Summary of EMULEX CORP /DE/

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, our representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "in the opinion," "believes," "intends," "expects," "may," "will," "should," "could," "plans," "forecasts," "estimates," "predicts," "projects," "potential," "continue," and similar expressions may be intended to identify forward-looking statements.
Actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations set forth below, and, in particular, those in the section entitled "Risk Factors" in Part II, Item 1A of this Form 10-Q included elsewhere herein. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. In light of the uncertainty of the economy generally, and the technology and storage segments specifically, which have been in a state of uncertainty, it 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. In the past, our results have been significantly impacted by a widespread slowdown in technology investment that pressured the storage networking market that is the mainstay of our business. Recent disruptions in world credit and equity markets and resulting economic uncertainty for our customers may result in a downturn in information technology spending that could adversely affect our revenues and results of operations. As a result of this uncertainty, we are unable to predict with any accuracy what future results might be. Other factors affecting these forward-looking statements include, but are not limited to, the following:
slower than expected growth of the storage networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, or decrease or delays in orders by, any such customers, or the failure of such customers to make payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our or our OEM customers' new or enhanced products; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; the effects of terrorist activities, natural disasters and any resulting political or economic instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; the effect of rapid migration of customers towards newer, lower cost product platforms; possible transitions from board or box level to application specific computer chip solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a decrease in the average unit selling prices or an increase in the manufactured cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; any inadequacy of our intellectual property protection or the potential for third-party claims of infringement; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities; our dependence on international sales and internationally produced products; the effect of acquisitions; impairment charges; changes in tax rates or legislation; changes in accounting standards; and the potential effects of global warming and any resulting regulatory changes on our business. These and other factors which could cause actual results to differ materially from those in the forward-looking statements are discussed elsewhere in this Form 10-Q, in our filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

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Executive Overview
Emulex creates enterprise-class products that connect storage, servers and networks. We are a leading supplier of a broad range of advanced storage networking infrastructure solutions. The world's leading server and storage providers depend on our products to help build high performance, highly reliable, and scalable storage networking solutions. Our products and technologies leverage flexible multi protocol architectures that extend from deep within the storage array to the server edge of storage area networks (SANs). Our storage networking offerings include host bus adapters (HBAs), converged network adapters (CNAs), mezzanine cards for blade servers, embedded storage bridges, routers, and switches, storage Input/Output controllers (IOCs), and data center networking solutions. HBAs, CNAs, and mezzanine cards are the data communication products that enable servers to connect to storage networks by offloading communication processing tasks as information is delivered and sent to the storage network. Embedded storage bridges, routers, and switches and IOCs are deployed inside storage arrays, tape libraries and other storage appliances.
We rely almost exclusively on OEMs and sales through distribution channels for our revenue. Our OEM customers include the world's leading server and storage providers, including Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Fujitsu Siemens Computers (Fujitsu Siemens), Groupe Bull (Bull), Hewlett-Packard Company (Hewlett-Packard), Hitachi Data Systems (HDS), Hitachi Limited (Hitachi), International Business Machines Corporation (IBM), LSI Corporation (LSI), NEC Corporation (NEC), Network Appliance, Inc. (NetAp), Quantum Corporation (Quantum), Sun Microsystems, Inc. (Sun), Unisys Corporation (Unisys), and Xyratex Ltd. (Xyratex). Our distribution partners include Avnet, Inc. (Avnet), Bell Microproducts, Inc. (Bell), Info X Technology Solutions (Info
X), Ingram Micro Inc. (Ingram Micro), Macnica Networks Corporation (Macnica), Netmarks Inc. (Netmarks), Tech Data Corporation (Tech Data), and Tokyo Electron Device Ltd. (TED). The market for storage 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. Our Company operates within a single business segment that has two market focused product lines - Host Server Products (HSP) and Embedded Storage Products (ESP). HSP includes both Fibre Channel based connectivity products and converged Fibre Channel and Ethernet based products. Our Fibre Channel based products include LightPulse® Host Bus Adapters (HBA), custom form factor solutions for Original Equipment Manufacturer (OEM) blade servers and ASICs. These products enable servers to efficiently connect to storage area networks (SANs) by offloading data communication processing tasks from the server as information is delivered and sent to the storage network. Our converged products include LightPulse® Converged Network Adapters (CNAs). CNAs efficiently move data between local area networks (LANs) and SANs using Fibre Channel over Ethernet (FCoE) to map the Fibre Channel protocol directly into the data layer of Ethernet networks. ESP includes our InSpeed®, FibreSpy®, input/output controller (IOC) solutions, embedded bridge and embedded router products. Embedded storage switches, bridges, routers, and IOCs are deployed inside storage arrays, tape libraries, and other storage appliances, delivering improved performance, reliability, and storage connectivity. Our Intelligent Network Products (INP) mainly consist of contract engineering services and our Other category mainly consists of legacy and other products. We plan to continue to invest in research and development, sales and marketing, capital equipment, and facilities in order to achieve our goals. As of September 28, 2008, we had a total of 794 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.

