UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

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

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

EMULEX CORPORATION

Delaware (State or other jurisdiction of incorporation or organization)		51-0300558 (I.R.S Employer Identification No.)
3333 Susan Street Costa Mesa, California (Address of principal executive offices)		92626 (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 April 25, 2011, the registrant had 87,756,047 shares of common stock outstanding.

 

 

EMULEX CORPORATION AND SUBSIDIARIES

INDEX

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets March 27, 2011 and June 27, 2010			3
Condensed Consolidated Statements of Operations Three and Nine months ended March 27, 2011 and March 28, 2010			4
Condensed Consolidated Statements of Cash Flows Nine months ended March 27, 2011 and March 28, 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			35
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
Signatures			53
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share data)

		March 27,				June 27,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	174,847			$	248,813
Investments			7,962				45,990
Accounts and other receivables, net of allowance for doubtful accounts of $1,732 and $1,653 at March 27, 2011 and June 27, 2010, respectively			69,645				59,479
Inventories			17,896				13,465
Prepaid income taxes			7,405				17,563
Prepaid expenses and other current assets			7,926				12,799
Deferred income taxes			21,896				19,442
Total current assets			307,577				417,551
Property and equipment, net			65,703				63,482
Goodwill			179,497				93,835
Intangible assets, net			146,356				44,497
Deferred income taxes			4,115				27,658
Other assets			4,910				42,427
Total assets		$	708,158			$	689,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	33,168			$	31,377
Accrued liabilities			41,278				29,053
Total current liabilities			74,446				60,430
Other liabilities			3,575				4,287
Accrued taxes			35,416				33,551
Total liabilities			113,437				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; 102,088,243 and 91,217,793 issued at March 27, 2011 and June 27, 2010, respectively			10,209				9,122
Additional paid-in capital			1,233,161				1,123,365
Accumulated deficit			(440,039	)			(372,450	)
Accumulated comprehensive loss			(288	)			(615	)
Treasury stock, at cost; 14,656,242 and 10,550,971 shares at March 27, 2011 and June 27, 2010, respectively			(208,322	)			(168,240	)
Total stockholders’ equity			594,721				591,182
Total liabilities and stockholders’ equity		$	708,158			$	689,450

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
Net revenues		$	112,082			$	102,204			$	329,177			$	296,021
Cost of sales			50,575				37,784				147,899				112,711
Gross profit			61,507				64,420				181,278				183,310
Operating expenses:
Engineering and development			42,660				31,338				122,592				94,417
Selling and marketing			15,346				13,743				42,281				42,415
General and administrative			12,106				12,099				43,388				36,274
Amortization of other intangible assets			2,231				1,698				7,013				5,094
In-process research and development impairment			6,000				—				6,000				—
Total operating expenses			78,343				58,878				221,274				178,200
Operating (loss) income			(16,836	)			5,542				(39,996	)			5,110
Nonoperating (expense) income, net:
Interest income			19				1				61				213
Interest expense			13				(1	)			(372	)			(5	)
Impairment of strategic investment			(9,184	)			—				(9,184	)			—
Other expense, net			(101	)			(166	)			(299	)			(68	)
Total nonoperating (expense) income, net			(9,253	)			(166	)			(9,794	)			140
(Loss) income before income taxes			(26,089	)			5,376				(49,790	)			5,250
Income tax (benefit) provision			(7,448	)			(7,933	)			17,799				(20,839	)
Net (loss) income		$	(18,641	)		$	13,309			$	(67,589	)		$	26,089
Net (loss) income per share:
Basic		$	(0.21	)		$	0.16			$	(0.79	)		$	0.32
Diluted		$	(0.21	)		$	0.16			$	(0.79	)		$	0.32
Number of shares used in per share computations:
Basic			87,278				80,156				85,416				79,960
Diluted			87,278				81,535				85,416				81,076

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)

