compared to an income tax benefit of $12.9 million in the six months ended December 27, 2009. The effective tax rate was approximately 118% for the six months ended December 26, 2010 compared to an effective tax benefit rate of 10,243% for the six months ended December 27, 2009. During the six months ended December 26, 2010, one of Emulex’s domestic entities entered into a platform contribution transaction with an international subsidiary to license the recently acquired ServerEngines technology, resulting in an increase in U.S. income taxes of approximately $36.6 million in the six months ended December 26, 2010. In December 2010, the Federal research credit was extended retroactively to calendar 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, resulting in an income tax benefit of approximately $3.4 million. Such tax benefit was partially offset by non-deductible stock-based compensation expense for the contingent shares related to the ServerEngines acquisition recognized during the six months ended December 26, 2010. 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 audit will have a material adverse effect on its financial condition or results of operations.
13. Net (Loss) Income Per Share
     The following table sets forth the computation of basic and diluted net (loss) income per share:
                                 
    Three Months Ended     Six Months Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
    (in thousands, except per     (in thousands, except per  
    share data)     share data)  
Numerator — Net (loss) income
  $ (39,758 )   $ 8,942     $ (47,866 )   $ 12,780  
Less: Undistributed earnings allocated to participating securities
          (111 )           (210 )
 
                       
Undistributed earnings allocated to common shareholders for basic net (loss) income per share
  $ (39,758 )   $ 8,831     $ (47,866 )   $ 12,570  
 
                       
Undistributed earnings allocated to common shareholders for diluted net (loss) income per share
  $ (39,758 )   $ 8,832     $ (47,866 )   $ 12,573  
 
                       

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    Three Months Ended     Six Months Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
    (in thousands, except per     (in thousands, except per  
    share data)     share data)  
Denominator:
                               
Denominator for basic net (loss) income per share — weighted average shares outstanding
    86,565       79,667       84,485       79,563  
Dilutive options outstanding, unvested stock units and ESPP
          1,067             942  
 
                       
Denominator for diluted net (loss) income per share — adjusted weighted average shares outstanding
    86,565       80,734       84,485       80,505  
 
                       
 
                               
Basic net (loss) income per share
  $ (0.46 )   $ 0.11     $ (0.57 )   $ 0.16  
 
                       
Diluted net (loss) income per share
  $ (0.46 )   $ 0.11     $ (0.57 )   $ 0.16  
 
                       
Antidilutive options and unvested stock excluded from the computations
    8,779       8,338       9,172       8,987  
 
                       
Average market price of common stock
  $ 11.18     $ 10.55     $ 10.32     $ 10.09  
 
                       
     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     Six Months Ended  
    December 26,     December 27,     December 26,     December 27,  
    2010     2009     2010     2009  
    (in thousands)     (in thousands)  
Net (loss) income
  $ (39,758 )   $ 8,942     $ (47,866 )   $ 12,780  
Other comprehensive(loss) income:
                               
Foreign currency translation adjustments, net of income taxes
    (91 )     68       131       (25 )
 
                       
 
  $ (39,849 )   $ 9,010     $ (47,735 )   $ 12,755  
 
                       

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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. In addition, we have and will incur charges associated with the acquisition of ServerEngines. As the valuation and purchase price allocation has not been finalized, we are unable to predict the impact of various post-acquisition charges, including amortization of intangibles and stock-based compensation. 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 our future results with any accuracy. 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 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; any inadequacy of our intellectual property protection or the potential that third-party claims of infringement and any related indemnity obligations or adverse judgments; 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 effects of changes in our business model to separately charge for software; 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; 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; the effects of acquisitions, including the recent acquisition of ServerEngines Corporation (ServerEngines); 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

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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 channel, 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 December 26, 2010, we had a total of 961 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

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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. During the second quarter of fiscal 2011 one of our domestic entities entered into a platform contribution transaction with one of our international subsidiaries to license the recently acquired ServerEngines technology for approximately $111.5 million. While these global initiatives are expected to continue to reduce our effective tax rate beginning with fiscal year 2012, the platform contribution transaction resulted in an incremental tax expense of approximately $39.3 million. 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’ PilotTM facility of Server 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   Percentage of Net Revenues
    Three Months Ended   Six Months Ended
    December 26,   December 27,   December 26,   December 27,
    2010   2009   2010   2009
     
Net revenues
    100 %     100 %     100 %     100 %
Cost of sales
    44       38       44       39  
     
Gross profit
    56       62       56       61  
     
Operating expenses:
                               
Engineering and development
    37       29       37       33  
Selling and marketing
    12       15       12       15  
General and administrative
    12       11       15       12  
Amortization of other intangible assets
    2       2       2       2  
     
Total operating expenses
    63       57       66       62  
     
Operating(loss) income
    (7 )     5       (10 )     (1 )
     
Nonoperating (expense) income, net:
                               
Interest income
                       
Interest expense
                       
Other (expense) income, net
                       
     
Total nonoperating (expense) income, net
                       
     
(Loss) Income before income taxes
    (7 )     5       (10 )     (1 )
     
Income tax provision (benefit)
    28       (3 )     12       (7 )
     
Net (loss) income
    (35 )%     8 %     (22 )%     6 %
     

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Three months ended December 26, 2010, compared to three months ended December 27, 2009
     Net Revenues. Net revenues for the second quarter of fiscal 2011 ended December 26, 2010, increased by approximately $5.7 million, or 5%, to approximately $114.0 million, compared to approximately $108.3 million for the same quarter of fiscal 2010 ended December 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          
    December 26,   of Net   December 27,   of Net   Increase/     Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)     Change
       
Host Server Products
  $ 92,167       81 %   $ 81,923       76 %     $ 10,244       13 %
Embedded Storage Products
    21,762       19 %     26,284       24 %       (4,522 )     (17 )%
Other
    69             83               (14 )     (17 )%
       
Total net revenues
  $ 113,998       100 %   $ 108,290       100 %     $ 5,708       5 %
       
     HSP primarily consists of HBAs, mezzanine cards, input/output (I/O) ASICs, and UCNAs. For the three months ended December 26, 2010, our Fibre Channel based products accounted for most of our HSP revenues. The increase in our HSP net revenue for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 was mainly due to an increase in units shipped of approximately 142% partially offset by a decrease in average selling price of approximately 53%. 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 decrease in our ESP net revenue for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 was primarily due to a decrease in units shipped of approximately 26% partially offset by an increase in average selling price of approximately 11%. The decrease in units shipped was primarily due to lower demand for ESP products. The increase in average selling price was primarily due to the migration from four Gb/s to eight G/bs I/O controller products.
     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
    December 26,   December 27,   December 26,   December 27,
    2010   2009   2010   2009
     
Net revenue percentage (1):
                               
OEM:
                               
EMC
                      12 %
Hewlett-Packard
    18 %     13 %     20 %     14 %
IBM
    28 %     23 %     38 %     33 %
 
(1)   Amounts less than 10% are not presented.

