Applied Micro Circuits (AMCC) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to             .

Commission File Number: 000-23193

APPLIED MICRO CIRCUITS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-2586591
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
215 Moffett Park Drive, Sunnyvale, CA	94089
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (408) 542-8600

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  ¨    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	¨	Accelerated filer	x
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 September 30, 2010, 64,511,863 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.

APPLIED MICRO CIRCUITS CORPORATION

INDEX

		Page
Part I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets at September 30, 2010 and March 31, 2010		3
	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2010 and 2009		4
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2010 and 2009		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		39
Part II.OTHER INFORMATION
Item 1.	Legal Proceedings		39
Item 1A.	Risk Factors		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 3.	Defaults Upon Senior Securities		55
Item 4.	(Removed and Reserved)		55
Item 5.	Other Information		56
Item 6.	Exhibits		56
Signatures			57

2

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	September 30, 2010			March 31, 2010
	(unaudited)			(note)
ASSETS
Current assets:
Cash and cash equivalents	$	42,766		$	122,526
Short-term investments available-for-sale		139,802			84,117
Accounts receivable, net		22,612			22,892
Inventories		17,557			15,387
Other current assets		15,948			18,098
Total current assets		238,685			263,020
Property and equipment, net		29,633			25,879
Goodwill		13,739			—
Purchased intangibles, net		33,218			16,850
Other assets		9,130			10,295
Total assets	$	324,405		$	316,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,716		$	20,074
Accrued payroll and related expenses		7,849			4,682
Other accrued liabilities		11,226			9,606
Deferred revenue		1,637			808
Notes payable		580			—
Total current liabilities		42,008			35,170
Commitments and contingencies
Deferred tax liability		656			—
Contingent consideration		2,550			—
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares — 2,000, none issued and outstanding		—			—
Common stock, $0.01 par value:
Authorized shares — 375,000 at September 30, 2010 and March 31, 2010
Issued and outstanding shares — 64,512 at September 30, 2010 and 65,404 at March 31, 2010		645			654
Additional paid-in capital		5,896,970			5,905,050
Accumulated other comprehensive income		3,870			2,430
Accumulated deficit		(5,622,294	)		(5,627,260	)
Total stockholders’ equity		279,191			280,874
Total liabilities and stockholders’ equity	$	324,405		$	316,044

Note: Amounts have been derived from the March 31, 2010 audited consolidated financial statements.

See Accompanying Notes to Condensed Consolidated Financial Statements

3

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010		2009
Net revenues	$	65,953	$	49,232		$	126,763	$	94,284
Cost of revenues		23,435		23,796			45,920		45,971
Gross profit		42,518		25,436			80,843		48,313
Operating expenses:
Research and development		27,339		20,828			53,116		40,242
Selling, general and administrative		13,087		11,991			24,711		22,510
Amortization of purchased intangible assets		1,079		1,005			2,084		2,010
Restructuring charges (recoveries), net		164		(125	)		533		(279	)
Total operating expenses		41,669		33,699			80,444		64,483
Operating income (loss)		849		(8,263	)		399		(16,170	)
Interest income and other-than-temporary impairments, net		2,666		(1,534	)		4,581		(162	)
Other income (expense), net		436		(1,891	)		602		(1,674	)
Income (loss) from continuing operations before income taxes		3,951		(11,688	)		5,582		(18,006	)
Income tax expense (benefit)		376		(3,617	)		616		(7,136	)
Income (loss) from continuing operations		3,575		(8,071	)		4,966		(10,870	)
Income from discontinued operations and gain on sale of Storage Business, net of taxes		—		1,347			—		7,044
Net income (loss)	$	3,575	$	(6,724	)	$	4,966	$	(3,826	)
Basic income (loss) per share:
Income (loss) per share from continuing operations	$	0.05	$	(0.12	)	$	0.08	$	(0.16	)
Income per share from discontinued operations		0.00		0.02			0.00		0.10
Net income (loss) per share	$	0.05	$	(0.10	)	$	0.08	$	(0.06	)
Shares used in calculating basic income (loss) per share		65,752		66,469			65,879		66,270
Diluted income (loss) per share:
Income (loss) per share from continuing operations	$	0.05	$	(0.12	)	$	0.07	$	(0.16	)
Income per share from discontinued operations		0.00		0.02			0.00		0.10
Net income (loss) per share	$	0.05	$	(0.10	)	$	0.07	$	(0.06	)
Shares used in calculating diluted income (loss) per share		68,021		66,469			68,378		66,270

See Accompanying Notes to Condensed Consolidated Financial Statements

4

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended September 30,
	2010			2009
Operating activities:
Net income (loss)	$	4,966		$	(3,826	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation		3,639			3,173
Amortization of purchased intangibles		7,432			8,856
Stock-based compensation expense:
Stock options		2,076			2,090
Restricted stock units		5,745			4,292
Other-than-temporary impairment of marketable securities		—			3,454
Impairment of strategic investment		—			2,000
Tax benefit from other comprehensive income		—			(4,007	)
Capitalization of prior years mask set costs		(1,177	)		—
Net (gain) loss on disposals of property		(320	)		24
Net gain on sale of storage business unit		—			(11,366	)
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable		850			(3,738	)
Inventories		(2,170	)		6,720
Other assets		(1,515	)		(503	)
Accounts payable		321			(4,398	)
Accrued payroll and other accrued liabilities		2,503			(6,365	)
Deferred revenue		186			(1,723	)
Net cash provided by (used for) operating activities		22,536			(5,317	)
Investing activities:
Proceeds from sales and maturities of short-term investments		36,132			42,735
Purchases of short-term investments		(90,012	)		(33,093	)
Purchase of property and equipment		(5,987	)		(3,664	)
Proceeds from sale of property and equipment		345			—
Purchase of strategic equity investment		—			(1,000	)
Proceeds from sale of strategic equity investment		4,991			—
Proceeds from sale of storage business unit		—			21,527
Purchase of a business, net of cash acquired		(31,484	)		—
Net cash (used for) provided by investing activities		(86,015	)		26,505
Financing activities:
Net proceeds from issuances of common stock		4,036			1,767
Repurchases of common stock		(23,112	)		—
Funding of restricted stock units withheld for taxes		(2,361	)		(666	)
Funding of structured stock repurchase agreements		(10,000	)		(21,797	)
Funds received from structured stock repurchase agreements		15,512			12,044
Other		(356	)		(55	)
Net cash used for financing activities		(16,281	)		(8,707	)
Net (decrease) increase in cash and cash equivalents		(79,760	)		12,481
Cash and cash equivalents at the beginning of the period		122,526			99,337
Cash and cash equivalents at the end of the period	$	42,766		$	111,818
Supplementary cash flow disclosures:
Cash paid for income taxes	$	142		$	220

See Accompanying Notes to Condensed Consolidated Financial Statements

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include all the accounts of Applied Micro Circuits Corporation (“AMCC”, “APM”, “AppliedMicro” or the “Company”), its wholly-owned subsidiaries and entities which are variable interest entities (“VIE”) of which the Company is the primary beneficiary. A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its strategic alliances for potential classification as variable interest entities by evaluating the sufficiency of each entity’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses. The Company determined that it is the primary beneficiary of one variable interest entity and has included the accounts of this entity in the condensed consolidated financial statements (see Note 10). All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the unaudited interim condensed consolidated financial statements of the Company included herein have been prepared on a basis consistent with the March 31, 2010 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010. The Company’s results of operations for the three and six months ended September 30, 2010 are not necessarily indicative of future operating results.

As described in Note 9, the Company has classified the financial results of its 3ware storage adapter business as discontinued operations for all periods presented due to the sale of its 3ware storage adapter business to LSI Corporation on April 21, 2009. These notes to the Company’s condensed consolidated financial statements relate to continuing operations only, unless otherwise indicated.

During the three months ended June 30, 2010, the Company made a correction resulting in the recognition of an asset totaling $1.2 million for unamortized mask costs incurred in prior periods as it was determined that these costs represented pre-production costs instead of research and development (“R&D”) expenses. The unamortized costs will be amortized as cost of sales over a period of approximately three years. As part of this correction, we recognized a reduction to R&D expenses of approximately $1.2 million. The net adjustments to make the correction to capitalize mask costs were not material to any periods affected.

On September 17, 2010, the Company completed the purchase of TPack A/S (“TPack”) for approximately $32 million in cash and potential additional contingent consideration of up to $5 million that will be payable upon the attainment of certain milestones. For a complete discussion, see note 11, “Acquisition of TPack A/S”.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to its capitalized mask sets, which affects its cost of goods sold and property and equipment or R&D expenses, if not capitalized; inventory valuation, warranty liabilities, and revenue reserves, which affects its revenues, cost of sales and gross margin; allowance for doubtful accounts, which affects its operating expenses; the unrealized losses or other-than-temporary impairments of its short-term investments available for sale, which affects its interest income (expense), net; the valuation of purchased intangibles and goodwill, which affects its amortization and impairments of purchased intangibles and impairments of goodwill; the valuation of restructuring liabilities, which affects the amount and timing of restructuring charges; the potential costs of litigation, which affects its operating expenses; the valuation of deferred income taxes, which affects its income tax expense (benefit); and stock-based compensation, which affects its gross margin and operating expenses. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 was subsequently codified in December 2009 as ASU No. 2009-17,Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (“ASU 2009-17”), which becomes effective the first annual reporting period after November 15, 2009 and will be effective for the Company in the fiscal year ending March 31, 2011. ASU 2009-17 amends ASC Topic 810 to require revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures of variable interests. The adoption of ASU 2009-17 did not have a material impact for the Company.

In April 2010, the FASB issued an amendment to ASC 605, Revenue Recognition, to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This amendment to ASC 605 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. This amendment is not expected to have a material impact for the Company.

2. CERTAIN FINANCIAL STATEMENT INFORMATION

Accounts receivable:

	September 30, 2010			March 31, 2010
	(In thousands)
Accounts receivable	$	23,937		$	23,607
Less: allowance for bad debts*		(1,325	)		(715	)
	$	22,612		$	22,892

* The increase is primarily from the TPack acquisition.

Inventories:

	September 30, 2010		March 31, 2010
	(In thousands)
Finished goods	$	13,538	$	12,888
Work in process		2,721		1,668
Raw materials		1,298		831
	$	17,557	$	15,387

Other current assets:

	September 30, 2010		March 31, 2010
	(In thousands)
Prepaid expenses+	$	10,874	$	7,882
Strategic investment*		—		5,369
Executive deferred compensation assets		3,220		3,213
Deposits		724		812
Other		1,130		822
	$	15,948	$	18,098

+ The increase is primarily due to a payment pursuant to a multi-year IP licensing agreement.

* The investee where the Company had a strategic investment, was acquired in April 2010 and the Company’s investment was liquidated.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Property and equipment:

	Useful Life		September 30, 2010			March 31, 2010
	(In years)		(In thousands)
Machinery and equipment*		3-7	$	30,738		$	29,252
Leasehold improvements		1-15		10,418			9,931
Computers, office furniture and equipment		3-7		45,982			43,789
Buildings		31.5		2,756			2,756
Land		N/A		9,800			9,800
				99,694			95,528
Less: accumulated depreciation and amortization				(70,061	)		(69,649	)
			$	29,633		$	25,879

* Includes capitalized mask set costs.

Goodwill:

The change in carrying amount of goodwill during the six months ended September 30, 2010 was:

	September 30, 2010		March 31, 2010
	(In thousands)
Goodwill beginning balance	$	—	$	—
Goodwill related to TPack acquisition (see note 11)		13,739		—
	$	13,739	$	—

All goodwill acquired, prior to the Tpack acquisition, of approximately $4.4 billion was fully amortized or impaired by fiscal year ended March 31, 2009.

Purchased intangibles (in thousands):

	September 30, 2010							March 31, 2010
	Gross		Accumulated Amortization and Impairments			Net		Gross		Accumulated Amortization and Impairments			Net
Developed technology/IPR&D	$	441,400	$	(418,973	)	$	22,427	$	425,000	$	(413,625	)	$	11,375
Customer relationships		12,830		(5,414	)		7,416		6,330		(5,226	)		1,104
Patents/core technology rights/tradename		63,206		(59,831	)		3,375		62,305		(57,934	)		4,371
	$	517,436	$	(484,218	)	$	33,218	$	493,635	$	(476,785	)	$	16,850

From March 31, 2010 to September 30, 2010, the change in gross carrying amount of the amortized intangible assets was approximately $23.8 million, due to the acquisition of TPack (see Note 11).

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

As of September 30, 2010, the estimated future amortization expense of purchased intangible assets to be charged to cost of sales and operating expenses was as follows (in thousands):

	Cost of Sales*		Operating Expenses		Total
Fiscal years ending March 31,
2011 (remaining)	$	6,538	$	2,976	$	9,514
2012		3,450		2,785		6,235
2013		2,575		2,183		4,758
2014		2,575		1,574		4,149
2015 and Thereafter		6,340		1,272		7,612
Total	$	21,478	$	10,790	$	32,268

* The amounts do not include approximately $1.0 million in in-process research and development.

Other assets:

	September 30, 2010		March 31, 2010
	(In thousands)
Non-current portion of prepaid expenses	$	8,130	$	9,295
Strategic investment		1,000		1,000
	$	9,130	$	10,295

Strategic Investments

The Company has entered into certain equity investments in privately held businesses for the promotion of business and strategic objectives. The Company’s investments in equity securities of privately held businesses are accounted for under the cost method. Under the cost method, strategic investments in which the Company holds less than a 20% voting interest and on which the Company does not have the ability to exercise significant influence are carried at the lower of cost or cost reduced by other-than-temporary impairments, as appropriate. These investments are included in other assets on the Company’s condensed consolidated balance sheets. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments when an other-than-temporary decline has occurred.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Short-term investments:

The following is a summary of cash, cash equivalents and available-for-sale investments by type of instruments (in thousands):

	September 30, 2010								March 31, 2010
	Amortized Cost		Gross Unrealized				Estimated Fair Value		Amortized Cost		Gross Unrealized				Estimated Fair Value
			Gains		Losses						Gains		Losses
Cash	$	7,845	$	—	$	—	$	7,845	$	9,126	$	—	$	—	$	9,126
Cash equivalents		34,921		—		—		34,921		113,400		—		—		113,400
U.S. Treasury securities and agency bonds		7,178		56		—		7,234		4,024		1		3		4,022
Corporate bonds		8,905		124		11		9,018		11,086		92		23		11,155
Mortgage-backed and asset-backed securities*		26,017		432		200		26,249		13,076		285		114		13,247
Mutual funds		46,384		580		—		46,964		—		—		—		—
Closed-end bond funds		33,504		8,945		372		42,077		36,545		7,858		105		44,298
Preferred stock		7,285		975		—		8,260		10,664		731		—		11,395
	$	172,039	$	11,112	$	583	$	182,568	$	197,921	$	8,967	$	245	$	206,643
Reported as:
Cash and cash equivalents							$	42,766							$	122,526
Short-term investments available-for-sale								139,802								84,117
							$	182,568							$	206,643

* At September 30, 2010 and March 31, 2010, approximately $21.8 million and $9.6 million of the amounts presented were mortgage-backed securities, respectively.