		Nine Months Ended
		March 27,				March 28,
		2011				2010
Cash flows from operating activities:
Net (loss) income		$	(67,589	)		$	26,089
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			15,874				15,740
Share-based compensation expense			31,391				13,210
Amortization of intangible assets			31,607				19,270
Impairment of strategic investment			9,184				—
In-process research and development impairment			6,000				—
Provision for losses on accounts and other receivables			80				106
Accrued interest income, net			25				32
Loss on disposal of property and equipment			206				719
Deferred income taxes			(837	)			(13,594	)
Excess tax benefit from share-based compensation			(893	)			(583	)
Foreign currency adjustments			608				(10	)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts and other receivables			(6,849	)			(11,632	)
Inventories			(3,871	)			(6,147	)
Prepaid expenses and other assets			12,539				(7,382	)
Accounts payable, accrued liabilities, and other liabilities			(8,948	)			7,866
Accrued taxes			(1,075	)			(1,418	)
Income taxes payable and prepaid income taxes			10,137				(484	)
Net cash provided by operating activities			27,589				41,782
Cash flows from investing activities:
Net proceeds from sale of property and equipment			89				214
Purchases of property and equipment			(16,049	)			(7,205	)
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	)			(11,000	)
Cash received from escrow for prior business acquisition			1,000				—
Purchases of investments			(45,876	)			(57,934	)
Maturities of investments			83,879				31,894
Net cash used in investing activities			(35,025	)			(64,031	)
Cash flows from financing activities:
Repurchase of common stock			(40,082	)			(18,240	)
Tax withholding payments reimbursed by common stock			(5,241	)			(4,071	)
Repayment of debt to the Founders of ServerEngines Corporation			(26,897	)			—
Proceeds from issuance of common stock under stock plans			4,559				3,213
Excess tax benefit from share-based compensation expense			893				583
Net cash used in financing activities			(66,768	)			(18,515	)
Effect of exchange rates on cash and cash equivalents			238				(203	)
Net decrease in cash and cash equivalents			(73,966	)			(40,967	)
Cash and cash equivalents at beginning of period			248,813				294,136
Cash and cash equivalents at end of period		$	174,847			$	253,169

See accompanying notes to condensed consolidated financial statements.

EMULEX CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

     In the opinion of management of Emulex Corporation (Emulex or the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows. Interim results for the three and nine months ended March 27, 2011, 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

		Nine Months Ended
		March 27,				March 28,
		2011				2010
		(in thousands)
Cash paid during the period for:
Interest		$	16			$	5
Income taxes		$	7,856			$	3,865
Non-cash activities:
Purchases of property and equipment not paid, net		$	1,335			$	792

   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

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 nine months ended March 27, 2011.

     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

     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 during the three months ended September 26, 2010, $3.2 million during the three months ended December 26, 2010, and $1.4 million during the three months ended March 27, 2011, and $15.2 million during the nine months ended March 27, 2011 and expects to recognize approximately another $6.9 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		$	12,162
Current deferred tax asset			4,248
Property and equipment			1,378
Other noncurrent assets			234
Intangible assets			135,310
Goodwill			85,662
Total assets acquired			238,994
Current liabilities			(72,073	)
Noncurrent deferred tax liability			(29,181	)
Accrued taxes			(2,486	)
Total liabilities assumed			(103,740	)
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 $72.1 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. During the nine months ended March 27, 2011, the Company recognized approximately $0.4 million in interest expense for the amount by which the loan due from ServerEngines was unfavorable from the Company's perspective compared to the current market terms.

     The intangible assets acquired of approximately $135.3 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 $135.3 million which was preliminarily assigned to acquired intangible assets, approximately $127.2 million was assigned to developed technology, approximately $2.4 million was assigned to in-process research and development, approximately $1.7 million was assigned to a tradename, approximately $1.6 million was assigned to backlog, approximately $1.9 million was assigned to customer relationships, and approximately $0.5 million was assigned to covenants not to compete.

