Emulex (ELX) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

OR

¨ 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 of incorporation or organization)	(I.R.S Employer 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  x    No  ¨

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  x    No  ¨

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	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	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  ¨    No  x

As of April 29, 2013, the registrant had 90,858,136 shares of common stock outstanding.

CAUTIONARY STATEMENT RELATED TO 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 the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, “Legal Proceedings” in Part II, Item 1, and “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 possibility that we may not realize the anticipated benefits from the acquisition of Endace on a timely basis or at all, and may be unable to integrate the technology, operations and personnel of Endace into our existing operations in a timely and efficient manner. In addition, intellectual property 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 will be obtainable 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. Ongoing lawsuits, such as the action brought by Broadcom Corporation (Broadcom) described elsewhere in this Form 10-Q, 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, loss of patent rights, monetary damages, injunctions against the sale of products incorporating the technology in question, counterclaims, attorneys’ fees, incremental costs associated with product or component redesigns, liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. With respect to the continuing Broadcom litigation, such potential risks also include the adequacy of any sunset period to make design changes, the ability to implement any design changes, the availability of customer resources to complete any re-qualification or re-testing that may be needed, the ability to maintain favorable working relationships with Emulex suppliers of serializer/deserializer (SerDes) modules, and the ability to obtain a settlement which does not put us at a competitive disadvantage. In addition, the fact that the economy generally, and the technology and storage market 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. Continued weakness in domestic and worldwide macroeconomic conditions and disruptions in world credit and equity markets and the resulting economic uncertainty for our customers, as well as the storage and converged networking market as a whole, has and could continue to adversely affect our revenues and results of operations. As a result of these uncertainties, 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 declines 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, decrease in or delays of 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 products or our OEM customers’ new or enhanced products; costs associated with entry into new areas of the network, server and storage technology markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; any inadequacy of our intellectual property protection and the costs of actual or potential third-party claims of infringement and any related indemnity obligations or adverse judgments; the effect of any actual or potential unsolicited offers to acquire us, proxy fights or the actions of activist stockholders; impairment charges, including but not limited to goodwill and intangible assets; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities; natural disasters, 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; 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; changes in accounting standards; 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.

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EMULEX CORPORATION AND SUBSIDIARIES

INDEX

	PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2013 and July 1, 2012		3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March  31, 2013 and April 1, 2012		4
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended March 31, 2013 and April 1, 2012		5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March  31, 2013 and April 1, 2012		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		38
Item 4. Controls and Procedures		38
Part II. OTHER INFORMATION		38
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 4. Mine Safety Disclosures		53
Item 6. Exhibits		54
Signatures		55

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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)

	March 31, 2013			July 1, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	91,071		$	201,048
Investments		500			28,879
Accounts receivable, net of allowance for doubtful accounts of $1,287 and $1,766 at March 31, 2013 and July 1, 2012, respectively		85,598			84,106
Inventories		30,304			20,319
Prepaid income taxes		3,361			10,784
Prepaid expenses and other current assets		14,534			7,380
Deferred income taxes		5,108			10,722
Total current assets		230,476			363,238
Property and equipment, net of accumulated depreciation and amortization of $142,562 and $136,364 at March 31, 2013 and July 1, 2012, respectively		62,971			60,118
Goodwill		246,234			177,290
Intangible assets, net		146,652			105,002
Other assets		23,771			7,311
Total assets	$	710,104		$	712,959
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	31,651		$	26,889
Accrued and other current liabilities		39,916			75,700
Total current liabilities		71,567			102,589
Other liabilities		3,981			3,878
Deferred income taxes		18,131			3,876
Accrued taxes		30,471			27,513
Total liabilities		124,150			137,856
Commitments and contingencies (Note 8)
Subsequent event (Note 2)
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; 108,301,993 and 106,771,909 issued at March 31, 2013 and July 1, 2012, respectively		10,830			10,677
Additional paid-in capital		1,273,099			1,261,619
Accumulated deficit		(467,870	)		(467,140	)
Accumulated comprehensive loss		(1,725	)		(1,673	)
Treasury stock, at cost; 17,592,322 shares at March 31, 2013 and July 1, 2012		(228,380	)		(228,380	)
Total stockholders’ equity		585,954			575,103
Total liabilities and equity	$	710,104		$	712,959

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						Nine Months Ended
	March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Net revenues	$	116,786		$	125,746		$	358,198		$	372,814
Cost of sales:
Cost of goods sold		41,642			45,351			130,265			137,314
Amortization of core and developed technology intangible assets		5,478			5,159			15,775			18,882
Patent litigation damages, sunset period royalties and license fees		1,426			477			3,376			865
Total cost of sales		48,546			50,987			149,416			157,061
Gross profit		68,240			74,759			208,782			215,753
Operating expenses:
Engineering and development		43,661			40,361			122,244			121,307
Selling and marketing		17,179			15,897			45,685			45,774
General and administrative		9,526			8,820			29,021			29,808
Amortization of other intangible assets		1,488			1,603			4,376			4,967
											��
Total operating expenses		71,854			66,681			201,326			201,856
Operating (loss) income		(3,614	)		8,078			7,456			13,897
Non-operating (expense) income, net:
Interest income		15			19			23			74
Interest expense		(7	)		(10	)		(11	)		(14	)
Other (expense) income, net		(4,481	)		(277	)		(4,844	)		265
Total non-operating (expense) income, net		(4,473	)		(268	)		(4,832	)		325
(Loss) income before income taxes		(8,087	)		7,810			2,624			14,222
Income tax benefit (provision)		1,117			869			(3,354	)		2,292
Net (loss) income	$	(6,970	)	$	8,679		$	(730	)	$	16,514
Net (loss) income per share:
Basic	$	(0.08	)	$	0.10		$	(0.01	)	$	0.19
Diluted	$	(0.08	)	$	0.10		$	(0.01	)	$	0.19
Number of shares used in per share computations:
Basic		90,590			86,495			90,000			86,421
Diluted		90,590			88,518			90,000			88,369

See accompanying notes to condensed consolidated financial statements.

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EMULEX CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited, in thousands)

	Three Months Ended					Nine Months Ended
	March 31, 2013			April 1, 2012		March 31, 2013			April 1, 2012
Net (loss) income	$	(6,970	)	$	8,679	$	(730	)	$	16,514
Other comprehensive (loss) income:
Foreign currency translation adjustments		(261	)		392		(52	)		(816	)
Comprehensive (loss) income	$	(7,231	)	$	9,071	$	(782	)	$	15,698

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)

	Nine Months Ended
	March 31, 2013			April 1, 2012
Cash flows from operating activities:
Net (loss) income	$	(730	)	$	16,514
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization of property and equipment		13,173			13,630
Share-based compensation expense		16,267			18,436
Amortization of intangible assets		20,151			23,849
Provision for losses on accounts receivable		(480	)		145
Accrued interest income, net		(61	)		252
Loss on disposal of property and equipment		276			124
Deferred income taxes		(958	)		(5,976	)
Excess tax benefit from share-based compensation		(28	)		(448	)
Foreign currency adjustments		489			(236	)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		1,523			(3,952	)
Inventories		(2,967	)		(9,759	)
Prepaid expenses, prepaid income taxes and other assets		(12,831	)		4,320
Accounts payable, accrued liabilities, and other liabilities		(44,178	)		(8,210	)
Accrued taxes		2,958			185
Net cash (used in) provided by operating activities		(7,396	)		48,874
Cash flows from investing activities:
Net proceeds from sale of property and equipment		17			140
Purchases of property and equipment		(10,339	)		(10,816	)
Acquisition of Endace Limited, net of cash acquired		(107,709	)		—
Purchases of investments		(14,030	)		(23,692	)
Maturities of investments		42,471			17,067
Net cash used in investing activities		(89,590	)		(17,301	)
Cash flows from financing activities:
Repurchase of common stock		—			(20,058	)
Purchases of noncontrolling interest in Endace Limited		(11,876	)		—
Payroll tax withholdings on behalf of employees for restricted stock		(3,937	)		(4,701	)
Proceeds from issuance of common stock under stock plans		2,634			4,790
Excess tax benefit from share-based compensation expense		28			448
Net cash used in financing activities		(13,151	)		(19,521	)
Effect of exchange rates on cash and cash equivalents		160			(274	)
Net (decrease) increase in cash and cash equivalents		(109,977	)		11,778
Cash and cash equivalents at beginning of period		201,048			131,160
Cash and cash equivalents at end of period	$	91,071		$	142,938

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 the management of Emulex Corporation (Emulex or the Company), the accompanying unaudited condensed consolidated financial statements contain adjustments, which are normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive (loss) income, and cash flows. Interim results for the three and nine months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013. 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 July 1, 2012. The preparation of the condensed consolidated financial statements requires the use of estimates and actual results could differ materially from management’s estimates.

On February 26, 2013, the Company acquired 89.6% of the outstanding stock of Endace Limited (Endace). As of March 31, 2013, the Company owned 99.9% of the outstanding stock of Endace. The unaudited condensed consolidated financial statements include the results of operations of Endace commencing as of the acquisition date.

The accompanying consolidated financial statements include the accounts of Emulex and its wholly and majority-owned and controlled subsidiaries. Material intercompany transactions and balances have been eliminated in consolidation. The noncontrolling interest in Emulex’s majority-owned and controlled operating subsidiary (“noncontrolling interest”), resulting from the Company’s acquisition of Endace, is not material and, therefore, has not been presented herein, but rather is included within consolidated stockholders’ equity and net (loss) income for the applicable periods presented.

The Company has a 52 or 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 2013 is a 52-week fiscal year. The last 53-week fiscal year was fiscal 2011.

Certain reclassifications have been made to prior year amounts to conform to current year’s presentation.

Supplemental Cash Flow Information

	Nine Months Ended
	March 31, 2013		April 1, 2012
	(in thousands)
Cash paid during the period for:
Interest	$	11	$	4
Income taxes	$	3,295	$	3,432
Non-cash activities:
Purchases of property and equipment not paid, net	$	253	$	142

Recently Adopted Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” eliminating the option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity can elect to present items of net income and other comprehensive income in one continuous statement (referred to as the statement of comprehensive income) or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts (i.e., net income and other comprehensive income), would need to be displayed under either alternative. The amendments are to be applied retrospectively. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” deferring the changes in ASU 2011-05 that related to the presentation of reclassification adjustments. For public entities, these amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company elected to present two separate but consecutive statements. There was no financial statement impact as a result of the Company’s adoption of ASU 2011-12 since the Company’s other comprehensive income is comprised of foreign currency translation adjustments.

In July 2012, the FASB issued ASU 2012-02, “Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” providing an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that

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the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with ASC Subtopic 350-30, “Intangibles — Goodwill and Other, General Intangibles Other than Goodwill.” An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company elected to early adopt this guidance during the first quarter of fiscal 2013. There was no financial statement impact as a result of the Company’s early adoption of this guidance.

Recently Issued Accounting Standards

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” requiring an entity to present, either on the face of the statement where net income is presented or in the notes, significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount is required by U.S. GAAP to be reclassified in its entirety to net income. For amounts not required under U.S. GAAP to be reclassified in their entirety, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12. For public entities, these amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 and are to be applied prospectively. Since the Company’s other comprehensive income is comprised of foreign currency translation adjustments, the Company does not expect any impact upon adoption of this guidance.

2.Business Combination

Acquisition of Endace Limited

On February 26, 2013, the Company acquired 89.6% of the outstanding common stock and all of the outstanding stock options of Endace for cash consideration of approximately $110.4 million. The Company further extended the offer period to 1 p.m. London time on April 12, 2013 for remaining shareholders to tender their shares, acquired an additional 10.3% of the outstanding common stock of Endace for cash consideration of approximately $12.0 million and had initiated compulsory acquisition proceedings for the remaining outstanding stock. The compulsory acquisition proceedings to acquire the remaining outstanding shares of Endace were concluded on April 25, 2013, at which time Emulex acquired the outstanding noncontrolling interest and obtained ownership of 100% of Endace for approximately $122.4 million.

Endace is a New Zealand based company that was publicly traded on London AIM Stock Exchange as of February 26, 2013, and subsequently delisted effective March 27, 2013. Endace provides network visibility infrastructures including network monitoring appliances, network analytics software and ultra-high speed network access switching. Emulex’s software-defined convergence architecture and Endace’s network visibility infrastructure are expected to provide customers with new and innovative ways to solve the challenges of network complexity and ensure application-level performance at speeds of 10Gb and beyond. The ability of Endace’s network visibility technology to record, visualize and monitor network traffic provides customers with the ability to dynamically optimize application delivery across the infrastructure. The combination of Emulex’s and Endace’s technology is expected to provide customers the solutions to connect, monitor and manage high-performance networks.

The Company has preliminarily allocated the purchase price of approximately $110.4 million 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 inventory, property and equipment, identifiable intangible assets, accounts payable and accrued liabilities, deferred revenue, and deferred taxes are based on preliminary information and are subject to refinement. The Company is in the process of finalizing third party valuations of certain assets.

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The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

	Estimated Fair Value
Cash	$	2,707
Accounts receivable		2,536
Inventories		6,963
Other current assets		1,547
Property and equipment		5,679
Other non-current assets		114
Intangible assets		61,800
Goodwill		68,944
Total assets acquired		150,290
Accounts payable		(5,791	)
Accrued and other current liabilities		(3,218	)
Non-current deferred tax liability		(19,036	)
Total liabilities assumed		(28,045	)
Noncontrolling interest		(11,828	)
Total preliminary estimated purchase price allocation	$	110,417

	Useful Life (in years)	Estimated Fair  Value
Intangible assets:
Developed technology	5.8 – 12.1	$	41,500
Customer relationships	3 – 4		5,000
Tradenames	11.6		2,300
In-process research and development	N/A		13,000
	10.4	$	61,800

The intangible assets acquired of approximately $61.8 million were preliminarily determined based on the estimated fair values using valuation techniques consistent with the 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. The Company concluded that the intangible assets classified as developed technology were identifiable intangible assets, separate from goodwill, since they were capable of being separated from Endace and sold, transferred or licensed, regardless of whether the Company intended to do so. The fair values of the identified intangible assets were estimated using several valuation methodologies, which represent Level 3 fair value measurements. The values for developed technology and acquired in-process research and development (IPR&D) were estimated based on a multi-period excess earnings approach, while values for customer relationships and tradenames were assessed using the with-and-without and relief from royalty methodologies, respectively. Inputs used in the methodologies primarily included projected future cash flows, discounted at a rate commensurate with the risk involved. Specifically, the income approach valuations included the following assumptions:

Discount rate	18% – 20%
Tax rate	28% – 40%
Risk-free rate	2.7%
Peer company beta	1.2

IPR&D is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts or impairment. IPR&D projects relate to in-process projects that have not reached technological feasibility as of the acquisition date and have no alternative future use. Upon completion of development, acquired in-process research and development assets are transferred to finite-lived intangible assets and amortized over their useful lives. The Company reviews indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows the asset is expected to generate. When necessary, acquired in-process research and development will be tested for impairment using Level 3 inputs.