The established guidelines for measuring fair value and expanded disclosures regarding fair value measurements are defined as a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1	—	Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2	—	Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3	—	Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

The following is a summary of cash, cash equivalents and available-for-sale investments by type of instruments measured at fair value on a recurring basis (in thousands):

	September 30, 2010								March 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash	$	7,845	$	—	$	—	$	7,845	$	9,126	$	—	$	—	$	9,126
Cash equivalents		34,921		—		—		34,921		113,400		—		—		113,400
U.S. Treasury securities and agency bonds		7,234		—		—		7,234		4,022		—		—		4,022
Corporate bonds		—		9,018		—		9,018		—		11,155		—		11,155
Mortgage-backed and asset-backed securities		—		26,249		—		26,249		—		13,247		—		13,247
Mutual funds		46,964		—		—		46,964		—		—		—		—
Closed-end bond funds		42,077		—		—		42,077		44,298		—		—		44,298
Preferred stock		—		8,260		—		8,260		—		11,395		—		11,395
	$	139,041	$	43,527	$	—	$	182,568	$	170,846	$	35,797	$	—	$	206,643

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

There were no significant transfers in and out of Level 1 and Level 2 fair value measurements during the period ended September 30, 2010.

The Company acquired certain intangible assets of approximately $23.8 million in connection with a business combination during the three months ended September 30, 2010. The fair value of the intangible asset was estimated using Level 3 inputs. See Note 11 for discussion of this business combination and the key inputs used in the valuation.

At September 30, 2010, the cost and estimated fair values of available-for-sale securities with stated maturities are U.S. Treasury securities and agency bonds, corporate bonds and mortgage-backed and asset-backed securities and the contractual maturities of such securities are as follows (in thousands):

	September 30, 2010				March 31, 2010
	Cost		Fair Value		Cost		Fair Value
Less than 1 year	$	3,761	$	3,740	$	9,931	$	9,829
Mature in 1 – 2 years		4,978		4,999		6,177		6,187
Mature in 3 – 5 years		9,274		9,286		—		—
Mature after 5 years		24,087		24,476		12,078		12,408
	$	42,100	$	42,501	$	28,186	$	28,424

The following is a summary of gross unrealized losses (in thousands):

	Less Than 12 Months of Unrealized Losses				12 Months or More of Unrealized Losses				Total
As of September 30, 2010	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
U.S. Treasury securities and agency bonds	$	—	$	—	$	—	$	—	$	—	$	—
Corporate bonds		1,663		11		—		—		1,663		11
Mortgage-backed and asset-backed securities		8,351		200		—		—		8,351		200
Closed-end bond funds		10,086		372		—		—		10,086		372
	$	20,100	$	583	$	—	$	—	$	20,100	$	583

	Less Than 12 Months of Unrealized Losses				12 Months or More of Unrealized Losses				Total
As of March 31, 2010	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
U.S. Treasury securities and agency bonds	$	4,012	$	3	$	—	$	—	$	4,012	$	3
Corporate bonds		1,850		23		—		—		1,850		23
Mortgage-backed and asset-backed securities		1,931		114		—		—		1,931		114
Closed-end bond funds		7,821		105		—		—		7,821		105
	$	15,614	$	245	$	—	$	—	$	15,614	$	245

Other-Than-Temporary Impairment

The Company assessed whether it intends to sell or it is more likely than not that it will be required to sell an available-for-sale debt instrument before recovery of its amortized cost basis less any current-period credit losses. For available-for-sale debt instruments that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the opening debt instrument’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income (loss).

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Based on an evaluation of securities that have been in a loss position, the Company did not recognize an other-than-temporary impairment charge, for the three and six months ended September 30, 2010. The Company considered various factors which included its intent and ability to hold the underlying securities until its estimated recovery of amortized cost. The other-than-temporary impairment charge for the three and six months ended September 30, 2009 was approximately $3.3 million and $3.5 million, respectively. As of September 30, 2010, the Company also has $11.1 million in unrealized gains. The basis for computing realized gains or losses is by specific identification.

Other accrued liabilities:

	September 30, 2010		March 31, 2010
	(In thousands)
Executive deferred compensation	$	3,655	$	3,213
Employee related liabilities		1,743		2,052
Professional fees		733		1,114
Contingent consideration		600		—
Restructuring liabilities		599		583
Warranty		167		169
Other		3,729		2,475
	$	11,226	$	9,606

Warranty reserves:

The Company’s products typically carry a one year warranty. The Company establishes reserves for estimated product warranty costs at the time revenue is recognized. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from the Company’s estimates, additional warranty reserves could be required, which could reduce its gross margin.

The following table summarizes warranty reserve activity (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2010			2009			2010			2009
Beginning balance	$	169		$	1,129		$	169		$	1,285
Charged to (reductions in) costs of revenues*		25			(877	)		41			(922	)
Charges incurred		(27	)		(26	)		(43	)		(137	)
Ending balance	$	167		$	226		$	167		$	226

* The reduction is primarily related to the sale of our 3ware storage adapter business to LSI Corporation.

Interest income and other-than-temporary impairments, net (in thousands):

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010		2009
Interest income	$	1,564	$	1,511		$	3,085	$	3,169
Net realized gains on short-term investments		1,102		234			1,496		123
Impairments of marketable securities		—		(3,279	)		—		(3,454	)
	$	2,666	$	(1,534	)	$	4,581	$	(162	)

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Other income (expense), net (in thousands):

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010		2009
Impairment of strategic investment	$	—	$	(2,000	)	$	—	$	(2,000	)
Net gain from disposal of property		297		—			305		—
Other		139		109			297		326
	$	436	$	(1,891	)	$	602	$	(1,674	)

Net income (loss) per share:

Shares used in basic net income (loss) per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted net income (loss) per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of restricted stock units (“RSUs”) and outstanding warrants. The reconciliation of shares used to calculate basic and diluted net income (loss) per share consists of the following (in thousands, except per share data):

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010		2009
Net income (loss):
From continuing operations	$	3,575	$	(8,071	)	$	4,966	$	(10,870	)
From discontinued operations, net of taxes		—		1,347			—		7,044
Net income (loss)	$	3,575	$	(6,724	)	$	4,966	$	(3,826	)
Shares used in net income (loss) per share computation:
Weighted average common shares outstanding, basic		65,752		66,469			65,879		66,270
Net effect of dilutive common share equivalents		2,269		—			2,499		—
Weighted average common shares outstanding, diluted		68,021		66,469			68,378		66,270
Basic net income (loss) per share:
From continuing operations	$	0.05	$	(0.12	)	$	0.08	$	(0.16	)
From discontinued operations, net of taxes		—		0.02			—		0.10
Basic net income (loss) per share	$	0.05	$	(0.10	)	$	0.08	$	(0.06	)
Diluted net income (loss) per share:
From continuing operations	$	0.05	$	(0.12	)	$	0.07	$	(0.16	)
From discontinued operations, net of taxes		—		0.02			—		0.10
Diluted net income (loss) per share	$	0.05	$	(0.10	)	$	0.07	$	(0.06	)

The effect of anti-dilutive securities (comprised of options and restricted stock units ) totaling 3.7 million equivalent shares for both the three and six months ended September 30, 2010 and 6.2 million and 7.1 million equivalent shares for the three and six months ended September 30, 2009, respectively, have been excluded from the net income per share computation.

The effect of dilutive securities (comprised of options, restricted stock units and warrants) totaling 1.9 million and 1.3 million equivalent shares for the three and six months ended September 30, 2009, respectively, have been excluded from the net loss per share computation, as their impact would be anti-dilutive because the company has incurred losses in the periods presented.

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

3. RESTRUCTURING CHARGES

The Company recognizes restructuring costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Over the last several years, the Company has undertaken significant restructuring activities under several plans in an effort to reduce operating costs. A combined summary of the activity of the restructuring programs initiated by the Company is as follows (in thousands):

	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments and Contract Cancellations			Total
Liability, March 31, 2009	$	1,568		$	1,074		$	1,500		$	4,142
Charged to continuing operations		666			—			359			1,025
Cash payments		(1,687	)		(759	)		(1,500	)		(3,946	)
Non-cash charges		—			—			(359	)		(359	)
Reductions to estimated liability		(154	)		(125	)		—			(279	)
Liability, March 31, 2010	$	393		$	190		$	—		$	583
Charged to continuing operations		453			112			—			565
Cash payments		(356	)		(161	)		—			(517	)
Reduction to estimated liability		(32	)		—			—			(32	)
Liability, September 30, 2010	$	458		$	141		$	—		$	599

The following table provides detailed activity related to the restructuring programs as of September 30, 2010 (in thousands):

	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments and Contract Cancellations			Total
Prior Fiscal Years’ Completed Restructuring Programs:
Liability, March 31, 2009	$	94		$	282		$	—		$	376
Cash payments		—			(282	)		—			(282	)
Reductions to estimated liability		(94	)		—			—			(94	)
Liability, March 31, 2010	$	—		$	—		$	—		$	—
February 2009 Restructuring Program
Liability, March 31, 2009	$	1,474		$	792		$	1,500		$	3,766
Cash payments		(1,414	)		(477	)		(1,500	)		(3,391	)
Reductions to estimated liability		(60	)		(125	)		—			(185	)
Liability, March 31, 2010	$	—		$	190		$	—		$	190
Charged to continuing operations		—			90			—			90
Cash payments		—			(139	)		—			(139	)
Liability, September 30, 2010	$	—		$	141		$	—		$	141
January 2010 Restructuring Program
Charged to continuing operations	$	666		$	—		$	359		$	1,025
Cash payments		(273	)		—			—			(273	)
Non-cash charges		—			—			(359	)		(359	)
Liability, March 31, 2010	$	393		$	—		$	—		$	393
Charged to continuing operations		453			22			—			475
Cash payments		(356	)		(22	)		—			(378	)
Reduction to estimated liability		(32	)		—			—			(32	)
Liability, September 30, 2010	$	458		$	—		$	—		$	458

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Prior Fiscal Years’ Completed Restructuring Programs

The March 2008 restructuring program was implemented to reduce job redundancies and consisted of the elimination of 20 positions. As a result of the March 2008 restructuring program, the Company recorded a net charge of $1.6 million, consisting of $0.4 million for employee severances, $0.9 million for operating lease impairment and $0.3 million for an asset impairment. During fiscal 2009, the Company paid down part of its remaining liabilities related to this restructuring program and recorded a reversal for part of its liabilities which was no longer required to complete the restructuring activities. During fiscal 2010, the Company paid all remaining liabilities related to this restructuring program.

The September 2008 restructuring program was implemented to realign and focus the Company’s resources on its core competencies and consisted of the elimination of 30 positions. As a result of the September 2008 restructuring program, the Company recorded a net charge of $1.2 million to continuing operations and $0.1 million to discontinued operations. During fiscal 2009, the Company paid down part of its remaining liabilities related to this restructuring program. During fiscal 2010, the Company recorded a reversal of approximately $0.1 million for the remaining restructuring liability accrual, which was no longer required to complete the restructuring activities.

February 2009 Restructuring Program

The February 2009 restructuring program was implemented to reduce its expenses and excess capacity in response to the worsening economic conditions. The restructuring program consisted of the elimination of approximately 100 positions. As a result of the February 2009 restructuring program, the Company recorded a net charge of $7.8 million, consisting of $4.7 million for employee severances, $0.8 million for operating lease impairments, $1.5 million in contract cancellation charges for a cancelled project and $0.8 million for an asset impairment.

January 2010 Restructuring Program

The January 2010 restructuring program was implemented as part of the Company’s ongoing cost reduction efforts and to better align its global operations to achieve greater efficiencies. The Company moved some of its functions offshore, which will allow it to be much closer to its third party subcontract manufacturers, thus reducing costs by taking advantage of its global cost structure and improving efficiencies by eliminating the delays inherent in working in different time zones. The January 2010 restructuring plan includes eliminating or relocating 63 positions. As a result of the January 2010 restructuring program, the Company recorded a charge of $1.0 million, consisting of $0.6 million for employee severances and $0.4 million for an asset impairment in fiscal 2010. During the six months ended September 30, 2010, the Company recorded an additional charge of $0.4 million for employee severances. The Company expects to record additional charges of approximately $0.2 million for employee severances during the remainder of the fiscal year.

4. COMPREHENSIVE INCOME

The components of comprehensive income (loss), net of tax where applicable, are as follows (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2010			2009			2010			2009
Net income (loss)	$	3,575		$	(6,724	)	$	4,966		$	(3,826	)
Change in net unrealized gain on investments		204			3,837			1,634			10,293
Cumulative implementation reclassification for prior non-credit related other-than-temporary impairment charges		—			—			—			(1,134	)
Release upon disposition of investment with cumulative implementation reclassification for prior non-credit related other-than-temporary impairment charges		105			—			173			—
Foreign currency translation adjustment loss		(325	)		(16	)		(367	)		(112	)
	$	3,559		$	(2,903	)	$	6,406		$	5,221

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

5. STOCKHOLDERS’ EQUITY

Preferred Stock

The Certificate of Incorporation allows for the issuance of up to two million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting any series of the designation of such series, without further vote or action by the stockholders.

Common Stock

At September 30, 2010, the Company had 375.0 million shares authorized for issuance and approximately 64.5 million shares issued and outstanding. At March 31, 2010, there were approximately 65.4 million shares issued and outstanding.

Employee Stock Purchase Plan

The Company has in effect an employee stock purchase plan under which 4.8 million shares of common stock was reserved for issuance. In August 2010, the Company’s stockholders approved the proposal to increase the number of shares reserved for issuance to 6.3 million shares. Under the terms of this plan, purchases are made semiannually and the purchase price of the common stock is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the six months ended September 30, 2010, 0.2 million shares were issued under this plan. During the fiscal year ended March 31, 2010, approximately 0.4 million shares were issued under this plan. At September 30, 2010, approximately 4.2 million shares had been issued under this plan and approximately 2.1 million shares were available for future issuance.

Stock Repurchase Program

In August 2004, the Board authorized a stock repurchase program for the repurchase of up to $200.0 million of the Company’s common stock. Under the program, the Company is authorized to make purchases in the open market or enter into structured stock repurchase agreements. In October 2008, the Board increased the stock repurchase program by $100.0 million. During the six months ended September 30, 2010, 2.1 million shares were repurchased on the open market at a weighted average price of $11.25 per share. During the fiscal year ended March 31, 2010, 1.1 million shares were repurchased on the open market at a weighted average price of $7.54 per share. From the time the program was first implemented in August 2004, the Company has repurchased on the open market a total of 12.0 million shares at a weighted average price of $11.28 per share. All repurchased shares were retired upon delivery to the Company.

The Company also utilizes structured stock repurchase agreements to buy back shares which are prepaid written put options on its common stock. The Company pays a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of its common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of its common stock is above the pre-determined price, the Company will have its cash investment returned with a premium. If the closing market price is at or below the pre-determined price, the Company will receive the number of shares specified at the agreement inception. The Company considers the guidance in ASC Topic 480-10,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and ASC Topic 815-40,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Any cash received, including the premium, is treated as additional paid-in capital on the balance sheet.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

During the six months ended September 30, 2010, the Company entered into structured stock repurchase agreements totaling $10.0 million. For those agreements that had been settled during the six months ended September 30, 2010, the Company received $15.5 million in cash and 0.5 million in shares of its common stock at an effective purchase price of $10.01 per share from the settled structured stock repurchase agreements. During the fiscal year ended March 31, 2010, the Company entered into structured repurchase agreements totaling $41.8 million. For those agreements that settled during the fiscal year ended March 31, 2010, the Company received $27.8 million in cash and 0.7 million in shares of its common stock at an effective purchase price of $7.25 per share from the settled structured stock repurchase agreements. At September 30, 2010, the Company had no outstanding structured stock repurchase agreements. From the inception of the Company’s most recent stock repurchase program in August 2004, it entered into structured stock repurchase agreements totaling $267.5 million. Upon settlement of these agreements, as of September 30, 2010, the Company received $179.8 million in cash and 9.0 million shares of its common stock at an effective purchase price of $9.79 per share.