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

Developed technology		6 - 10 years
Customer relationships		2 years
Covenants not to compete		2.5 years
Tradename		10 years
Backlog		10 months
Weighted-average amortization period		6 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 $9.8 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 nine months ended March 27, 2011 and March 28, 2010, 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 March 27, 2011, was prepared based upon the statement of operations of Emulex for the three months ended March 27, 2011, 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 March 28, 2010, was prepared based upon the statement of operations of Emulex for the three months ended March 28, 2010, combined with the statement of operations of ServerEngines for the period from January 1, 2010 to March 31, 2010. The pro forma combined results of operations for the nine months ended March 27, 2011, was prepared based upon the statement of operations of Emulex for the nine months ended March 27, 2011 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 nine months ended March 28, 2010, was prepared based upon the statement of operations of Emulex for the nine months ended March 28, 2010 combined with the statement of operations of ServerEngines for the period from July 1, 2009 to March 31, 2010.

     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 $1.1 million for the nine months ended March 27, 2011 and stock based compensation related to the contingent shares which is tied to the employment of certain recipients of approximately $1.4 million and $15.2 million recognized in the Company’s statement of operations for the three and nine months ended March 27, 2011, 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 $6.9 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								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
		(in thousands)								(in thousands)
Net revenues		$	112,082			$	107,402			$	331,069			$	312,218
Net (loss) income		$	(17,242	)		$	6,324			$	(57,768	)		$	2,129
Net (loss) income per basic share		$	(0.20	)		$	0.07			$	(0.66	)		$	0.02
Net (loss) income per diluted share		$	(0.20	)		$	0.07			$	(0.66	)		$	0.02

    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 was 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. During the three months ended March 27, 2011, the business climate for the product associated with this IPR&D deteriorated significantly as the technology was no longer expected to be designed into customer products and was determined to be other than temporary and thus, the entire amount of the IPR&D of approximately $6.0 million was impaired during the three months ended March 27, 2011. See Note 6.

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 March 27, 2011 and June 27, 2010 are as follows:

		Level 1				Level 2				Level 3				Total
						(in thousands)
March 27, 2011
Cash and cash equivalents		$	174,847			$	—			$	—			$	174,847
Term deposits			2,740				—				—				2,740
U.S. Government securities			2,251				—				—				2,251
U.S. Government sponsored entity securities			1,365				—				—				1,365
Corporate bonds			1,606				—				—				1,606
		$	182,809			$	—			$	—			$	182,809
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

     During the three months ended March 27, 2011, an impairment charge of approximately $9.2 million was recorded to write down the carrying value of the Company’s equity investment in a privately held company, which was recorded in other assets (see Note 7), to its estimated fair value. The business climate of the privately-held company deteriorated significantly as the technology was no longer expected to be designed into customer products and was determined to be other than temporary and thus, the fair value of the privately-held company was deemed to be zero. The fair value was estimated 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 impairment charge was recorded in nonoperating (expense) income, net in the accompanying consolidated statements of operations.

     The Company’s other financial instruments consist primarily of a note receivable of approximately $1.0 million. 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. Subsequent to the quarter ended March 27, 2011, the loan was settled.

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)
March 27, 2011
Term deposits		$	2,740			$	—			$	—			$	2,740
U.S. Government securities			2,251				—				—				2,251
U.S. Government sponsored entity securities			1,366				—				(1	)			1,365
Corporate bonds			1,605				1				—				1,606
		$	7,962			$	1			$	(1	)		$	7,962
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 March 27, 2011 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:

		March 27,				June 27,
		2011				2010
		(in thousands)
Raw materials		$	4,677			$	2,717
Finished goods			13,219				10,748
		$	17,896			$	13,465

6. Goodwill and Intangible Assets, net

     The activity in goodwill during the nine months ended March 27, 2011 is as follows:

		Carrying
		Amount
		(in thousands)
Goodwill, as of June 27, 2010 (a)		$	93,835
Goodwill from ServerEngines acquisition during the period			85,662
Goodwill, as of March 27, 2011		$	179,497