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The IPR&D projects that comprise approximately $13.0 million of intangible assets relate to Network Visibility Products. The following table summarizes the valuation for IPR&D at the acquisition date:

Products	IPR&D (in millions)
DAG Cards	$	1.9
ODE Platforms	$	0.6
Appliances	$	10.5

The goodwill of approximately $68.9 million arising from the acquisition is primarily attributable to the benefits the Company expects to derive from expected synergies from the transaction, including complementary products that will enhance the Company’s overall product portfolio, opportunities within new markets, and an acquired assembled workforce. All of the goodwill was assigned to the Visibility segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

The fair value of the noncontrolling interest in Endace was estimated using the quoted market price traded in an active market for Endace stock not held by Emulex as of the acquisition date.

Acquisition-related transaction costs 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 acquisition-related transaction costs incurred by the Company were approximately $3.0 million, of which approximately $1.0 million and $3.0 million were incurred and recorded during the three months and nine months ended March 31, 2013, respectively. Included in acquisition-related transactions costs are approximately $0.8 million and $2.8 million of general and administrative expenses for the three months and nine months ended March 31, 2013, respectively.

Endace’s results of operations have 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 $4.9 million in revenues, with a corresponding net loss of approximately $0.4 million, in each of the three months and nine months ended March 31, 2013, with respect to the Endace business in the Company’s condensed consolidated statements of operations.

Following is the summarized pro forma combined results of operations for the three months and nine months ended March 31, 2013 and April 1, 2012, assuming the acquisition had taken place as of July 4, 2011. The pro forma combined results of operations for the three months and nine months ended March 31, 2013, were prepared based on the statements of operations of Emulex for the three months and nine months ended March 31, 2013 combined with the statements of operations of Endace for the periods from January 1, 2013 to February 26, 2013 and July 1, 2012 to February 26, 2013, respectively, as all operating results of Endace were included in the statements of operations of Emulex since the acquisition date of February 26, 2013. The pro forma combined results of operations for the three months and nine months ended April 1, 2012, were prepared based on the statements of operations of Emulex for the three months and nine months ended April 1, 2012 combined with the statements of operations of Endace for the periods from January 1, 2012 to March 31, 2012 and July 1, 2011 to March 31, 2012, respectively. The following table reflects the unaudited consolidated pro forma information as if the acquisition had taken place at the beginning of each period presented, after giving effect to certain adjustments including the following:

• decrease in cost of goods sold associated with the fair value adjustment related to acquired inventory of approximately $0.7 million in each of the three months and nine months ended March 31, 2013 and increase of approximately $3.1 million in the nine months ended April 1, 2012;

• increase in operating expenses of approximately $0.9 million and $3.8 million for the three months and nine months ended March 31, 2013, respectively, and approximately $1.4 million and $4.2 million for the three months and nine months ended April 1, 2012, respectively, as a result of the amortization of acquired intangible assets;

• decrease in operating expenses of approximately $3.9 million and $6.7 million for the three months and nine months ended March 31, 2013, respectively, as a result of excluding acquisition-related transaction costs, including costs incurred by Endace prior to the acquistion;

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• decrease in non-operating expenses of approximately $4.7 million for each of the three months and nine months ended March 31, 2013, as a result of excluding a non-recurring foreign exchange transaction loss related to the cash consideration paid for Endace resulting from changes in the value of the British Pound Sterling (GBP) relative to the U.S. Dollar (USD) between the date the funds were converted to GBP and the dates the funds were disbursed;

• related estimated tax effects for the above adjustments.

	Three Months Ended					Nine Months Ended
	March 31, 2013			April 1, 2012		March 31, 2013		April 1, 2012
	(Unaudited)					(Unaudited)
	(in thousands, except per share data)					(in thousands, except per share data)
Net revenues	$	120,272		$	136,248	$	379,905	$	406,701
Net (loss) income	$	(2,462	)	$	9,561	$	2,421	$	10,345
Net (loss) income per basic share	$	(0.03	)	$	0.11	$	0.03	$	0.12
Net (loss) income per diluted share	$	(0.03	)	$	0.11	$	0.03	$	0.12

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.

3.Fair Value of Financial Instruments

Instruments Measured at Fair Value on a Recurring Basis

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 that may be used to measure fair value, of which the first two are considered observable and the last unobservable. A description of the three levels of inputs is as follows:

Level 1	—	Quoted prices (unadjusted) 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 are as follows:

	March 31, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
							(in thousands)
Cash	$	42,539	$	—	$	—	$	42,539	$	42,539	$	—	$	—
Level 1:
Money market funds		48,532		—		—		48,532		48,532		—		—
Level 2:
Marketable certificates of deposit		500		—		—		500		—		500		—
Level 3:
None		—		—		—		—		—		—		—
	$	91,571	$	—	$	—	$	91,571	$	91,071	$	500	$	—

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	July 1, 2012
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
							(in thousands)
Cash	$	39,864	$	—	$	—	$	39,864	$	39,864	$	—	$	—
Level 1:
Money market funds		161,184		—		—		161,184		161,184		—		—
U.S. government securities		22,600		2		—		22,602		—		22,600		—
U.S. government sponsored entity securities		2,110		—		—		2,110		—		2,110		—
Level 2:
Marketable certificates of deposit		4,169		—		—		4,169		—		4,169		—
Level 3:
None		—		—		—		—		—		—		—
	$	229,927	$	2	$	—	$	229,929	$	201,048	$	28,879	$	—

All investments were short-term investments (maturities less than one year) as of March 31, 2013 and July 1, 2012.

The Company’s Level 2 securities were primarily valued based on information obtained from a third-party pricing service. To estimate fair value, the pricing service utilizes a pricing model for which all significant inputs are observable, either directly or indirectly from market data. These inputs include reported trades and broker/dealer quotes of the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.

There were no transfers between Level 1, Level 2 or Level 3 securities during the nine months ended March 31, 2013.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis

The Company measures the fair value of its assets acquired and liabilities assumed in a business acquisition, and goodwill and other long lived assets when they are held for sale or determined to be impaired. See Note 2 for discussion of fair value measurements of certain assets recorded at fair value on a non-recurring basis.

4. Inventories

Inventories are summarized as follows:

	March 31, 2013		July 1, 2012
	(in thousands)
Raw materials	$	9,663	$	5,084
Finished goods		20,641		15,235
	$	30,304	$	20,319

5.Goodwill and Intangible Assets, net

Goodwill relates to the purchase of Sierra Logic, Inc. in fiscal 2007, the purchase of a privately-held storage networking company in fiscal 2010, the purchase of ServerEngines Corporation in fiscal 2011, and the purchase of Endace Limited in fiscal 2013.

Although the Company’s market capitalization exceeded its book value as of March 31, 2013, the Company’s stock price continues to be volatile and thus, it is reasonably possible that the Company’s determination that goodwill is not impaired could change in the near term if the Company’s market capitalization and estimated control premium decrease below its book value.

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The activity in goodwill during the nine months ended March 31, 2013 is as follows:

	Networking Segment		Visibility Segment		Total
			(in thousands)
Goodwill, as of July 1, 2012	$	177,290		—	$	177,290
Goodwill from the acquisition of Endace during the period		—		68,944		68,944
Goodwill, as of March 31, 2013	$	177,290	$	68,944	$	246,234

Intangible assets, net, are as follows (in thousands):

	March 31, 2013							July 1, 2012
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Core technology and patents	$	77,345	$	(69,872	)	$	7,473	$	77,345	$	(66,092	)	$	11,253
Developed technology		239,600		(121,909	)		117,691		198,100		(106,134	)		91,966
Customer relationships		6,900		(2,026	)		4,874		5,100		(4,942	)		158
Tradenames		8,639		(5,094	)		3,545		6,339		(4,951	)		1,388
Other		707		(638	)		69		707		(470	)		237
Total amortizable intangible assets:		333,191		(199,539	)		133,652		287,591		(182,589	)		105,002
In-process research and development		13,000		—			13,000		—		—			—
Total intangible assets, net:	$	346,191	$	(199,539	)	$	146,652	$	287,591	$	(182,589	)	$	105,002

During the three and nine months ended March 31, 2013, intangible assets increased by approximately $61.8 million due to the Endace acquisition. (See Note 2.)

The intangible assets subject to amortization are being amortized on a straight-line basis over expected useful lives ranging from approximately two to twelve years. Aggregate amortization expense for intangible assets for the three months ended March 31, 2013 and April 1, 2012, was approximately $7.0 million and $6.8 million, respectively. Aggregate amortization expense for intangible assets for the nine months ended March 31, 2013 and April 1, 2012, was approximately $20.2 million and $23.8 million, respectively.

The following table presents the estimated future aggregate amortization expense of amortizable intangible assets as of March 31, 2013 (in thousands):

Remainder of 2013	$	7,874
2014		31,495
2015		27,495
2016		26,221
2017		9,332
Thereafter		31,235
	$	133,652

6.Other Assets

As of March 31, 2013 and July 1, 2012, the Company had other assets of approximately $23.8 million and $7.3 million, respectively. Included in other assets at March 31, 2013 was approximately $14.4 million in long-term prepaid patent license fees (see Note 8).

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7.Accrued and Other Current Liabilities

Components of accrued and other current liabilities are as follows:

	March 31, 2013		July 1, 2012
	(in thousands)
Payroll and related costs	$	21,044	$	19,990
Warranty liability		2,667		2,463
Accrued rebates		4,560		7,378
Deferred revenues		4,651		1,032
Patent litigation settlement, damages and sunset period royalties payable to Broadcom Corporation (1)		994		37,310
Other		6,000		7,527
	$	39,916	$	75,700

(1) See Note 8.

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 future costs of fulfilling its warranty obligations. Changes to the warranty liability during nine months ended March 31, 2013 were:

	(in thousands)
Balance at beginning of period	$	2,463
Accrued warranties assumed with the acquisition of Endace		32
Accrual for warranties issued		1,487
Changes to pre-existing warranties (including changes in estimates)		(29	)
Settlements made (in cash or in kind)		(1,286	)
Balance at end of period	$	2,667

8.Commitments and Contingencies

Litigation

Broadcom Patent Infringement Litigation

On September 14, 2009, Broadcom Corporation (Broadcom) filed a patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The original complaint alleged infringement by the Company of ten Broadcom patents covering certain data and storage networking technologies. On January 11, 2010, the Court set a trial date of September 20, 2011. On February 23, 2010, Broadcom filed a first amended complaint adding allegations of infringement for one additional Broadcom patent. The first amended complaint sought unspecified damages and injunctive relief. On March 25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint alleging that it believed that the Broadcom patents at issue were invalid or not infringed, or both. In addition, the Company asserted counterclaims for declaratory judgment of invalidity and non-infringement against each of the Broadcom patents at issue, and sought award of attorneys’ fees, costs, and expenses.

On May 26, 2010, Broadcom filed a separate patent infringement lawsuit against the Company in the United States District Court in the Central District of California. The 2010 lawsuit alleged infringement of a Broadcom patent covering certain data and storage networking technologies by certain Emulex products. Broadcom sought a judgment for damages, injunctive relief, and an award of attorneys’ fees and costs.

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On June 30, 2010, the Court consolidated the 2009 and 2010 patent cases into a single case. 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, the Court provided interpretations of certain terms contained in the claims of the patents being asserted by Broadcom. In February and May 2011, the Court issued separate orders on the parties’ joint stipulations collectively dismissing two patents from the case (leaving seven patents in the case). The Court heard the parties’ respective motions for summary judgment and subsequently issued a ruling on August 3, 2011 barring Broadcom’s claim for infringement on one patent, leaving six patents in the case. On August 25, 2011, the Company met with a mediator and representatives of Broadcom concerning potential settlement of the case. On September 2, 2011, the parties submitted a joint summary of the mediation proceedings in which they stated that the mediation proceedings continued for a full day, but the parties were unable to reach a settlement agreement.

After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by Emulex, and the jury rendered an advisory verdict on October 12, 2011 to the Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the ‘691 patent] had been infringed by Emulex. The ‘150 patent, particularly Claim 8 considered at the trial, pertains to the use of multiple lanes of phase interpolators, and products that utilize clock and data recovery (CDR) circuits in SerDes modules on an application specific integrated circuit (ASIC). The ‘691 patent, particularly Claim 7 considered at the trial, pertains to fibre channel arbitrated loop switch crossbars and scoreboards, and products that utilize specialized ASICs used in storage arrays and pass-through modules. The Company has filed an appeal for both the ‘150 patent and ‘691 patent infringement findings with the Court of Appeals for the Federal Court, oral arguments for which were heard on December 3, 2012.

On March 16, 2012, the Court issued a decision concerning injunctive relief for the ‘150 and the ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The affected products for the ‘150 patent include the BE2, BE3, XE201, and SOC 442 ASICs, products containing them, and products not colorably different from them. The affected products for the ‘691 patent include the SOC 320, SOC 422, and SOC 442 ASICs, products containing them, and products not colorably different from them. The sunset period allows the Company to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and when certain firm orders had been placed. The decision further provided for the Company to pay a royalty of nine percent on all sales of such products made during the sunset period, and also provided that foreign sales (outside the U.S.) are beyond the scope of the suit. On April 3, 2012, the Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and ‘691 patents, further describe the prohibited activities, contain sunset provision terms including royalty rates and computations, limit the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permit design around efforts including modifications and design, development, and testing to eliminate infringement, and permit service and technical support for certain products.

The Court scheduled the start of the re-trial relating to the ‘194 family of patents that the previous jury could not reach a unanimous verdict on for November 5, 2013. The previous trial involved the following patents in the ‘194 family: U.S. Patent 6,424,194 [the ‘194 patent], Claim 1; U.S. Patent 7,486,124, Claim 5; and U.S. Patent 7,724,057, Claim 42, all of which pertain to circuitry used to deserialize signals. The Court has not issued any rulings with respect to these remaining three patents.

On May 30, 2012, the Court issued an order requiring the parties to submit the Appendix to the 2012 Permanent Injunction, and excluded from the sunset provision any customer who is a distributor and not an OEM, with distributor exceptions for needs of an end user affecting health of the public, public safety, and governmental agencies engaged in the national defense. The May 30, 2012 order provided that, not later than 90 days from the date of that order, Broadcom may move the Court for exclusion of certain device/customer product combinations from the Appendix. An Appendix was filed by Emulex and Broadcom with the Court under seal on June 10, 2012. The current Permanent Injunction permits major OEMs to obtain continued supply beyond the sunset period, providing them time to re-qualify products resulting from the design around efforts.

On July 3, 2012, Broadcom and the Company entered into a Patent License and Release Agreement (Settlement Agreement) pursuant to which both parties agreed to settle and release certain claims related to patent infringement litigation in exchange for a lump sum payment of $58.0 million. The Settlement Agreement provided for certain amendments to the 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. The Company also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent and related families for certain fields of use including Fibre Channel applications. The fields of use licensed to Emulex are related, in part, to the Emulex XE201 (Lancer) ASICs, that are capable of Fibre Channel and Ethernet, 16Gbps Fibre Channel HBAs, Fibre Channel SOCs and other Fibre Channel products. On July 18, 2012, pursuant to the Settlement Agreement, the Court issued an amended Permanent Injunction with an amended appendix, and approved a stipulation to dismiss certain allegations in the lawsuit.