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(2)   Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.
     Direct sales to our top five customers accounted for approximately 68% of total net revenues for the three months ended December 26, 2010, compared to approximately 58% for the three months ended December 27, 2009. Direct and indirect sales to our top five customers accounted for approximately 80% of total net revenues for the three months ended December 26, 2010 compared to approximately 72% for the three months ended December 27, 2009. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models. The increase in concentration was primarily due to the significant increase in revenues from IBM and Hewlett - Packard.
Net Revenues by Sales Channel
     Net revenues by sales channel were as follows:
                                                 
    Net Revenues by Sales Channel
    Three Months           Three Months            
    Ended   Percentage   Ended   Percentage        
    December 26,   of Net   December 27,   of Net   Increase/   Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)   Change
     
OEM
  $ 100,554       88 %   $ 91,194       84 %   $ 9,360       10 %
Distribution
    13,441       12 %     16,992       16 %     (3,551 )     (21 )%
Other
    3             104             (101 )     (97 )%
     
Total net revenues
  $ 113,998       100 %   $ 108,290       100 %   $ 5,708       5 %
     
     The increase in OEM net revenues for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 was primarily due to an increase of approximately 21% in HSP revenues generated through our OEMs. The decrease in distribution net revenues for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 was primarily due to a decrease of approximately 23% 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        
    December 26,   of Net   December 27,   of Net   Increase/   Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)   Change
     
Asia Pacific
  $ 58,052       51 %   $ 40,172       37 %   $ 17,880       45 %
United States
    31,903       28 %     33,324       31 %     (1,421 )     (4 )%
Europe, Middle East, and Africa
    21,965       19 %     32,972       30 %     (11,007 )     (33 )%
Rest of the world
    2,078       2 %     1,822       2 %     256       14 %
     
Total net revenues
  $ 113,998       100 %   $ 108,290       100 %   $ 5,708       5 %
     
     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 December 26, 2010 compared to the three months ended December 27, 2009 was primarily due to our OEM customers migrating towards using contract manufacturers that are predominately located in Asia Pacific. 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.

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     Gross Profit. Gross profit consists of net revenues less cost of sales. Our gross profit was as follows (in thousands):
                     
Gross Profit
Three Months Ended   Percentage of   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$63,773   56%   $66,784   62%   $(3,011)   (6)%
     Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $8.8 million and $4.7 million of amortization of technology intangible assets for the three months ended December 26, 2010 and December 27, 2009, respectively, with approximately $4.3 million in the three months ended December 26, 2010 being related to the ServerEngines acquisition. Approximately $0.4 million and $0.3 million of share-based compensation expense was included in cost of sales for the three months ended December 26, 2010 and December 27, 2009, respectively.
     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
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$41,668   37%   $31,680   29%   $9,988   8%
     Engineering and development expenses for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 increased approximately $10.0 million, or 32%. Approximately $3.4 million and $1.2 million of share-based compensation expense were included in engineering and development costs for the three months ended December 26, 2010 and December 27, 2009, respectively, with approximately $1.2 million in the three months ended December 26, 2010 being related to the ServerEngines acquisition. Engineering and development headcount increased to 616 at December 26, 2010 from 450 at December 27, 2009 primarily due to the acquisition of ServerEngines. The increase in headcount resulted in a net increase of approximately $6.5 million in salary and related expenses as compared to the same period in fiscal 2010, partially offset by a decrease in performance based compensation of approximately $0.5 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   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$14,226   12%   $15,760   15%   $(1,534)   (3)%
     Selling and marketing expenses for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 decreased approximately $1.5 million, or 10%. Approximately $1.2 million and $0.9 million of share-based compensation expense were included in selling and marketing costs for the three months ended December 26, 2010 and December 27, 2009, respectively. Selling and marketing headcount increased to 135 at December 26, 2010 from 121 at December 27, 2009. The increase in headcount resulted in a net increase of approximately $0.6 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 December 26, 2010 was primarily due to a decrease in performance based compensation of approximately $1.9 million and a decrease in outside services and advertising expenses of approximately $0.5 million. We will continue to closely manage and target advertising,

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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   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$13,663   12%   $11,896   11%   $1,767   1%
     General and administrative expenses for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 increased approximately $1.8 million, or 15%. Approximately $3.6 million and $1.2 million of share-based compensation expense were included in general and administrative costs for the three months ended December 26, 2010 and December 27, 2009, respectively, with approximately $2.0 million in the three months ended December 26, 2010 being related to the ServerEngines acquisition. General and administrative headcount increased to 140 at December 26, 2010 from 128 at December 27, 2009. The increase in headcount resulted in a net increase of approximately $0.4 million in salary and related expenses as compared to the same period in fiscal 2010, fully offset by a decrease of approximately $0.6 million in performance based compensation. The remaining change was primarily due to a decrease in litigation costs.
     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   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$2,457   2%   $1,698   2%   $759  
     Amortization of other intangible assets for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 increased by approximately $0.8 million, or 45%. The increase was primarily due to amortization expense of intangible assets acquired from ServerEngines of approximately $0.6 million.
     Nonoperating (Expense) Income, net. Nonoperating (expense) income, net, consisted primarily of interest income, interest expense, and other non-operating income and expense items. Our nonoperating (expense) income, net, was as follows (in thousands):
                     
