Executive Overview

Emulex is a global provider of a broad range of enterprise-class connectivity solutions for servers, networks and storage devices within the data center. The world's leading server and storage Original Equipment Manufacturers (OEMs) depend on our broad range of products to help build high performance, highly reliable, and scalable Fibre Channel Storage Area Networks (SAN) and Ethernet Converged Networking solutions.

Our Company operates within a single business segment that has two primary market-focused product lines: Network Connectivity Products (NCP) and Storage Connectivity Products (SCP). Customers in the NCP market use our industry standard Fibre Channel and Ethernet solutions to 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), 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 products 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). Our Ethernet products include Universal Local Area Network on Motherboard application specific integrated circuits (ULOMs), OneConnect ® Universal Converged Network Adapters (UCNAs), and custom form factor solutions for OEM blade servers that enable high performance, scalable networks and convergence. Our Fibre Channel based products include Fibre Channel application specific integrated circuits (ASICs), LightPulse® Host Bus Adaptors (HBAs), and custom form factor solutions for OEM blade servers.

SCP includes our InSpeed®, switch-on-a-chip (SOC) or backend connectivity, bridge, and router products. SCP are deployed inside storage arrays, tape libraries, and other storage appliances, and connect storage controllers to storage capacity, delivering improved performance, reliability, and connectivity. Our products use industry standard protocols including Fibre Channel, Serial Attached Small Computer Interface (SAS), and Serial Advanced Technology Attachment (SATA).

Our third product line, Advanced Technology and Other Products (ATP), primarily consists of Integrated Baseboard Management Controllers (iBMC), OneCommand® Vision products, certain legacy products and other products and services.

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), 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 December 30, 2012, we had a total of 1,059 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.

Pending Business Combination

On December 20, 2012, we issued a formal offer under the terms of New Zealand Takeover Code to acquire Endace Limited (Endace) for cash consideration of 500 pence per share, or approximately £80.7 million (approximately $130.7 million using an exchange rate of 1.62 US Dollars for 1.00 British Pound Sterling) in exchange for 100% of the outstanding equity interests in Endace. The offer period will end at 1p.m., London Time on February 12, 2013. Endace is a network performance management company that provides 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 is 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. Endace's ability to record, visualize and monitor network traffic provides customers with the ability to dynamically optimize application delivery across the infrastructure. The combination of Emulex and Endace's technology is expected to provide customers the solutions to connect, monitor and manage high-performance networks.

Consolidation of Facilities

During fiscal 2011, we commenced the consolidation of certain leased facilities in Colorado and Washington. The consolidation of facilities was completed during the first quarter of fiscal 2012. Total charges related to the facility consolidation and related workforce reductions were approximately $4.2 million, of which $1.1 million was recorded in fiscal 2012 and $3.1 million was recorded in fiscal 2011. The charges consisted primarily of salaries and benefits based on continuous employment of affected employees through the facility closure dates. In fiscal 2012, the charges were comprised of salaries and benefits expense of approximately $0.4 million, acceleration of rent expense of approximately $0.5 million, and other costs of approximately $0.2 million.

Patent Litigation

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 the '150 patent is not invalid, and awarded approximately $0.4 million in damages related 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 on the remaining four patents (including U.S. Patent 6,424,194 [the '194 patent]) for which no unanimous verdict was reached. Subsequent to the trial, the Court issued orders consistent with the advisory verdicts of invalidity, and issued an order that one additional patent (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 Emulex to sell the affected products to existing customers for specific customer devices, subject to limitations relating to when customers had qualified the products and when certain firm orders had been placed. The decision further provided for Emulex to pay a royalty of nine percent on all sales of such products made during the sunset period. The decision also clarified that foreign sales (outside the U.S.) are beyond the scope of the suit. On April 3, 2012, the Court issued a 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. On April 4, 2012, we filed a notice of 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 May 30, 2012, the Court issued an order requiring the parties to submit an appendix, which identities the permitted sunset sales (Appendix), to the April 3, 2012 Permanent Injunction 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, we entered into a Patent License and Release Agreement (Settlement Agreement) with Broadcom pursuant to which both parties agreed to settle and release certain claims related to the patent infringement litigation in exchange for a lump sum payment of $58.0 million. The Settlement Agreement provided for certain amendments to the April 3, 2012 permanent injunction (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. 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 in light of the Settlement Agreement.