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While the Company has contractual commitments from its suppliers concerning the defense and indemnification of certain Broadcom claims relating to certain technology provided by such suppliers, it cannot be certain that such defense and indemnification obligations will be promptly honored by such suppliers. This lawsuit continues to present risks with respect to U.S. sales of certain Ethernet products that could have a material adverse effect on the Company’s business, financial condition, or results of operations, including loss of patent rights, monetary damages, potential reimbursement or indemnification liabilities to customers, and injunction against the sale of accused products. The Company continues to present a vigorous defense against this ongoing lawsuit, as well as the previous infringement verdicts, damages and judgments. The Company expects to incur incremental mitigation, product redesign, appeal related expenses during the remainder of fiscal 2013 and fiscal 2014 in the range of $11 million to $12 million. Through March 31, 2013, the Company has incurred approximately $8.1 million of such expenses, approximately $3.1 million and $4.5 million of which were recorded in the three months and nine months ended March 31, 2013, respectively. Engineering and development costs will include expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of the affected products during the sunset period, and to implement the end of life processes in the U.S. for certain other affected products. Sales and marketing costs are likely to include expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. General and administrative costs will include expenses for the Company’s appeal of the previous verdicts and judgments. In addition, the Company may be required to participate in certain customer royalty obligations arising under licensing agreements with Broadcom in the range of $1 million to $8 million during the remainder of fiscal 2013 and fiscal 2014. Such costs would reduce gross margins in the periods accrued.

During the first quarter of fiscal 2013, the Company made a payment of $58.0 million to Broadcom pursuant to the Settlement Agreement, approximately $36.8 million of which was expensed in fiscal 2012. The remainder of approximately $21.2 million was recorded as prepaid license fees and is being amortized to cost of goods sold over the ten year license term in proportion to the estimated future revenues of such licensed technology. As of March 31, 2013, the unamortized prepaid license fee was approximately $18.3 million, of which approximately $3.9 million was recorded in prepaid expenses and other current assets and approximately $14.4 million was recorded in other assets. The Company recognized approximately $1.4 million and $3.4 million of amortization expense related to such prepaid license fees and sunset period royalty expenses during the three and nine months ended March 31, 2013, respectively.

The Company is currently unable to determine whether any further loss will occur related to the ongoing portion of this litigation or to estimate the range of any such further loss.

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.

9.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. As of March 31, 2013, the Company has repurchased approximately 9.0 million shares of its common stock for an aggregate purchase price of approximately $78.4 million at an average purchase price of $8.67 per share under this plan. No shares were repurchased during the nine months ended March 31, 2013. Approximately $21.6 million remains available under this program after these repurchases. The Company may repurchase additional shares from time-to-time in open market purchases or privately negotiated transactions. Any future share repurchases are expected to 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.

10.Stock-Based Compensation

The assumptions used to compute the fair value of stock option grants under the 2005 Equity Incentive Plan (Equity Incentive Plan) for the three and nine months ended March 31, 2013 and April 1, 2012 were:

	Three Months Ended			Nine Months Ended
	March 31, 2013	April 1, 2012 (1)		March 31, 2013	April 1, 2012
Expected volatility	40% – 43%		N/A	40% – 47%	45% – 47%
Weighted average expected volatility	42%		N/A	45%	46%
Expected dividends	—		N/A	—	—

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	Three Months Ended			Nine Months Ended
	March 31, 2013	April 1, 2012 (1)		March 31, 2013	April 1, 2012
Expected term (in years)	3.77 – 5.77		N/A	3.77 – 5.77	3.57 – 5.57
Weighted average expected term (in years)	4.61		N/A	4.61	4.41
Risk-free rate	0.59% – 1.05%		N/A	0.53% – 1.05%	0.67% – 1.22%

(1) No options were granted during the three months ended April 1, 2012.

The assumptions used to compute the fair value of the compensatory element related to the shares to be purchased under the Emulex Corporation Employee Stock Purchase Plan (Purchase Plan) for the three and nine months ended March 31, 2013 and April 1, 2012 were:

	Three Months Ended						Nine Months Ended
	March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Expected volatility		45	%		45	%		45	%		45	%
Expected dividends		—			—			—			—
Expected term (in years)		0.49			0.49			0.49			0.49
Risk-free rate		0.16	%		0.06	%		0.16	%		0.06	%

A summary of stock-based compensation expense, by functional line item in the condensed consolidated statements of operations is as follows:

	Three Months Ended				Nine Months Ended
	March 31, 2013		April 1, 2012		March 31, 2013		April 1, 2012
	(in thousands)
Cost of goods sold	$	248	$	223	$	744	$	990
Engineering and development		2,606		2,547		7,518		7,831
Sales and marketing		890		938		2,576		2,874
General and administrative		1,594		2,149		5,429		6,741
	$	5,338	$	5,857	$	16,267	$	18,436

A summary of stock option activity for the nine months ended March 31, 2013 is as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)		(in millions)
Options outstanding at July 1, 2012		4,316,266		$	13.38		2.94	$	0.8
Options granted		424,200		$	7.46
Options exercised		(22,172	)	$	2.80
Options expired		(399,376	)	$	18.68
Options forfeited		(9,365	)	$	7.65
Options outstanding at March 31, 2013		4,309,553		$	12.37		2.70	$	0.6

A summary of unvested stock awards activity for nine months ended March 31, 2013 is as follows:

	Number of Awards			Weighted Average Grant Date Fair Value
Awards outstanding and unvested at July 1, 2012		3,319,507		$	9.12
Awards granted		1,938,873		$	6.91
Awards vested		(1,606,445	)	$	9.29
Awards forfeited		(105,698	)	$	9.96
Awards outstanding and unvested at March 31, 2013		3,546,237		$	7.81

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During the nine months ended March 31, 2013, the Company granted unvested stock units that will be settled in cash upon vesting over a three year period (Cash-Settled Unit Awards). The Cash-Settled Unit Awards vest 30%, 30%, and 40% on the first, second and third anniversaries of the date of grant, respectively. Some of these awards are tied to the achievement of certain performance goals established by the Board of Directors. These awards are liability classified as they will be settled in cash. As of March 31, 2013, the liability related to Cash-Settled Unit Awards was approximately $0.8 million and will continue to be remeasured at each reporting date until the awards vest.

A summary of Cash-Settled Unit Award activity for nine months ended March 31, 2013 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value
Awards outstanding and unvested at July 1, 2012		—		NA
Awards granted		538,100	$	7.54
Awards vested		—		NA
Awards forfeited		—		NA
Awards outstanding and unvested at March 31, 2013		538,100	$	7.54

As of March 31, 2013, there was approximately $18.1 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. Such cost is expected to be recognized over a weighted-average period of approximately 1.3 years.

At Emulex’s Annual Shareholders Meeting on November 20, 2012, the shareholders approved increases of 1.5 million authorized shares and 0.5 million authorized shares under the Equity Incentive Plan Stock Award Plan for Non-Employee Directors (Director Plan), respectively. As of March 31, 2013, the Company anticipates that the number of shares authorized under the Equity Incentive Plan, the Director Plan, the Purchase Plan, and nine other stock-based plans, which are closed for future grants but have options outstanding, are sufficient to cover future stock option exercises, restricted stock awards, and shares that will be purchased under the Purchase Plan during the next six month option period from November 1, 2012 to April 30, 2013.

11.Income Taxes

The Company is currently providing for income taxes in fiscal 2013 interim periods based on the year-to-date actual effective income tax rate as of the end of each interim period. The income tax provision is computed on the pretax income of the consolidated entities located within each taxing jurisdiction based on legislation enacted as of the balance sheet date. Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for accounting and tax purposes. A valuation allowance for deferred tax assets is recorded to the extent that the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not.

Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant management judgment. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances. Due to uncertainties surrounding the realization of the Company’s U.S. federal and state deferred tax assets, the Company previously recorded a valuation allowance against the portion of such deferred tax assets that were not expected to be recoverable in available carryback periods or through the reversal of deferred tax liabilities. On a quarterly basis, the Company reassesses the need for these valuation allowances based on operating results and its assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions. The Company continues to maintain a valuation allowance as of March 31, 2013 against deferred tax assets that it believes are not more likely than not to be recoverable in available carryback periods or through the reversal of deferred tax liabilities.

As of March 31, 2013, the liability for income taxes associated with uncertain tax positions was approximately $37.8 million for which a reasonably reliable estimate for the period of payment cannot be made. If fully recognized, approximately $35.7 million of such liability would impact the Company’s effective tax rate. Absent any resolution of the on-going audit by the Internal Revenue Service (IRS) discussed below, the Company does not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months.

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The Company’s federal income tax returns for fiscal years 2008 to 2012 and California income tax returns for fiscal years 2008 to 2012 are open as the statutes of limitations have not yet expired or have been extended. The Company’s federal income tax returns for fiscal years 2008 and 2009 are currently under examination by the IRS. Additionally, the IRS is examining an amended return filed for fiscal year 2007. The Company’s California income tax returns for fiscal years 2008 and 2009 are currently under examination by the California Franchise Tax Board. The Company is also currently under audit by various state and international taxing authorities. While the Company strives to resolve open matters with each tax authority at the examination level, it may decide to challenge any assessments that may be made, and may exercise its right to appeal. The Company has accrued for what it believes are adequate amounts of tax and related interest, if any, that may result from these examinations. Such accruals are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations with tax authorities, identification of new issues, and issuance of new regulations or case law. If the ultimate resolution of these audits are substantially different from the Company’s estimate of any potential associated liabilities, the resulting audit adjustments could have a material adverse effect on Emulex’s tax provision, net income and cash flows.

President Obama signed The American Taxpayer Relief Act of 2012 into law on January 2, 2013 which contained a provision extending the federal credit for increasing research activities (research and development tax credits) retroactively from January 1, 2012 through December 31, 2013. As a result of this legislation, the Company recorded additional research and development credit carryforwards for amounts generated in fiscal 2012 of approximately $2.4 million and amounts generated in the nine months ended March 31, 2013 of approximately $3.7 million during the three months ended March 31, 2013. This increase in deferred tax assets relating to these research and development tax credit carryforwards was fully offset by a valuation allowance.

12.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 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
	(in thousands, except per share data)						(in thousands, except per share data)
Numerator — Net (loss) income	$	(6,970	)	$	8,679		$	(730	)	$	16,514
Less: Undistributed earnings allocated to participating securities		—			(8	)		—			(16	)
Undistributed earnings allocated to the Company’s common stockholders for basic and diluted net (loss) income per share	$	(6,970	)	$	8,671		$	(730	)	$	16,498
Denominator:
Denominator for basic net (loss) income per share — weighted average shares outstanding		90,590			86,495			90,000			86,421
Dilutive options outstanding, unvested stock units and ESPP		—			2,023			—			1,948
Denominator for diluted net (loss) income per share — adjusted weighted average shares outstanding		90,590			88,518			90,000			88,369
Basic net (loss) income per share	$	(0.08	)	$	0.10		$	(0.01	)	$	0.19
Diluted net (loss) income per share	$	(0.08	)	$	0.10		$	(0.01	)	$	0.19
Antidilutive options and unvested stock excluded from the computations		5,908			4,421			6,178			5,616

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.

13.Operating Segment Information

Emulex has two reportable business segments, Networking and Visibility. The Visibility segment was formed as a result of the acquisition of Endace on February 26, 2013. The Networking segment includes the operating results of Network Connectivity Products (NCP), Storage Connectivity Products (SCP) and Advanced Technology & Other Products (ATP). The Visibility segment includes the operating results of Network Visibility Products (NVP) resulting from the Endace acquisition. As of March 31, 2013, total assets in the Networking and Visibility segments were approximately $557.1 million and $153.0 million, respectively.

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The following table presents details of the Company’s reportable segments:

	Three Months Ended					Nine Months Ended
	March 31, 2013			April 1, 2012		March 31, 2013			April 1, 2012
	(in thousands)					(in thousands)
Net revenues:
Networking	$	111,913		$	125,746	$	353,325		$	372,814
Visibility		4,873			—		4,873			—
Consolidated net revenues	$	116,786		$	125,746	$	358,198		$	372,814
Net (loss) income:
Networking	$	(6,599	)	$	8,679	$	(359	)	$	16,514
Visibility		(371	)		—		(371	)		—
Net (loss) income	$	(6,970	)	$	8,679	$	(730	)	$	16,514

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

Executive Overview

Emulex, a leader in network connectivity, monitoring and management, provides hardware and software solutions for global networks that support enterprise, cloud, government and telecommunications. During the three months ended March 31, 2013, Emulex acquired 99.9% of the outstanding common stock of Endace Limited (Endace), a leading supplier of network visibility infrastructure products. Prior to the acquisition of Endace, Emulex operated within a single business segment. With the acquisition of Endace, Emulex formed the Visibility operating segment, which includes Network Visibility Products.

Emulex’s products enable end-to-end application visibility, optimization and acceleration. The Company’s I/O connectivity offerings, including its line of ultra high-performance Ethernet and Fibre Channel-based connectivity products, have been designed into server and storage solutions from leading original equipment manufacturers (OEMs), including Cisco, Dell, EMC, Fujitsu, Hitachi, HP, Huawei, IBM, NetApp and Oracle, and can be found in the data centers of nearly all of the Fortune 1000. Emulex’s monitoring and management solutions, including its portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100Gb Ethernet (100GbE).

We rely almost exclusively on OEMs and sales through distribution channels for our revenue. Our significant 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), 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), NEC Corporation (NEC), Network Appliance, Inc. (NetApp), Oracle Corporation (Oracle), and Xyratex Ltd. (Xyratex). Our significant distributors include ASI Computer Technologies, Inc. (ASI), Avnet, Inc. (Avnet), British Telecom (BT), Digital China Technology Limited, Info X Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro), Macnica Networks Corporation (Macnica), Netmarks Inc. (Netmarks), SYNNEX Corporation (SYNNEX), 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 31, 2013, we had a total of 1,250 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.

Business Operating Segments

With our acquisition of Endace, our network connectivity, monitoring and management solutions are now broken into two business operating segments consisting of four product lines. Our Networking Segment consists of our legacy Emulex products and includes Network Connectivity Products (NCP), Storage Connectivity Products (SCP) and Advanced Technology and Other Products (ATP). Our Visibility Segment consists of our Network Visibility Products (NVP) that were acquired through the Endace acquisition.

Networking Segment Products:

NCP includes industry standard Fibre Channel and Ethernet-based solutions that provide server Input/Output (I/O) and target storage array connectivity to create networks for mission-critical enterprise and cloud data centers. These products enable servers to reliably and efficiently connect to Local Area Networks (LANs), Storage Area Networks (SANs), and Network Attached Storage (NAS) by offloading data communication processing tasks from the server as information is delivered and sent to the network. Our NCP use industry standard protocols including Fibre Channel Protocol (FCP), Internet Protocol (IP), Transmission Control Protocol (TCP)/IP, internet Small Computer System Interface (iSCSI), NAS, and Fibre Channel over Ethernet (FCoE). Emulex Ethernet-based products include our OneConnect® Universal Converged Network Adapters (UCNAs) and Local Area Network on Motherboard (LOM) application specific integrated circuits, and custom form factor solutions for OEM blade servers that enable high performance, scalable networks and convergence. Emulex Fibre Channel-based products include LightPulse® Host Bus Adapters (HBAs), Fibre Channel application specific integrated circuits (ASICs) and custom form factor solutions for OEM blade servers.