Nonoperating (Expense) Income, net
Three Months Ended   Percentage of   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$(34)     $(41)     $7   —%
     Our nonoperating (expense) income, net, for the three months ended December 26, 2010 did not change significantly compared to the three months ended December 27, 2009.
     Income Taxes. Income taxes were as follows (in thousands):
                     
Income Taxes
Three Months Ended   Percentage of   Three Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$31,483   28%   $(3,233)   (3)%   $34,716   31%
     Income taxes for the three months ended December 26, 2010 compared to the three months ended December 27, 2009 increased approximately $34.7 million, or 1,074%. Our effective tax rate was approximately 380% for the three months ended December 26, 2010 compared to an effective tax benefit rate of approximately 57% for the three months ended December 27, 2009. During the three months ended December 26, 2010, one of our domestic entities entered into a platform contribution transaction with an international subsidiary to license the recently acquired

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ServerEngines technology, resulting in an increase in U.S. income taxes of approximately $36.6 million, partially offset by a decrease in U.S. income taxes of approximately $3.4 million related to higher Federal research credits. The Federal research credits increased during the three months ended December 26, 2010 due to a retroactive extension of the Federal research credit in December 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. These tax items may not recur in future periods.
Six months ended December 26, 2010, compared to six months ended December 27, 2009
     Net Revenues. Net revenues for the six months ended December 26, 2010, increased by approximately $23.3 million, or 12%, to approximately $217.1 million compared to approximately $193.8 million for the six months ended December 27, 2009.
Net Revenues by Product Line
     Net revenues by product line were as follows:
                                                 
    Net Revenues by Product Line
    Six Months           Six Months            
    Ended   Percentage   Ended   Percentage        
    December 27,   of Net   December 27,   of Net   Increase/   Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)   Change
     
Host Server Products
  $ 171,167       79 %   $ 146,068       75 %   $ 25,099       17 %
Embedded Storage Products
    45,801       21 %     47,558       25 %     (1,757 )     (4 )%
Other
    127             191             (64 )     (34 )%
     
Total net revenues
  $ 217,095       100 %   $ 193,817       100 %   $ 23,278       12 %
     
     HSP primarily consists of HBAs, mezzanine cards, input/output (I/O) ASICs, and UCNAs. For the six months ended December 26, 2010, our Fibre Channel based products accounted for most of our HSP revenues. The increase in our HSP net revenue for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 was mainly due to an increase of approximately 137% in units shipped partially offset by a decrease in average selling price of approximately 50%. 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 period 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 slight decrease in our ESP net revenue for the six months ended December 26, 2010 compared to the six months ended December 26, 2010 was primarily due to a decrease in average selling price of approximately 10%, partially offset by an increase in units shipped of approximately 8%. The decrease in average selling price and increase in units shipped is primarily due to the launch of certain new bridge products with 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)
    Six Months   Six Months   Six Months   Six Months
    Ended   Ended   Ended   Ended
    December 26,   December 27,   December 26,   December 27,
Net revenue percentage (1):   2010   2009   2010   2009
     
OEM:
                               
EMC
                10 %     11 %
Hewlett-Packard
    17 %     14 %     19 %     15 %
IBM
    25 %     23 %     35 %     33 %

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(1)   Amounts less than 10% are not presented.
 
(2)   Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM’s revenues in these columns rather than as revenue for the distributors, resellers or other third parties.
     Direct sales to our top five customers accounted for approximately 63% of total net revenues for the six months ended December 26, 2010, compared to approximately 59% for the six months ended December 27, 2009. Direct and indirect sales to our top five customers accounted for approximately 77% of total net revenues for the six months ended December 26, 2010, compared to approximately 73% for the six months ended December 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
    Six Months           Six Months            
    Ended   Percentage   Ended   Percentage        
    December 26,   of Net   December 27,   of Net   Increase/   Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)   Change
     
OEM
  $ 186,860       86 %   $ 163,481       84 %   $ 23,379       14 %
Distribution
    30,215       14 %     30,203       16 %     12        
Other
    20             133             (113 )     (85 )%
     
Total net revenues
  $ 217,095       100 %   $ 193,817       100 %   $ 23,278       12 %
     
     The increase in OEM net revenues for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 was primarily due to an increase of approximately 22% in HSP revenues generated through our OEMs. Distribution net revenues for the six months ended December 26, 2010 did not change significantly compared to the six months ended December 27, 2009.
Net Revenues by Geographic Territory
     Our net revenues by geographic territory based on billed-to location were as follows:
                                                 
    Net Revenues by Geographic Territory
    Six Months           Six Months            
    Ended   Percentage   Ended   Percentage        
    December 26,   of Net   December 27,   of Net   Increase/   Percentage
(in thousands)   2010   Revenues   2009   Revenues   (Decrease)   Change
     
Asia Pacific
  $ 101,479       47 %   $ 69,338       36 %   $ 32,141       46 %
United States
    65,323       30 %     60,090       31 %     5,233       9 %
Europe, Middle East, and Africa
    46,717       21 %     61,087       31 %     (14,370 )     (24 )%
Rest of the world
    3,576       2 %     3,302       2 %     274       8 %
     
Total net revenues
  $ 217,095       100 %   $ 193,817       100 %   $ 23,278       12 %
     
     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 six months ended December 26, 2010 compared to the six months ended December 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