The table below is a plan-to-date summary of the Company’s repurchase program activity as of September 30, 2010 (in thousands, except per share data):

	Aggregate Price		Repurchased Shares		Average Price Per Share
Stock repurchase program
Authorized amount	$	300,000		—	$	—
Open market repurchases		135,155		11,981		11.28
Structured stock repurchase agreements*		100,517		8,962		11.22
Total repurchases	$	235,672		20,943	$	11.25
Available for repurchase	$	64,328

* The amounts above do not include gains of $12.8 million from structured stock repurchase agreements which settled in cash. The average price per share for structured stock repurchase agreements adjusted for gains from settlements in cash would have been $9.79 share and for total repurchases would have been $10.64 per share.

Stock Options

The Company has granted stock options to employees and non-employee directors under several plans. These option plans include two stockholder-approved plans (the 1992 Stock Option Plan and 1997 Directors’ Stock Option Plan) and four plans not approved by stockholders (the 2000 Equity Incentive Plan, Cimaron Communications Corporation’s 1998 Stock Incentive Plan assumed in the fiscal 1999 merger, and JNI Corporation’s 1997 and 1999 Stock Option Plans assumed in the fiscal 2004 merger). Certain other outstanding options were assumed through the Company’s various acquisitions.

In March 2007, the Company’s stockholders also approved the amendment and restatement of the 1992 Stock Option Plan (i) to expand the type of awards available under the plan, (ii) to rename the plan as the 1992 Equity Incentive Plan, (iii) to extend the plan’s expiration date until January 10, 2017, (iv) to increase the shares reserved under the plan by 2.3 million shares, (v) to serve as a successor plan to the 2000 Equity Incentive Plan, which is no longer used for equity awards, and (vi) to provide that any shares subject to stock awards under the 2000 Equity Incentive Plan that terminate or are forfeited or repurchased (other than options issued under the 2000 Equity Incentive Plan that were tendered in the stock option exchange, which occurred in May 2007) are added to the share reserve under the 1992 Equity Incentive Plan.

The Board has delegated administration of the Company’s equity plans to the Compensation Committee, which generally determines eligibility, vesting schedules and other terms for awards granted under the plans. Options under the plans expire not more than ten years from the date of grant and are generally exercisable upon vesting. Vesting generally occurs over four years. New hire grants generally vest and become exercisable at the rate of 25% on the first anniversary of the date of grant and ratably on a monthly basis over a period of 36 months thereafter; subsequent option grants to existing employees generally vest and become exercisable ratably on a monthly basis over a period of 48 months measured from the date of grant.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

In May 2009, Dr. Gopi, our CEO, was awarded 300,000 stock options for “Extraordinary Accomplishment.” The Black-Scholes value of these stock options are $1.1 million. These options will vest only if Company performance milestones are satisfied; otherwise they will expire unvested. The first milestone for 75,000 shares will vest only if we achieve an annual revenue target of $270 million or more for any fiscal year from fiscal 2010 through fiscal 2013. The next milestone for another 75,000 shares will vest only if we achieve an annual revenue target of $310 million or more for any fiscal year from fiscal 2010 through fiscal 2013 or an annual revenue target of $350 million or more for fiscal 2014. The last milestone for 150,000 shares will vest only if we achieve an annual operating margin of 13.5% of annual revenue or higher in fiscal 2013 or 15% or higher for any fiscal year from fiscal 2010 through fiscal 2012. The Company evaluates the probability of achieving the milestones and adjusts any stock option expense accordingly under stock-based compensation expense.

At September 30, 2010 and March 31, 2010, there were no shares of common stock subject to repurchase. Options are granted at prices at least equal to fair value of the Company’s common stock on the date of grant.

Option activity under the Company’s stock incentive plans during the six months ended September 30, 2010 is set forth below:

	Number of Shares (in thousands)			Weighted Average Exercise Price Per Share
Outstanding at the beginning of the year		6,310		$	11.76
Granted		574			11.98
Exercised		(375	)		7.40
Forfeited		(673	)		11.44
Outstanding at the end of the period		5,836		$	12.10
Vested and expected to vest at the end of the period		5,681		$	12.20
Vested at the end of the period		3,799		$	14.15

At September 30, 2010, the weighted average remaining contractual term for options outstanding is 4.3 years and for options vested is 3.4 years.

The aggregate pretax intrinsic value of options exercised during the six months ended September 30, 2010 was $1.5 million. This intrinsic value represents the excess of the fair market value of the Company’s common stock on the date of exercise over the exercise price of such options.

The weighted average remaining contractual life and weighted average per share exercise price of options outstanding and of options exercisable as of September 30, 2010 were as follows (in thousands, except exercise prices and years):

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Number of Shares		Weighted Average Exercise Price
$  0.52 - $      7.12		1,215	$	6.07		5.30		349	$	5.61
7.13 -         8.56		1,297		7.94		5.93		652		7.92
8.57 -       12.84		1,711		12.25		3.99		1,187		12.33
12.85 -       19.60		1,167		14.51		3.05		1,165		14.51
19.61 -     152.25		446		33.85		1.76		446		33.85
$  0.52 - $  152.25		5,836	$	12.10		4.34		3,799	$	14.15

As of September 30, 2010, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $2.9 million and options outstanding was $7.5 million. The aggregate pretax intrinsic values were calculated based on the closing price of the Company’s common stock of $10.00 on September 30, 2010.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Restricted Stock Units

The Company has granted restricted stock units pursuant to its 2000 Equity Incentive Plan as part of its regular annual employee equity compensation review program as well as to new hires. Restricted stock units are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Generally, restricted stock units vest ratably on a quarterly basis over four years from the date of grant. For employees hired after May 15, 2006, restricted stock units will vest on a quarterly basis over four years from the date of hire provided that no shares will vest during the first year, at the end of which the shares that would have vested during that year will vest and the remaining shares will vest over the remaining 12 quarters.

In May 2009, the Company issued three-year RSU grants, or “EBITDA Grants.” Vesting for the EBITDA Grants is subject to (i) the Company’s performance as measured by earnings before interest, taxes, depreciation and amortization (“EBITDA”), and (ii) individual performance as measured by the accomplishment of goals and objectives. For the fiscal year ended March 31, 2010, approximately 34% of the three-year performance pool vested because the Company’s performance exceeded its “stretch” EBITDA target. For the fiscal year ending March 31, 2011, up to 42% of the remaining three-year performance pool can vest. Approximately 21% can vest for “at plan” Company performance, 28% can vest for “stretch” Company performance and 42% can vest for “extraordinary” Company performance. The Company evaluates the probability of achieving the milestones and adjusts any RSU expense accordingly under stock-based compensation expense.

Restricted stock unit activity during the six months ended September 30, 2010 is set forth below:

	Restricted Stock Units Outstanding Number of Shares
	(in thousands)
Outstanding at the beginning of the year		3,687
Awarded		903
Vested		(1,281	)
Cancelled		(448	)
Outstanding at the end of the period		2,861

The weighted average remaining contractual term for the restricted stock units outstanding as of September 30, 2010 was 1.2 years.

Based on the closing price of the Company’s common stock of $10.00 on September 30, 2010, the total pretax intrinsic value of all outstanding restricted stock units on that date was $28.6 million.

The aggregate pretax intrinsic value of RSUs released during the six months ended September 30, 2010 was $13.6 million. This intrinsic value represents the fair market value of the Company’s common stock on the date of release.

Warrants

On May 17, 2009, the Company entered into agreements with Veloce Technologies, Inc. (“Veloce”) pursuant to which Veloce has agreed to perform development work for the Company on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of the Company’s common stock, which would vest upon the achievement of certain performance and time-based milestones.

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The warrant expires on July 15, 2014 and has an exercise price of $0.01. The first tranche is for 33% and will vest on the 12-month anniversary of the agreement date and the remaining 67% will vest 8% every three months beginning on the 15th month after the agreement date until the warrant is 100% vested provided that “certain milestones” are achieved by the 12-month anniversary of the agreement date. If at any time, Veloce achieves the “project milestone,” the warrant will vest 100% on the date the “project milestone” is achieved. Recognition of expense related to the warrant agreement is initially dependent upon the probability of “certain milestones” being achieved, which is based on consideration of several factors including the stage of development, nature and complexity of the technology being developed and the uncertainty involved in developing complex leading edge products. The Company assesses the probability of the “certain milestones” being achieved each reporting period. As of September 30, 2010, the milestones required for vesting to begin have not been achieved. The Company is currently in the process of renegotiating the terms and conditions of the Merger Agreement and related agreements with Veloce including, without limitation, the performance milestones, and expects to enter into formal amendments to these agreements with Veloce over the next few days or weeks.

6. STOCK-BASED COMPENSATION

The Company estimates the fair value of stock-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes option pricing model to estimate the fair value of its share-based payments, excluding RSUs, which uses the fair market value. The Black-Scholes model determines the fair value of share-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Although the fair value of stock options granted by the Company is estimated by the Black-Scholes model, the estimated fair value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The fair value of the options granted during the three months ended September 30, 2010 and 2009 is estimated as of the grant date using the Black-Scholes option-pricing model assuming the weighted-average assumptions listed in the following table:

	Three Months Ended September 30,
	Employee Stock Options						Employee Stock Purchase Plans
	2010			2009			2010			2009
Expected life (years)		3.8			3.9			0.5			0.5
Risk-free interest rate		1.0	%		2.2	%		0.2	%		0.3	%
Volatility		56	%		54	%		57	%		53	%
Dividend yield		—	%		—	%		—	%		—	%
Weighted average fair value	$	5.25		$	3.73		$	3.70		$	2.59

The weighted average grant-date fair value per share of the restricted stock units awarded was $10.99 and $10.77 during the three and six months ended September 30, 2010, respectively, compared to $7.52 and $6.60 during the three and six months ended September 30, 2009, respectively. The weighted average fair value per share was calculated based on the fair market value of the Company’s common stock on the respective grant dates.

Effective April 1, 2010, the Company revised its estimated forfeiture rate used in determining the amount of stock-based compensation from 5.8% to 6.6% as a result of an increasing rate of forfeitures in recent periods, which the Company believes is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested grants.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The following table summarizes stock-based compensation expense related to stock options and restricted stock units under ASC Topic 718-10 (in thousands):

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010			2009
Stock-based compensation expense by type of awards
Stock options (including employee stock purchase program)	$	1,087	$	1,053		$	2,083		$	2,088
Restricted stock units		2,871		2,751			5,754			4,344
Total stock-based compensation		3,958		3,804			7,837			6,432
Stock-based compensation expensed from (capitalized to) inventory, net		17		(37	)		(16	)		(50	)
Total stock-based compensation expense	$	3,975	$	3,767		$	7,821		$	6,382

The following table summarizes stock-based compensation expense as it relates to the Company’s statement of operations (in thousands):

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010			2009
Stock-based compensation expense by type of awards
Cost of revenues	$	163	$	180		$	348		$	304
Research and development		1,931		1,594			3,902			2,866
Selling, general and administrative		1,864		2,030			3,587			3,262
Total stock-based compensation	$	3,958	$	3,804		$	7,837		$	6,432
Stock-based compensation expensed from (capitalized to) inventory, net		17		(37	)		(16	)		(50	)
Total stock-based compensation expense	$	3,975	$	3,767		$	7,821		$	6,382

The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2015 related to unvested share-based payment awards at September 30, 2010 is $26.6 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.2 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards or assumes unvested equity awards in connection with acquisitions.

7. CONTINGENCIES

Legal Proceedings

The Company acquired JNI Corporation (“JNI”) in October 2003. In November 2001, a class action lawsuit was filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the U.S. District Court for the Southern District of New York, case no. 01 Civ 10740 (SAS). The complaint alleges that defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with JNI’s public offerings. This lawsuit is among more than 300 class action lawsuits pending in this District Court that have come to be known as the “IPO laddering cases.” Pursuant to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), a settlement has been reached in all of the cases. On October 6, 2009, the Court issued an order granting final approval of the settlement and dismissing the case. The Court subsequently issued a final judgment. Several appeals of the settlement and judgment were filed between October 29 and November 4, 2009. Should the settlement be overturned on appeal and the final approval vacated, the Company’s liability, if any, could not be reasonably estimated at this time.

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

In 1993, the Company was named as a Potentially Responsible Party (“PRP”) along with more than 100 other companies that used an Omega Chemical Corporation waste treatment facility in Whittier, California. The Company is a member of a large group of PRPs, known as the Omega Chemical Site PRP Organized Group (“OPOG”) that has agreed to fund certain on-going remediation efforts at the Omega site. The U.S. Environmental Protection Agency (“EPA”) has alleged that Omega failed to properly treat and dispose of certain hazardous waste materials. On February 26, 2001 the U.S. District Court for the Central District of California approved a consent decree between the EPA and OPOG to study contamination and evaluate cleanup options at the Omega site. Under the terms of the consent decree, EPA agreed to supervise OPOG’s soil remedial investigation and feasibility study, groundwater treatment design and the installation of three groundwater monitoring wells downgradient from the Omega site. On January 22, 2009, the District Court ordered that the first and second amendments to the consent decree be entered and made part of the consent decree. The First Amendment expanded the scope of work to mitigate volatile organic compounds affecting indoor air quality at a roller rink neighboring the Omega site and, the Second Amendment added settling parties to the consent decree. On November 7, 2007, Angeles Chemical Company filed Angeles Chemical Company, Inc. et al. v. Omega Chemical PRP Group, LLC, et al., in the U.S. District Court for the Central District of California against OPOG for cost recovery and indemnification for future response costs resulting from an alleged regional groundwater contamination plume originating at the Omega site. On March 27, 2008, the Court granted OPOG’s motion to stay the action pending EPA’s determination of how to investigate and remediate the regional groundwater.

Tpack, the Company’s wholly owned subsidiary acquired in September 2010, is involved in a contractual dispute with Xtera Communications Inc. and its subsidiary Meriton Networks, Canada Inc. (collectively, “Xtera”). In August 2009, Xtera filed an action against Tpack in the United States District Court for the Eastern Division of Texas. In October 2010, the action was dismissed for lack of jurisdiction. A related lawsuit was brought by Tpack against Xtera in September 2009 in the Ontario Superior Court of Justice in Canada, which suit is still pending. Further actions may be initiated by Tpack or Xtera with respect to the subject matter of the foregoing cases. The Company does not currently anticipate that the Tpack/Xtera legal proceedings will have a material adverse effect on Tpack, the Company or their respective operations.

8. INCOME TAXES

The total amount of unrecognized tax benefits as of April 1, 2010, was $38.8 million, including interest and penalties. During the quarter ended September 30, 2010, additional unrecognized tax benefits of $40,000 were recorded. The Company does not foresee significant changes to its estimated amount of liability associated with its uncertain tax positions within the next twelve months.

The Company’s income tax expense consists of state taxes and foreign taxes. The federal statutory income tax rate was 35% for the three months ended September 30, 2010 and 2009. The Company’s income tax expense for the three and six months ended September 30, 2010 was $0.4 million and $0.6 million, respectively, as compared to an income tax benefit of $3.6 million and $7.3 million during the three and six months ended September 30, 2009, respectively. The increase in the income tax expense recorded for the three and six months ended September 30, 2010 compared to the three and six months ended September 30, 2009, was primarily related to discontinued operations and other comprehensive income benefits allocated to continuing operations for the three and six months ended September 30, 2009. The Company acquired TPack, headquartered in Denmark, on September 17, 2010. The Company is still in the process of evaluating the accompanying tax implications of the TPack acquisition.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company is currently under audit by the North Carolina Department of Revenue for fiscal years 2006 to 2008. Effectively, all of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of net operating loss and credit carryforwards. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for years before 2007.