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SCP includes Emulex InSpeed®, switch-on-a-chip (SOC) and backend connectivity, bridge, and router products. SCP is deployed inside storage arrays, tape libraries, and other storage appliances, and connect storage controllers to storage capacity, delivering improved performance, reliability, and connectivity. Emulex SCP uses industry standard protocols including Fibre Channel, Serial Attached Small Computer Interface (SAS), and Serial Advanced Technology Attachment (SATA), and support the broadest range of Hard Disk Drive (HDD) and Solid State Disk (SSD) technologies.

ATP primarily consists of Pilot™ Integrated Baseboard Management Controllers (iBMC), OneCommand® Vision I/O performance management software, certain legacy products and other products and services.

Visibility Segment Products:

NVP consists entirely of the recently acquired Endace® family of network visibility and intelligent network recording products. The EndaceProbe™ captures, indexes and stores network traffic history in order to help organizations troubleshoot problems and respond to network security breaches. EndaceVision™ is a browser-based network traffic search engine that enables engineers to search through large amounts of network history in order to find the network traffic that they need to investigate specific issues. EndaceProbe™ appliances connect to the network via passive network taps or via SPAN ports found on routers and switches. For ultra-fast network segments EndaceAccess™ network visibility headend systems can be used to load balance network traffic across multiple 10GbE ports. Underpinning all of the Endace family of network visibility and recording products are the Data Acquisition and Generation (DAG) network capture cards that are integrated into the EndaceProbe™ appliances and sold as stand-alone components for use in a wide range of monitoring and security systems.

For additional information about our operating segments, please see Note 13, “Operating Segment Information,” in the accompanying notes to condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Business Combination

On February 26, 2013, we acquired 89.6% of the outstanding common stock and all of the outstanding stock options of Endace Limited (Endace) for cash consideration of approximately $110.4 million. As of March 31, 2013, we had acquired an additional 10.3% of the outstanding stock of Endace for approximately $12.0 million and had initiated compulsory acquisition proceedings for the remaining outstanding stock. The compulsory acquisition proceedings to acquire the remaining outstanding shares of Endace were concluded on April 25, 2013, at which time we acquired the outstanding noncontrolling interest and obtained ownership of 100% of Endace for approximately $122.4 million. See Note 2, “Business Combination,” in the accompanying notes to condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional information.

Product Redesign Activities and Potential Royalty Obligations

Broadcom Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011, the Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the ‘691 patent] had been infringed by us. On March 16, 2012, the Court issued a decision concerning injunctive relief for the ‘150 and the ‘691 patents. The decision provided, in part, for a sunset period of 18 months relating to the ‘150 patent, starting on October 12, 2011. The decision further provided for a sunset period of 18 months relating to the ‘691 patent, starting on December 16, 2011. The sunset period allows us to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when the products had been qualified and

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when certain firm orders had been placed. On April 3, 2012, the Court issued a permanent injunction (2012 Permanent Injunction) which, with respect to both the ‘150 and the ‘691 patents, further describes the prohibited activities, contains sunset provision terms including royalty rates and computations, limits the territory to allow sales of products that are manufactured outside the U.S. to customers located outside the U.S., permits design around efforts including modifications and design, development, and testing to eliminate infringement, and permits service and technical support for certain products.

We expect to incur incremental mitigation, product redesign, appeal related expenses during the remainder of fiscal 2013 and fiscal 2014 in the range of $11 million to $12 million. Through March 31, 2013, we have incurred approximately $8.1 million of such expenses, approximately $3.1 million and $4.5 million of which were recorded in the three months and nine months ended March 31, 2013, respectively. Engineering and development costs will include expenses for activities to redesign, design around, modify, design, develop, test and requalify certain of our affected products during the sunset period, and to implement our end of life processes in the U.S. for certain other affected products. Sales and marketing costs are likely to include expenses for customer support, pre-production samples, education and training, and other miscellaneous costs. General and administrative costs will include expenses for our appeal of the previous verdicts and judgments. In addition, we may be required to participate in certain customer royalty obligations arising under their licensing agreements with Broadcom in the range of $1 million to $8 million during the remainder of fiscal 2013 and fiscal 2014. Such costs would reduce gross margins in the periods accrued.

See Note 8, “Commitments and Contingencies,” in the accompanying notes to condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q for additional information.

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 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Net revenues		100	%		100	%		100	%		100	%
Cost of sales:
Cost of goods sold		36			36			36			37
Amortization of core and developed technology intangible assets		5			4			5			5
Patent litigation settlement, damages, sunset period royalties and license fees		1			1			1			—
Total cost of sales		42			41			42			42
Gross profit		58			59			58			58
Operating expenses:
Engineering and development		37			32			34			33
Selling and marketing		15			13			13			12
General and administrative		8			7			8			8
Amortization of other intangible assets		1			1			1			1
Total operating expenses		61			53			56			54
Operating (loss) income		(3	)		6			2			4
Non-operating (expense) income, net:
Interest income		—			—			—			—
Interest expense		—			—			—			—
Other (expense) income, net		(4	)		—			(1	)		—
Total non-operating (expense) income, net		(4	)		—			(1	)		—
(Loss) income before income taxes		(7	)		6			1			4
Income tax benefit (provision)		1			1			(1	)		—
Net (loss) income		(6	)%		7	%		—	%		4	%

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Three months ended March 31, 2013, compared to three months ended April 1, 2012

Net Revenues.Net revenues for the three months ended March 31, 2013, decreased by approximately $9.0 million, or 7%, to approximately $116.8 million, compared to approximately $125.7 million for the three months ended April 1, 2012. The decrease in revenues was primarily due to weakness in the server and storage technology markets resulting from continuing concern over the global macroeconomic climate.

Net Revenues by Operating Segment and Product Line

Net revenues by operating segment and product line were as follows:

	Net Revenues by Operating Segment and Product Line
(in thousands)	Three Months Ended March 31, 2013		Percentage of Net Revenues			Three Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
Networking Segment:
Network Connectivity Products	$	85,166		73	%	$	91,127		73	%	$	(5,961	)		(7	)%
Storage Connectivity Products		20,833		18	%		27,855		22	%		(7,022	)		(25	)%
Advanced Technology & Other Products		5,914		5	%		6,764		5	%		(850	)		(13	)%
Total Networking Segment		111,913		96	%		125,746		100	%		(13,833	)		(11	)%
Visibility Segment:
Network Visibility Products		4,873		4	%		—		—	%		4,873			N/A
Total net revenues	$	116,786		100	%	$	125,746		100	%	$	(8,960	)		(7	)%

Networking segment revenues, which includes revenues from NCP, SCP and ATP, decreased by approximately 11% for the three months ended March 31, 2013 compared to the three months ended April 1, 2012, primarily due to decreases in NCP and SCP revenues.

NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, LOMs, and UCNAs. For the three months ended March 31, 2013, Ethernet based products revenues decreased by approximately $9.6 million, or 37%, from the same period in the prior year, while Fibre Channel based products, which accounted for approximately 67% of total NCP revenues in the three months ended March 31, 2013, decreased by approximately $2.2 million, or 4%. The decrease in Ethernet based products revenue was primarily due to a decrease in units shipped of approximately 55%, arising principally from lower customer demand for 10Gb LOM products as customers consumed residual inventory purchased in prior periods. This was partially offset by an increase in average selling price of approximately 43% due to a change in product mix. The decrease in Fibre-Channel based products revenue was primarily due to a decrease in average selling price of approximately 9%, partially offset by an increase in units shipped of approximately 6%.

SCP primarily consists of InSpeed^®, SOC and backend connectivity, bridge, and router products. Our SCP revenues decreased by approximately $7.0 million, or 25%, for the three months ended March 31, 2013 compared to the three months ended April 1, 2012, primarily due to a 35% decline in bridging products revenue as a result of a 31% decrease in units shipped due to last-time buys of certain products reaching end of life during fiscal 2012. Our SCP revenue is expected to be lower in the fourth quarter of fiscal 2013 compared to the same period in the prior year.

ATP primarily consists of iBMCs, OneCommand^® Vision software products, certain legacy products and other products and services. For the three months ended March 31, 2013, iBMC based products accounted for the majority of ATP revenues. The decrease in our ATP revenues for the three months ended March 31, 2013 was primarily due to a decrease in units shipped of approximately 16%.

The Visibility segment, which includes the revenues from NVP, had revenues of approximately $4.9 million for the three months ended March 31, 2013 compared to no revenues for the three months ended April 1, 2012 as NVP revenues resulted from the Endace acquisition on February 26, 2013.

NVP consists entirely of the recently acquired Endace® family of network visibility and intelligent network recording products. Revenues from systems sales and DAG cards accounted for approximately 69% and 17%, respectively, of total NVP revenues for the three months ended March 31, 2013.

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

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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 Ended March 31, 2013			Three Months Ended April 1, 2012			Three Months Ended March 31, 2013			Three Months Ended April 1, 2012
Net revenue percentage (1):
OEM:
EMC		—			—			12	%		11	%
Hewlett-Packard		18	%		24	%		25	%		28	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)		13	%		—			—			—
IBM		28	%		27	%		32	%		31	%

(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.

(3) Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.

Direct sales to our top five customers accounted for approximately 68% of total net revenues for the three months ended March 31, 2013, compared to approximately 70% for the three months ended April 1, 2012. Direct and indirect sales to our top five customers accounted for approximately 79% of total net revenues for the three months ended March 31, 2013, compared to approximately 82% for the three months ended April 1, 2012. 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
(in thousands)	Three Months Ended March 31, 2013		Percentage of Net Revenues			Three Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
OEM	$	100,975		86	%	$	115,327		92	%	$	(14,352	)		(12	)%
Distribution		13,985		12	%		10,282		8			3,703			36	%
Other		1,826		2	%		137		—			1,689			1,233	%
Total net revenues	$	116,786		100	%	$	125,746		100	%	$	(8,960	)		(7	)%

The decrease in OEM net revenues for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 reflected decreases of approximately 24% in SCP revenues, 8% in NCP revenues, and 11% in ATP revenues. The increase in distribution net revenues for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 was primarily due to additional NVP net revenues generated through 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.

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Net Revenues by Geographic Territory

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

	Net Revenues by Geographic Territory
(in thousands)	Three Months Ended March 31, 2013		Percentage of Net Revenues			Three Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
Asia Pacific	$	65,285		56	%	$	67,461		54	%	$	(2,176	)		(3	)%
United States		29,713		26	%		40,100		32	%		(10,387	)		(26	)%
Europe, Middle East, and Africa		19,088		16	%		17,919		14	%		1,169			7	%
Rest of the world		2,700		2	%		266		—			2,434			915	%
Total net revenues	$	116,786		100	%	$	125,746		100	%	$	(8,960	)		(7	)%

We believe the increase in Asia Pacific net revenues and decreases in United States (US) and Europe, Middle East, and Africa (EMEA) net revenues, all as a percentage of total net revenues for the three months ended March 31, 2013 compared to the three months ended April 1, 2012, were primarily due to our OEM customers continuing to migrate 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 based on billed-to location 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 March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points  Change
$	68,240		58	%	$	74,759		59	%	$	(6,519	)		(1	)%

Cost of sales includes the cost of producing, supporting, and managing our supply of finished products. Approximately $0.2 million of share-based compensation expense was included in both the three months ended March 31, 2013 and the three months ended April 1, 2012. Approximately $5.5 million and $5.2 million of amortization of technology intangible assets were included in cost of sales for the three months ended March 31, 2013 and April 1, 2012, respectively. The increase in amortization of technology intangible assets was primarily due to acquired finite-lived intangible assets of approximately $41.5 million from the Endace acquisition. See Note 2, “Business Combination,” and Note 5, “Goodwill and Intangible Assets, net,” in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional details.

Our gross margin percentage for the three months ended March 31, 2013 remained comparable to the three months ended April 1, 2012 due to favorable product mix that was offset by sunset period royalty and patent license fee amortization expenses of approximately $1.4 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012. We will continue to recognize amortization expenses for technology intangible assets over their remaining useful lives, patent license fee related to the Settlement Agreement over the remaining patent license term (which expires on July 1, 2020) and sunset period royalty expenses related to the amended 2012 Permanent Injunction through fiscal 2014. We expect our gross margin percentage to trend downward as the portion of our revenues generated from lower margin products increases in the future. In addition, we will continue to recognize amortization expenses for technology intangible assets over their remaining useful lives, patent license fee related to the Settlement Agreement over the remaining patent license term (which expires on July 1, 2020) and sunset period royalty expenses through fiscal 2014. We may also incur potential costs to reimburse certain customers or directly pay Broadcom certain customer royalty obligations arising in connection from their licensing agreements with Broadcom related to the amended 2012 Permanent Injunction. See “Product Redesign Activities and Potential Royalty Obligations” elsewhere in Part I, Item 2 of this Form 10-Q.

Engineering and Development.Engineering and development expenses consist primarily of salaries and related expenses for personnel engaged in the design, development, and support of our products. These expenses also include 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 March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)		Percentage Points  Change
$	43,661		37	%	$	40,361		32	%	$	3,300		5	%

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Engineering and development expenses increased from approximately $40.4 million during the three months ended April 1, 2012 to approximately $43.7 million for the three months ended March 31, 2013. Approximately $2.6 million and $2.5 million of share-based compensation expense were included in engineering and development costs for the three months ended March 31, 2013 and April 1, 2012, respectively. Engineering and development expenses increased due to an increase in product redesign expenses of approximately $2.4 million related to our mitigation activities for the 2012 Permanent Injunction. Salary and related expenses also increased by approximately $1.7 million due to an increase in headcount from 641 at April 1, 2012 to 781 at March 31, 2013, of which approximately $0.8 million and 83 headcount were associated with our acquisition of Endace. This was partially offset by a decrease of approximately $1.2 million due to lower new product development costs. We plan to continue to invest in engineering and development costs. In addition, due to the 2012 Permanent Injunction, we expect to continue to incur incremental engineering and development expenses to redesign our impacted products through fiscal 2014. See “Product Redesign Activities and Potential Royalty Obligations” and “Business Combination” elsewhere in Part I, Item 2 of this Form 10-Q.

Selling and Marketing.Selling and marketing expenses consist primarily of salaries, commissions, and related expenses for personnel engaged in the marketing and sales of our products, as well as samples, 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 March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)		Percentage Points  Change
$	17,179		15	%	$	15,897		13	%	$	1,282		2	%

Selling and marketing expenses for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 increased approximately $1.3 million, or 8%. Approximately $0.9 million of share-based compensation expense were included in selling and marketing costs for each of the three months ended March 31, 2013 and April 1, 2012. Selling and marketing headcount increased to 220 at March 31, 2013 from 150 at April 1, 2012, resulting in an increase in salary and related expenses of approximately $1.8 million, partially offset by a decrease in advertising costs of approximately $0.9 million. Approximately 64 of the increase in headcount and approximately $1.3 million of salary and related expenses were associated with the Endace acquisition. We plan to continue to closely manage and target advertising and market promotion expenses to heighten brand awareness of our new and existing products in an effort to provide overall revenue growth. Due to the 2012 Permanent Injunction, we expect to continue to incur incremental sales and marketing expenses to requalify and recertify our impacted products with customers through fiscal 2014. See “Product Redesign Activities and Potential Royalty Obligations” and “Business Combination” elsewhere in Part I, Item 2 of this Form 10-Q.