     Intangible assets, net, are as follows:

		March 27,				June 27,
		2011				2010
		(in thousands)
Intangible assets subject to amortization:
Core technology and patents		$	77,345			$	73,345
Accumulated amortization, core technology and patents			(59,792	)			(53,050	)
Developed technology			195,700				68,500
Accumulated amortization, developed technology			(73,583	)			(51,375	)
Customer relationships			5,100				3,200
Accumulated amortization, customer relationships			(3,436	)			(2,398	)
Tradename			6,339				4,639
Accumulated amortization, tradename			(4,739	)			(4,364	)
Covenants not to compete			550				—
Accumulated amortization, covenants not to compete			(129	)			—
Backlog			1,560				—
Accumulated amortization, backlog			(1,098	)			—
Perpetual licenses			157				—
Accumulated amortization, perpetual licenses			(18	)			—
Total amortizable intangible assets, net			143,956				38,497
In process research and development			2,400				6,000
Total intangible assets, net		$	146,356			$	44,497

     During the three months ended March 27, 2011, the business climate for the product associated with the IPR&D from the acquisition of a privately-held company in fiscal 2010, deteriorated significantly as the technology was no longer expected to be designed into customer products and was determined to be other than temporary and thus, the entire amount of the IPR&D of approximately $6.0 million was impaired during the three months ended March 27, 2011.

     The intangible assets subject to amortization are being amortized on a straight-line basis over original lives ranging from approximately 10 months to 10 years. Aggregate amortization expense for intangible assets for the three months ended March 27, 2011 and March 28, 2010, was approximately $10.7 million and $6.4 million, respectively. Aggregated amortization expense for intangible assets for the nine months ended March 27, 2011 and March 28, 2010, was approximately $31.6 million and $19.3 million, respectively.

     Amortization expense of approximately $8.5 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 March 27, 2011 and March 28, 2010, respectively. Amortization expense of approximately $24.6 million and $14.2 million related to core and developed technology is included in cost of sales in the accompanying condensed consolidated statements of operations for the nine months ended March 27, 2011 and March 28, 2010, respectively.

     The following table presents the estimated future aggregated amortization expense of intangible assets, excluding in process research and development, as of March 27, 2011 (in thousands):

2011 (remaining 3 months)		$	10,736
2012			30,337
2013			25,888
2014			25,583
2015			21,584
Thereafter			29,828
		$	143,956

7. Other Assets

     Components of other assets are as follows:

		March 27,				June 27,
		2011				2010
		(in thousands)
Note receivable		$	1,000			$	24,256
Equity investment in privately-held company			—				9,184
Other			3,910				8,987
		$	4,910			$	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. Subsequent to the quarter ended March 27, 2011, the loan was settled.

     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. During the three months ended March 27, 2011, the business climate of the privately-held company deteriorated significantly as the technology was no longer expected to be designed into customer products and was determined to be other than temporary and thus, the fair value of the privately-held company was deemed to be zero. As a result, the entire investment of approximately $9.2 million in the privately-held company was impaired during the three months ended March 27, 2011.

8. Accrued Liabilities

     Components of accrued liabilities are as follows:

		March 27,				June 27,
		2011				2010
		(in thousands)
Payroll and related costs		$	20,439			$	14,387
Warranty liability			1,956				1,637
Deferred revenue and accrued rebates			10,417				4,169
Other			8,466				8,860
		$	41,278			$	29,053

     The Company provides a warranty of between one to five years on its products. The Company records a provision for estimated warranty related costs at the time of sale based on historical product return rates and the

Company’s estimates of expected future costs of fulfilling its warranty obligations. Changes to the warranty liability were:

		(in thousands)
Balance at beginning of period		$	1,754
Accrual for warranties issued			261
Changes to pre-existing warranties (including changes in estimates)			160
Settlements made (in cash or in kind)			(219	)
Balance at end of period		$	1,956

9. Commitments and Contingencies

Litigation

     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. On February 22, 2011, the Court issued an order on the parties’ joint stipulation dismissing one patent from the case (leaving 8 patents in the case). The status of this matter does not allow management of the Company to determine whether a loss will occur or estimate the range of such a loss. Accordingly, management has determined that a potential loss is not probable and no amount has been accrued.