During the first quarter of fiscal 2013, we made the $58.0 million payment to Broadcom pursuant to the Settlement Agreement, $36.8 million of which was previously expensed in fiscal 2012. The remaining $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. We recognized approximately $1.0 million and $2.0 million of amortization expense related to such prepaid license fees and sunset period royalty expenses during the three and six months ended December 30, 2012.

We expect to incur incremental mitigation, product redesign and appeal related expenses during fiscal 2013 and fiscal 2014 related to the unsettled infringement findings in the range of $15 million to $20 million. 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. See Note 7 in the accompanying notes to condensed consolidated financial statements under the caption "Litigation" in Part I, Item 1 of this Form 10-Q.

Results of Operations

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



                                             Percentage of Net Revenues                 Percentage of Net Revenues
                                                 Three Months Ended                          Six Months Ended
                                        December 30,             January 1,        December 30,             January 1,
                                            2012                    2012               2012                    2012
Net revenues                                      100 %                  100 %               100 %                  100 %
Cost of sales
Cost of goods sold                                 36                     37                  37                     37
Amortization of core and developed
technology intangible assets                        4                      4                   4                      6
Patent litigation settlement,
damages, sunset period royalties and
license fees                                        1                     -                    1                     -

Total cost of sales                                41                     41                  42                     43

Gross profit                                       59                     59                  58                     57

Operating expenses:
Engineering and development                        33                     29                  33                     33
Selling and marketing                              12                     12                  12                     12
General and administrative                          9                      7                   8                      8
Amortization of other intangible
assets                                              1                      1                   1                      2

Total operating expenses                           55                     49                  54                     55

Operating income                                    4                     10                   4                      2

Non-operating (expense) income, net                -                      -                   -                      -

Income before income taxes                          4                     10                   4                      2

Income tax (benefit) provision                     (1 )                   (2 )                 2                     (1 )

Net income                                          5 %                   12 %                 2 %                    3 %

Three months ended December 30, 2012, compared to three months ended January 1, 2012

Net Revenues. Net revenues for the three months ended December 30, 2012, decreased by approximately $6.5 million, or 5%, to approximately $122.1 million, compared to approximately $128.7 million for the three months ended January 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 Product Line

Net revenues by product line were as follows:



                                                                                  Net Revenues by Product Line
                                          Three Months                            Three Months
                                              Ended            Percentage            Ended            Percentage
                                          December  30,          of Net           January  1,           of Net           Increase/          Percentage
(in thousands)                                2012              Revenues              2012             Revenues          (Decrease)           Change
Network Connectivity Products            $        96,132                79 %     $       96,620                75 %     $       (488 )               (1 )%
Storage Connectivity Products                     22,670                18 %             27,583                21 %           (4,913 )              (18 )%
Advanced Technology & Other Products               3,343                 3 %              4,468                 4 %           (1,125 )              (25 )%

Total net revenues                       $       122,145               100 %     $      128,671               100 %     $     (6,526 )               (5 )%

NCP primarily consists of standup HBAs, mezzanine cards, I/O ASICs, ULOMs, and UCNAs. For the three months ended December 30, 2012, Fibre Channel based products accounted for approximately 81% of total NCP revenues, which was comparable to the same period in the prior year. Our NCP revenues for the three months ended December 30, 2012 remained comparable to the three months ended January 1, 2012 but reflect a decrease in units shipped of approximately 7% being offset by an increase in average selling price of approximately 7%.

SCP primarily consists of InSpeed®, SOC or backend connectivity, and bridge and router products. Our SCP revenues decreased by approximately 18% for the three months ended December 30, 2012 compared to the three months ended January 1, 2012. The decrease was primarily due to a decline in backend connectivity product shipments as a result of certain products reaching end of life in fiscal 2012. These products typically had higher selling prices compared to other SCP products, therefore, average selling prices for SCP decreased by approximately 25% compared to the same period in the prior year. Our SCP revenue is expected to continue to be lower in fiscal 2013 compared to fiscal 2012.

ATP primarily consists of iBMCs, OneCommand® Vision software products, certain legacy products and other products and services. For the three months ended December 30, 2012, iBMC based products accounted for the majority of ATP revenues. The decrease in our ATP revenues for the three months ended December 30, 2012 was primarily due to a decrease in units shipped of approximately 27%, combined with a decrease in average selling price of approximately 11%.