General and Administrative.Ongoing general and administrative expenses consist 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 March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)		Percentage Points  Change
$	9,526		8	%	$	8,820		7	%	$	706		1	%

General and administrative expenses for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 increased approximately $0.7 million, or 8%. Approximately $1.6 million and $2.1 million of share-based compensation expense were included in general and administrative costs for the three months ended March 31, 2013 and April 1, 2012, respectively. Offsetting the decrease in shared-based compensation was an increase of approximately $0.8 million in legal and accounting costs related to the Endace acquisition, an increase of approximately $0.4 million in salary and related expenses, and an increase of approximately $0.4 million in legal costs related to our mitigation activities for the 2012 Permanent Injunction. General and administrative headcount increased to 165 at March 31, 2013 from 139 at April 1, 2012, 27 of which was associated with the Endace acquisition. We expect to continue to incur incremental general and administrative expenses related to our mitigation activities for the 2012 Permanent Injunction and our acquisition of Endace through fiscal 2014. See “Product Redesign Activities and Potential Royalty Obligations” and “Business Combination” elsewhere in Part I, Item 2 of this Form 10-Q.

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Amortization of Other Intangible Assets.Amortization of other intangible assets consists 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 March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points  Change
$	1,488		1	%	$	1,603		1	%	$	(115	)		—	%

Amortization of other intangible assets for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 decreased by approximately $0.1 million, or 7%. Approximately $0.3 million of the decrease was due to a lower unamortized intangible assets balance at the beginning of the current three month period as a result of certain intangible assets being fully amortized in fiscal 2012. This was partially offset by an increase of approximately $0.1 million in amortization of other intangibles assets associated with assets acquired from Endace. See “Business Combination” elsewhere in Part I, Item 2 of this Form 10-Q.

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

Non-operating (Expense) Income, net
Three Months  Ended March 31, 2013			Percentage of Net  Revenues			Three Months Ended April  1, 2012			Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points  Change
$	(4,473	)		(4	)%	$	(268	)		—	%	$	(4,205	)		(4	)%

Our non-operating (expense) income, net, for the three months ended March 31, 2013 decreased by approximately $4.2 million, compared to the three months ended April 1, 2012, primarily due to a non-recurring foreign exchange transaction loss of approximately $4.7 million related to the cash consideration paid for Endace resulting from changes in the value of the British Pound Sterling (GBP) relative to the U.S. Dollar (USD) between the date the funds were converted to GBP and the dates the funds were disbursed.

Income Tax Benefit (Provision). Income tax benefit (provision) was as follows (in thousands):

Income Tax Benefit (Provision)
Three Months  Ended March 31, 2013		Percentage of Net  Revenues			Three Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)		Percentage Points  Change
$	1,117		1	%	$	869		1	%	$	248		—	%

Income tax benefit for the three months ended March 31, 2013 was approximately $1.1 million, compared to approximately $0.9 million during the three months ended April 1, 2012. Our effective tax benefit rate was approximately 14% and 11% for the three months ended March 31, 2013 and April 1, 2012, respectively. The increase in our effective tax benefit rate for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 was primarily due to the continuing impact of our previously recorded U.S. deferred tax asset valuation allowance, changes in the mix of earnings in international versus U.S. tax jurisdictions and the use of an actual year-to-date effective tax rate for the three months ended March 31, 2013 versus an annualized effective tax rate. We continue to generate the majority of our earnings in countries other than the U.S. including India, Ireland, and Isle of Man, where such earnings are generally subject to significantly lower tax rates than the U.S. We expect this trend to continue in the future. We have made no provision for U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries as these amounts are intended to be indefinitely reinvested in operations outside of the U.S.

We expect to recognize an annual effective tax rate for fiscal 2013 that is substantially different from the U.S. Federal statutory rate, primarily due to the continued impact of our previously recorded U.S. deferred tax valuation allowance, including changes in the estimated timing of reversing temporary differences and the resulting amount of deferred tax assets estimated to be recoverable in available carryback periods, and the mix of earnings in international versus U.S. tax jurisdictions. Actual current year originations and reversals of temporary differences that are recoverable in available carryback periods and subject to our U.S. deferred tax valuation allowance could drive significant volatility in our effective tax rate and actual tax expense for fiscal 2013. In addition, changes in the mix of U.S. versus international earnings and changing tax laws could affect our actual tax expense for fiscal 2013. As estimates and judgments are used to project such originations and reversals of temporary differences and the mix of earning in our various tax jurisdictions, the impact to our tax provision could vary significantly if the current planning or assumptions change. We also do not forecast discrete events, such as a settlement of tax audits with governmental authorities or changes in tax laws, due to their inherent uncertainty. Such discrete events could also materially impact our tax expense. As the tax rate is driven by various factors, it is not possible to estimate our future tax rate with a high degree of certainty.

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Nine months ended March 31, 2013, compared to nine months ended April 1, 2012

Net Revenues.Net revenues for the nine months ended March 31, 2013 decreased by approximately $14.6 million, or 4%, to approximately $358.2 million compared to approximately $372.8 million for the nine months ended April 1, 2012.

Net Revenues by Operating Segment and Product Line

Net revenues by operating segment and product line were as follows:

	Net Revenues by Operating Segment and Product Line
(in thousands)	Nine Months Ended March 31, 2013		Percentage of Net Revenues			Nine Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
Networking Segment:
Network Connectivity Products	$	278,031		78	%	$	274,336		74	%	$	3,695			1	%
Storage Connectivity Products		62,272		17	%		79,320		21	%		(17,048	)		(21	)%
Advanced Technology & Other Products		13,022		4	%		19,158		5	%		(6,136	)		(32	)%
Total Networking Segment		353,325		99	%		372,814		100	%		(19,489	)		(5	)%
Visibility Segment:
Network Visibility Products		4,873		1	%		—		—	%		4,873			N/A
Total net revenues	$	358,198		100	%	$	372,814		100	%	$	(14,616	)		(4	)%

Networking segment revenues decreased by approximately 5% for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012. The decrease in revenues was primarily due to weakness in the server and storage technology markets resulting from continuing concern over the global macroeconomic climate.

Within NCP, embedded I/O based product revenue increased by 67% primarily due to an increase in units shipped of approximately 69%, partially offset by a decrease in average selling price of approximately 1%. The increase in embedded I/O based product revenue was offset by decreases of 10% and 2% in revenues of Ethernet based products and Fibre Channel based products. Ethernet based products revenue decreased primarily due to a decrease in units shipped of approximately 24%, arising principally from lower customer demand for 10Gb LOM products as customers consumed residual inventory purchased in prior periods. This was partially offset by an increase in average selling price of approximately 18% due to a change in product mix. Fibre Channel based products revenues, which accounted for approximately 68% and 75% of total NCP revenues for the nine months ended March 31, 2013 and the same period in the prior year, respectively, decreased primarily due to a decrease in average selling price of approximately 7%, partially offset by an increase in units shipped of approximately 6%.

Our SCP revenues decreased by approximately $17.0 million, or 21%, for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012. This decrease was primarily due to a decline in backend connectivity product shipments due to last-time buys of certain products reaching end of life during fiscal 2012.

For the nine months ended March 31, 2013, iBMC based products accounted for the majority of total ATP revenues. The decrease in ATP revenue for the nine months ended March 31, 2013 was primarily due to a decrease in units shipped of approximately 23% combined with a decrease in average selling price of approximately 11%.

The Visibility segment, which includes the revenues from NVP, had revenues of approximately $4.9 million for the nine months ended March 31, 2013 compared to no revenues for the nine months ended April 1, 2012 as NVP revenues resulted from the Endace acquisition on February 26, 2013.

NVP consists entirely of the recently acquired Endace® family of network visibility and intelligent network recording products. Revenues from systems sales and DAG cards accounted for approximately 69% and 17% of total NVP revenues for the nine months ended March 31, 2013.

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Net Revenues by Major Customers

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)
	Nine Months Ended March 31, 2013			Nine Months Ended April 1, 2012			Nine Months Ended March 31, 2013			Nine Months Ended April 1, 2012
Net revenue percentage (1):
OEM:
Hewlett-Packard		20	%		24	%		24	%		26	%
Hon Hai Precision Industry Co., Ltd. (Foxconn Technology Group) (3)		11	%		—			—			—
IBM		32	%		31	%		36	%		35	%
EMC		—			—			11	%		—

(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.

(3) Hon Hai Precision Industry Co., Ltd. is a contract manufacturer that performed manufacturing for some of our OEM customers.

Direct sales to our top five customers accounted for approximately 72% of total net revenues for the nine months ended March 31, 2013 compared to approximately 71% for the nine months ended April 1, 2012. Direct and indirect sales to our top five customers accounted for approximately 82% of total net revenues for the nine months ended March 31, 2013 compared to approximately 81% for the nine months ended April 1, 2012. 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
(in thousands)	Nine Months Ended March 31, 2013		Percentage of Net Revenues			Nine Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
OEM	$	320,188		89	%	$	337,288		90	%	$	(17,100	)		(5	)%
Distribution		36,074		10	%		35,331		10	%		743			2	%
Other		1,936		1	%		195		—			1,741			893	%
Total net revenues	$	358,198		100	%	$	372,814		100	%	$	(14,616	)		(4	)%

The decrease in OEM net revenues for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 reflected a decrease of approximately 21% in SCP revenues and a decrease of approximately 31% in ATP revenues, partially offset by a 2% increase in NCP generated through our OEMs. The increase in distribution net revenues for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 was primarily due to NVP net revenues generated through distribution partners, partially offset by a decrease of approximately 5% in NCP net revenues generated through distribution partners.

Net Revenues by Geographic Territory

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

	Net Revenues by Geographic Territory
(in thousands)	Nine Months Ended March 31, 2013		Percentage of Net Revenues			Nine Months Ended April 1, 2012		Percentage of Net Revenues			Increase/ (Decrease)			Percentage Change
Asia Pacific	$	215,767		60	%	$	214,515		58	%	$	1,252			1	%
United States		87,838		25	%		104,142		28	%		(16,304	)		(16	)%
Europe, Middle East, and Africa		49,920		14	%		53,267		14	%		(3,347	)		(6	)%
Rest of the world		4,673		1	%		890		—			3,783			425	%
Total net revenues	$	358,198		100	%	$	372,814		100	%	$	(14,616	)		(4	)%

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We believe the increase in Asia Pacific net revenues as a percentage of total net revenues and decrease in US net revenues as a percentage of total net revenues for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 were primarily due to our OEM customers continuing to migrate towards using contract manufacturers that are predominately located in Asia Pacific. The EMEA net revenues as a percentage of total net revenues essentially remained unchanged. However, as we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues based on billed-to location 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
Nine Months  Ended March 31, 2013		Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points  Change
$	208,782		58	%	$	215,753		58	%	$	(6,971	)		—

Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Approximately $0.7 million and $1.0 million of share-based compensation expense and approximately $15.8 million and $18.9 million of amortization of technology intangible assets were included in cost of sales for the nine months ended March 31, 2013 and April 1, 2012, respectively. Our gross margin percentage for the nine months ended March 31, 2013 was comparable to same period in the prior year. The decrease in our gross profit was primarily due to a 4% decrease in net revenues. The decrease in amortization of technology intangible assets was offset by the sunset period royalty and patent license fee amortization expenses of approximately $3.4 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012.

Engineering and Development.Engineering and development expenses were as follows (in thousands):

Engineering and Development
Nine Months  Ended March 31, 2013		Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)		Percentage Points  Change
$	122,244		34	%	$	121,307		33	%	$	937		1	%

Engineering and development expenses for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 increased by approximately $0.9 million. Approximately $7.5 million and $7.8 million of share-based compensation expense were included in engineering and development costs for the nine months ended March 31, 2013 and April 1, 2012, respectively. Engineering and development expenses increased due to increased product redesign expenses of approximately $2.9 million related to our mitigation activities for the 2012 Permanent Injunction and increased salary and related expenses of approximately $2.2 million related to an increase in headcount from 641 at April 1, 2012 to 781 at March 31, 2013, partially offset by a decrease of approximately $4.1 million in new product development costs. Approximately 83 of the increase in headcount and approximately $0.8 million of salary and related expenses were associated with the Endace Acquisition.

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

Selling and Marketing
Nine Months  Ended March 31, 2013		Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points Change
$	45,685		13	%	$	45,774		12	%	$	(89	)		1	%

Selling and marketing expenses for the nine months ended March 31, 2013 remained comparable to the nine months ended April 1, 2012. Approximately $2.6 million and $2.9 million of share-based compensation expense were included in selling and marketing costs for the nine months ended March 31, 2013 and April 1, 2012, respectively. Selling and marketing headcount increased to 220 at March 31, 2013 from 150 at April 1, 2012 primarily due to the Endace acquisition on February 26, 2013. The increase in headcount resulted in a net increase of approximately $2.0 million in salary and related expenses as compared to the same period in fiscal 2012, of which approximately $1.3 million and 64 headcount were associated with our acquisition of Endace. This was partially offset by a decrease in advertising costs of approximately $1.6 million.

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

General and Administrative
Nine Months  Ended March 31, 2013		Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points Change
$	29,021		8	%	$	29,808		8	%	$	(787	)		—

General and administrative expenses for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 decreased approximately $0.8 million, or 3%. Approximately $5.4 million and $6.7 million of share-based compensation expense were included in general and administrative costs for the nine months ended March 31, 2013 and April 1, 2012, respectively. General and administrative expenses decreased by approximately $3.7 million in litigation costs related to our on-going patent dispute litigation with Broadcom. The net decrease in general and administrative expenses was partially offset by an increase of approximately $2.8 million in legal and accounting costs related to the Endace acquisition, and an increase of approximately $1.4 million in legal costs related to our mitigation activities for the 2012 Permanent Injunction.

Amortization of Other Intangible Assets.Amortization expense was as follows (in thousands):

Amortization of Other Intangible Assets
Nine Months  Ended March 31, 2013		Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues			Increase/ (Decrease)			Percentage Points  Change
$	4,376		1	%	$	4,967		1	%	$	(591	)		—

Amortization of other intangible assets for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 decreased by approximately $0.6 million, or 12%. Approximately $0.7 million of the decrease was due to a lower unamortized intangible assets balance at the beginning of the current three month period as a result of certain intangible assets being fully amortized in fiscal 2012. This was partially offset by an increase of approximately $0.1 million in amortization of other intangibles assets associated with assets acquired from Endace.

Non-operating (Expense) Income, net.Non-operating (expense) income, net, was as follows (in thousands):

Non-operating Income (Expense), net
Nine Months  Ended March 31, 2013			Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues		Increase/ (Decrease)			Percentage Points  Change
$	(4,832	)		(1	)%	$	325		—	$	(5,157	)		(1	)%

Our non-operating (expense) income, net, for the nine months ended March 31, 2013 decreased by approximately $5.2 million, compared to the nine months ended April 1, 2012, primarily due to a non-recurring foreign exchange transaction loss of approximately $4.7 million related to the cash consideration paid for Endace resulting from changes in the value of the GBP relative to the USD between the date the funds were converted to GBP and the dates the funds were disbursed.