9. SALE OF THE 3WARE STORAGE ADAPTER BUSINESS TO LSI CORPORATION

On April 5, 2009, the Company entered into a Purchase Agreement with LSI Corporation (“LSI”). Under the Purchase Agreement, the Company agreed to sell to LSI substantially all of the operating assets (other than patents) primarily used or held for use in its 3ware storage adapter business (the “Storage Business”) but retaining certain assets, including patents, cash, accounts receivable and accounts payable, even if related to the Storage Business (the “Transaction”). The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.”

The Company completed the Transaction on April 21, 2009. After adjustments for the level of inventory of $0.7 million and products in the channel of $0.8 million, the final adjusted price of the Transaction was approximately $21.5 million for a gain of $11.4 million. During the fiscal year ended March 31, 2010, the Company and LSI reached an agreement to end the warranty support portion of the Purchase Agreement. As a result of the Transaction, the Company decreased its number of full-time employees by 56.

The Company has reclassified the financial results of the 3ware storage adapter business as discontinued operations for all periods presented.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

10. VELOCE

On May 17, 2009, the Company entered into agreements with Veloce pursuant to which Veloce has agreed to perform product development work for the Company on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of the Company’s common stock, which will vest upon the achievement of both certain performance and time-based milestones.

The Company has determined that Veloce, a California corporation, is a VIE by evaluating the sufficiency of the entity’s equity investment at risk to absorb losses and the Company’s share of respective expected losses and determined that the Company is the primary beneficiary of the VIE. The Company has included the accounts of Veloce in the consolidated financial statements and all significant intercompany balances and transactions have been eliminated in consolidation.

Under the merger agreement between the Company and Veloce, which has been approved by Veloce’s Board of Directors and stockholders, the Company also agreed to acquire Veloce if certain performance milestones and delivery schedules set forth under the merger and other agreements are achieved. The Company also has the unilateral option to acquire Veloce in the event Veloce fails to meet the milestones and delivery schedules. Should the Company acquire Veloce pursuant to the merger agreement, the purchase price payable by the Company is estimated to be in the range of approximately $5 million up to approximately $100 million, subject to adjustments. The final price would be based upon the achievement and timing of achieving multiple performance milestones and currently is not determinable. The form of consideration used for the merger, cash or the Company’s stock, would be determined by the Company at the time of the merger. The merger agreement contains customary representations, warranties and covenants and may be terminated upon mutual agreement of the parties or unilaterally by the Company or Veloce if the other party fails to meet certain conditions set forth in the agreement. The agreements permit the Company to appoint one individual to serve on Veloce’s Board of Directors and Board committees. The Company’s chief executive officer has been appointed to Veloce’s Board of Directors and as of September 30, 2010, the performance milestones and delivery schedules set forth under the merger and other agreements have not been achieved.

In addition, the Company has provided Veloce a promissory note of $1.5 million to be forgiven over eight quarters starting on March 31, 2011. If Veloce commits a material breach of the merger agreement, the outstanding principal amount of the note and accrued interest is due to the Company. If the Company commits a material breach of the merger agreement, the outstanding principal amount of the note and accrued interest is to be forgiven by the Company. The $1.5 million promissory note is eliminated in consolidation. The Company will pay Veloce $1.5 million per quarter for up to twelve consecutive quarters in order to assist Veloce in meeting its expenses to perform its obligations under the agreement and the Company will recognize the payments as research and development expenses when such operating costs have been incurred by Veloce. The Company recognized $2.3 million and $4.4 million as research and development expense during the three and six months ended September 30, 2010, respectively, compared to $1.5 million and $2.0 million during the three and six months ended September 30, 2009, respectively. During the six months ended September 30, 2010, the Company provided additional advances of $0.8 million to Veloce. The Company is currently in the process of renegotiating the terms and conditions of the Merger Agreement and related agreements with Veloce, including, without limitation, the development deliverables, performance milestones, delivery schedules and payment obligations thereunder, and expects to enter into formal amendments to these agreements with Veloce over the next few days or weeks.

11. ACQUISITION OF TPACK A/S.

On September 17, 2010, the Company acquired all of the shares of TPack, a limited liability company organized under the laws of Denmark. The Company believes the acquisition of TPack, a provider of silicon intellectual property for Mapping and Switching functions to leading telecom and networking equipment suppliers, will enable AppliedMicro to expand its presence and customer relationships in the rapidly growing OTN and Carrier Ethernet markets.

The total consideration paid at the closing of the transaction (the “Closing”) was approximately $32 million, exclusive of $0.5 million cash acquired. Following certain working capital adjustments, deductions for transaction expenses, including without limitation, those related to certain change in control bonuses owed by the shareholders to TPack’s employees, and indemnity escrow holdbacks of approximately $5 million, a balance of approximately $22.6 million was paid at the Closing to the former shareholders of TPack. The former TPack shareholders may also earn up to approximately $5 million in additional consideration, subject to the achievement of certain revenue and performance milestones by TPack during the 18 month period following the Closing. The Company recorded the initial fair value of the contingent consideration liability which was calculated based on a weighted probability assessment. The liability will continue to be measured at fair value at the end of each reporting period. In addition, we recorded acquisition related transaction costs of $0.9 million, which were included in selling, general and administrative expenses.

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The Company has calculated the fair value of the tangible and intangible assets acquired to allocate the purchase price as of the acquisition date. The excess of purchase price over the aggregate fair values was recognized as goodwill. Based upon these calculations, the preliminary purchase price of the transaction was allocated as follows (in thousands), and also includes the estimated amortization period of the acquired intangibles:

	Estimated Useful Life (In years)		Purchase price
Purchased intangible assets
Developed Technology		6	$	15,450
Existing customer contracts		5		4,000
Partner relationship		3		2,500
Trademarks and tradenames		3		650
Covenants not-to-compete		3		250
In-process R&D		—		950
Goodwill (non tax deductible)*				13,739
Deferred tax liability				(656	)
Contingent consideration (payable)				(3,150	)
Net liabilities			$	(1,699	)
Cash consideration				32,034
Contingent consideration				3,150
The total consideration issued in the acquisition			$	35,184

* The amount resulted primarily from our expectation of synergies from the integration of TPack product offerings with our product offerings

The fair values of the TPack intangible assets were determined using the income approach with significant inputs that are not observable in the market. Key assumptions included expected future cash flows and discount rates consistent with the assessment of risk. Purchased intangible assets, including IPR&D, are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or if that pattern cannot be reliably determined, using a straight-line amortization method.

The financial information in the table below summarizes the combined results of operations of the Company and TPack, on a proforma basis, as though the companies have been combined as of the beginning of the fiscal years of the periods presented. The proforma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2010 or July 1, 2010 or of results that may occur in the future.

	Three Months Ended September 30,					Six Months Ended September 30,
	2010		2009			2010		2009
Net revenues	$	67,385	$	50,530		$	129,660	$	97,085
Net income (loss)		3,291		(7,082	)		4,067		(4,357	)

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. The MD&A is organized as follows:

• Caution concerning forward-looking statements. This section discusses how forward-looking statements made by us in the MD&A and elsewhere in this report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.

• Overview. This section provides an introductory overview and context for the discussion and analysis that follows in the MD&A.

• Critical accounting policies. This section discusses those accounting policies that are both considered important to our financial condition and operating results and require significant judgment and estimates on the part of management in their application.

• Results of operations. This section provides an analysis of our results of operations for the three and six months ended September 30, 2010 and 2009. A brief description is provided of transactions and events that impact the comparability of the results being analyzed.

• Financial condition and liquidity. This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

The MD&A should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this report. This discussion contains forward-looking statements. These forward-looking statements are made as of the date of this report. Any statement that refers to an expectation, projection or other characterization of future events or circumstances, including the underlying assumptions, is a forward-looking statement. We use certain words and their derivatives such as “anticipate”, “believe”, “plan”, “expect”, “estimate”, “predict”, “intend”, “may”, “will”, “should”, “could”, “future”, “potential”, and similar expressions in many of the forward-looking statements. The forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and other assumptions made by us. These statements and the expectations, estimates, projections, beliefs and other assumptions on which they are based are subject to many risks and uncertainties and are inherently subject to change. We describe many of the risks and uncertainties that we face in Part II, Item 1A, “Risk Factors” and elsewhere in this report. Our actual results and actual events could differ materially from those anticipated in any forward-looking statement. Readers should not place undue reliance on any forward-looking statement.

OVERVIEW

Applied Micro Circuits Corporation (“AMCC”, “APM”, “AppliedMicro” or the “Company”) is a leader in semiconductor solutions for the enterprise, telecom and consumer/small medium business (“SMB”) markets. We design, develop, market and support high-performance low power ICs, which are essential for the processing, transporting and storing of information worldwide. In the telecom and enterprise markets, we utilize a combination of design expertise coupled with system-level knowledge and multiple technologies to offer IC products for wireline and wireless communications equipment such as wireless access points, wireless base stations, multi-function printers, enterprise and edge switches, blade servers, storage systems, gateways, core switches, routers, metro, long-haul, and ultra-long-haul transport platforms. In the consumer/SMB markets, we combine optimized software and system-level expertise with highly integrated semiconductors to deliver comprehensive reference designs and stand-alone semiconductor solutions for wireline and wireless communications equipment such as wireless access points, network attached storage, and residential and smart energy gateways. Our corporate headquarters are located in Sunnyvale, California. Sales and engineering offices are located throughout the world.

Our business had three reporting units, Process, Transport and Store. On April 21, 2009, we completed the sale of our 3ware storage adapter business, which was substantially all of the business of our Store reporting unit, to LSI Corporation to focus on our Process and Transport reporting units. We are a semiconductor company that possesses fundamental and differentiated intellectual property for high speed signal processing, packet based communications processors and telecommunications transport protocols. This intellectual property enables us to be a key player in the datacenter, enterprise and telecommunications applications. Our focus is on the OEMs and telecommunications companies that build and connect to datacenters. As of September 30, 2010, our business had two reporting units, Process and Transport.

25

On September 17, 2010, we completed the acquisition of TPack, a limited liability company organized under the laws of Denmark, in accordance with the terms and conditions of the stock purchase agreement dated August 17, 2010.

Since the start of fiscal 2009, we have invested a total of $226.0 million in the research and development of new products, including higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single highly integrated products, and other products to complete our portfolio of communications products. These products, and our customers’ products for which they are intended, are highly complex. Due to this complexity, it often takes several years to complete the development and qualification of these products before they enter into volume production. Accordingly, we have not yet generated significant revenues from some of the products developed during this time period. In addition, downturns in the telecommunications market can severely impact our customers’ business and usually results in significantly less demand for our products than was expected when the development work commenced.

The following tables present a summary of our results of operations for the three and six months ended September 30, 2010 and 2009 (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount			% of  Net Revenue			Increase (Decrease)			% Change
Net revenues	$	65,953		100.0	%	$	49,232			100.0	%	$	16,721			34.0	%
Cost of revenues		23,435		35.5			23,796			48.3			(361	)		(1.5	)
Gross profit		42,518		64.5			25,436			51.7			17,082			67.2
Total operating expenses		41,669		63.2			33,699			68.4			7,970			23.7
Operating income (loss)		849		1.3			(8,263	)		(16.7	)		9,112			110.3
Interest and other income (expense), net		3,102		4.7			(3,425	)		(7.0	)		6,527			190.6
Income (loss) from continuing operations before income taxes		3,951		6.0			(11,688	)		(23.7	)		15,639			133.8
Income tax expense (benefit)		376		0.6			(3,617	)		(7.3	)		3,993			110.4
Income (loss) from continuing operations		3,575		5.4			(8,071	)		(16.4	)		11,646			144.3
Income from discontinued operations, net of taxes		—		—			1,347			2.7			(1,347	)		(100.0	)
Net income (loss)	$	3,575		5.4	%	$	(6,724	)		(13.7	)%	$	10,299			153.2	%

	Six Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount			% of  Net Revenue			Increase (Decrease)			% Change
Net revenues	$	126,763		100.0	%	$	94,284			100.0	%	$	32,479			34.4	%
Cost of revenues		45,920		36.2			45,971			48.8			(51	)		(0.1	)
Gross profit		80,843		63.8			48,313			51.2			32,530			67.3
Total operating expenses		80,444		63.5			64,483			68.4			15,961			24.8
Operating income (loss)		399		0.3			(16,170	)		(17.2	)		16,569			102.5
Interest and other income (expense), net		5,183		4.1			(1,836	)		(1.9	)		7,019			382.3
Income (loss) from continuing operations before income taxes		5,582		4.4			(18,006	)		(19.1	)		23,588			131.0
Income tax expense (benefit)		616		0.5			(7,136	)		(7.6	)		7,752			108.6
Income (loss) from continuing operations		4,966		3.9			(10,870	)		(11.5	)		15,836			145.7
Income from discontinued operations, net of taxes		—		—			7,044			7.5			(7,044	)		(100.0	)
Net income (loss)	$	4,966		3.9	%	$	(3,826	)		(4.0	)%	$	8,792			229.8	%

Net Revenues. We generate revenues primarily through sales of our IC products, embedded processors and printed circuit board assemblies to OEMs, such as Alcatel-Lucent, Ciena, Cisco, Brocade, Fujitsu, Hitachi, Huawei, Juniper, Ericsson, NEC, Nortel, Nokia Siemens Networks, and Tellabs, who in turn supply their equipment principally to communications service providers.

26

In July 2008, we entered into a Patent Purchase Agreement (the “Agreement”) with QUALCOMM Incorporated (“Qualcomm”). Pursuant to the Agreement, we agreed to sell a series of our patents, patent applications and associated rights related to certain technologies for an aggregate purchase price of $33.0 million. The purchase price is being paid over three years in equal quarterly payments of $3.0 million each beginning in the three months ended December 31, 2008 through March 31, 2011. Due to the nature of the payment terms, related revenue is being recorded as the payments are received.

In November 2009, we also entered into another Patent Purchase Agreement with Acacia Patent Acquisition LLC (“APAC”). Pursuant to this Agreement, we agreed to sell a series of our patents, patent applications and associated rights related to certain technologies for an aggregate purchase price of $2.5 million payable over two years and a 25% share of royalty payments for assignment of rights under the sale and or use of the patents. Due to the nature of the payment terms, related revenue is being recorded as the payments are received.

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

• the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory corrections;

• the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products.

• our ability to specify, develop or acquire, complete, introduce, and market new products and technologies in a cost effective and timely manner;

• the rate at which our present and future customers and end-users adopt our products and technologies in our target markets;

• general economic and market conditions in the semiconductor industry and communications markets;

• combinations of companies in our customer base, resulting in the combined company choosing our competitor’s IC standardization other than our supported product platforms;

• the gain or loss of one or more key customers, or their key customers, or significant changes in the financial condition of one or more of our key customers or their key customers; and

• our ability to meet customer demand due to capacity constraints at our suppliers.

For these and other reasons, our net revenue and results of operations for the three and six months ended September 30, 2010 and 2009 may not necessarily be indicative of future net revenue and results of operations.

Based on direct shipments, net revenues to customers that were equal to or greater than 10% of total net revenues were as follows:

	Three Months  Ended September 30,						Six Months  Ended September 30,
	2010			2009			2010			2009
Avnet (distributor)		30	%		28	%		31	%		26	%
Hon Hai (sub-contract manufacturer)		14	%		14	%		14	%		13	%
Flextronics (sub-contract manufacturer)		10	%		*			*			*

* Less than 10% of total net revenues for period indicated.

We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future.