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

     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.

     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 $35.4 million of liabilities for uncertain tax positions as of March 27, 2011 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 March 27, 2011, the Company’s obligation associated with such agreements was approximately $62.7 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 March 27, 2011, 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 March 27, 2011, the Company has repurchased approximately 6.1 million shares of its common stock for an aggregate purchase price of approximately $58.3 million or an average of $9.55 per share under this plan, of which approximately 4.1 million shares for an aggregate purchase price of approximately $40.1 million or an average of $9.76 was purchased during the nine months ended March 27, 2011. 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 March 27, 2011, 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 4,338,445 shares under the Equity Incentive Plan, 480,905 shares under the Director Plan, and 1,873,399 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.

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

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
		(in thousands)
Total cost of stock-based payment plans during the period		$	7,427			$	4,686			$	31,365			$	13,179
Amounts capitalized in inventory during the period			(165	)			(123	)			(545	)			(326	)
Amounts recognized in income for amounts previously capitalized in inventory			173				83				571				357
Amounts charged against income, before income tax benefit		$	7,435			$	4,646			$	31,391			$	13,210
Amount of related income tax benefit recognized in income		$	2,291			$	1,640			$	6,624			$	4,707

     In connection with the ServerEngines acquisition, the Company has recognized approximately $15.2 million of stock-based compensation expense related to employment based contingent shares during the nine months ended March 27, 2011 and expects to recognize approximately another $6.9 million of stock-based compensation expense through fiscal 2012.

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

The assumptions used to compute the fair value of stock option grants for the three and nine months ended March 27, 2011 and March 28, 2010 are:

		Three Months Ended				Nine Months Ended
		March 27,		March 28,		March 27,		March 28,
		2011		2010		2011		2010
Expected volatility		N/A		43% — 45%		39% — 45%		43% — 49%
Weighted average expected volatility		N/A		44%		43%		47%
Expected dividends		N/A		—		—		—
Expected term (in years)		N/A		2.97 — 4.97		3.34 — 5.34		2.97 — 4.97
Weighted average expected term (in years)		N/A		3.81		4.16		3.81
Risk-free rate		N/A		1.62% — 2.55%		0.69% — 1.80%		1.49% — 2.55%

     No options were granted for the three month period ended March 27, 2011.

     The assumptions used to compute the fair value of the compensatory element related to the shares to be purchased under the Purchase Plan for the three and nine months ended March 27, 2011 and March 28, 2010 were:

		Three Months Ended								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
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 nine months ended March 27, 2011 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			(236,762	)		$	6.79
Options canceled			(1,264,859	)		$	34.77
Options forfeited			(80,654	)		$	10.84
Options outstanding at March 27, 2011			7,525,052			$	16.31				3.08			$	4.0
Options vested and expected to vest at March 27, 2011			7,255,254			$	16.56				2.98			$	3.7
Options exercisable at March 27, 2011			5,932,725			$	18.14				2.42			$	2.2

     A summary of unvested stock awards activity for the nine months ended March 27, 2011 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			1,904,745			$	10.80
Awards vested			(1,361,206	)		$	11.48
Awards forfeited			(221,417	)		$	9.83
Awards outstanding and unvested at March 27, 2011			3,759,863			$	10.30

     As of March 27, 2011, there was approximately $30.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans, including $6.9 million related to employment based contingent shares granted in connection with the ServerEngines acquisition. That cost is expected to be recognized over a weighted-average period of approximately 1.3 years.