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Income Tax Benefit (Provision). Income tax benefit (provision) was as follows (in thousands):

Income Tax Benefit (Provision)
Nine Months  Ended March 31, 2013			Percentage of Net  Revenues			Nine Months Ended April  1, 2012		Percentage of Net  Revenues		Increase/ (Decrease)			Percentage Points  Change
$	(3,354	)		(1	)%	$	2,292		—	$	(5,646	)		(1	)%

Income tax benefit (provision) for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 decreased by approximately $5.6 million. Our effective tax (expense) benefit rate was approximately (128)% and 16% for the nine months ended March 31, 2013 and April 1, 2012, respectively. The increase in our effective tax expense rate for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 was primarily due to the continuing impact of our previously recorded U.S. deferred tax asset valuation allowance, changes in the mix of earnings in international versus U.S. tax jurisdictions, and the use of an actual year-to-date effective tax rate for the nine months ended March 31, 2013 versus an annualized effective tax rate. We continue to generate the majority of our earnings in countries other than the U.S. including India, Ireland, and Isle of Man, where such earnings are generally subject to significantly lower tax rates than the U.S. We expect this trend to continue in the future. We have made no provision for U.S. income taxes or foreign withholding taxes on the earnings of our foreign subsidiaries as these amounts are intended to be indefinitely reinvested in operations outside the U.S.

Critical Accounting Policies

The preparation of our 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 at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties.

Changes in judgments and uncertainties relating to these estimates 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. We believe that the critical accounting policies that are the most significant for purposes of fully understanding and evaluating our reported financial results include the following:

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 collectability is reasonably assured. We make certain sales through two tier distribution channels using selected distributors and Master Value Added Resellers (collectively, Distributors). These Distributors are subject to distribution agreements that may be terminated upon written notice by either party and that generally provide privileges to return a portion of inventory and to participate in price protection and cooperative marketing programs that limit our ability to reasonably estimate product returns and the final price of inventory sold to distributors. Accordingly, we recognize revenue on our standard non-OEM specific products sold to our Distributors based on a sell-through model. OEM specific models sold to our Distributors are generally governed under the related OEM agreements rather than under these distribution agreements; accordingly, we generally recognize revenue at the time of shipment for OEM specific products shipped to our Distributors.

In the normal course of business, we enter into certain sales transactions, referred to as multiple-element arrangements, which involve making judgments about allocating the consideration to the various elements of the transactions. The most common type of multiple-element arrangements encountered by the Company involves the sale of certain products with post-contract customer support. Consideration in a multiple-element arrangement is allocated at the inception of the arrangement to all deliverables on the basis of the relative selling price of each deliverable. If available, the selling price for each deliverable is determined using vendor-specific objective evidence (VSOE) of the selling price or third-party evidence (TPE) of the selling price, when applying the relative selling price method. If neither VSOE nor TPE of the selling price exists for a deliverable, we use our best estimate of the selling price for that deliverable. In accounting for multiple-element transactions, judgment must be exercised in identifying the separate elements in a bundled transaction as well as determining the values of these elements. These judgments can impact the amount of revenues, expenses and net income recognized over the term of the contract, as well as the period in which they are recognized.

We also maintain sales related reserves for our sales incentive programs. Based on the specific program criteria, we classify the costs of these incentive programs as a reduction of revenue, a cost of sale, or an operating expense.

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.

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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.

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 two to twelve years. Furthermore, we assess whether our intangible assets and other long-lived assets 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.

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. In assessing goodwill impairment, we have the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if we conclude otherwise, then we are required to perform the first step of the two-step impairment test by comparing 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 not considered impaired; otherwise, goodwill is considered 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. We also have the option to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test. We may resume performing the qualitative assessment in any subsequent period. The annual impairment test is performed during the fourth fiscal quarter. See Note 5 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for additional information.

Although our market capitalization exceeded its book value as of March 31, 2013, our stock price continues to be volatile and thus, it is reasonably possible that our determination that goodwill is not impaired could change in the near term if our market capitalization and estimated control premium decrease below the book value.

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 first reporting period that it becomes more-likely-than-not such tax position will be sustained upon examination. A tax position that meets this more-likely-than-not recognition threshold is recorded at the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Previously recognized income tax positions that fail to meet the recognition threshold in a subsequent period are derecognized in that period. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. We record potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

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.

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 the period that includes the enactment date. A valuation allowance is recorded against any deferred tax assets when, in the judgment of management, it is more likely than not that all of or part of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all positive and negative

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evidence, including recent financial performance, scheduled reversals of temporary differences, projected future taxable income, availability of taxable income in carryback periods and tax planning strategies. Based on a review of such information, we believe that insufficient positive evidence exists to support that we will more likely than not be able to realize the majority of our U.S. federal and state deferred tax assets. Therefore, we have recorded a valuation allowance against our deferred tax assets to the extent that they are not expected to be recoverable against taxes previously paid in available carryback periods.

Stock-Based Compensation. We account for our stock-based awards to employees and non-employees using the fair value method. Although we grant unvested stock awards, cash-settled stock unit awards and stock options, the majority of the awards granted and stock based compensation recognized consists of unvested stock awards. The fair value of each unvested stock award is determined based on the closing price of our common stock on the grant date. The fair value of each cash-settled unit award is determined based on the closing price of our common stock upon vesting, and therefore, is subject to remeasurement at each reporting period until the award is vested. For stock options, the fair value of each option is based on several criteria including, but not limited to, the valuation model used and associated input factors including principally stock price volatility and, to a lesser extent, expected term, dividend rate, and risk free interest rate. The input factors used in the valuation model are based on subjective future expectations combined with management judgment. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for each separate vesting tranche of the award. A forfeiture rate assumption is applied in determining the fair value of our stock-based compensation related to both unvested stock awards and stock options based on future expectations and may be revised as significant differences become known. In addition, a probability assessment is applied to unvested performance-based stock awards. These adjustments may materially impact our results of operations in the period such changes are made.

Litigation Costs. We record a charge equal to at least the minimum estimated liability for a loss contingency or litigation settlement when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Liabilities related to litigation settlements with multiple elements are recorded based on the fair value of each element. Legal and other litigation related costs are recognized as the services are provided. We record insurance and other indemnity recoveries for litigation costs when both of the following 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. See Note 8 in the accompanying notes to condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Recently Adopted and Recently Issued Accounting Standards

See Note 1 in the accompanying notes to condensed consolidated financial statements included in Part I, Item I of this Form 10-Q for a description of the recently adopted accounting standards.

Liquidity and Capital Resources

Our principal sources of liquidity consist of our existing cash balances and investments, as well as funds expected to be generated from operations. At March 31, 2013, we had approximately $158.9 million in working capital and approximately $91.6 million in cash and cash equivalents and current investments as compared to approximately $260.6 million in working capital and approximately $229.9 million in cash and cash equivalents and current investments at July 1, 2012. 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 of marketable certificates of deposit as of March 31, 2013 and we did not hold any auction rate securities or direct investments in mortgage-backed securities.

Our cash balances and investments are held in numerous locations throughout the world. As of March 31, 2013, our international subsidiaries held approximately 25% of our total cash, cash equivalents and investment securities, which will be used to repay obligations to U.S. affiliate entities that arise in the normal course of business and would not result in incremental U.S. tax liabilities when paid.

Our accounts receivable are primarily with large multinational OEM customers and denominated in U.S. dollars. At March 31, 2013, approximately 16% of our accounts receivable are related to customers with a European billing address. However, we do not believe that the ongoing European Sovereign debt crisis will materially impact the collectability of our accounts receivable or adversely affect our financial position or liquidity.

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Cash Flows

The following table summarizes our cash flows:

	Nine Months Ended
	March 31, 2013			April 1, 2012
	(In thousands)
Net cash (used in) provided by:
Operating activities	$	(7,396	)	$	48,874
Investing activities		(89,590	)		(17,301	)
Financing activities		(13,151	)		(19,521	)
Effect of foreign currency translation on cash and cash equivalents		160			(274	)
(Decrease) increase in cash and cash equivalents	$	(109,977	)	$	11,778

Operating Activities

Cash used in operating activities was approximately $7.4 million during the nine months ended March 31, 2013 compared to cash provided by operating activities of approximately $48.9 million during the nine months ended April 1, 2012. The decrease in cash flows from operating activities was primarily due to a payment of $58.0 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012, of which approximately $36.8 million was accrued during fiscal 2012. See Note 8, “Commitments and Contingencies,” in the accompanying notes to condensed consolidated financial statements under the caption, “Litigation” in Part I; Item 1 of this Form 10-Q. The Broadcom payment was partially offset by income tax refunds received of approximately $6.6 million less income taxes paid of approximately $3.3 million. The current period cash used in operating activities resulted from net loss of approximately $0.7 million, changes in operating assets and liabilities including a decrease in accounts payable, accrued liabilities and other liabilities of approximately $44.2 million due primarily to the Broadcom payment, an increase in prepaid expenses, prepaid income taxes and other assets of approximately $12.8 million and an increase in inventories of approximately $3.0 million, offset by an increase in accrued taxes of approximately $3.0 million and non-cash adjustments for amortization of intangible assets of approximately $20.2 million, share-based compensation expense of approximately $16.3 million, and depreciation and amortization of approximately $13.2 million.

Investing Activities

Cash used in investing activities was approximately $89.6 million during the nine months ended March 31, 2013 compared to approximately $17.3 million during the nine months ended April 1, 2012. The current period usage of cash was primarily related to our acquisition of Endace for approximately $107.7 million and purchases of property and equipment of approximately $10.3 million, offset by a net decrease in investments of approximately $28.4 million.

Financing Activities

Cash used in financing activities was approximately $13.2 million during the nine months ended March 31, 2013 compared to approximately $19.5 million during the nine months ended April 1, 2012. The current period usage of cash was primarily due to approximately $11.9 million of purchases of noncontrolling interest in Endace, and payroll tax withholdings on behalf of employees for restricted stock of approximately $3.9 million, partially offset by the proceeds from issuance of common stock under stock plans of approximately $2.6 million.

Prospective Capital Needs

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 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. From June 29, 2009 through March 31, 2013, the Company repurchased approximately 9.0 million shares of its common stock for an aggregate purchase price of approximately $78.4 million at an average purchase price of $8.67 per share under this plan. Our Board of Directors has not set an expiration date for the plan. Therefore, we may repurchase additional shares under this plan from time to time through open market purchases or privately negotiated transactions. It is expected that any future share repurchases will be financed by available cash and cash from operations.

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We 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 product development alignment agreements with our suppliers, customers, and other third parties. 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, capital expenditure requirements and stock repurchasing expenditures for at least the next 12 months although we may also consider external financing sources. We currently do not have any outstanding lines of credit or other borrowings.

We have disclosed outstanding legal proceedings in Note 8 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q, including the consolidated patent infringement lawsuit filed by Broadcom against us. This lawsuit continues to present risks that could have a material adverse effect on our business, financial condition, or results of operations, including loss of patent rights, monetary damages, and injunction against the sale of accused products. We continue to present a vigorous post-trial defense against this on-going lawsuit, and have appealed the trial verdict. On July 3, 2012, we entered into a Settlement Agreement pursuant to which both parties agreed to settle and release certain claims related to the patent infringement litigation. The Settlement Agreement provided for certain amendments to the April 3, 2012 Permanent Injunction, and dismissals of certain allegations of the lawsuit, including portions of the scheduled re-trial. We also received a worldwide limited license to the ‘691 patent, the ‘150 patent, the ‘194 patent and related families for certain fields of use including Fibre Channel applications.

We expect to incur incremental mitigation, product redesign, appeal related expenses during the remainder of fiscal 2013 and fiscal 2014 in the range of $11 million to $12 million. In addition, we may be required to participate in certain customer royalty obligations arising under their licensing agreements with Broadcom in the range of $1 million to $8 million during the remainder of fiscal 2013 and fiscal 2014. Such costs would reduce gross margins in the periods accrued. See “Product Redesign Activities and Potential Royalty Obligations” in Part I, Item 2 of this Form 10-Q. Also see “Third party claims of intellectual property infringement could adversely affect our business” and “We are dependent on sole source and limited source third party suppliers and EMS providers for our products” in Part II, Item 1A — Risk Factors, of this Form 10-Q for a description of certain risks relating to the litigation with Broadcom that could impact our liquidity and prospective capital needs.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of April 1, 2012, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We issue letters of credit or bank guarantees in the normal course of business as required by certain vendors. As of March 31, 2013, we had approximately $0.7 million in outstanding letters of credit and bank guarantees.

Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations as of April 1, 2012, 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)
	Total		Remaining 2013		2014		2015		2016		2017		Thereafter
Leases (1)	$	21,303	$	1,594	$	5,580	$	4,935	$	4,177	$	2,194	$	2,823
Purchase commitments (2)		44,694		44,694		—		—		—		—		—
Other commitments (3)		17,288		3,907		8,731		3,001		942		707		—
Total	$	83,285	$	50,195	$	14,311	$	7,936	$	5,119	$	2,901	$	2,823

(1) Lease payments include common area maintenance (CAM) charges.

(2) Purchase commitments represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services as of March 31, 2013. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

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(3) Other commitments consist primarily of commitments for software license fees of approximately $8.9 million and non-recurring engineering services of approximately $6.9 million.

(4) Excludes approximately $30.5 million of liabilities for uncertain tax positions for which we cannot make a reasonably reliable estimate of the period of payment. See Note 11 in the accompanying notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

(5) The expected timing of payments for the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. Amounts disclosed as contingent or milestone based obligations depend on the achievement of the milestones or the occurrence of the contingent events and can vary significantly.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We do not believe our cash and cash equivalents are subject to significant interest rate risk due to their short terms to maturity. As of March 31, 2013, the carrying value of our cash and cash equivalents approximated fair value.

As of March 31, 2013, our investment portfolio consisted primarily of fixed income securities of approximately $0.5 million. We have the positive intent and ability to hold these securities to maturity. We did not hold any auction rate securities or direct investments in mortgage-backed securities as of March 31, 2013.

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 March 31, 2013, 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.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to generally be minimal. Currently, sales to customers and arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars (USD), and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the USD relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the USD relative to other currencies could result in our suppliers raising their prices to continue doing business with us. We are also exposed to foreign exchange rate fluctuations for a portion of our expenses that are denominated in currencies other than the USD, primarily with respect to our operations in India and New Zealand, for which we do not maintain an active hedging program. As a result, fluctuations in foreign exchange rates have affected, and could continue to affect, our business and results of operations.

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.

On February 26, 2013, we acquired Endace Limited (Endace) and, as a result, we have begun integrating the processes, systems and controls relating to Endace into our existing system of internal control over financial reporting in accordance with our integration plans. Except for the processes, systems and controls relating to the integration of Endace, there have not been any changes in our internal control over financial reporting during the third quarter ended March 31, 2013 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

The information set forth under Note 8 in the notes to the condensed consolidated financial statements under the caption “Litigation” included in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

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Item 1A. Risk Factors

We may fail to realize the anticipated benefits from our acquisition of Endace Limited, future acquisitions, and strategic investments.

The acquisition of Endace Limited (Endace) involves numerous risks and uncertainties, including, but not limited to:

• Different geographic locations of the principal operations of Emulex and Endace could create and difficulties relating to the management of the former Endace operations and personnel in New Zealand and other countries;

• Difficulties with integrating acquired technology into our existing technology and/or product roadmaps in a timely and efficient manner to fully realize the benefits of this acquisition.

As a result of these and other difficulties, we may not realize the anticipated benefits of the acquisition and may encounter difficulties that could have a material adverse effect on our business and operating results or cause expectations with respect to Endace specifically, and the combined companies to be inaccurate.