27

Net revenues by geographic region were as follows (in thousands):

	Three Months Ended September 30,										Six Months Ended September 30,
	2010					2009					2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Amount		% of  Net Revenue			Amount		% of  Net Revenue
United States of America	$	22,159		33.6	%	$	17,428		35.4	%	$	40,630		32.1	%	$	32,968		35.0	%
Other North America		609		0.9			1,734		3.5			756		0.6			4,344		4.6
Europe		13,508		20.5			9,267		18.8			23,472		18.5			16,234		17.2
Asia		29,307		44.4			20,650		41.9			61,143		48.2			40,340		42.8
Other		370		0.6			153		0.4			762		0.6			398		0.4
	$	65,953		100.0	%	$	49,232		100.0	%	$	126,763		100.0	%	$	94,284		100.0	%

All of our revenues have been denominated in U.S. dollars.

Sale of the 3ware storage adapter business to LSI Corporation.We completed the sale of our 3ware storage adapter business (the “Transaction”), a significant portion of our overall storage business and substantially all of our Store reporting unit, to LSI Corporation on April 21, 2009. As a result, we now expect to generate all of our sales from our remaining business, Process and Transport, which will require us to grow our remaining business in order to achieve profitability. Under the Asset Purchase Agreement with LSI Corporation (the “Purchase Agreement”), which we entered on April 5, 2009, we sold substantially all of the operating assets (other than patents) of our 3ware storage adapter business. The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.” The purchase price, adjusted for the level of inventory and products in the channel at the closing of the Transaction, was approximately $21.5 million. The net gain recorded from this transaction during the fiscal year ended March 31, 2010 was $11.4 million. Unless otherwise specified, all amounts discussed in the Management’s discussion and analysis addresses only continuing operations.

Key non-GAAP measurements.We use certain non-GAAP metrics such as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to measure our performance. We define Adjusted EBITDA as net loss less interest income, income taxes, depreciation and amortization, stock-based compensation, amortization of intangibles and other one-time and/or non-cash items. The following table reconciles Adjusted EBITDA to the accompanying financial statements:

	Three Months Ended September 30,						Six Months Ended September 30,
	2010			2009			2010			2009
Net income (loss)	$	3,575		$	(6,724	)	$	4,966		$	(3,826	)
Interest and other income		(1,414	)		(1,708	)		(2,587	)		(3,472	)
Stock-based compensation expense		3,975			3,767			7,821			6,382
Amortization of intangibles		3,802			4,269			7,432			8,856
Acquisition transaction expenses		859			—			859			—
Restructuring charges (recoveries), net		164			(125	)		533			(279	)
Impairment of strategic investment		—			2,000			—			2,000
Impairment of marketable securities*		(1,688	)		3,133			(2,596	)		3,308
Depreciation and amortization		2,150			2,004			4,428			3,911
Income tax adjustment		376			(3,617	)		616			(7,136	)
Income from discontinued operations		—			(1,347	)		—			(7,044	)
Adjusted EBITDA	$	11,799		$	1,652		$	21,472		$	2,700

* For non-GAAP purposes, the impairment of marketable securities is not recognized until the securities are sold.

We believe that Adjusted EBITDA is a useful supplemental measure of our operation’s performance because it helps investors evaluate and compare the results of operations from period to period by removing the accounting impact of the company’s financing strategies, tax provisions, depreciation and amortization, restructuring charges, stock based compensation expense, discontinued operations and other operating items that are outside the Company’s ordinary course of business. We adjust for these excluded items because we believe that, in general, these items possess one or more of the following characteristics: their magnitude and timing is largely outside of the company’s control; they are unrelated to the ongoing operation of the business in the ordinary course; they are unusual or infrequent and the company does not expect them to occur in the ordinary course of business; or they are non-operational, or non-cash expenses involving stock option grants.

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Adjusted EBITDA is not a measure determined in accordance with generally accepted accounting principles in the United States, or GAAP, and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Adjusted EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors and is used as a metric to determine the performance vesting of our three-year restricted stock unit grants issued in May 2009 (the “EBITDA Grants”) in the fiscal year ended March 31, 2010 and fiscal years ending March 31, 2011 and 2012. Management believes Adjusted EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business. Management also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate the company.

The book-to-bill ratio is another metric commonly used by investors to compare and evaluate technology and semiconductor companies. The book-to-bill ratio is a demand-to-supply ratio that compares the total amount of orders received to the total amount of orders filled. This ratio tells whether the company has more orders than it delivered (if greater than 1), has the same amount of orders that it delivered (equals 1), or has less orders than it delivered (under 1). Though the ratio provides an indicator of whether orders are rising or falling, it does not consider the timing of, or if the order will result in future revenues. Our book-to-bill ratio at September 30, 2010 and 2009 was 0.9 and 1.1, respectively.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to: inventory valuation and capitalized mask set costs, which affect our cost of sales and gross margin; the valuation of purchased intangibles, which has in the past affected, and could in the future affect, our impairment charges to write down the carrying value of purchased intangibles and the amount of related periodic amortization expense recorded for definite-lived intangibles; the valuation of restructuring liabilities, which affects the amount and timing of restructuring charges; and an evaluation of other-than-temporary impairment of our investments, which affects the amount and timing of write-down charges. We also have other key accounting policies, such as our policies for stock-based compensation and revenue recognition, including the deferral of a portion of revenues on sales to distributors. The methods, estimates and judgments we use in applying these critical accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Inventory Valuation

Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for future demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. For example, as of September 30, 2010, reducing our future demand estimate to six months could decrease our current inventory valuation by approximately $0.8 million or increasing our future demand forecast to 18 months could increase our current inventory valuation by approximately $0.1 million.

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Goodwill and Intangible Assets

The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. Determining the fair values and useful lives of intangible assets requires the use of estimates and the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the discounted cash flow method and the market comparison approach. These methods require significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. These judgments can significantly affect our net operating results.

In accordance with ASC Topic 350-10 (“ASC 350-10”) as it relates to Goodwill and Other Intangible Assets, the Company performs its annual impairment review at the reporting unit level each fiscal year or more frequently if the Company believes indicators of impairment are present. ASC 350-10 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. Goodwill is allocated to reporting units based upon the type of products under development by the acquired company, which initially generated the goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The fair value is determined using a combination of the discounted cash flow analysis and/or market comparisons. The determination of fair value requires significant judgment and estimates. The Company last recorded goodwill impairment charges in the year ended March 31, 2009 of $223.0 million to continuing operations and $41.2 million to discontinued operations. In conjunction with the TPack acquisition, we recorded $23.8 million in amortizable intangible assets and $13.7 million in goodwill.

We evaluate our long-lived assets such as property, plant and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. The carrying value of an asset or asset group is not recoverable if the amount of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value. When we identify an impairment has occurred, we reduce the carrying value of the assets to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. The fair value of the intangible assets was determined using the income approach. Key assumptions include the expected future cash flows, timing of expected future cash flows and discount rates consistent with the level of risk. We evaluate the useful lives of our intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization.

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Investments

We hold a variety of securities that have varied underlying investments. We review our investment portfolio periodically to assess for other-than-temporary impairment. We assess the existence of impairment of our investments in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment. The recent economic climate and volatile financial markets have created an environment in which it may be difficult to make accurate estimates and assumptions on which we base our judgments. The factors we consider in determining whether any individual impairment is temporary or other-than-temporary are primarily the length of the time and the extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization), the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If we decided to sell the security, an other-than-temporary impairment shall be considered to have occurred. However, if we do not intend to sell the debt security, we shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis due to cash, working capital requirements, contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs. If it is more likely than not that we are required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment is considered to have occurred. If we do not expect to recover the entire amortized cost basis of the security, we would not be able to assert that it will recover its amortized cost basis even if we do not intend to sell the security. Therefore, in those situations, an other-than-temporary impairment shall be considered to have occurred. Use of present value cash flow models to determine whether the entire amortized cost basis of the security will be recovered is expected. We will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. An other-than-temporary impairment is said to have occurred if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. In the three and six months ended September 30, 2010, we did not record any other-than-temporary impairment charges. For the three months ended September 30, 2010, we did not record an impairment charge in connection with other securities in a continuous loss position (fair value less than carrying value) with unrealized losses of $0.6 million as we believe that such unrealized losses are temporary. As of September 30, 2010, we also had $11.1 million in unrealized gains. For the three and six months ended September 30, 2009, we recorded other-than-temporary impairment charges of $3.3 million and $3.5 million, respectively.

Mask Costs

We incur material costs for the fabrication of masks used by our contract manufacturers to manufacture our products. If we determine, at the time the cost for the fabrication of masks are incurred, that technological feasibility of the product has been achieved, we consider the nature of these costs to be pre-production costs. Accordingly, such costs are capitalized as property and equipment under machinery and equipment and are amortized as cost of sales over approximately three years, representing the estimated production period of the product. If we determine, at the time fabrication mask costs are incurred, that either technological feasibility of the product has not occurred or that the mask is not reasonably expected to be used in production manufacturing or that the commercial feasibility of the product is uncertain, the related mask costs are expensed to R&D in the period in which the costs are incurred. We will also periodically assess capitalized mask costs for impairment. During the six months ended September 30, 2010, total mask costs of $4.5 million were incurred, of which $1.5 million was expensed as R&D expense because technological feasibility had not been achieved and the remaining $3.0 million was capitalized. During the three months ended September 30, 2010, mask cost of $3.0 million were incurred and capitalized.

During the three months ended June 30, 2010, we made a correction resulting in the recognition of an asset totaling $1.2 million for unamortized mask costs incurred in prior periods as it was determined that these costs represented pre-production costs instead of R&D expenses. The unamortized costs will be amortized as cost of sales over a period of approximately three years. As part of this correction we recognized a reduction to R&D expenses of approximately $1.2 million. Amortization of these capitalized mask set costs recognized as cost of sales during the three and six months ended September 30, 2010 was approximately $0.1 million and $0.3 million, respectively. The net adjustments to make the correction to capitalize mask costs were not material to any periods affected.

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Restructuring Charges

Over the last several years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and reducing spending levels. We have had to record estimated expenses for employee severance, long-term asset write downs, lease cancellations, facilities consolidation costs, and other restructuring costs. Given the significance, and the timing of the execution, of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. Our assumptions for exiting certain facilities, such as estimating sublease incomes, may differ from actual outcomes, which could result in the need to record additional costs or reduce estimated amounts previously charged to restructuring expense. Our policies require us to periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. For the six months ended September 30, 2010, we recorded net restructuring charges of approximately $0.5 million associated with our restructuring actions. In the fiscal year ended March 31, 2010, we recorded net charges of $0.8 million for our restructuring activities to continuing operations.

Stock-Based Compensation Expense

All share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are required to be recognized in our financial statements based on their respective grant date fair values. The fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments, excluding RSUs, which we use the fair market value. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of our stock-based awards as it does not consider certain factors important to stock-based awards, such as continued employment, periodic vesting requirements and limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility of our stock options at grant date by equally weighting the historical volatility and the implied volatility of our stock over specific periods of time as the expected volatility assumption required in the Black-Scholes model. The expected life of the stock options is based on historical and other data including life of the option and vesting period. The risk-free interest rate assumption is the implied yield currently available on zero-coupon government issues with a remaining term equal to the expected term. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock units is based on the fair market value of our common stock on the date of grant. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ significantly from those estimated. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. We currently estimate when and if performance-based grants will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we consider the award to be probable, expense is recorded over the estimated service period. To the extent that our assumptions are incorrect, the amount of stock-based compensation recorded will be increased or decreased. To the extent that we grant additional equity securities to employees or we assume unvested securities in connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.

Revenue Recognition

We recognize revenue based on four basic criteria: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. In addition, we do not recognize revenue until the applicable customer’s acceptance criteria have been met. The criteria are usually met at the time of product shipment, except for shipments to distributors with rights of return. The portion of revenue from shipments to distributors subject to rights of return is deferred until the agreed upon percentage of return or cancellation privileges lapse. Revenue from shipments to distributors without return rights is recognized upon shipment. In addition, we record reductions to revenue for estimated allowances such as returns not pursuant to contractual rights, competitive

pricing programs and rebates. These estimates are based on our experience with product returns and the contractual terms of the competitive pricing and rebate programs.

Shipping terms are generally FCA (Free Carrier) shipping point. If actual returns or pricing adjustments exceed our estimates, we would record additional reductions to revenue.

From time to time we generate revenue from the sale of our internally developed IP. We generally recognize revenue from the sale of IP when all basic criteria outlined above are met.

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Under the TPack acquisition, we will recognize revenue pursuant to the requirements under the authoritative guidance on software revenue recognition, and any applicable amendments or modifications. Revenues will consist of royalties based upon sales of our customer’s products that include our software, professional service revenue, and revenue relating to our maintenance contracts.

RESULTS OF OPERATIONS

Comparison of the Three and Six Months Ended September 30, 2010 to the Three and Six Months Ended September 30, 2009

Net Revenues.Net revenues for the three and six months ended September 30, 2010 were $65.9 million and $126.8 million, representing an increase of 34.0% and 34.4% from net revenues of $49.2 million and $94.3 million for the three and six months ended September 30, 2009, respectively. We classify our revenues into two categories based on the markets that the underlying products serve. The categories are Process and Transport. We use this information to analyze our performance and success in these markets. See the following tables (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase		% Change
Process	$	30,935		46.9	%	$	25,085		51.0	%	$	5,850		23.3	%
Transport		35,018		53.1			24,147		49.0			10,871		45.0
	$	65,953		100.0	%	$	49,232		100.0	%	$	16,721		34.0	%

	Six Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase		% Change
Process	$	60,418		47.7	%	$	50,165		53.2	%	$	10,253		20.4	%
Transport		66,345		52.3			44,119		46.8			22,226		50.4
	$	126,763		100.0	%	$	94,284		100.0	%	$	32,479		34.4	%

During the three and six months ended September 30, 2010, revenues recovered strongly as the overall market for semiconductor products continued to show improved growth trends. The year over year increase represents the recovery from the recessionary economic conditions and overall softness in demand that was observed during the prior years and the current pace of infrastructure build out. We expect revenues for the three months ending December 31, 2010 to be approximately $62 million, plus or minus $2 million. This decline is primarily driven by inventory corrections in the industry. Our future revenues could be impacted by the duration and the severity of such inventory corrections and other factors.

Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the three and six months ended September 30, 2010 and 2009 (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase (Decrease)			% Change
Net revenues	$	65,953		100.0	%	$	49,232		100.0	%	$	16,721			34.0	%
Cost of revenues		23,435		35.5			23,796		48.3			(361	)		(1.5	)
Gross profit	$	42,518		64.5	%	$	25,436		51.7	%	$	17,082			67.2	%

	Six Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase (Decrease)			% Change
Net revenues	$	126,763		100.0	%	$	94,284		100.0	%	$	32,479			34.4	%
Cost of revenues		45,920		36.2			45,971		48.8			(51	)		(0.1	)
Gross profit	$	80,843		63.8	%	$	48,313		51.2	%	$	32,530			67.3	%

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The gross profit percentage for the three and six months ended September 30, 2010 increased to 64.5% and 63.8%, compared to 51.7% and 51.2% for the three and six months ended September 30, 2009, respectively. The increase in our gross profit percentage for the three and six months ended September 30, 2010 was primarily due to favorable product mix, higher licensing revenues, improved manufacturing yields and efficiencies and the overall impact of increased revenues.