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

                                                                         Net Revenues by Major Customers
                                                  Direct Revenues                            Total Direct and Indirect Revenues (2)
                                        Three Months            Three Months              Three Months                      Three Months
                                           Ended                   Ended                      Ended                             Ended
                                        December 30,             January 1,               December 30,                       January 1,
                                            2012                    2012                      2012                              2012
Net revenue percentage (1):
OEM:
EMC                                                -                       -                            11 %                            -
Hewlett-Packard                                    19 %                    22 %                         22 %                            25 %
IBM                                                35 %                    37 %                         38 %                            41 %
Hon Hai Precision Industry Co.,
Ltd. (Foxconn Technology Group)
(3)                                                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 74% of total net revenues for the three months ended December 30, 2012, compared to approximately 73% for the three months ended January 1, 2012. Direct and indirect sales to our top five customers accounted for approximately 83% of total net revenues for the three months ended December 30, 2012, compared to approximately 81% for the three months ended January 1, 2012. Our net revenues from customers can be significantly impacted by changes in our customers' business and their business models.

                         Net Revenues by Sales Channel

Net revenues by sales channel were as follows:



                                                                                 Net Revenues by Sales Channel
                                          Three Months                           Three Months
                                             Ended            Percentage            Ended            Percentage
                                          December 30,          of Net            January 1,           of Net           Increase/          Percentage
(in thousands)                                2012             Revenues              2012             Revenues          (Decrease)           Change
OEM                                      $      110,174                90 %     $      117,925                92 %     $     (7,751 )               (7 )%
Distribution                                     11,896                10 %             10,733                 8 %            1,163                 11 %
Other                                                75                -                    13                -                  62                477 %

Total net revenues                       $      122,145               100 %     $      128,671               100 %     $     (6,526 )               (5 )%

The decrease in OEM net revenues for the three months ended December 30, 2012 compared to the three months ended January 1, 2012 reflected decreases of approximately 24% in ATP revenues, 19% in SCP revenues, and 2% in NCP revenues generated through our OEMs. The increase in distribution net revenues for the three months ended December 30, 2012 compared to the three months ended January 1, 2012 reflected an increase of approximately 9% in NCP 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.

                      Net Revenues by Geographic Territory

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



                                                                             Net Revenues by Geographic Territory
                                          Three Months                           Three Months
                                             Ended            Percentage            Ended            Percentage
                                          December 30,          of Net            January 1,           of Net           Increase/          Percentage
(in thousands)                                2012             Revenues              2012             Revenues          (Decrease)           Change
Asia Pacific                             $       73,610                60 %     $       80,391                63 %     $     (6,781 )               (8 )%
United States                                    31,151                26 %             31,394                24 %             (243 )               (1 )%
Europe, Middle East, and Africa                  15,941                13 %             16,473                13 %             (532 )               (3 )%
Rest of the world                                 1,443                 1 %                413                -               1,030                249 %

Total net revenues                       $      122,145               100 %     $      128,671               100 %     $     (6,526 )               (5 )%

The decrease in net revenues across geographic territories was primarily due to weakness in the server and storage technology markets resulting from continuing concern over the macroeconomic climate. Although Asia Pacific net revenues decreased as a percentage of total net revenues compared to the same period in the prior year, we expect our OEM customers will continue to migrate towards using contract manufacturers that are predominately located in Asia Pacific. However, since we sell to OEMs and distributors who ultimately resell our products to their customers, the geographic mix of our net revenues may not be reflective of the geographic mix of end-user demand or installations.

Gross Profit. Gross profit consists of net revenues less cost of sales. Our gross profit was as follows (in thousands):

                                            Gross Profit
Three Months Ended   Percentage of   Three Months Ended   Percentage of   Increase/     Percentage
December 30, 2012    Net Revenues     January 1, 2012     Net Revenues    (Decrease)   Points Change
     $71,566              59%             $75,423              59%         $(3,857)          -

Cost of sales includes the cost of producing, supporting, and managing our supply of quality finished products. Cost of sales also included approximately $5.1 million of amortization of technology intangible assets for both three months ended December 30, 2012 and January 1, 2012. Approximately $0.2 million and $0.3 million of share-based compensation expenses were included in cost of sales for the three months ended December 30, 2012 and January 1, 2012, respectively. Our gross margin percentage for the three months ended December 30, 2012 remained comparable to the three months ended January 1, 2012 due to favorable product mix that was offset by the sunset period royalty and patent license fee amortization expenses of approximately $1.0 million related to the Settlement Agreement entered into with Broadcom on July 3, 2012. We will continue to recognize patent license fee amortization expenses related to the Settlement Agreement over the remaining patent license term (which expires on . . .