Our future performance will depend in part on our ability to realize the anticipated benefits from acquisitions and strategic investments, including Endace and whether we can successfully integrate, operate or partner with these businesses with our existing operations in an effective and efficient manner. Integrating our operations with acquired businesses is a complex, time-consuming and expensive process and involves 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 acquisitions and/or strategic investments include, but are not limited to:

• The difficulty in integrating any newly acquired businesses and operations in an efficient and effective manner;

• The risk of diverting our resources and the attention of our senior management from the operations of our existing business;

• Additional demands on management related to the increase in the size and scope of our company following the acquisition;

• Complexities in creating and maintaining uniform standards, controls, procedures, and policies

• Difficulties in combining corporate cultures;

• Difficulties in the assimilation and retention of key employees;

• The risks of potential disputes concerning indemnities and other obligations that could result in substantial costs;

• 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;

• Costs and expenses associated with any undisclosed or potential liabilities of acquired businesses;

• Delays, difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, business information 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 challenges in achieving strategic objectives, cost savings and other benefits expected from any acquisitions;

• The risk that the financial 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;

• 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; and

• Difficulties in maintaining relationships with present and potential customers, distributors and suppliers of the acquired business.

Furthermore, to complete future acquisitions or strategic investments, we may need to 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.

On occasion, we receive communications from third parties alleging patent infringement, and there is always the chance that third parties may assert infringement claims against us. We are entering technology markets where we have not

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participated before, where there are entrenched incumbents, and where our entrance into the market is disruptive and may cause such incumbents to assert infringement claims in order to deter our competition. Any such claims, with or without merit, could result in costly litigation, cause product shipment delays, result in temporary restraining orders or injunctions concerning the sale of products in certain countries, require the redesign of products to design around asserted claims, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available on commercially reasonable terms. Any such claims, with or without merit, may also cause customers to be deterred from purchasing products from us. We have obtained contractual commitments from our suppliers concerning the defense and indemnification of claims relating to certain technology provided by such suppliers, but we cannot be certain that such defense and indemnification obligations will be promptly honored by such suppliers. 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. We have participated in technology standardization activities which provide for licenses being available on reasonable and non-discriminatory terms, but we cannot be certain that such licenses will actually and promptly be made available to us. 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 Corporation (Broadcom) filed a consolidated patent infringement suit against us during fiscal 2010. After a nearly three week trial that ended October 6, 2011, the jury reached a partial verdict involving two out of the six patents. The Court determined that one of the patents (U.S. Patent 7,058,150) [the ‘150 patent] had been infringed by us, and the jury rendered an advisory verdict on October 12, 2011 to the Court that it is not invalid, and awarded approximately $0.4 million in damages with respect to that patent. The jury reached a unanimous verdict of non-infringement on another patent relating to Emulex Fibre Channel switch products. A mistrial was declared concerning the remaining four patents for which no unanimous verdict was reached. On December 15, 2011, the Court issued judgments as a matter of law (JMOL) that the two patents, on which the jury had rendered advisory verdicts, were not invalid. On December 16, 2011 the Court issued an additional JMOL that one of the patents (U.S. Patent 7,471,691) [the‘691 patent] had been infringed by us. See Note 8, “Commitments and Contingencies,” in the accompanying notes to condensed consolidated financial statements under the caption“Litigation” in Part I, Item 1 of this Form 10-Q. Also see“We are dependent on sole source and limited source third party suppliers and EMS providers for our products”elsewhere in this Item 1A — Risk Factors.

Specific risks related to the on-going Broadcom infringement litigation and Settlement Agreement include:

• Design changes (sometimes referred to as design-arounds) that may be used as alternatives for the two patents for which there have been findings of infringement, may present unforeseen technical problems for implementation or result in significant internal design costs, as well as third party non-recurring engineering costs;

• Total costs related to our product redesign activities may exceed our current expectations.

• Our suppliers, on whom we rely for SerDes changes for chip spins, may require more time than what is available under the sunset periods to complete redesigns of clock and data recovery (CDR) in SerDes modules which would restrict our ability to continue to sell products after the expiration of the sunset periods until redesigned products are available;

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• The sunset periods may not be long enough to permit us, our suppliers, our OEM customers and end users to implement, test, qualify, and certify replacement products containing design changes that eliminate the patent infringement;

• There may be technical resource and equipment availability shortages impeding our ASIC component suppliers from completing chip spins, and our OEM customers and end users from completing testing of redesigned products;

• Our sales and support for products sold outside the United States may be made subject to the 2012 Permanent Injunction, although such sales were previously found to be outside the scope of the suit;

• Our continuing support and sales for products previously provided to customers and end users may be made restricted by the 2012 Permanent Injunction, although technical support is not prohibited by the 2012 Permanent Injunction for products subject to the jury verdict award of damages, or permitted under the sunset period;

• The 2012 Permanent Injunction provisions limiting sunset period sales by when each customer qualified our products and when each customer first submitted its orders to us for products, and provisions requiring written certification by customers, may cause our customers to exclude us from new product opportunities;

• Our customers may approach us and request or demand reimbursements of expenses incurred by them related to the requalification of our products, their obligations to Broadcom under licensing agreements related to appendices of the amended 2012 Permanent Injunction, or other amounts under the indemnification provisions of our supply agreements;

• The 2012 Permanent Injunction royalties may make our costs too high to meet market pricing requirements set by our customers;

• Our July 3, 2012 Settlement Agreement with Broadcom requires us to maintain certain records, as well as provide certain written notices and reports, and such activities may cause additional costs and limitations for us not borne by our competitors;

• The terms of any future settlements, beyond the July 3, 2012 Settlement Agreement, that we may reach in the suit brought by Broadcom may be less favorable to us than were settlements in other patent litigation involving companies;

• Broadcom may not assert the patents against our competitors, thus leaving us with a competitive disadvantage relative to future business that may not be borne by our competitors;

• Broadcom may be unwilling to settle the remaining lawsuit with us, beyond the July 3, 2012 Settlement Agreement, for strategic or tactical reasons that we are unable to determine;

• A settlement, beyond the July 3, 2012 Settlement Agreement, in the suit brought by Broadcom may never be reached, and a permanent injunction may be issued and remain in place for the life of the patents in the lawsuit;

• The interpretation of the provisions of the 2012 Permanent Injunction may be unfavorable to us, resulting in part because of the complexity of the business practices used by our customers, including a large quantity of different customer product models, customer platforms, and design configurations, and the complexity of the supply chains, support implementations, and product distribution networks used by our customers, each of which may result in the need for further hearings before the Court;

• Our supply to customers in the United States may be disrupted by the 2012 Permanent Injunction affecting our Ethernet based products that include our BE2 or BE3 chips (collectively referred to as the affected products);

• Our total net revenues may be reduced by our inability to sell the affected products in the United States after any injunction;

• The content of the 2012 Permanent Injunction, and its Appendix, may be modified by the Court in ways that are unfavorable to us;

• The Court may amend the Appendix to the 2012 Permanent Injunction to exclude certain device/customer product combinations;

• The Court may determine that we have not adequately proven the extent of the injuries that may occur to our customers or proven reasons for delays in completing product redesigns and retesting, and therefore, may not modify the amended 2012 Permanent Injunction to provide for a longer time period;

• The re-trial may result in significant additional defense costs, and the outcome for such a re-trial is uncertain, but may include a further injunction and may result in further product redesign activities;

• Broadcom could file additional lawsuits against us, asserting additional claims from the same patents involved in the lawsuit, or additional patents, or file other proceedings with commissions such as the International Trade Commission; and

• Any appeals we make with respect to the determinations made by the jury or the Court may not be successful; any requests for stay of any permanent injunction may be denied; and royalties we pay pending an appeal may not be promptly reimbursed to us even if we are successful with any appeal.

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Ongoing lawsuits, such as the action brought by Broadcom, present inherent risks, including 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, including substantial costs and difficulties in implementing design changes and the associated customer re-qualification thereof or maintaining favorable working relationships with our suppliers of SerDes modules; counterclaims, attorneys’ fees, potential liabilities to customers under reimbursement agreements or contractual indemnification provisions, and diversion of management’s attention from other business matters. Such lawsuits and the related risks thereof could have a material adverse effect on our business, financial condition, or results of operations.

Unsolicited takeover proposals, governance change proposals, and proxy contests may be disruptive to our business.

We received an unsolicited takeover proposal in the past from Broadcom (and related proposals to change our governance and board of directors) that resulted in a proxy contest, and there can be no assurance a third party, such as a competitor or activist investor, will not make an unsolicited takeover proposal, propose to change our governance or board of directors, or make other proposals concerning takeovers in the future. The review and consideration of any takeover proposal or proposal to change our governance or board of directors 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, proxy contest or actions by an activist investor 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, proxy contest or actions by an activist investor 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, proxy contests, or actions by an activist investor, and any related costly and time-consuming 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, proxy contest or actions by an activist investor 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 three of our current executive officers, and adopted a Change in Control Retention Plan, in which currently an additional 27 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.

The current macroeconomic environment continues to result in a reduction in information technology spending.

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 weakness in domestic and worldwide economic conditions and related disruptions in world credit and equity markets, as well as the European debt crisis, have resulted in a global downturn in spending on information technology. If the continuing weakness and uncertainty in the global economy result in significant reductions in the demand for our 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 reductions 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 we may need to continue despite any such reductions in demand.

Our business is highly competitive.

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. 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. We currently compete against QLogic Corporation (QLogic), Brocade Communications Systems, Inc. (Brocade) and PMC Sierra, Inc. (PMC Sierra) for our Fibre Channel (FC) products. For Ethernet products, we compete against the leading integrated circuits (IC) vendors including Intel Corporation (Intel), Broadcom, QLogic and Mellanox Technologies, LTD (Mellanox). Our competitors for combined Ethernet and FC products include Brocade and QLogic.

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We expect that our markets will continue to attract new competition. 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 time-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.

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 future revenue growth and profitability. However, the market for converged networking products may not gain broader acceptance and customers may choose alternative technologies that we are not investing in, 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 or no incremental cost to end users. These software only iSCSI solutions compete with our Network Connectivity 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 network product revenues more than we anticipate.

In addition, the market for FC products may shrink as more storage subsystems adopt SAS based connectivity for external and direct attached storage devices. Furthermore, FCoE may not be adopted at the rate or extent that we anticipate, and adoption of FCoE is largely dependent on third-party vendors and end users. While the usage of FCoE has increased since its first specifications were completed in 2009, continued adoption of FCoE is dependent on continued collaboration and cooperation among information technology solutions providers.

Since our products are sold as parts of integrated systems, demand for our products is driven by the demand for such integrated systems, including other companies’ complementary products. A lack of demand for these 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, or attracts more competitors than we expect, or if our products do not achieve continued market acceptance, our business, results of operations, and financial condition could be materially adversely affected.

A significant portion of our revenue is generated from sales to a limited number of customers, none of which are subject to exclusive or long-term contracts.

We rely almost exclusively on OEMs and sales through distribution channels for our revenue. For the three and nine months ended March 31, 2013, respectively, we derived approximately 86% and 89% of our net revenues from sales to OEM customers and approximately 12% and 10% from sales through distribution. Furthermore, as some of our sales through distribution channels consist of OEM products, OEM customers effectively generated approximately 90% and 93% of our revenue for the three and nine months ended March 31, 2013, respectively. Moreover, 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 79% and 82% of our net revenues for the three and nine months ended March 31, 2013, respectively. If we are unable to retain our current OEM and distributor customers, recruit additional or replacement customers, or timely collect amounts due from our customers, or if demand from our customers is reduced due to difficulties in their ability to acquire components or other products such as microprocessors, disk drives, switches and optical modules used in conjunction with our products or in the deployments of their products, our business, results of operations, and financial condition could be materially adversely affected.

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

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Although we continue to expand our base of customers, we believe our revenues in the future will still be 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, or if we are unable to collect our accounts receivables from our customers, our business, results of operations, and financial condition could be materially adversely affected.

Our operating results are difficult to forecast resulting in significant fluctuations from quarter to quarter.

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 in any given quarter by many factors, including, but not limited to:

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

• Changes in the sales and deployment cycles for our products 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, including the timing of server chipset refresh cycles related to new server chipsets, such as Intel Corporation’s Romley chipset, by us, our OEM customers or competitors;

• Market share losses or difficulty in gaining incremental market share;

• Reduced demand from our customers if there is a shortage of, or difficulties in, acquiring components or other products, such as microprocessors, disk drives, switches, and optical modules, used in conjunction with the deployment of systems containing our products;

• Seasonality;

• Changes in general social and macroeconomic 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;

• Fluctuations in product development, procurement, resource utilization and other operating expenses;

• Inability to realize anticipated efficiencies resulting from increased revenues;

• Difficulties controlling costs, including operating expenses, as revenues increase;

• Inability of our electronics manufacturing service providers (EMS) or suppliers to produce and distribute our products in a timely fashion;

• Difficulties with updates, changes or additions to our information technology systems; and

• Breaches of our network security, including viruses.

Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold, shortages of materials, delays in the introduction of new products and longer than anticipated sales cycles for our products have adversely affected our business, financial condition and results of operations in the past. Despite these factors, we, along with our EMS providers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If our customers purchase less than their forecasted orders or cancel or delay existing purchase orders, there will be higher levels of inventory that face a greater risk of obsolescence. If our customers choose to purchase products in excess of the forecasted amounts or in a different product mix, we could experience inadequate inventory or manufacturing capacity to meet such demand.

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

Our industry is subject to rapid technological change.

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 16 Gb/s and 32 Gb/s Fibre Channel solutions; FCoE; 40GbE and 100GbE solutions; Infiniband; Remote Direct Memory Access (RDMA) over Converged Ethernet (RoCE) and

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low latency Ethernet Solutions; PCI Express 3.0; PCI Express Advanced Switching; 10G base T; 6 Gb/s and 12 Gb/s SAS; and Solid State Drives (SSDs) are in development by many companies and their ultimate acceptance and deployment in the market is uncertain. We are developing some 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 for purchase or license from third parties or will be immaterial to our business.

These developments or enhancements, such as the migration of our next generation products from 65nm to 40nm or lower geometry process technologies, may be late, may have technical problems, may fail to meet customer or market specifications and may not be competitive with other products using alternative technologies that offer comparable performance and functionality. We may be unable to successfully develop additional next generation products, new products or product enhancements. Our next generation products or any new products or product enhancements may not be accepted in new or existing markets. Our business will suffer if we fail to continue to develop and introduce new products or product enhancements in a timely manner or on a cost-effective basis.

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 or may miss the market window. 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.

We may be unsuccessful in our expansion into new segments of the storage and server technology market, and the costs associated with our expansion may be greater than anticipated.

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, or effectively address 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.

Further, although most of our revenues have historically been derived from products based on Fibre Channel technology, we expect that the future growth of our business will be primarily driven through our offerings of converged networking solutions. We believe that our Fibre Channel products and 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.

The timing of migration by our customers toward emerging technologies and newer product platforms varies. 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.

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 potentially have a material adverse effect on our financial condition and results of operations.

Our customers may elect to substitute low-end adapter card solutions and chip only options for use in high-end environments or applications.

We supply FC and Ethernet I/O solutions that target separate high-end, midrange and small to medium sized end users. Historically, the majority of our revenues have come from our high-end enterprise server and storage solutions. If customers elect to utilize midrange HBA and CNAs in higher-end environments or applications, or migrate to chip only solutions faster than we anticipate, our business results of operations and financial condition could be negatively affected.