The amortization of purchased intangible assets included in cost of revenues during the three and six months ended September 30, 2010 was $2.7 million and $5.3 million compared to $3.3 million and $6.9 million for the three and six months ended September 30, 2009, respectively. Based on the amount of capitalized purchased intangibles on the balance sheet as of September 30, 2010, we expect amortization expense for purchased intangibles charged to cost of revenues to be $6.5 million during the remainder of fiscal 2011, $3.5 million for fiscal 2012, $2.6 million for fiscal 2013, $2.6 million for fiscal 2014, $6.3 million for fiscal 2015 and thereafter. The expected amortization does not include $1.0 million of in-process R&D. Future acquisitions of businesses may result in substantial additional charges, which may impact the gross profit percentage in future periods.

Research and Development and Selling, General and Administrative Expenses. The following table presents research and development and selling, general and administrative expenses for the three and six months ended September 30, 2010 and 2009 (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase		% Change
Research and development	$	27,339		41.5	%	$	20,828		42.3	%	$	6,511		31.3	%
Selling, general and administrative	$	13,087		19.8	%	$	11,991		24.4	%	$	1,096		9.1	%

	Six Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase		% Change
Research and development	$	53,116		41.9	%	$	40,242		42.7	%	$	12,874		32.0	%
Selling, general and administrative	$	24,711		19.5	%	$	22,510		23.9	%	$	2,201		9.8	%

Research and Development. Research and development (“R&D”) expenses consist primarily of salaries and related costs (including stock-based compensation) of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs and facilities expenses. The increase in R&D expenses of 31.3% for the three months ended September 30, 2010, compared to the three months ended September 30, 2009 was primarily due to an increase of $3.1 million in personnel costs, $0.9 million in contractor cost, $0.5 million in printed circuit board cost, $0.3 million in product software interface cost, $0.3 million in stock-based compensation charges, $0.6 million in corporate service allocations and $0.5 million decrease in customer funded non-recurring engineering payments. The increase in R&D expenses of 32.0% for the six months ended September 30, 2010, compared to the six months ended September 30, 2009 was primarily due to an increase of $7.2 million in personnel costs primarily related to Veloce, $1.0 million in contractor costs, $1.0 million in stock-based compensation charges, $0.8 million in third party foundry costs, $0.6 million in technology access fees, $0.6 million in printed circuit board costs, $0.3 million in new processor core development costs and $1.2 million in corporate service allocations. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative products. In addition to our internal R&D programs, our business strategy includes acquiring products, technologies or businesses from third parties. Future acquisitions of products, technologies or businesses may result in substantial additional on-going R&D costs.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of personnel related expenses, professional and legal fees, corporate branding and facilities expenses. The increase in SG&A expenses of 9.1% for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to an increase of $1.0 million in external consultants and $0.4 million in personnel costs. The increase in SG&A expenses of 9.8% for the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was primarily due to an increase of $1.5 million in external consultants, $0.8 million in personnel costs, $0.4 million in travel expenses and $0.3 million in stock-based compensation charges, offset by a decrease of $1.1 million in professional service fees. Future acquisitions of products, technologies or businesses may result in substantial additional on-going SG&A costs.

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Stock-Based Compensation. The following table presents stock-based compensation expense for the three months ended June 30, 2010 and 2009, which was included in the tables above (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase (Decrease)			% Change
Costs of revenues	$	180		0.3	%	$	143		0.3	%	$	37			25.9	%
Research and development		1,931		2.9			1,594		3.2			337			21.1
Selling, general and administrative		1,864		2.8			2,030		4.1			(166	)		(8.2	)
	$	3,975		6.0	%	$	3,767		7.7	%	$	208			5.5	%
	Six Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount		% of  Net Revenue			Increase			% Change
Costs of revenues	$	332		0.3	%	$	254		0.3	%	$	78			30.7	%
Research and development		3,902		3.1			2,866		3.0			1,036			36.1
Selling, general and administrative		3,587		2.8			3,262		3.5			325			10.0
	$	7,821		6.2	%	$	6,382		6.8	%	$	1,439			22.5	%

The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2015 related to unvested share-based payment awards at September 30, 2010 is $26.6 million. This expense relates to equity instruments already issued and will not be affected by our future stock price. Vesting of the EBITDA Grants is subject to (i) the Company’s performance as measured by earnings before interest, taxes, depreciation and amortization (“EBITDA”), and (ii) individual performance as measured by the accomplishment of goals and objectives. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.2 years. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense will increase to the extent that we grant additional equity awards. The value of these grants cannot be predicted at this time because it will depend on the number of share-based payments granted and the then current fair values.

Restructuring Charges. The restructuring charges recorded during the three and six months ended September 30, 2010 was primarily for employee severances.

Interest and Other Income (Expense) and Other-Than-Temporary Impairments, net. The following table presents interest and other income (expense) and other-than-temporary impairments, net for the three and six months ended September 30, 2010 and 2009 (dollars in thousands):

	Three Months Ended September 30,
	2010					2009
	Amount		% of  Net Revenue			Amount			% of  Net Revenue			Increase		% Change
Interest income (expense) and other-than-temporary impairments, net	$	2,666		4.0	%	$	(1,534	)		(3.1	)%	$	4,200		273.8	%
Other income (expense), net	$	436		0.7	%	$	(1,891	)		(3.8	)%	$	2,327		123.1	%

	Six Months Ended September 30,
	2010					2009
	Amount		% of Net Revenue			Amount			% of Net Revenue			Increase		% Change
Interest income (expense) and other-than-temporary impairments, net	$	4,581		3.6	%	$	(162	)		(0.2	)%	$	4,743		2927.8	%
Other income (expense), net	$	602		0.5	%	$	(1,674	)		(1.8	)%	$	2,276		136.0	%

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Interest and Other Income and Other-Than-Temporary Impairment, net. Interest income and other-than-temporary impairment, net of management fees and other-than-temporary impairment, reflects interest earned on cash and cash equivalents, short-term investments and marketable securities as well as realized gains and losses from the sale of short-term investments and impairment charges on investments, less interest expense. The increase in interest income and other-than-temporary impairment, net for the three and six months ended September 30, 2010, compared to the three and six months ended September 30, 2009 was primarily due to gains that were realized from the sale of securities in our investment portfolio in the current fiscal year and an other-than-temporary impairment charge of $3.3 million in the prior fiscal year. The increase in other income for the three and six months ended September 30, 2010, compared to the three and six months ended September 30, 2009 was primarily due to a $2.0 million impairment for a strategic investment in the prior fiscal year.

Income Taxes.The federal statutory income tax rate was 35% for the three and six months ended September 30, 2010 and 2009. The benefit recorded during the three and six months ended September 30, 2009, related primarily to the gains from discontinued operations, other comprehensive income and an increase in refundable tax credits. For the three and six months ended September 30, 2010, the Company had no gains or losses relating to discontinued operations and provided a provision relating to foreign and state taxes.

Discontinued Operations. We completed the sale of our 3ware storage adapter business (“Storage Business”) to LSI Corporation on April 21, 2009. Under the Purchase Agreement, we substantially sold all of the operating assets (other than patents) of our Storage Business. The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.” The purchase price for the Transaction was approximately $20.0 million, subject to adjustments based on the level of inventory and products in the channel at the closing of the Transaction. After adjustments for the level of inventory of $0.7 million and products in the channel of $0.8 million, the final adjusted price of the Transaction was approximately $21.5 million. During the fiscal year ended March 31, 2010, we reached an agreement with LSI Corporation to end the warranty support portion of the Purchase Agreement. We recorded a net gain of $11.4 million from the sale during the fiscal year ended March 31, 2010. During the fiscal year ended March 31, 2010, we recognized a tax charge of approximately $4.2 million to discontinued operations in connection with the sale of our 3ware storage adapter business and concurrently recorded the same amount as an income tax benefit to continuing operations.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2010, our principal source of liquidity consisted of $182.6 million in cash, cash equivalents and short-term investments. Working capital as of September 30, 2010 was $196.7 million. Total cash, cash equivalents, and short-term investments decreased by $24.1 million during the six months ended September 30, 2010, primarily due to the acquisition of a business for $31.5 million, repurchases of our common stock for $23.1 million and purchase of property and equipment of $6.0 million, offset by net cash provided by operations of $22.5 million, net structured stock repurchase proceeds of $5.5 million, proceeds from issuances of common stock of $4.0 million and proceeds from the sale of a strategic equity investment of $5.0 million. At September 30, 2010, we had contractual obligations not included on our balance sheet totaling $57.3 million, primarily related to facility leases, engineering design software tool licenses and non-cancelable inventory purchase commitments.

For the six months ended September 30, 2010, we generated $22.5 million of cash from our operations compared to using $5.3 million for the six months ended September 30, 2009. Our net income of $5.0 million for the six months ended September 30, 2010 included $17.7 million of non-cash charges consisting of $3.6 million of depreciation, $7.4 million of amortization of purchased intangibles, $7.8 million of stock-based compensation and a credit of $1.2 million related to the capitalization of prior years mask set costs. Our net loss of $3.8 million for the six months ended September 30, 2009 included $20.0 million of non-cash charges consisting of $3.2 million of depreciation, $8.9 million of amortization of purchased intangibles, $6.4 million of stock-based compensation, $3.5 million for marketable securities impairment and $2.0 million impairment of a strategic investment, offset by $4.0 million in tax benefit from other comprehensive income. The remaining change in operating cash flows for the six months ended September 30, 2010 primarily reflected decreases in accounts receivable and other assets and increases in inventories, accrued payroll and other accrued liabilities, deferred revenue and accounts payable. Our overall days sales outstanding was 33 days and 36 days for the three months ended September 30, 2010 and March 31, 2010, respectively.

We used $86.0 million of cash from our investing activities during the six months ended September 30, 2010, compared to generating $26.5 million during the six months ended September 30, 2009. During the six months ended September 30, 2010, we used $53.9 million for short-term investment activities, net, $6.0 million for the purchase of property and equipment and $31.5 million for the acquisition of a business, offset by proceeds of $5.0 million from the sale of a strategic equity investment. During the six months ended September 30, 2009, we generated net proceeds of $9.7 million from short-term investment activities and received proceeds of $21.5 million for the sale of our 3ware storage adapter business, offset by $3.7 million for the purchase of property, equipment and other assets and $1.0 million for the purchase of a strategic investment.

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We used $16.3 million of cash for our financing activities during the six months ended September 30, 2010, compared to using $8.7 million during the six months ended September 30, 2009. The major financing use of cash for the six months ended September 30, 2010 was the funding of our structured stock repurchase agreements for $10.0 million, $23.1 million for the repurchases of common stock, restricted stock units withheld for taxes of $2.4 million offset by proceeds of $15.5 million from the settlement of structured stock repurchase agreements and proceeds from issuances of common stock of $4.0 million. The major financing use of cash for the six months ended September 30, 2009 was the funding of our structured stock repurchase agreements for $21.8 million, offset by proceeds of $12.0 million from the settlement of structured stock repurchase agreements and $1.8 million from the issuances of our common stock.

In August 2004, our Board of Directors authorized a stock repurchase program for the repurchase of up to $200.0 million of our common stock. Under the program, we are authorized to make purchases in the open market or enter into structured agreements. In October 2008, our Board of Directors increased the stock repurchase program by $100.0 million. During the six months ended September 30, 2010, approximately 2.1 million shares were repurchased on the open market at a weighted average price of $11.25 per share. During the fiscal year ended March 31, 2010, 1.1 million shares were repurchased on the open market at a weighted average price of $7.54 per share. All repurchased shares are retired upon delivery to us.

We also utilize structured stock repurchase agreements to buy back shares which are prepaid written put options on our common stock. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned with a premium. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement inception. Any cash received, including the premium, is treated as additional paid in capital on the balance sheet.

During the six months ended September 30, 2010, we entered into structured stock repurchase agreements totaling $10.0 million. For those agreements that settled during the six months ended September 30, 2010, we received $15.5 million in cash and 0.5 million in shares of our common stock at an effective purchase price of $10.01 per share from the settled structured stock repurchase agreements. During the fiscal year ended March 31, 2010, we entered into structured stock repurchase agreements totaling $41.8 million. For those agreements that settled during the fiscal year ended March 31, 2010, we received $27.8 million in cash and 0.7 million shares of our common stock at an effective purchase price of $7.25 per share from the settled structured stock repurchase agreements. At September 30, 2010, we had approximately $64.3 million remaining available to repurchase shares under the stock repurchase program.

On May 17, 2009, we entered into agreements with Veloce, pursuant to which Veloce has agreed to perform product development work for us on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of our common stock, which will vest upon the achievement of both certain performance and time-based milestones.

Under the merger agreement between us and Veloce, we agreed to acquire Veloce if certain performance milestones and delivery schedules set forth under the merger and other agreements are achieved. We also have the unilateral option to acquire Veloce in the event Veloce fails to meet the milestones and delivery schedules. Should we acquire Veloce pursuant to the merger agreement, the purchase price is estimated to be in the range of approximately $5 million up to approximately $100 million, subject to adjustments. The final price would be based upon the achievement and timing of achieving multiple performance milestones and currently is not determinable. We will determine the form of consideration used for the merger, cash or our stock, at the time of the merger. The merger agreement contains customary representations, warranties and covenants and may be terminated upon mutual agreement of the parties or unilaterally by us or Veloce if the other party fails to meet certain conditions set forth in the agreement. The agreements permit us to appoint one individual to serve on Veloce’s Board of Directors and Board committees.

In addition, we provided Veloce a promissory note of $1.5 million to be forgiven over eight quarters starting on March 31, 2011. If Veloce commits a material breach of the merger agreement, the outstanding principal amount of the note and accrued interest is due to us. If we commit a material breach of the merger agreement, the outstanding principal amount of the note and accrued interest is to be forgiven by us. The promissory note is eliminated in consolidation. We will pay Veloce $1.5 million per quarter for up to twelve consecutive quarters in order to assist Veloce in meeting its expenses to perform its obligations under the agreement and we will recognize the payments as research and development expenses when incurred. During the six months ended September 30, 2010, we provided additional advances of $0.8 million to Veloce. We are currently in the process of renegotiating the terms and conditions of the Merger Agreement and related agreements with Veloce, including, without limitation, the development deliverables, performance milestones, delivery schedules and payment obligation, thereunder, and expects to enter into formal amendments to these agreement with Veloce over the next few days or weeks.

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On September 17, 2010, we acquired TPack, a limited liability company organized under the laws of Denmark, in accordance with the terms and conditions of the stock purchase agreement dated August 17, 2010. The total consideration paid at the closing of the transaction was approximately $32 million. The former TPack shareholders may also earn up to approximately $5 million in additional consideration, subject to the achievement of certain revenue and performance milestones by TPack within 18 months after the acquisition. Approximately $5 million was placed in escrow to secure the indemnification obligation of TPack. In addition, we recorded acquisition related transaction costs of $0.9 million, which were included in selling, general and administrative expense.

In July 2010, we entered into an agreement for a multi-year license with a leading semiconductor IP supplier, where the components of the licensed technology are expected to be delivered over multiple years. The Company does not regard the license as significant to its current business. We intend to use the license to develop new products. The aggregate licensing fees are approximately $18.1 million and are payable over five years. This is in addition to a technology license agreement we entered into in March 2010, for approximately $4.4 million which is payable over approximately one year.

The following table summarizes our contractual operating leases and other purchase commitments as of September 30, 2010 (in thousands):

	Operating Leases		Other Purchase Commitments		Total
Fiscal Years Ending March 31, 2011	$	8,003	$	44,426	$	52,429
2012		2,772		—		2,772
2013		2,080		—		2,080
2014		31		—		31
2015 and thereafter		—		—		—
Total minimum payments	$	12,886	$	44,426	$	57,312

The amount in the table above does not include an estimated $0.6 million as it relates to accounting for uncertainty in income taxes.