     The weighted average grant date fair value of options granted during the nine months ended March 27, 2011 and March 28, 2010 was approximately $3.40 per share and $3.94 per share, respectively. The weighted average grant date fair value of unvested stock awards granted during the nine months ended March 27, 2011 and March 28, 2010 was approximately $10.80 per share and $9.75 per share, respectively. The total intrinsic value of stock options exercised was approximately $1.1 million and $0.7 million for the nine months ended March 27, 2011 and March 28, 2010, respectively. The total fair value of unvested stock awards that vested during the nine months ended March 27, 2011 and March 28, 2010 was approximately $14.5 million and $11.4 million, respectively. Cash received from stock option exercises under stock-based plans and shares purchased under the Purchase Plan was approximately $4.6 million and $3.2 million for the nine months ended March 27, 2011 and March 28, 2010, respectively. The actual tax benefit realized for tax deductions from option exercises was approximately $5.8 million and $4.6 million for the nine months ended March 27, 2011 and March 28, 2010, respectively.

     At Emulex’s Annual Shareholders Meeting on November 23, 2010, the shareholders approved an increase in the number of shares authorized by 1.5 million and 2.0 million shares under the Purchase Plan and the Equity Incentive Plan, respectively. As of March 27, 2011, 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, including the 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 $17.8 million in the nine months ended March 27, 2011 compared to an income tax benefit of approximately $20.8 million in the nine months ended March 28, 2010. The effective tax rate was approximately 36% for the nine months ended March 27, 2011 compared to an effective tax benefit rate of 397% for the nine months ended March 28, 2010. During the nine months ended March 27, 2011, 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 U.S. income taxes of approximately $36.9 million. Such tax expense was partially offset by the Federal research credit being extended retroactively to calendar 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in December 2010, resulting in an income tax benefit of approximately $6.2 million. 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								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
		(in thousands, except per								(in thousands, except per
		share data)								share data)
Numerator — Net (loss) income		$	(18,641	)		$	13,309			$	(67,589	)		$	26,089
Less: Undistributed earnings allocated to participating securities			—				(143	)			—				(378	)
Undistributed earnings allocated to common shareholders for basic net (loss) income per share		$	(18,641	)		$	13,166			$	(67,589	)		$	25,711
Undistributed earnings allocated to common shareholders for diluted net (loss) income per share		$	(18,641	)		$	13,169			$	(67,589	)		$	25,717
Denominator:
Denominator for basic net (loss) income per share — weighted average shares outstanding			87,278				80,156				85,416				79,960
Dilutive options outstanding, unvested stock units and ESPP			—				1,379				—				1,116
Denominator for diluted net (loss) income per share — adjusted weighted average shares outstanding			87,278				81,535				85,416				81,076
Basic net (loss) income per share		$	(0.21	)		$	0.16			$	(0.79	)		$	0.32
Diluted net (loss) income per share		$	(0.21	)		$	0.16			$	(0.79	)		$	0.32
Antidilutive options and unvested stock excluded from the computations			7,786				7,294				8,949				8,434
Average market price of common stock		$	11.31			$	12.56			$	10.66			$	10.91

     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								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
		(in thousands)								(in thousands)
Net (loss) income		$	(18,641	)		$	13,309			$	(67,589	)		$	26,089
Other comprehensive (loss) income —
Foreign currency translation adjustments, net of income taxes			196				(110	)			327				(135	)
		$	(18,445	)		$	13,199			$	(67,262	)		$	25,954

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 have 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, such as the earthquake and resulting tsunami off the coast of Japan in March 2011, and any resulting disruption in our supply chain or customer purchasing patterns or any other resulting economic or political 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 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 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), Intel Corporation (Intel), International Business Machines Corporation (IBM), LSI Corporation (LSI), NEC Corporation (NEC), Network Appliance, Inc. (NetApp), Oracle Corporation (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 March 27, 2011, we had a total of 977 employees.