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Global Initiatives
We continued to implement our global initiatives during the latter part of fiscal 2008 by creating an Irish subsidiary to expand our international operations by providing local customer service and support to our customers outside the United States. In addition, Emulex granted an intellectual property license and entered into a research and development cost sharing agreement with a newly formed subsidiary in the Isle of Man. The terms of the license require, among other matters, that the subsidiary make prepayments of expected royalties to Emulex, the first of which was paid before the end of our fiscal 2008 in the amount of approximately $131.0 million, for expected royalties relating to fiscal years 2009 and 2010. The second payment will be paid during fiscal 2009, for expected royalties for fiscal years 2011 through 2014. Subsequent royalty payments or prepayments will be made relating to fiscal year 2015. Additionally, the cost sharing agreement became effective during the fourth quarter of 2008. While these global initiatives are expected to significantly reduce our effective tax rate beginning with fiscal year 2010, the first prepayment and cost sharing agreement expenses, including the tax expense recorded in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" (FIN 48), resulted in an incremental tax expense of approximately $58.5 million and increased our effective tax rate to approximately 109% for fiscal 2008. The second prepayment, which is anticipated to be paid during fiscal 2009, is expected to result in an incremental tax expense of approximately $34.4 million and increase our effective tax rate to approximately 77% for fiscal 2009.
Our cash balances and investments are held in numerous locations throughout the world. Once our global initiatives are implemented, the cash and investments held outside of the U.S. are expected to increase, primarily in our Isle of Man subsidiary. Substantially all of the amounts held outside of the U.S. will be available for repatriation at any time, but under current law, repatriated funds would be subject to U.S. federal income taxes, less applicable foreign tax credits.
Results of Operations
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements included elsewhere herein.

                                                    Percentage of Net Revenues
                                                        Three Months Ended
                                                 September 28,      September 30,
                                                     2008               2007

      Net revenues                                     100.0 %             100.0 %
      Cost of sales                                     37.4                42.0

      Gross profit                                      62.6                58.0

      Operating expenses:
      Engineering and development                       31.1                26.7
      Selling and marketing                             13.0                11.0
      General and administrative                         8.4                 7.3
      Amortization of other intangible assets            1.9                 2.3

      Total operating expenses                          54.4                47.3

      Operating income                                   8.2                10.7

      Nonoperating income, net:
      Interest income                                    1.6                 2.8
      Interest expense                                     -                   -
      Other income, net                                  0.3                 0.1

      Total nonoperating income, net                     1.9                 2.9

      Income before income taxes                        10.1                13.6

      Income tax provision                               3.4                 4.9

      Net income                                         6.7 %               8.7 %

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Three months ended September 28, 2008, compared to three months ended September 30, 2007
Net Revenues. Net revenues for the first quarter of fiscal 2009 ended September 28, 2008, decreased by approximately $5.4 million, or 5%, to approximately $111.7 million, compared to approximately $117.1 million for the same quarter of fiscal 2008 ended September 30, 2007.