We believe that our available cash, cash equivalents and short-term investments will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months, although we could elect or could be required to raise additional capital during such period. There can be no assurance that debt or equity financing will be available on commercially reasonable terms or at all.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements as of September 30, 2010 or March 31, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and a decline in the stock market. The current turbulence in the U.S. and global financial markets has caused a decline in stock values across all industries. We are exposed to market risks related to changes in interest rates and foreign currency exchange rates.

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss. We have established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of interest rate trends. We invest our excess cash in debt instruments of the U.S. Treasury, corporate bonds, mortgage-backed and asset backed securities, mutual funds and closed-end bond funds, with credit ratings as specified in our investment policy. We also have invested in preferred stocks, which pay quarterly fixed rate dividends. We generally do not utilize derivatives to hedge against increases in interest rates which decrease market values.

We are exposed to market risk as it relates to changes in the market value of our investments. At September 30, 2010, our investment portfolio included short-term securities classified as available-for-sale investments with an aggregate fair market value of $139.8 million and a cost basis of $129.4 million. These securities are subject to interest rate risk, as well as credit risk and liquidity risk, and will decline in value if interest rates increase or an issuer’s credit rating or financial condition is decreased.

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The following table presents the hypothetical changes in fair value of our short-term investments held at September 30, 2010 (in thousands):

	Valuation of Securities Given an Interest Rate Decrease of X Basis Points (“BPS”)						Fair Value as of September 30, 2010		Valuation of Securities Given an Interest Rate Increase of X Basis Points (“BPS”)
	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Available-for-sale investments	$	144,597	$	142,996	$	141,371	$	139,802	$	138,128	$	136,603	$	135,170

The modeling technique used measures the change in fair market value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points, 100 basis points, and 150 basis points. While this modeling technique provides a measure of our exposure to market risk, the current economic turbulence could cause interest rates to shift by more than 150 basis points.

We also invest in equity instruments of private companies for business and strategic purposes. These investments are valued based on our historical cost, less any recognized impairments. The estimated fair values are not necessarily representative of the amounts that we could realize in a current transaction.

We generally conduct business, including sales to foreign customers, in U.S. dollars, and as a result, we have limited foreign currency exchange rate risk. However, we have periodically entered into forward currency exchange contracts to hedge our overseas monthly operating expenses when deemed appropriate. We did not enter into any forward currency exchange contract during the six months ended September 30, 2010. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and included in the basis of the transaction in the same period that the underlying transaction is settled. Gains and losses on any instruments not meeting the above criteria are recognized in income or expenses in the consolidated statements of operations in the current period. The effect of an immediate 10% change in foreign exchange rates would not have a material impact on our financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit with the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by Exchange Act Rule 13a-15(b), we conducted an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is 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 7 of Notes to Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.

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ITEM 1A. RISK FACTORS

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment. The risks and uncertainties set forth below with an asterisk (“*”) next to the title contain changes to the description of the risks and uncertainties associated with our business as previously disclosed in Item 1A to our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed with the SEC on May 11, 2010.

*If we are unable to timely develop new products or new generations and versions of our existing products to replace our current products, our operating results and competitive position will be materially harmed.

Our industry is characterized by intense competition, rapidly evolving technology and continually changing customer requirements. These factors could render our existing products obsolete. Accordingly, our ability to compete in the future will depend in large part on our ability to identify and develop new products or new generations and versions of our existing products that achieve market acceptance on a timely and cost-effective basis, and to respond to changing requirements. If we are unable to do so, our business, operating results and financial condition will be negatively affected.

The successful development and market acceptance of our products depend on a number of factors, including, but not limited to:

• our accurate prediction of changing customer requirements;

• timely development of new designs;

• timely qualification and certification of our products for use in electronic systems;

• commercial acceptance and production of the electronic systems into which our products are incorporated;

• availability, quality, price, performance, and size of our products relative to competing products and technologies;

• our customer service and support capabilities and responsiveness;

• successful development of relationships with existing and potential new customers;

• successful development of relationships with key developers of advanced digital semiconductors;

• changes in technology and industry standards; and

• rapidly changing consumer preferences.

In addition, on May 17, 2009, we entered into agreements with Veloce for them to perform product development work for us on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of our common stock, which will vest upon the achievement of both performance and/or time-based milestones. Under the merger agreement with Veloce, we agreed to acquire Veloce if certain performance milestones and delivery schedules set forth under the merger and other agreements are achieved. We also have the unilateral option to acquire Veloce in the event Veloce fails to meet the milestones and delivery schedules. Should we acquire Veloce pursuant to the merger agreement, the purchase price is estimated to be in the range of approximately $5 million up to approximately $100 million, subject to adjustments. The final price would be based upon the achievement and timing of achieving multiple performance milestones and currently is not determinable. We also provided Veloce a promissory note of $1.5 million to be forgiven over eight quarters starting on March 31, 2011. We will also pay Veloce $1.5 million per quarter for up to twelve consecutive quarters in order to assist Veloce in meeting its expenses to perform its obligations under the agreement. During the six months ended September 30, 2010, we provided additional advances of $0.8 million to Veloce.

Our arrangement with Veloce may not result in the development of any new technologies or products. Moreover, products we have recently developed and which we are currently developing may not achieve market acceptance. If these products fail to achieve market acceptance, or if we fail to timely develop new products that achieve market acceptance, our business, financial condition and operating results will be materially harmed.

Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of materials will be higher than expected.

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We depend upon third parties to manufacture, assemble, package or test certain of our products. As a result, we are subject to risks associated with these third parties, including:

• reduced control over delivery schedules and quality;

• inadequate manufacturing yields and excessive costs;

• difficulties selecting and integrating new subcontractors;

• potential lack of adequate capacity during periods of excess demand;

• limited warranties on products supplied to us;

• potential increases in prices;

• potential instability in countries where third-party manufacturers are located; and

• potential misappropriation of our intellectual property.

Our outside foundries generally manufacture our products on a purchase order basis, and we have few long-term supply arrangements with these suppliers. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. A manufacturing disruption experienced by one or more of our outside foundries or a disruption of our relationship with an outside foundry, including discontinuance of our products by that foundry, would negatively impact the production of certain of our products for a substantial period of time.

Our IC products are generally only qualified for production at a single foundry. These suppliers can allocate, and in the past have allocated, capacity to the production of other companies’ products while reducing deliveries to us on short notice. There is also the potential that they may discontinue manufacturing our products or go out of business. Because establishing relationships, designing or redesigning ICs, and ramping production with new outside foundries may take over a year, there is no readily available alternative source of supply for these products.

Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of outside foundries can lead to reduced yields of our IC products. The process technology of an outside foundry is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between us and our manufacturer. This risk could be compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. Manufacturing defects that we do not discover during the manufacturing or testing process may lead to costly product recalls. These risks may lead to increased costs or delayed product delivery, which would harm our profitability and customer relationships.

If the foundries or subcontractors we use to manufacture our products discontinue the manufacturing processes needed to meet our demands, or fail to upgrade their technologies needed to manufacture our products, we may be unable to deliver products to our customers, which could materially adversely affect our operating results. The transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed.

Our requirements typically represent a very small portion of the total production of the third-party foundries. As a result, we are subject to the risk that a producer will cease production of an older or lower-volume process that it uses to produce our parts. We cannot assure you that our external foundries will continue to devote resources to the production of parts for our products or continue to advance the process design technologies on which the manufacturing of our products are based. Each of these events could increase our costs, lower our gross margin, cause us to hold more inventories or materially impact our ability to deliver our products on time. As our volumes decrease with any third-party foundry, the likelihood of unfavorable pricing increases.

Some companies that supply our customers are similarly dependent on a limited number of suppliers to produce their products. These other companies’ products may be designed into the same networking equipment into which our products are designed. Our order levels could be reduced materially if these companies are unable to access sufficient production capacity to produce in volumes demanded by our customers because our customers may be forced to slow down or halt production on the equipment into which our products are designed.

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*We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration and that may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

As smaller line width geometry processes become more prevalent, we expect to integrate greater levels of functionality into our IC products and to transition our IC products to increasingly smaller geometries. This transition will require us to redesign certain products and will require us and our foundries to migrate to new manufacturing processes for our products.

We may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance, and we have designed IC products to be manufactured at as little as .04 micron geometry processes. We have experienced some difficulties in shifting to smaller geometry process technologies and new manufacturing processes. These difficulties resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. The transition to smaller

geometries is inherently more expensive and as we manufacture more products using smaller geometries, the incremental costs could have an adverse impact on our earnings. We may face similar difficulties, delays and expenses as we continue to transition our IC products to smaller geometry processes. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our relationships with our foundries. If we or our foundries experience significant delays in this transition or fail to implement this transition, our business, financial condition and results of operations could be materially and adversely affected.

The gross margins for our products could decrease rapidly or not increase as forecasted, which will negatively impact our operating results.

The gross margins for our solutions have historically declined over time. Factors that we expect to cause downward pressure on the gross margins for our products include competitive pricing pressures, the cost sensitivity of our customers, particularly in the higher-volume markets, new product introductions by us or our competitors, and other factors. From time to time, for strategic reasons, we may accept orders at less than optimal gross margins in order to facilitate the introduction of, or, market penetration of our new or existing products. To maintain acceptable operating results, we will need to offset any reduction in gross margins of our products by reducing costs, increasing sales volume, developing and introducing new products and developing new generations and versions of existing products on a timely basis. If the gross margins for our products decline or not increase as forecasted and we are unable to offset those reductions, our business, financial condition and operating results will be materially harmed.

*The current economic circumstances and uncertain political conditions could harm our revenues, operating results and financial condition.

The economies of the United States and other developed countries are currently coming out of a recession. We cannot predict either if this economic recovery will continue or retreat back into a recession.

The recent recession has caused a decline in our near term revenues and it will take some time to return to our previous levels. Our current operating plans are based on assumptions concerning levels of consumer and corporate spending. If global and domestic economic and market conditions persist or deteriorate, we may experience further material impacts on our business, operating results and financial condition which could result in a decline in the price of our common stock. If economic conditions worsen, we may have to implement additional cost reduction measures or delay certain research and development spending.

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Our portfolio primarily includes fixed income securities, mutual funds and preferred stocks, the values of which are subject to market price volatility. The deterioration of these market prices has had an unfavorable impact on our portfolio and has caused us to record impairment charges to our earnings. During the fiscal years’ ended March 31, 2010 and 2009, we recorded other-than-temporary impairment charges of $4.1 million and $17.1 million, respectively. If the market prices continue to decline or securities continue to be in a loss position over time, we may recognize additional impairments in the fair value of our investments.

Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do business, including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us. As a result, allowances for doubtful accounts and write-offs of accounts receivable from our customers may increase. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products.

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We have invested in privately-held companies, many of which can still be considered in startup or developmental stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose all or substantially all of the value of our investments in these companies and, in some cases, we have lost all or substantially all of the value of our investment in such entities.

*Our operating results may fluctuate because of a number of factors, many of which are beyond our control.

If our operating results are below the expectations of public market analysts or investors, then the market price of our common stock could decline. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict, are:

• communications, information technology and semiconductor industry conditions;

• fluctuations in the timing and amount of customer requests for product shipments;

• the reduction, rescheduling or cancellation of orders by customers, including as a result of slowing demand for our products or our customers’ products or over-ordering or double booking of our products or our customers’ products;

• changes in the mix of products that our customers buy;

• the gain or loss of one or more key customers or their key customers, or significant changes in the financial condition of one or more of our key customers or their key customers;

• our ability to introduce, certify and deliver new products and technologies on a timely basis;

• the announcement or introduction of products and technologies by our competitors;

• competitive pressures on selling prices;

• the ability of our customers to obtain components from their other suppliers;

• market acceptance of our products and our customers’ products;

• fluctuations in manufacturing output, yields or other problems or delays in the fabrication, assembly, testing or delivery of our products or our customers’ products;

• increases in the costs of products or discontinuance of products by suppliers;

• the availability of external foundry capacity, contract manufacturing services, purchased parts and raw materials including packaging substrates;

• the availability of package and test vendor capacity;

• problems or delays that we and our foundries may face in shifting the design and manufacture of our future generations of IC products to smaller geometry process technologies and in achieving higher levels of design and device integration;

• the timing of meeting the specifications and expense recovery on non-recurring engineering projects;

• the amounts and timing of costs associated with warranties and product returns;

• the amounts and timing of investments in research and development;

• the product lifecycle and recoverability of capitalized architectural licenses, technology access fees and mask sets;

• the amounts and timing of the costs associated with payroll taxes related to stock option exercises or settlement of restricted stock units;

• costs associated with acquisitions and the integration of acquired companies, products and technologies;

• the impact of potential one-time charges related to purchased intangibles;

• our ability to successfully integrate acquired companies, products and technologies;

• the impact on interest income of a significant use of our cash for an acquisition, stock repurchase or other purpose;

• the effects of changes in interest rates or credit worthiness on the value and yield of our short-term investment portfolio;

• costs associated with compliance with applicable environmental, other governmental or industry regulations including costs to redesign products to comply with those regulations or lost revenue due to failure to comply in a timely manner;

• the effects of changes in accounting standards;

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• costs associated with litigation, including without limitation, attorney fees, litigation judgments or settlements, relating to the use or ownership of intellectual property or other claims arising out of our operations;

• our ability to identify, hire and retain senior management and other key personnel;

• the effects of war, acts of terrorism or global threats, such as disruptions in general economic activity and changes in logistics and security arrangements; and

• global economic and industry conditions.

Our business, financial condition and operating results would be harmed if we do not achieve anticipated revenues.

We can have revenue shortfalls for a variety of reasons, including:

• the reduction, rescheduling or cancellation of customer orders;

• declines in the average selling prices of our products;

• delays when our customers are transitioning from old products to new products;

• a decrease in demand for our products or our customers’ products;

• a decline in the financial condition or liquidity of our customers or their customers;

• delays in the availability of our products or our customers’ products;

• the failure of our products to be qualified in our customers’ systems or certified by our customers;

• excess inventory of our products held by our customers, resulting in a reduction in their order patterns as they work through the excess inventory of our products;

• fabrication, test, product yield, or assembly constraints for our products that adversely affect our ability to meet our production obligations;

• the failure of one of our subcontract manufacturers to perform its obligations to us;

• our failure to successfully integrate acquired companies, products and technologies;

• shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers, which may disrupt our ability to meet our production obligations; and

• global economic and industry conditions.

Our business is characterized by short-term orders and shipment schedules. Customer orders typically can be cancelled or rescheduled without significant penalty to the customer. Because we do not have substantial non-cancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. Customer orders for our products typically have non-standard lead times, which make it difficult for us to predict revenues and plan inventory levels and production schedules. If we are unable to plan inventory levels and production schedules effectively, our business, financial condition and operating results could be materially harmed.

From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside contract manufacturers, suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render our products less marketable. If we are forced to hold excess inventory or we incur unanticipated inventory write-downs, our financial condition and operating results could be materially harmed.

Our expense levels are relatively fixed in the short-term and are based on our expectations of future revenues. We have limited ability to reduce expenses quickly in response to any revenue shortfalls. Changes to production volumes and impact of overhead absorption may result in a decline in our financial condition or liquidity.

Our business substantially depends upon the continued growth of the technology sector and the Internet.

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The technology equipment industry is cyclical and has in the past experienced significant and extended downturns. The recent downturn was significant and we cannot predict if the current improvement is sustainable in the near future. A substantial portion of our business and revenue depends on the continued growth of the technology sector and the Internet. We sell our communications IC products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet. The past downturn has caused a reduction in capital spending on information technology. While we are beginning to see indications of improvement, there are no guarantees that this growth will sustain, resulting in potential volatility. If there is another downturn, our business, operating results and financial condition may be materially harmed.