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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
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$121,168   56%   $118,890   61%   $2,278   (5)%
     Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $15.0 million and $9.5 million of amortization of technology intangible assets for the six months ended December 26, 2010 and December 27, 2009, respectively, with approximately $5.7 million in the six months ended December 26, 2010 being related to the ServerEngines acquisition. Approximately $0.9 million and $0.7 million of share-based compensation expense was included in cost of sales for the six months ended December 26, 2010 and December 27, 2009, respectively.
     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
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$79,932   37%   $63,079   33%   $16,853   4%
     Engineering and development expenses for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 increased approximately $16.9 million, or 27%. Approximately $9.5 million and $3.7 million of share-based compensation expense were included in engineering and development costs for the six months ended December 26, 2010 and December 27, 2009, respectively, with approximately $5.3 million being related to the ServerEngines acquisition. Engineering and development headcount increased to 616 at December 26, 2010 from 450 at December 27, 2009 primarily due to the acquisition of ServerEngines. The increase in headcount resulted in a net increase of approximately $7.3 million in salary and related expenses as compared to the same period in fiscal 2010.
     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
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$26,935   12%   $28,672   15%   $(1,737)   (3)%
     Selling and marketing expenses for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 decreased approximately $1.7 million, or 6%. Approximately $2.3 million and $1.4 million of share-based compensation expense were included in selling and marketing costs for the six months ended December 26, 2010 and December 27, 2009, respectively. Selling and marketing headcount increased to 135 at December 26, 2010 from 121 at December 27, 2009. The increase in headcount resulted in a net increase of approximately $0.8 million in salary and related expenses as compared to the same period in fiscal 2010. The decrease in selling and marketing expenses during the six months ended December 26, 2010 was primarily due to a decrease in performance based compensation of approximately $2.6 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.

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     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
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$31,282   15%   $24,175   12%   $7,107   2%
     General and administrative expenses for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 increased approximately $7.1 million, or 29%. Approximately $11.3 million and $2.8 million of share-based compensation expense were included in general and administrative costs for the six months ended December 26, 2010 and December 27, 2009, respectively, with approximately $8.6 million in the six months ended December 26, 2010 being related to the ServerEngines acquisition. General and administrative headcount increased to 140 at December 26, 2010 from 128 at December 27, 2009. The increase in headcount resulted in a net increase of approximately $0.6 million in salary and related expenses as compared to the same period in fiscal 2010. The remaining change was primarily due to a decrease in performance based compensation of approximately $1.1 million.
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
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$4,473   2%   $3,396   2%   $1,077  
     Amortization of other intangible assets for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 increased by approximately $1.1 million, or 32%. The increase was primarily due to intangible assets acquired from ServerEngines of approximately $0.8 million.
     Nonoperating (Expense) Income, net. Nonoperating (Expense) income, net, consisted primarily of interest income, interest expense, and other non-operating income and expense items. Our nonoperating (expense) income, net, was as follows (in thousands):
                     
Nonoperating (Expense) Income, net
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$(541)     $306     $(847)  
     Our nonoperating (expense) income, net, for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 decreased approximately $0.8 million, or 277%. 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.

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Income Taxes. Income taxes were as follows (in thousands):
                     
Income Taxes
Six Months Ended   Percentage of   Six Months Ended   Percentage of   Increase/   Percentage
December 26, 2010   Net Revenues   December 27, 2009   Net Revenues   (Decrease)   Points Change
 
$25,871   12%   $(12,906)   (7)%   $38,777   19%
Income taxes for the six months ended December 26, 2010 compared to the six months ended December 27, 2009 increased approximately $38.8 million, or 300%. Our effective tax rate was approximately 118% for the six months ended December 26, 2010 compared to an effective tax benefit rate of approximately 10,243% for the six months ended December 27, 2009. During the six months ended December 26, 2010, one of our domestic entities entered into a platform contribution transaction with an international subsidiary to license the recently acquired ServerEngines technology, resulting in an increase in U.S. income taxes of approximately $36.6 million. The remaining increase was primarily due to non-deductible stock-based compensation expense for contingent shares related to the ServerEngines acquisition of approximately $3.8 million combined with a decrease in tax benefits due to a non-recurring tax benefit in the prior year of approximately $4.0 million related to the stock option exchange program, partially offset by an increase of approximately $2.8 million in tax benefits from Federal research credits due to a retroactive extension of the Federal research credit in December 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. These tax items may not recur in future periods.
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 is 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 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.

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     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 collectibility 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 ten months to twelve 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 December 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 six months ended December 26, 2010 related to the ServerEngines acquisition that was completed on August 25, 2010, adding approximately $76.9 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.

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     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 Issued Accounting Standards
     See Note 1 in the accompanying notes to consolidated financial statements for a description of the recently issued accounting standards.
Liquidity and Capital Resources
     At December 26, 2010, we had approximately $217.9 million in working capital and approximately $178.6 million in cash and cash equivalents and current investments. At June 27, 2010, we had approximately $357.1 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 term deposits, fixed income securities and corporate bonds as of December 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 December 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

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shares for an aggregate purchase price of approximately $40.1 million or an average of $9.76 was purchased during the six months ended December 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 six months ended December 26, 2010 was approximately $17.0 million compared to approximately $19.8 million during the six months ended December 27, 2009. The current period cash provided by operating activities was primarily due to a net loss of approximately $47.9 million before adjustments for share-based compensation expense of approximately $24.0 million, amortization of intangible assets of approximately $19.4 million and depreciation and amortization of approximately $10.6 million. The remaining increase in cash was primarily due to an increase in income taxes payable of approximately $27.6 million and an increase in prepaid expenses and other assets of approximately $5.0 million, partially offset by a decrease in accounts and other receivables of approximately $12.2 million, an increase in deferred income taxes of approximately $5.6 million, and a decrease in accounts payable, accrued and other liabilities of approximately $3.1 million.
     Cash used in investing activities during the six months ended December 26, 2010 was approximately $29.8 million compared to approximately $42.4 million during the six months ended December 27, 2009. The current period usage of cash was primarily due to payments to the shareholders of ServerEngines in connection with the acquisition of approximately $53.1 million, net of cash acquired, purchases of property and equipment of approximately $9.0 million, payment pursuant to a licensing arrangement with a third party of approximately $4.0 million, partially offset by maturities of investments that were not reinvested.
     Cash used in financing activities for the six months ended December 26, 2010 was approximately $67.3 million compared to approximately $18.8 million for the six months ended December 27, 2009. The current period usage of cash was primarily due to the purchase of treasury stock of approximately $40.1 million 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 December 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)
  $ 10,643     $ 3,487     $ 4,869     $ 2,150     $ 137     $     $  
Purchase commitments
    55,542       55,542                                
Other commitments (2)
    15,540       13,228       2,311       1                    
     
Total
  $ 81,725     $ 72,257     $ 7,180     $ 2,151     $ 137     $     $  
     
 
(1)   Lease payments include common area maintenance (CAM) charges.
 