Net Revenues by Product Line From a product line perspective, the majority of our net revenues were generated from our HSPs for the three months ended September 28, 2008 and September 30, 2007. The following chart details our net revenues by product line for the three months ended September 28, 2008 and September 30, 2007:

                                                                        Net Revenues by Product Line
                                Three Months                            Three Months
                                   Ended             Percentage            Ended             Percentage
                               September 28,           of Net          September 30,           of Net           Increase/         Percentage
(in thousands)                      2008              Revenues              2007              Revenues         (Decrease)           Change

Host Server Products           $     81,203                73 %        $     88,769                76 %         $ (7,566 )             (9 %)
Embedded Storage
Products                             30,364                27 %              27,996                24 %            2,368                8 %
Intelligent Network
Products and Other                      129                 -                   305                 -               (176 )            (58 %)

Total net revenues             $    111,696               100 %        $    117,070               100 %         $ (5,374 )             (5 %)

HSP mainly consists of our Fibre Channel based connectivity products and converged Fibre Channel over Ethernet based products. The decrease in our HSP net revenue for the three month period ended September 28, 2008 compared to the three month period ended September 30, 2007 was mainly due to a decrease of approximately 10% in average selling price partially offset by an increase of approximately 2% in units shipped.
ESP mainly consists of our InSpeed®, FibreSpy®, input/output controller solutions, embedded bridge, and embedded router products. The increase in our ESP net revenue for the three month period ended September 28, 2008 compared to the three month period ended September 30, 2007 was mainly due to an increase in units shipped of approximately 13% partially offset by a decrease in average selling price of approximately 4%.
Our INP mainly consists of contract engineering services and our Other category mainly consists of legacy and other products.

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

                                                                                Net Revenues by Major Customers
                                                             Direct Revenues                      Total Direct and Indirect Revenues (2)
                                                    Three Months         Three Months               Three Months               Three Months
                                                        Ended                Ended                     Ended                      Ended
                                                    September 28,        September 30,             September 28,              September 30,
                                                        2008                 2007                       2008                       2007

Net revenue percentage (1):
OEM:
EMC                                                          -                    -                             13 %                    22 %
Hewlett-Packard                                             16 %                 14 %                           16 %                    15 %
IBM                                                         22 %                 20 %                           29 %                    28 %
Other:
Info X                                                      10 %                 18 %                            -                       -

(1) Amounts less than 10% are not presented.

(2) Customer-specific models purchased or marketed indirectly through distributors, resellers, and other third parties are included with the OEM's revenues in these columns rather than as revenue for the distributors, resellers or other third parties.

Direct sales to our top five customers accounted for approximately 61% of total net revenues for the three months ended September 28, 2008, compared to approximately 63% for the three months ended September 30, 2007. We expect to be similarly concentrated in the future. Our net revenues from our customers can be significantly impacted by changes to our customers' business and their business models.

Net Revenues by Sales Channel From a sales channel perspective, sales generated from OEM customers were approximately 78% of net revenues and sales through distribution were approximately 22% for the three months ended September 28, 2008, compared to approximately 71% and approximately 29%, respectively, for the three months ended September 30, 2007. Net revenues by sales channel were as follows:

                                                                              Net Revenues by Sales Channel

                                  Three Months Ended        Percentage        Three Months Ended        Percentage
                                    September 28,             of Net            September 30,             of Net           Increase/         Percentage
(in thousands)                           2008                Revenues                2007                Revenues         (Decrease)           Change

OEM                               $         87,511                78 %        $         82,565                71 %        $   4,946                6 %
Distribution                                24,118                22 %                  34,362                29 %          (10,244 )            (30 %)
Other                                           67                 -                       143                 -                (76 )            (53 %)

Total net revenues                $        111,696               100 %        $        117,070               100 %        $   5,374               (5 %)

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. The decrease in distribution net revenues for the three months ended September 28, 2008 compared to the three months ended September 30, 2007 was mainly due to an approximately 34% decrease in HSP net revenues partially offset by an approximately 62% increase in ESP net revenues sold through our distribution partners.