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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. To the extent that growth in storage device unit demand slows or decreases, our business, financial condition and results of operations may be materially adversely affected.

Our average unit selling prices may decrease at a faster rate than we are able to realize cost reductions in our products.

We continue to experience downward pressure on the average unit selling prices of our products. 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 materially decline. 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 were to deteriorate. Moreover, if the manufactured cost of our products were to increase due to inflation or other factors and we are unable to pass along such increase in our costs to our customers, our gross margins and financial performance could be materially adversely affected.

Our international business activities subject us to increased business risks.

For the three and nine months ended March 31, 2013, respectively, sales in Asia Pacific accounted for approximately 56% and 60% of our total net revenues, sales in the United States accounted for approximately 26% and 25% of our total net revenues, and sales in Europe, Middle East, Africa and the rest of the world accounted for approximately 18% and 15% 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 based on billed-to address may not be reflective of the geographic mix of end-user demand or installations. Since the majority of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets.

In addition, as we continue to expand our international operations and with our recent acquisition of Endace, an increasing amount of our expenses are incurred in currencies other than U.S. dollars, including the India Rupee and New Zealand Dollar. Therefore, we are required from time to time to convert currencies to meet our expense obligations for such international operations.

Although we generally purchase our inventory in U.S. dollars, our suppliers also increasingly located outside of the U.S., and a significant portion of our products are produced at our EMS providers’ production facilities in China, Thailand, and New Zealand.

As a result, we are subject to numerous risks inherent in international operations. Our international business activities could be affected, limited or disrupted by a variety of factors, including, but not limited to:

• Fluctuations in freight costs and potential disruptions in the transportation infrastructure for our products and components;

• Longer accounts receivable payment cycles;

• Increased travel, infrastructure, accounting, and legal compliance costs associated with multiple international locations;

• Difficulty in locating, hiring and retaining personnel with requisite skill sets and knowledge;

• Difficulty maintaining management oversight and control of remote locations;

• Changes in the value of local currencies relative to the U.S. dollar and other functional currencies;

• Costs and risks of localizing products for international countries;

• Import and export restrictions;

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• Limitations on the amount and nature of foreign investment, including restrictions on the structure and/or permissible forms of investment;

• Imposition of or changes in governmental controls, taxes, tariffs, trade restrictions, and regulatory requirements to our current or future operations;

• 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;

• Taxation in multiple jurisdictions;

• Bureaucratic intrusions and delays, government corruption, political instability, war, and/or terrorism; and

• 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.

We may experience delays in our product development cycle and the introduction of new products.

We have experienced delays in product development in the past and may experience similar delays in the future. Such delays may result from numerous factors, which 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 or lengthy redevelopment efforts to make design changes resulting from unintentional intellectual product infringement and related injunctions;

• Unanticipated engineering or manufacturing complexity, including complexity arising 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.

We expect to continue to engage in product development alignment activities with customers, companies we have investments in or receivables from, and other third parties. These product development alignment activities can magnify several risks for us, including the loss of control over development activities and the timing of product availability. Accordingly, we face increased risk that such product development alignment activities will result in products that are not commercially successful or that are not available in a timely fashion.

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.

We are dependent on sole source and limited source third party suppliers and EMS providers for our products.

We rely on third party suppliers for components and the manufacture of our products. A number of these components and products are only available from a single or limited number of suppliers. We also purchase certain components and products from single or limited suppliers and EMS providers to drive volume discounts. As a result, we have experienced delays or difficulty in securing components and finished goods in the past, as well as additional costs related to such issues. Delays or difficulty in securing components or finished goods at reasonable cost may be caused by numerous factors including, but not limited to:

• Natural disasters, such as the significant flooding in Thailand in October 2011;

• 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;

• Increases in manufacturing costs due to lower volumes or more complex manufacturing process;

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• Sole sourcing of 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;

• Market shortages;

• Changes in business strategies of our suppliers and EMS providers;

• Financial stability and viability of our suppliers and EMS providers;

• 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;

• Disruption in shipping channels;

• Labor shortages or labor strikes at our suppliers or EMS providers;

• Intellectual property controversies; and

• Difficulties associated with international operations.

We utilize third-party EMS providers located inside and outside the United States to manufacture and test the majority of our products. These EMS providers also procure and manage most of the components used in our board and box level products. As a result of our reliance on third-party EMS providers, we may not be able to directly control product delivery schedules and the quality of our products which could have a material adverse effect on our business, results of operations, and financial condition. If our EMS providers are unable to respond in a timely fashion to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand, resulting in lost revenues. Alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our EMS providers. We regularly provide rolling forecasts of our requirements to our EMS providers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our EMS providers may result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our EMS providers that were in excess of our requirements, and we have previously recognized charges and expenses related to such excess material. We expect that we will continue to incur such costs in the future.

We also purchase ASICs and field-programmable gate arrays (FPGAs) from sole source suppliers, including LSI Corporation, Marvell Technology Group Ltd., Intel Corporation, Renesas Electronics America Inc., Toshiba Corporation, Altera Corporation, and Xilinx Inc., who in turn rely on a limited number of suppliers and foundries to manufacture the ASICs and FPGAs. This creates risks in assuring the availability of such ASICs and FPGAs. While we have multiple ASIC suppliers, we sole source each of our ASICs and FPGAs, and we use the same supplier for more than one of our ASICs and FPGAs. The inability of the Company or our EMS providers to obtain these ASICs and FPGAs in sufficient quantities or in the desired time periods could delay the production and delivery of our products which, in turn, could result in lost revenue due to customer cancellations and have a material adverse effect on our business, results of operations, and financial condition.

The use of third party ASIC suppliers also creates risks relating to intellectual property controversies including the possible need to redesign ASICs provided by such ASIC component supplier in response to such controversies. For example, on September 14, 2009, Broadcom Corporation filed two separate patent infringement lawsuits against the Company in the U.S. District Court in the Central District of California that were subsequently amended and consolidated. The consolidated lawsuit includes claims related to the use of multiple lanes of phase interpolators, clock and data recovery (CDR) circuits and other circuitry used to deserialize signals in SerDes modules included within an ASIC supplied by third party ASIC suppliers. See Note 8 in the accompanying notes to condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q. Also see“Third party claims of intellectual property infringement could adversely affect our business” elsewhere in this Item 1A — Risk Factors.

Our intellectual property protections may be inadequate.

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.

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

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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, 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.

We may be unable to attract, motivate or retain key managerial and technical personnel.

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 products and customers. Competition for such highly skilled employees is intense in the communities in which we operate, as well as our industry, 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 we may incur costs relating to their departure. Also, many of these key managerial and technical personnel receive stock-based compensation incentives 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-based compensation incentives, 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 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 of technology 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 continue to fluctuate in the future. For example, during calendar year 2012 through March 31, 2013, the closing sales price of our common stock ranged from a low of $6.03 per share to a high of $11.01 per share. Factors that could have a significant impact on the market price of our stock include, but are not limited to, the following:

• Actual or alleged intellectual property infringement;

• Quarterly variations in customer demand and operating results;

• The gain or loss of significant customers or design wins;

• Pricing pressures;

• General conditions in the computer, storage, or communications markets;

• Events affecting other companies that investors deem to be comparable to us;

• Announcements of new products by us or our competitors;

• Offers to buy us or a competitor for a premium over recent trading prices;

• Changes in analysts’ earnings estimates;

• Changes in analyst recommendations, price targets, or other parameters that may not be related to earnings estimates;

• Rumors or dissemination of false information; and

• Short selling of our common stock.

In addition, a 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.

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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 8 in the accompanying notes to condensed consolidated financial statements under the caption “Litigation” in Part I, Item 1 of this Form 10-Q, 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.

Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. See “Critical Accounting Policies” contained in Part I, Item 2 of this Form 10-Q.

The final determination of our income tax liability may be materially different from our income tax provisions and accruals.

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file.

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 the allocation of income and expenses related to cost sharing arrangements, including adjustments related to changes in our corporate structure, acquisitions or tax law changes;

• Tax effects of increases in nondeductible compensation;

• Changes in transfer pricing regulations;

• 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;

• 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;

• Unfavorable results from income tax audits; and

• Expiration or lapses of federal and state research credits.

We have adopted transfer-pricing procedures between our affiliated entities. Our procedures call for the licensing of intellectual property, the provision of services, and the sale of products from one affiliate to another at prices that we believe are equivalent to an arm’s length negotiated price. If the U.S. Internal Revenue Service (IRS) or the taxing authorities of any other jurisdiction were to successfully challenge our transfer pricing practices resulting in adjustments for prior or future tax years, we could become subject to higher taxes and our earnings would be adversely affected. Any redetermination of income allocations or modification of transfer pricing laws could result in an income tax assessment on the portion of income deemed to be derived from the U.S. or other taxing jurisdictions.

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. Significant judgment is required to determine the recognition and measurement of tax liabilities 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 IRS and other foreign, state and local tax authorities. We are currently under audit by the IRS for fiscal years 2008 and 2009 and an amended return for fiscal 2007, and by the California Franchise Tax Board 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.

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We may not realize the full benefits of the New Zealand research and development grants.

We are entitled to reimbursement of certain New Zealand based research and development costs through various grant programs offered by the New Zealand government that were assumed as part of our acquisition of Endace. The receipt and amount of funds under these programs are subject to our satisfaction of certain terms and conditions. As of March 31, 2013, Endace has received an aggregate of approximately $4.3 million in credits to research and development expenses and approximately $1.4 million in credits related to capital expenditures pursuant to these grants. If we do not to satisfy the terms and conditions of any of these grant programs, expenses incurred in respect of the relevant research and development projects may not be approved for reimbursement, we may be required to return amounts previously paid to us under such grant programs, and further grants may not be available to us in the future.

Changes in our business model to separately charge for software may not result in expected revenue increases.

We recently began charging separate license fees for software associated with our product offerings. The success of this strategy to generate software revenues is subject to numerous risks, including:

• We may be unable 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.

While revenues related to such software activities recognized during the nine months ended March 31, 2013 have not been significant, any failure to successfully implement this new strategy could have an adverse effect on our results of operations in the future.

Our corporate offices, principal product development facilities, EMS providers, suppliers and customers are located in regions that are subject to earthquakes and other natural disasters.

Our California facilities, which include 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. In addition, natural disasters such as hurricanes, tsunamis, flooding, and earthquakes, such as the flooding in Thailand in October 2011 and the earthquake off the coast of Japan and the resulting tsunami in March 2011, could disrupt manufacturing operations of our EMS providers, component suppliers and customers or the downstream suppliers that are located in such impacted areas, resulting in lost revenue opportunities in the near term and/or long term.

We currently do not carry earthquake or flood insurance. However, we do carry various other lines of insurance that may or may not be adequate to protect our business in the case of a natural disaster.

Our certificate of incorporation and the related provisions under Delaware law could adversely affect the performance of our stock.

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 or 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.

We may be subject to theft or misuse of our electronic data, which could result in third-party claims and harm our business and results of operations.

We may experience attempts by others that try to gain unauthorized access through the Internet to our information technology systems, such as when they masquerade as authorized users or surreptitiously introduce software. These attempts, which might be the result of industrial or other espionage, or actions by hackers seeking to harm us, our products, or our end users. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and

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other confidential business information as a result of such cyber threats could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in research and development and marketing could be reduced; and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Any such event could have a material adverse effect on our business, results of operations, and financial condition.

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 Over Financial Reporting (ICOFR) under the Sarbanes-Oxley Act of 2002. If our ICOFR 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, or take other actions that will divert significant financial and managerial resources, as well as subject us to fines or other government enforcement actions. Furthermore, the price of our stock could be adversely affected.

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 the future for various purposes, including:

• Acquisitions of or strategic investments in complementary businesses or technologies;

• International expansion;

• Development of new products or services;

• Unanticipated competitive pressures; and

• Unexpected tax or litigation costs and settlements.

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.

Changes in laws, regulations, and financial accounting standards may affect our reported results of operations.

As our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, SEC and NYSE, have implemented requirements and regulations and continue developing additional regulations and requirements in response to corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, such as the increased use of fair value measures, proposed changes to revenue recognition, lease accounting, financial instruments and other accounting standards, and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (IFRS), could have a significant effect on our reported financial results or the way we conduct our business. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue and expense recognition, could cause us to defer revenue recognition or accelerate the timing of expense recognition, which would adversely affect our reported financial results, and could have an adverse effect on our stock price.

As new and modified laws, regulations, and standards are subject to varying interpretations due in part to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

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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 March 31, 2013, the Company has repurchased approximately 9.0 million shares of its common stock for an aggregate purchase price of approximately $78.4 million at an average purchase price of $8.67 per share under this plan. We may repurchase additional shares under this plan 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

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans Or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs
December 31, 2012 — January 27, 2013		—		—		—	$	21,619,430
January 28, 2013 — February 24, 2013		—		—		—	$	21,619,430
February 25, 2013 — March 31, 2013		—		—		—	$	21,619,430
Total		—		—		—	$	21,619,430

Sales of Unregistered Securities

There were no sales of unregistered securities for the three months ended March 31, 2013.

Item 4. Mine Safety Disclosures

Not applicable.

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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 3.2 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	Letter agreement, dated March 27, 2013, by and among Elliott Associates, L.P., Elliott International, L.P., Elliott International Capital Advisors Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-k filed on April 1, 2013)
Exhibit 10.2	Form Performance Cash Settled Unit Award Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.3	Form Cash-Settled Restricted Stock Unit Award Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.4	Form of Amended and Restated Appendix to Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Non-Qualified Stock Option Agreement, Incentive Stock Option Agreement, Cash-Settled Restricted Stock Unit Award Agreement, and Performance Stock Unit Award Agreement for Change in Control Retention Plan Participants or Employees Covered by a Key Employee Retention Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.5	Form of Amended and Restated Appendix to Restricted Stock Unit Award Agreement for Non-U.S. Grantees under the Amended and Restated 2005 Equity Incentive Plan
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	Second Amended Permanent Injunction, dated July 18, 2012, relating to Broadcom Corporation v. Emulex Corporation and related counterclaims (public version as redacted at District Court).
Exhibit 99.2	Emulex Corporation Corporate Governance Guidelines, as Amended.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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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: May 10, 2013

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	Letter agreement, dated March 27, 2013, by and among Elliott Associates, L.P., Elliott International, L.P., Elliott International Capital Advisors Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-k filed on April 1, 2013)
Exhibit 10.2	Form Performance Cash Settled Unit Award Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.3	Form Cash-Settled Restricted Stock Unit Award Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.4	Form of Amended and Restated Appendix to Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Non-Qualified Stock Option Agreement, Incentive Stock Option Agreement, Cash-Settled Restricted Stock Unit Award Agreement, and Performance Stock Unit Award Agreement for Change in Control Retention Plan Participants or Employees Covered by a Key Employee Retention Agreement under the Amended and Restated 2005 Equity Incentive Plan
Exhibit 10.5	Form of Amended and Restated Appendix to Restricted Stock Unit Award Agreement for Non-U.S. Grantees under the Amended and Restated 2005 Equity Incentive Plan
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	Second Amended Permanent Injunction, dated July 18, 2012, relating to Broadcom Corporation v. Emulex Corporation and related counterclaims (public version as redacted at District Court).
Exhibit 99.2	Emulex Corporation Corporate Governance Guidelines, as Amended.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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