(2)   Consists primarily of commitments for professional services of approximately $6.5 million and non-recurring engineering services of approximately $6.4 million but excludes approximately $36.1 million of liabilities for uncertain tax positions for which we cannot make a reasonably reliable estimate of the period of payment.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
     Our cash and cash equivalents are not subject to significant interest rate risk due to their short terms to maturity. As of December 26, 2010, the carrying value of our cash and cash equivalents approximated fair value.
     As of December 26, 2010, our investment portfolio of approximately $9.8 million consisted primarily of term deposits, fixed income securities, and corporate bonds. 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 December 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 December 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 December 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 were originally filed by six groups of appellants, four of whom have settled with the plaintiffs.
     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

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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. Emulex was told that a settlement was reached between the plaintiffs and ARM Ltd. (the original supplier of the alleged infringing product), the terms of which are not known by Emulex. A dismissal of the action was filed with the court on about December 8, 2010.
     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 separate 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. On November 1, 2010, the Court issued an order allowing Broadcom to make infringement assertions against additional Emulex products. In a Court ruling dated December 17, 2010, there are interpretations of certain terms contained in the claims of the patents being asserted by Broadcom. 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.

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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

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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.
Third party claims of intellectual property infringement could adversely affect our business.
     We believe that our products and technology do not infringe on the intellectual property rights of others or upon intellectual property rights that may be granted in the future pursuant to pending applications. We occasionally receive communications from third parties alleging patent infringement, and there is always the chance that third parties may assert infringement claims against us. Any such claims, with or without merit, could result in costly litigation, cause product shipment delays, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations, and financial condition could be materially adversely affected.
     Broadcom has filed a consolidated patent infringement suit against us, which currently alleges that we are infringing nine Broadcom patents covering certain data and storage networking technologies. Ongoing lawsuits, such as the action brought by Broadcom, present inherent risks, any of which could have a material adverse effect on our business, financial condition, or results of operations. Such potential risks include continuing expenses of litigation, risk of loss of patent rights and/or monetary damages, risk of injunction against the sale of products incorporating the technology in question, counterclaims, attorneys’ fees, and diversion of management’s attention from other business matters. See “Legal Proceedings” in Item 1, Part I of this Form 10-Q.
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

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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 and six months ended December 26, 2010, respectively, we derived approximately 88% and 86% of our net revenues from sales to OEM customers and approximately 12% and 14% from sales through distribution. Furthermore, as some of our sales through distribution channels consist of OEM products, OEM customers effectively generated approximately 93% and 92% of our revenue for the three and six months ended December 26, 2010. Moreover, direct sales to our top five customers accounted for approximately 68% and 63% of our net revenues for the three and six months ended December 26, 2010, 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 80% and 77% of our net revenues for the three and six months ended December 26, 2010, 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.

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     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.

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     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

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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.

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     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.
     Storage device density continues to improve rapidly and at some point in the future, the industry may experience a period where the advancement in technology may increase storage device capacity to a level that may equal or exceed the need for digital data storage requirements. This would result in a situation where the number of units of storage devices required in the marketplace may level out or even decrease. Our growth in revenue depends on growth in unit shipments to offset declining average selling prices. To the extent that growth in storage device unit demand slows or decreases, our financial condition and results of operations may be materially adversely affected.
A decrease in the average unit selling prices or an increase in the manufactured cost of our products due to inflation or other factors could adversely affect our revenue, gross margins and financial performance.
     In the past, we have experienced downward pressure on the average unit selling prices of our products, and we expect this trend to continue. Furthermore, we may provide pricing discounts to customers based upon volume purchase criteria, and achievement of such discounts may reduce our average unit selling prices. To the extent that growth in unit demand fails to offset decreases in average unit selling prices, our revenues and financial performance could be materially adversely affected. Although we have historically achieved offsetting cost reductions, to the extent that average unit selling prices of our products decrease without a corresponding decrease in the costs of such products, our gross margins and financial performance could be materially adversely affected. Our gross margins could also be adversely affected by a shift in the mix of product sales to lower gross margin products. Furthermore, as our products are manufactured internationally, cost reductions would be more difficult to achieve if the value of the U.S. dollar continues to deteriorate. Moreover, if the manufactured cost of our products were to increase due to inflation or other factors and we cannot pass along the increase in our costs to our customers, our gross margins and financial performance could be materially adversely affected.
Delays in product development could adversely affect our business.
     We have experienced delays in product development in the past and may experience similar delays in the future. Prior delays have resulted from numerous factors, which may include, but are not limited to:
    Difficulties in hiring and retaining necessary employees and independent contractors;
 
    Difficulties in reallocating engineering resources and other resource limitations;
 
    Unanticipated engineering or manufacturing complexity, including from third party suppliers of intellectual property such as foundries of our ASICs;
 
    Undetected errors or failures in our products;
 
    Changing OEM product specifications;
 
    Delays in the acceptance or shipment of products by OEM customers; and
 
    Changing market or competitive product requirements.
     Given the short product life cycles in the markets for our products and the relatively long product development cycles, any delay or unanticipated difficulty associated with new product introductions or product enhancements could have a material adverse effect on our business, results of operations, and financial condition.