     Our corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626. Our periodic and current reports filed with, or furnished to, the Securities and Exchange Commission pursuant to the requirements of the Securities and Exchange Act of 1934 are available free of charge through our website (www.emulex.com) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. References contained herein to “Emulex,” the “Company,” the “Registrant,” “we,” “our,” and “us” refer to Emulex Corporation and its subsidiaries.

Global Initiatives

     As part of our global initiatives, we created an Irish subsidiary to expand our international operations by providing local customer service and support to our customers outside of the United States in the fourth quarter of fiscal 2008. In addition, Emulex granted an intellectual property license and entered into a research and development cost sharing agreement with its subsidiary in the Isle of Man. The terms of the license require that the subsidiary make prepayments of expected royalties to a U.S. subsidiary, the first of which was paid before the end of fiscal 2008 in the amount of approximately $131.0 million for expected royalties relating to fiscal 2009 through 2015. In the fourth quarter of fiscal 2010, the subsidiary made the second prepayment of approximately $6.5 million for expected royalties relating to fiscal 2011 through 2015. These global initiatives are expected to continue to reduce our effective tax rate. 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’ Pilot^TM family 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								Nine Months Ended
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
Net revenues			100	%			100	%			100	%			100	%
Cost of sales			45				37				45				38
Gross profit			55				63				55				62
Operating expenses:
Engineering and development			38				31				37				32
Selling and marketing			14				13				13				14
General and administrative			11				12				13				12
Amortization of other intangible assets			2				2				2				2
In process research and development impairment			5				—				2				—
Total operating expenses			70				58				67				60
Operating (loss) income			(15	)			5				(12	)			2
Nonoperating (expense) income, net:
Interest income			—				—				—				—
Interest expense			—				—				—				—
Impairment of strategic investment			(8	)			—				(3	)			—
Other expense, net			—				—				—				—
Total nonoperating (expense) income, net			(8	)			—				(3	)			—
(Loss) income before income taxes			(23	)			5				(15	)			2
Income tax (benefit) provision			(7	)			(8	)			5				(7	)
Net (loss) income			(16	)%			13	%			(20	)%			9	%

Three months ended March 27, 2011, compared to three months ended March 28, 2010

     Net Revenues. Net revenues for the third quarter of fiscal 2011 ended March 27, 2011, increased by approximately $9.9 million, or 10%, to approximately $112.1 million, compared to approximately $102.2 million for the same quarter of fiscal 2010 ended March 28, 2010.

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
		March 27,				of Net				March 28,				of Net				Increase/				Percentage
(in thousands)		2011				Revenues				2010				Revenues				(Decrease)				Change
Host Server Products		$	84,825				76	%		$	69,724				68	%		$	15,101				22	%
Embedded Storage Products			27,201				24	%			32,348				32	%			(5,147	)			(16	)%
Other			56				—				132				—				(76	)			(58	)%
Total net revenues		$	112,082				100	%		$	102,204				100	%		$	9,878				10	%

     HSP primarily consists of HBAs, mezzanine cards, input/output (I/O) ASICs, and UCNAs. For the three months ended March 27, 2011, our Fibre Channel based products accounted for most of our HSP revenues. The increase in our HSP net revenue for the three months ended March 27, 2011 compared to the three months ended March 28, 2010 was mainly due to an increase in units shipped of approximately 248% partially offset by a decrease in average

selling price of approximately 65%. 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 along with the growth in Fibre Channel 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 March 27, 2011 compared to the three months ended March 28, 2010 was primarily due to a decrease in units shipped of approximately 23% partially offset by an increase in average selling price of approximately 9%. The decrease in units shipped was primarily due to the tail off in legacy products partially offset by the ramping volumes from our bridging and target design wins.