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Net Revenues by Geographic Territory For the three months ended September 28, 2008, domestic net revenues decreased by approximately $9.7 million to $39.8 million from $49.5 million in the three months ended September 30, 2007. For the three months ended September 28, 2008, international net revenues (Pacific Rim and Europe and rest of the world) increased by approximately $4.3 million to $71.9 million from $67.6 million in the three months ended September 30, 2007. Our net domestic and international revenues based on billed-to location were as follows:

                                                                      Net Domestic and International Revenues
                                    Three Months                            Three Months
                                       Ended             Percentage            Ended             Percentage
                                   September 28,           of net          September 30,           of Net           Increase/         Percentage
(in thousands)                          2008              Revenues              2007              Revenues         (Decrease)           Change

Domestic                           $     39,799                36 %        $     49,471                42 %         $ (9,672 )            (20 %)
Pacific Rim                              32,474                29 %              31,344                27 %            1,130                4 %
Europe and rest of the world             39,423                35 %              36,255                31 %            3,168                9 %

Total net revenues                 $    111,696               100 %        $    117,070               100 %         $ (5,374 )             (5 %)

We believe the higher growth rate in net international revenue was mainly due to the increase in ESP revenues, which is mainly sourced to international locations. However, as we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations. Gross Profit. Gross profit consists of net revenues less cost of sales. Our gross profit for the three months ended September 28, 2008 and September 30, 2007 were as follows (in thousands):

                                             Gross Profit
   Three Months                          Three Months
Ended September 28,   Percentage of   Ended September 30,   Percentage of   Increase/     Percentage
       2008           Net Revenues           2007           Net Revenues    (Decrease)   Points Change

      $69,952              63%              $67,927              58%          $2,025          5%

Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $4.7 million and $6.4 million of amortization of technology intangible assets for the three months ended September 28, 2008 and September 30, 2007, respectively. The decrease in amortization of technology intangible assets was mainly due to various core and developed technology intangible assets from prior acquisitions being fully amortized. Approximately $3.1 million of impairment charges were recorded in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) during the three months ended September 30, 2007. The impairment charge was related to a developed technology intangible asset from the Aarohi Communications, Inc. acquisition in May 2006. The initial value ascribed to this developed technology intangible asset was based primarily on forecasted revenues from products we no longer plan to place into production. We recorded this impairment charge to reduce the carrying value of this developed technology intangible asset to the estimated fair value of zero. Approximately $0.3 million of share-based compensation expense was included in cost of sales for both the three months ended September 28, 2008 and September 30, 2007. Gross margin also improved during the three months ended September 28, 2008 due to a favorable mix of higher gross margin dual channel product. We anticipate gross margin will trend down over time as faster growing, lower gross margin products such as mezzanine cards for blade servers and embedded storage products become a bigger portion of our business.

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Engineering and Development. Engineering and development expenses consisted primarily of salaries and related expenses for personnel engaged in the design, development, and technical support of our products. These expenses included third-party fees paid to consultants, prototype development expenses, and computer service costs related to supporting computer tools used in the design process. Expenses for the three months ended September 28, 2008 and September 30, 2007 were as follows (in thousands):

                                    Engineering and Development
Three Months Ended   Percentage of   Three Months Ended   Percentage of   Increase/     Percentage
September 28, 2008   Net Revenues    September 30, 2007   Net Revenues    (Decrease)   Points Change

     $34,783              31%             $31,287              27%          $3,496          4%

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