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Changes in our business model to separately charge for software may not result in expected revenue increases.
     Emulex recently began charging separate license fees for software associated with our product offerings. The success of this strategy to generate software revenues depends on a number of factors, and any failure of successfully implement this new strategy could have an adverse effect on our results of operations. Such factors include:
    Our inability to develop and market these new software products successfully;
 
    The software products we develop may not be well received by customers;
 
    Our software products may have quality problems or other defects in the early stages that were not anticipated in the design of those products; and
 
    Software products developed and new technologies offered by others may affect demand for our products.
Our joint development activities may result in products that are not commercially successful or that are not available in a timely fashion.
     We have engaged in joint development projects with customers, companies we have investments in and receivables from, and third parties in the past and we expect to continue doing so in the future. Currently, we have investments in and commitments to various third parties related to these joint development efforts. Joint development can magnify several risks for us, including the loss of control over development of aspects of the jointly developed products and over the timing of product availability. Accordingly, we face increased risk that joint development activities will result in products that are not commercially successful or that are not available in a timely fashion. Any failure to timely develop commercially successful products through our joint development activities could have a material adverse effect on our business, results of operations, and financial condition.
A change in our business relationships with our third party suppliers or our electronics manufacturing service providers could adversely affect our business.
     We rely on third party suppliers for components and the manufacture of our products, and we have experienced delays or difficulty in securing components and finished goods in the past. Delays or difficulty in securing components or finished goods at reasonable cost may be caused by numerous factors including, but not limited to:
    Discontinued production by a supplier;
 
    Required long-term purchase commitments;
 
    Undetected errors, failures or production quality issues, including projected failures that may constitute epidemic failure rates specified in agreements with our customers or that may require us to make concessions or accommodations for continuing customer relationships;
 
    Timeliness of product delivery;
 
    Sole sourcing and components made by a small number of suppliers, including the inability to obtain components and finished goods at reasonable cost from such sources and suppliers;
 
    Financial stability and viability of our suppliers and electronics manufacturing service (EMS) providers;
 
    Changes in business strategies of our suppliers and EMS providers;
 
    Increases in manufacturing costs due to lower volumes or more complex manufacturing process than anticipated;
 
    Disruption in shipping channels;

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    Natural disasters;
 
    Inability or unwillingness of our suppliers or EMS providers to continue their business with us;
 
    Environmental, tax or legislative changes in the location where our products are produced or delivered;
 
    Difficulties associated with international operations; and
 
    Market shortages.
     There is a risk that we will not be able to retain our current suppliers or change to alternative suppliers. An interruption in supply, the cost of shifting to a new supplier or EMS providers, disputes with suppliers or EMS providers could have a material adverse effect on our business, results of operations, and financial condition.
     Our EMS providers procure and manage most of the components used in our board or box level products; therefore, we face third party risks associated with ensuring product availability. Further, an adverse inventory management control issue by one or more of our third party suppliers could have a material adverse effect on our business, results of operations, and financial condition. We also purchase ASIC components from sole source suppliers, including LSI Corporation, Marvell Technology Group Ltd., Intel Corporation, Renenas Electronics America Inc., and Toshiba Corporation, who in turn rely on a limited number of their suppliers to manufacture ASICs, all of which create risks in assuring such component availability.
Unsolicited takeover proposals may be disruptive to our business and may adversely affect our operations; results and our ability to retain key employees.
     On April 21, 2009, we received an unsolicited takeover proposal from Broadcom Corporation (Broadcom) to acquire all of our outstanding shares of common stock. While Broadcom has allowed its tender offer to expire, there can be no assurance that Broadcom or another third party will not make an unsolicited takeover proposal in the future. The review and consideration of any takeover proposal may be a significant distraction for our management and employees and could require the expenditure of significant time and resources by us.
     Moreover, any unsolicited takeover proposal may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Any such takeover proposal may also create uncertainty for our customers, suppliers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. The uncertainty arising from unsolicited takeover proposals and any related costly litigation may disrupt our business, which could result in an adverse effect on our operating results. Management and employee distraction related to any such takeover proposal also may adversely impact our ability to optimally conduct our business and pursue our strategic objectives.
     We have entered into Key Employee Retention Agreements with four of our current executive officers, and adopted a Change in Control Retention Plan, in which currently an additional 29 key employees participate. The participants of these retention arrangements may be entitled to severance payments and benefits, based on a period of between twelve months and two years, upon a termination of their employment by us without cause or by them for good reason in connection with a change of control of our company (each as defined in the applicable agreement or plan). These retention arrangements may not be adequate to allow us to retain critical employees during a time when a change in control is being proposed or is imminent.
If our intellectual property protections are inadequate, it could adversely affect our business.
     We believe that our continued success depends primarily on continuing innovation, marketing, and technical expertise, as well as the quality of product support and customer relations. At the same time, our success is partially dependent on the proprietary technology contained in our products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws, and contractual provisions to establish and protect our intellectual property rights in our products.

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     We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. In addition, the laws of some of the countries in which our products are or may be developed, manufactured, or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States, or at all. Furthermore, we enter into various development projects and arrangements with other companies. In some cases, these arrangements allow for the sharing or use of our intellectual property. Our failure to protect our intellectual property rights could have a material adverse effect on our business, results of operations, and financial condition. We attempt to mitigate this risk by obtaining indemnification from others, where possible.
     Certain of our software (as well as that of our customers) may be derived from “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License (GPL), which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, or license such derivative works under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.
The inability or increased cost of attracting, motivating, or retaining key managerial and technical personnel could adversely affect our business.
     Our success depends to a significant degree upon the performance and continued service of key managers, as well as engineers involved in the development of our storage networking technologies and technical support of our storage networking products and customers. Competition for such highly skilled employees in the communities in which we operate, as well as our industry, is intense, and we cannot be certain that we will be successful in recruiting, training, and retaining such personnel. In addition, employees may leave us and subsequently compete against us, and there may be costs relating to their departure. Also, many of these key managerial and technical personnel receive stock options or unvested stock as part of our employee retention initiatives. The number of shares authorized under stock based plans may be insufficient and shareholders may not approve to increase the number of authorized shares. New regulations, volatility in the stock market, and other factors could diminish the value of our stock options or unvested stock, putting us at a competitive disadvantage and forcing us to use more cash compensation. If we are unable to attract new managerial and technical employees, or are unable to retain and motivate our current key managerial and technical employees, or are forced to use more cash compensation to retain or replace key personnel, our business, results of operations, and financial condition could be materially adversely affected.
Our international business activities subject us to risks that could adversely affect our business.
     For the three and six months ended December 26, 2010, respectively, sales in the United States accounted for approximately 28% and 30% of our total net revenues, sales in Asia Pacific accounted for approximately 51% and 47% of our total net revenues, sales in Europe, Middle East, and Africa accounted for approximately 19% and 21% of our total revenue, and sales in the rest of the world accounted for approximately 2% of our total net revenues based on billed-to address. We expect that our sales will continue to increase outside of the United States as our customers are migrating towards using contract manufacturers located internationally, predominantly in Asia Pacific. However, because we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our sales may not be reflective of the geographic mix of end-user demand or installations. All of our sales are currently denominated in U.S. dollars. As a result, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets. In addition, an increasing amount of our expenses will be incurred in currencies other than U.S. dollars and as a result, we will be required from time to time to convert currencies to meet our obligations. Additionally, our suppliers are increasingly located outside of the U.S., and a significant portion of our products is produced at our EMS providers’ production facilities in Thailand and Malaysia. Furthermore, in connection with the reorganization of our international subsidiaries, we established a company in Ireland, and a significant portion of our sales and operations will now also occur in countries outside of the U.S. As a result, we are subject to the risks inherent in international operations. Our