     Our Other category primarily consists of 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
		March 27,				March 28,				March 27,				March 28,
		2011				2010				2011				2010
Net revenue percentage (1):
OEM:
EMC			—				—				—				14	%
Hewlett-Packard			20	%			13	%			22	%			13	%
IBM			22	%			20	%			30	%			28	%

     Direct sales to our top five customers accounted for approximately 61% of total net revenues for the three months ended March 27, 2011, compared to approximately 56% for the three months ended March 28, 2010. Direct and indirect sales to our top five customers accounted for approximately 75% of total net revenues for the three months ended March 27, 2011 compared to approximately 71% for the three months ended March 28, 2010. Our net revenues from customers can be significantly impacted by changes to our customers’ business and their business models.

Net Revenues by Sales Channel

     Net revenues by sales channel were as follows:

		Net Revenues by Sales Channel
		Three Months								Three Months
		Ended				Percentage				Ended				Percentage
		March 27,				of Net				March 28,				of Net				Increase/				Percentage
(in thousands)		2011				Revenues				2010				Revenues				(Decrease)				Change
OEM		$	97,085				87	%		$	86,017				84	%		$	11,068				13	%
Distribution			14,989				13	%			16,011				16	%			(1,022	)			(6	)%
Other			8				—				176				—				(168	)			(96	)%
Total net revenues		$	112,082				100	%		$	102,204				100	%		$	9,878				10	%

     The increase in OEM net revenues for the three months ended March 27, 2011 compared to the three months ended March 28, 2010 was primarily due to an increase of approximately 29% in HSP revenues generated through our OEMs. Distribution net revenues for the three months ended March 27, 2011 did not change significantly compared to the three months ended March 28, 2010. 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
		March 27,				of Net				March 28,				of Net				Increase/				Percentage
(in thousands)		2011				Revenues				2010				Revenues				(Decrease)				Change
Asia Pacific		$	58,827				53	%		$	33,517				33	%		$	25,310				76	%
United States			33,858				30	%			35,582				35	%			(1,724	)			(5	)%
Europe, Middle East, and Africa			17,268				15	%			32,309				32	%			(15,041	)			(47	)%
Rest of the world			2,129				2	%			796				—				1,333				167	%
Total net revenues		$	112,082				100	%		$	102,204				100	%		$	9,878				10	%

     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 March 27, 2011 compared to the three months ended March 28, 2010 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.

     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
March 27, 2011		Net Revenues		March 28, 2010		Net Revenues		(Decrease)		Points Change
$61,507		55%		$64,420		63%		$(2,913)		(8)%

     Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $8.5 million and $4.7 million of amortization of technology intangible assets for the three months ended March 27, 2011 and March 28, 2010, respectively, with approximately $5.1

million in the three months ended March 27, 2011 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 March 27, 2011 and March 28, 2010, respectively. The remaining decrease was primarily due to an unfavorable mix of lower margin products sold during the three months ended March 27, 2011, combined with the consumption of previously reserved excess inventories in the prior year quarter that did not reoccur in the current year quarter.

     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
March 27, 2011		Net Revenues		March 28, 2010		Net Revenues		(Decrease)		Points Change
$42,660		38%		$31,338		31%		$11,322		7%

     Engineering and development expenses for the three months ended March 27, 2011 compared to the three months ended March 28, 2010 increased approximately $11.3 million, or 36%. Approximately $3.2 million and $1.7 million of share-based compensation expense were included in engineering and development costs for the three months ended March 27, 2011 and March 28, 2010, respectively, with approximately $0.5 million in the three months ended March 27, 2011 being related to the ServerEngines acquisition. Engineering and development headcount increased to 629 at March 27, 2011 from 454 at March 28, 2010 primarily due to the acquisition of ServerEngines. The increase in headcount resulted in a net increase of approximately $5.9 million in salary and related expenses as compared to the same period in fiscal 2010. The remaining increase was primarily due to an increase in costs associated with new product development of approximately $2.0 million and an increase in design tool costs 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
March 27, 2011		Net Revenues		March 28, 2010		Net Revenues		(Decrease)		Points Change
$15,346		14%		$13,743		13%		$1,603		1%