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international business activities could be affected, limited or disrupted by a variety of factors, including, but not limited to:
    Imposition of or changes in governmental controls, taxes, tariffs, trade restrictions, and regulatory requirements to our current or future operations;
 
    Import and export restrictions;
 
    Loss of tax benefits or increases in tax expenses;
 
    Taxation in multiple jurisdictions;
 
    Longer accounts receivable payment cycles;
 
    Changes in the value of local currencies relative to our functional currency;
 
    Potential restrictions on transferring funds between countries and difficulties associated with repatriating cash generated or held outside of the U.S. in a tax-efficient manner;
 
    Costs and risks of localizing products for international countries;
 
    Fluctuations in freight costs and potential disruptions in the transportation infrastructure for our products and components;
 
    Difficulty maintaining management oversight and control of remote locations;
 
    The increased travel, infrastructure, accounting, and legal compliance costs associated with multiple international locations; and
 
    Political instability, war, or terrorism.
 
    General economic and social conditions within international countries;
     All of these factors could harm future sales of our products to international customers or production of our products outside of the United States, and have a material adverse effect on our business, results of operations, and financial condition.
Our stock price is volatile, which has and may result in lawsuits against us and our officers and directors.
     The stock market in general and the stock prices in technology based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well. For example, during calendar year 2010 through December 26, 2010, the closing sales price of our common stock ranged from a low of $8.30 per share to a high of $14.28 per share. Factors that could have a significant impact on the market price of our stock include, but are not limited to, the following:
    Quarterly variations in customer demand and operating results;
 
    Announcements of new products by us or our competitors;
 
    The gain or loss of significant customers or design wins;
 
    Changes in analysts’ earnings estimates;
 
    Changes in analyst recommendations, price targets, or other parameters that may not be related to earnings estimates;

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    Rumors or dissemination of false information;
 
    Pricing pressures;
 
    Short selling of our common stock;
 
    General conditions in the computer, storage, or communications markets;
 
    Events affecting other companies that investors deem to be comparable to us; and
 
    Offers to buy us or a competitor for a premium over recent trading price.
     In addition, Broadcom’s initiation and subsequent abandonment of its unsolicited takeover proposal to acquire all of the shares of our common stock has resulted in volatility in the price of our common stock. Any other takeover proposal by any third party to acquire the outstanding shares of our common stock may result in further volatility in the price of our common stock. If a takeover does not occur following announcement of a takeover proposal, for any reason, the market price of our common stock may decline. In addition, our stock price may decline as a result of the fact that we have been required to incur, and will continue to be required to incur, significant expenses related to the Broadcom unsolicited takeover proposal.
     In the past, companies, including us, that have experienced volatility in the market price of their stock have been subject to securities class action litigation. If we were to be the subject of similar litigation in the future or experience unfavorable outcomes in any of our pending litigation, as discussed in Note 9 in the accompanying notes to our consolidated financial statements contained elsewhere herein, it could have a material adverse effect on our business, results of operations, and financial condition. Such litigation would also divert management’s attention from other business matters.
Terrorist activities and resulting military and other actions could adversely affect our business.
     The continued threat of terrorism, military action, and heightened security measures in response to the threat of terrorism may cause significant disruption to commerce in some of the geographic areas in which we operate. Additionally, it is uncertain what impact the reactions to such events by various governmental agencies and security regulators worldwide will have on shipping costs. To the extent that such disruptions result in delays or cancellations of customer orders, delays in collecting cash, a general decrease in corporate spending on information technology, or our inability to effectively market, manufacture, or ship our products, our business, financial condition, and results of operations could be materially and adversely affected. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have any long-term material adverse effect on our business, results of operations, or financial condition.
Our corporate offices and principal product development facilities are located in regions that are subject to earthquakes and other natural disasters.
     Our California and Washington facilities, including our corporate offices and principal product development facilities, are located near major earthquake faults. Any disruption in our business activities, personal injury, or damage to the facilities in excess of our currently insured amounts as a result of earthquakes or other such natural disasters, could have a material adverse effect on our business, results of operations, and financial condition.
     We currently do not carry earthquake insurance. However, we do carry various other lines of insurance that may or may not be adequate to protect our business.
Our certificate of incorporation, provisions of Delaware law, and any shareholders rights plan could adversely affect the performance of our stock.

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     Provisions of our certificate of incorporation and Delaware General Corporation Law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. In addition, although we do not currently maintain a shareholders rights plan, we have maintained such a plan in the past and it is possible that we may adopt a shareholders rights plan in the future should general business, market and other conditions, opportunities and risks arise. The provisions of our certificate of incorporation, Delaware law, and any shareholders rights plan are generally intended to encourage potential acquirers to negotiate with us and allow our board of directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price.
Our system of internal controls may be inadequate.
     We maintain a system of internal controls in order to ensure we are able to collect, process, summarize, and disclose the information required by the Securities and Exchange Commission within the time periods specified. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Due to these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Additionally, public companies in the United States are required to review their internal controls under the Sarbanes-Oxley Act of 2002. If the internal controls put in place by us are not adequate or fail to perform as anticipated, we may be required to restate our financial statements, receive an adverse audit opinion on the effectiveness of our internal controls, and/or take other actions that will divert significant financial and managerial resources, as well as be subject to fines and/or other government enforcement actions. Furthermore, the price of our stock could be adversely affected.
Changes in laws, regulations, and financial accounting standards may affect our reported results of operations.
     New laws, regulations and accounting standards, as well as changes to and varying interpretations of currently accepted accounting practices in the technology industry might adversely affect our reported financial results, which could have an adverse effect on our stock price.
The final determination of our income tax liability may be materially different from our income tax provisions and accruals and our tax liabilities may be adversely affected by changes in applicable tax laws.
     We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file.
     We have adopted transfer-pricing procedures between our subsidiaries to regulate intercompany transfers. Our procedures call for the licensing of intellectual property, the provision of services, and the sale of products from one subsidiary to another at prices that we believe are equivalent to arm’s length negotiated pricing. We have established these procedures due to the fact that some of our assets, such as intellectual property, developed in the U.S., will be utilized among other affiliated companies. If the U.S. Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully require changes to our transfer pricing practices, we could become subject to higher taxes and our earnings would be adversely affected. Any determination of income reallocation or modification of transfer pricing laws can result in an income tax assessment on the portion of income deemed to be derived from the U.S. or other taxing jurisdiction.
     Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, or determined in connection with finalization of our tax returns, or if our effective tax rate should change as a result of changes in federal, international or state and local tax laws or their interpretations, or if we were to change the locations where we operate or if we elect or are required to transfer funds between jurisdictions, there could be a material adverse effect

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on our income tax provision and net income in the period or periods in which that determination is made, and potentially to future periods as well.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results
     Our provision for income taxes is subject to volatility and could be adversely affected by numerous factors including:
    Earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;
 
    Changes in domestic and foreign tax laws including possible U.S. changes to the taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to foreign income and changes to foreign tax credit rules;
 
    Expiration or lapses of federal and state research credits;
 
    Unfavorable results from income tax audits;
 
    Changes in transfer pricing regulations;
 
    Changes in allocation of income and expenses related to cost sharing arrangements, including adjustments related to changes in the corporate structure, acquisitions or law changes;
 
    Tax effects of increases in nondeductible compensation;
 
    Changes in accounting rules or principles, including the potential adoption of international financial reporting standards (IFRS) and changes in the valuation of deferred tax assets and liabilities.
     Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other foreign, state and local tax authorities. We are currently under audit by the Internal Revenue Service for tax returns for fiscal years 2008 and 2009. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
We may need additional capital in the future and such additional financing may not be available on favorable terms.
     While we believe we have adequate working capital to meet our expected cash requirements for the next 12 months, we may need to raise additional funds through public or private debt or equity financings in order to, without limitation:
    Take advantage of unanticipated opportunities, including more rapid international expansion or acquisitions of complementary businesses or technologies;
 
    Develop new products or services;
 
    Repay outstanding indebtedness; and
 
    Respond to unanticipated competitive pressures.

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     Any additional financing we may need may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of business opportunities, develop new products or services, or otherwise respond to unanticipated competitive pressures. In any such case, our business, results of operations, and financial condition could be materially adversely affected.
Global warming issues may cause us to alter the way we conduct our business.
     The general public is becoming more aware of global warming issues and as a result, governments around the world are beginning to focus on addressing this issue. This may result in new environmental regulations that may unfavorably impact us, our suppliers, and our customers in how we conduct our business including the design, development, and manufacturing of our products. The cost of meeting these requirements may have an adverse impact on our results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 from 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. Through December 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. We may repurchase shares from time-to-time in open market purchases or privately negotiated transactions. The share repurchases will be financed by available cash balances and cash from operations.
Issuer Purchases of Equity Securities
                                 
                    Total Number of     Approximate Dollar  
                    Shares Purchased as     Value of Shares  
    Total Number     Average     Part of Publicly     that May Yet Be  
    of Shares     Price Paid     Announced Plans     Purchased under the  
Period   Purchased     per Share     Or Programs     Plans or Programs  
September 27, 2010 — October 24, 2010
                    $ 41,678,152  
October 25, 2010 — November 21, 2010
                    $ 41,678,152  
November 22, 2010 — December 26, 2010
                    $ 41,678,152  
 
                           
Total
                    $ 41,678,152  
 
                           
Sales of Unregistered Securities
There were no sales of unregistered securities for the three months ended December 26, 2010.

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Item 6. Exhibits
     
Exhibit 3.1
  Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s 1997 Annual Report on Form 10-K).
 
   
Exhibit 3.2
  Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2000).
 
   
Exhibit 3.3
  Amended and restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 2, 2009).
 
   
Exhibit 3.4
  Amended and Restated Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of Emulex Corporation, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 16, 2009.
 
   
Exhibit 10.1
  Emulex Corporation 2005 Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on October 12, 2010 with respect to the 2010 Annual Meeting of stockholders).
 
   
Exhibit 10.2
  Emulex Corporation Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix B to the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on October 12, 2010 with respect to the 2010 Annual Meeting of stockholders).
 
   
Exhibit 31A
  Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31B
  Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 99.1
  Corporate Governance Guidelines, dated December 24, 2010.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 3, 2011
         
  EMULEX CORPORATION
 
 
  By:   /s/ James M. McCluney    
    James M. McCluney   
    Chief Executive Officer   
 
     
  By:   /s/ Michael J. Rockenbach    
    Michael J. Rockenbach   
    Executive Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer) 
 

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EXHIBIT INDEX
     
Exhibit 3.1
  Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s 1997 Annual Report on Form 10-K).
 
   
Exhibit 3.2
  Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2000).
 
   
Exhibit 3.3
  Amended and restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 2, 2009).
 
   
Exhibit 3.4
  Amended and Restated Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of Emulex Corporation, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 16, 2009.
 
   
Exhibit 10.1
  Emulex Corporation 2005 Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on October 12, 2010 with respect to the 2010 Annual Meeting of Stockholders).
 
   
Exhibit 10.2
  Emulex Corporation Employee Stock Purchase Plan, as amended (incorporated by reference to appendix B to the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on October 12, 2010 with respect to the 2010 Annual Meeting of Stockholders).
 
   
Exhibit 31A
  Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31B
  Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 99.1
  Corporate Governance Guidelines, dated December 24, 2010.

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