The loss of one or more key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenues and profits.

A relatively small number of customers have accounted for a significant portion of our revenues in any particular period. We have no long-term volume purchase commitments from our key customers. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

Our ability to maintain or increase sales to key customers and attract significant new customers is subject to a variety of factors, including:

• customers may stop incorporating our products into their own products with limited notice to us and may suffer little or no penalty as a result of such action;

• customers or prospective customers may not incorporate our products into their future product designs;

• design wins (as explained below) with customers or prospective customers may not result in sales to such customers;

• the introduction of new products by customers may occur later or be less successful in the market than planned;

• we may successfully design a product to customer specifications but the customer may not be successful in the market;

• sales of customer product lines incorporating our products may rapidly decline or such product lines may be phased out;

• our agreements with customers typically are non-exclusive and do not require them to purchase a minimum quantity of our products;

• many of our customers have pre-existing relationships with our current or potential competitors that may cause our customers to switch from using our products to using competing products;

• some of our OEM customers may develop products internally that would replace our products;

• we may not be able to successfully develop relationships with additional network equipment vendors;

• our relationships with some of our larger customers may deter other potential customers (who compete with these customers) from buying our products;

• the impact of terminating certain sales representatives or sales personnel as a result of a Company workforce reduction or otherwise; and

• some of our customers and prospective customers may become less viable or fail.

The occurrence of any one of the factors above could have a material adverse effect on our business, financial condition and results of operations.

There is no guarantee that design wins will become actual orders and sales.

A “design win” occurs when a customer or prospective customer notifies us that our product has been selected to be integrated with the customer’s product. There can be delays of several months or more between the design win and when a customer initiates actual orders of our product. Following a design win, we will commit significant resources to the integration of our product into the customer’s product before receiving the initial order. Receipt of an initial order from a customer following a design win, however, is dependent on a number of factors, including the success of the customer’s product, and cannot be guaranteed. The design win may never result in an actual order or sale.

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*Any significant order cancellations or order deferrals could cause unplanned inventory growth resulting in excess inventory which may adversely affect our operating results.

Our customers may increase orders during periods of product shortages or cancel orders if their inventories are too high. Major inventory corrections by our customers are not uncommon and can last for significant periods of time and affect demand for our products. Customers may also cancel or delay orders in anticipation of new products or for other reasons. Cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins by reducing sales prices, incurring inventory write-downs or writing off additional obsolete products.

The book-to-bill ratio is commonly used by investors to compare and evaluate technology and semiconductor companies. The book-to-bill ratio is a demand-to-supply ratio that compares the total amount of orders received to the total amount of orders filled. This ratio tells whether the company has more orders than it delivered (if greater than 1), has the same amount of orders that it delivered (equals 1), or has less orders than it delivered (under 1). Though the ratio provides an indicator of whether orders are rising or falling, it does not consider the timing of, or if the order will result in future revenues. Our book-to-bill ratio at September 30, 2010 and 2009 was 0.9 and 1.1, respectively.

The increasing lead times from our suppliers cause us to make commitments for inventory purchases earlier in our production cycle which in turn increases our risk of excess inventory. In addition, some of our suppliers are delivering based on allocations which in turn causes us to increase our inventory levels. We must balance our inventory levels between the risk of losing a significant customer to a competitor because we cannot meet our customer’s requirements and the risk of having excess inventory if a significant order is cancelled.

Inventory fluctuations could affect our results of operations and restrict our ability to fund our operations. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times, meet customer expectations and guard against the risk of inventory obsolescence because of changing technology and customer requirements.

We generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not pay for these products, we could miss future revenue projections or incur significant charges against our income, which could materially and adversely affect our operating results.

Our customers’ products typically have lengthy design cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales.

After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers may need more than six months to test, evaluate and adopt our product and an additional nine months or more to begin volume production of equipment that incorporates our product. Due to this lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from

these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we cannot guarantee that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in this lengthy design cycle increases the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. While our customers’ design cycles are typically long, some of our product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to mitigate those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.

An important part of our strategy is to focus on the markets for communications equipment. If we change strategy or are unable to further expand our share of these markets or react timely or properly to emerging trends, our revenues may not grow and could decline.

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Our markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, or if our products fail to be certified by OEMs, we would lose business from an existing or potential customer and may not have the opportunity to compete for new design wins or certification until the next product transition occurs. If we fail to develop products with required features or performance standards, or if we experience a delay as short as a few months in certifying or bringing a new product to market, or if our customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period.

We expect a significant portion of our revenues to continue to be derived from sales of products based on current, widely accepted transmission standards. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance.

The sale of our 3ware storage adapter business to LSI Corporation marks a change in our strategy. This change, or any further changes we might make, could have a significant impact on our business, financial condition and results of operations while we are implementing our new strategy.

If we do not identify and pursue the correct emerging trends and align ourselves with the correct market leaders, we may not be successful and our business, financial condition and results of operations could be materially and adversely affected.

Customers for our products generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to internally develop their own products. The future prospects for our products in these markets are dependent upon our customers’ acceptance of our products as an alternative to their internally developed products. Future prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Network equipment vendors may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products.

If our network equipment vendor customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations would be materially and adversely affected.

*Our business strategy contemplates the acquisition of other companies, products and technologies. Merger and acquisition activities involve numerous risks and we may not be able to address these risks successfully without substantial expense, delay or other operational or financial problems that could disrupt our business and harm our results of operations and financial condition.

Acquiring products, technologies or businesses from third parties or making additional investments in companies we have already have an interest in is part of our long-term business strategy. The risks involved with merger and acquisition activities include:

• potential dilution to our stockholders;

• use of a significant portion of our cash reserves;

• diversion of management’s attention from our core business;

• failure to integrate or potential loss of key employees, particularly those of the acquired organizations.

• difficulty in completing an acquired company’s in-process research or development projects;

• amortization of acquired intangible assets and deferred compensation;

• customer dissatisfaction or performance problems with an acquired company’s products or services;

• adverse effects on existing business relationships with suppliers and customers;

• costs associated with acquisitions or mergers;

• difficulties associated with combining or integrating acquired companies, purchased operations, products or technologies;

• difficulties and risks associated with entering and competing in markets that are unfamiliar to us;

• ability of the acquired companies to meet their financial projections; and

• assumption of unknown liabilities, or other unanticipated costs, events or circumstances.

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In addition, in the event of any such investments or acquisitions, we could

• issue stock that would dilute our current stockholders’ percentage ownership;

• incur debt;

• assume liabilities;

• incur amortization or impairment expenses related to goodwill and other intangible assets; or

• incur large and immediate write-offs.

Any of these risks could materially harm our business, financial condition and results of operations.

As with past acquisitions, future acquisitions could adversely affect operating results. In particular, acquisitions may materially and adversely affect our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial additional depreciation or deferred compensation charges. Our past purchase acquisitions required us to capitalize significant amounts of goodwill and purchased intangible assets. As a result of the slowdown in our industry and reduction of our market capitalization, we have been required to record significant impairment charges against these assets as noted in our financial statements. In the fiscal year ended March 31, 2009 we recorded a goodwill impairment charge of $223.0 million to continuing operations. The goodwill impaired was previously assigned to the Process and Transport reporting units in the amounts of $101.5 million, $121.5 million, respectively. In the fiscal years ended March 31, 2009 and 2008, we recorded goodwill impairment charges to discontinued operations of $41.1 million and $71.5 million, respectively, for the Store reporting unit. These market conditions continuously change and it is difficult to project how long these current uncertain economic conditions may last. These conditions have caused a decline in our near term revenues and it will take some time to ramp back up to our previous levels. Additionally, market values had deteriorated which has had an unfavorable impact on our valuations which are part of the goodwill and purchased intangible asset impairment tests. There can be no assurances that market conditions will not deteriorate further or that our market capitalization will not decline further. At September 30, 2010, we had $33.2 million of purchased intangible assets. We cannot assure you that we will not be required to take significant charges as a result of impairment to the carrying value of the purchased intangible assets, due to further adverse changes in market conditions.

On September 17, 2010, we completed the acquisition of TPack for $32 million in cash and potentially up to an additional $5 million if certain performance milestones are achieved. In conjunction with the acquisition, we recorded $23.8 million in amortizable intangible assets and $13.7 million in goodwill. If the financial forecasts and other assumptions used to evaluate the acquisition do not materialize as expected, we could incur an impairment charge for up to the entire value the intangible assets and goodwill.

We cannot assure you that we will be able to successfully integrate TPack’s business, products, technologies or personnel or any additional businesses, products, technologies or personnel that we might acquire.

Our industry and markets are subject to consolidation, which may result in stronger competitors, fewer customers and reduced demand.

There has been industry consolidation among communications IC companies, network equipment companies and telecommunications companies in the past. We expect this consolidation to continue as companies attempt to strengthen or hold their positions in evolving markets. Consolidation may result in stronger competitors, fewer customers and reduced demand, which in turn could have a material adverse effect on our business, operating results, and financial condition.

Our operating results are subject to fluctuations because we rely heavily on international sales.

International sales account for a significant part of our revenues and may account for an increasing portion of our future revenues. The revenues we derive from international sales may be subject to certain risks, including:

• foreign currency exchange fluctuations;

• changes in regulatory requirements;

• tariffs, rising protectionism and other barriers;

• timing and availability of export licenses;

• political and economic instability;

• difficulties in staffing and managing foreign operations;

• difficulties in managing distributors;

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• difficulties in obtaining governmental and export approvals for communications, processors and other products;

• reduced or uncertain protection for intellectual property rights in some countries;

• longer payment cycles and difficulties to collect accounts receivable in some countries;

• burdens of complying with a wide variety of complex foreign laws and treaties;

• potentially adverse tax consequences; and

• an uncertain economic condition that may trail any improvements in the United States.

We are subject to risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations.

Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from laws in the United States. As a result, our ability to enforce our rights under such agreements may be limited compared with our ability to enforce our rights under agreements governed by laws in the United States.

*Our portfolio of short-term investments are exposed to certain market risks.

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment portfolio is exposed to market risks related to changes in interest rates and credit ratings of the issuers, as well as to the risks of default by the issuers and lack of overall market liquidity. Substantially all of these securities are subject to interest rate and credit rating risk and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. Increases in interest rates or decreases in the credit worthiness of one or more of the issuers in our investment portfolio could have a material adverse impact on our financial condition or results of operations. During the fiscal years’ ended March 31, 2010 and 2009, we recorded $4.1 million and $17.1 million respectively, in write-downs in the carrying value of certain securities as we determined the decline in the fair value of these securities to be other-than-temporary. If there is a further deterioration in market conditions or there are additional losses incurred, we may be required to record a further decline in the carrying value of these securities resulting in further charges. At September 30, 2010, the unrealized losses on these securities, that were not written down as an other-than-temporary impairment charge, were approximately $0.6 million. If the fair value of any of these securities does not recover to at least the amortized cost of such security or we are unable to hold these securities until they recover, we may be required to record a decline in the carrying value of these securities.

Our restructuring activities could result in management distractions, operational disruptions and other difficulties.

Over the past several years, we have initiated several restructuring activities in an effort to reduce operating costs, including new restructuring initiatives announced in October 2008, February 2009 and January 2010. Employees whose positions were eliminated in connection with these restructuring activities may seek employment with our customers or competitors. Although each of our employees is required to sign a confidentiality agreement with us at the time of hire, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any additional restructuring efforts could divert the attention of our management away from our operations, harm our reputation and increase our expenses. We cannot guarantee that we will not undertake additional restructuring activities, that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities.

Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products.

The markets for our products are characterized by:

• rapidly changing technologies;

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• evolving and competing industry standards;

• changing customer needs;

• frequent introductions of new products and enhancements;

• increased integration with other functions;

• long design and sales cycles;

• short product life cycles; and

• intense competition.

To develop new products for the communications or other technology markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to develop technical and design expertise. We must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet customers’ changing needs. We must respond to changing industry standards, trends towards increased integration and other technological changes on a timely and cost-effective basis. Our pursuit of technological advances may require substantial time and expense and may ultimately prove unsuccessful. If we are not successful in adopting such advances, we may be unable to timely bring to market new products and our revenues will suffer.

Many of our products are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards or requirements, we could miss opportunities to achieve crucial design wins which in turn could have a material adverse effect on our business, operating results and financial condition.

The markets in which we compete are highly competitive, and we expect competition to increase in these markets in the future.

The markets in which we compete are highly competitive, and we expect that domestic and international competition will increase in these markets, due in part to deregulation, rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share. Our ability to compete successfully in our markets depends on a number of factors, including:

• our ability to partner with OEM and channel partners who are successful in the market;

• success in designing and subcontracting the manufacture of new products that implement new technologies;

• product quality, interoperability, reliability, performance and certification;

• customer support;

• time-to-market;

• price;

• production efficiency;

• design wins;

• expansion of production of our products for particular systems manufacturers;

• end-user acceptance of the systems manufacturers’ products;

• market acceptance of competitors’ products; and

• general economic conditions.

Our competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower cost alternatives to our products. The introduction of enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. We expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. Each of these factors could have a material adverse effect on our business, financial condition and results of operations.

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In the transport communications IC markets, we compete primarily against companies such as Broadcom, Cortina, Netlogic, PMC-Sierra and Vitesse. In the embedded processor communications IC market, we compete with technology companies such as Freescale Semiconductor, Cavium and Intel. Many of these companies may have substantially greater financial, marketing and distribution resources than we have. Certain of our customers or potential customers have internal IC design or manufacturing capabilities with which we compete. We may also face competition from new entrants to our target markets, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to our detriment. Any failure by us to compete successfully in these target markets would have a material adverse effect on our business, financial condition and results of operations.

Our operating results depend on manufacturing output and yields of our ICs and printed circuit board assemblies, which may not meet expectations.

The yields on wafers we have manufactured decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors, including minute levels of contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Design iterations and process changes by our suppliers can cause a risk of defects. Many of these problems are difficult to diagnose, are time consuming and expensive to remedy and can result in shipment delays.

We estimate yields per wafer and final packaged parts in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be re-valued. We may have to take inventory write-downs as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production at a new manufacturing facility.

We must develop or otherwise gain access to improved IC process technologies.

Our future success will depend upon our ability to access new IC process technologies. In the future, we may be required to transition one or more of our IC products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs or improve product performance. We may not be able to gain access to new process technologies in a timely or affordable manner or products based on these new technologies may not achieve market acceptance.

The complexity of our products may lead to errors, defects and bugs, which could negatively impact our reputation with customers and result in liability.

Products as complex as ours may contain errors, defects and bugs when first introduced or as new versions are released. Our products have in the past experienced such errors, defects and bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the products or result in a costly recall and could damage our reputation and adversely affect our ability to retain existing customers and to attract new customers. Errors, defects or bugs could cause problems with device functionality, resulting in interruptions, delays or cessation of sales to our customers.

We may also be required to make significant expenditures of capital and resources to resolve such problems. We cannot assure you that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers. Any problem could result in:

• additional development costs;

• loss of, or delays in, market acceptance;

• diversion of technical and other resources from our other development efforts;

• claims by our customers or others against us; and

• loss of credibility with our current and prospective customers.

Any such event could have a material adverse effect on our business, financial condition and results of operations.

If our internal control over financial reporting is not considered effective, our business and stock price could be adversely affected.

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Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to and report on the effectiveness of our internal control over financial reporting.

Our management, including our chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of control must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal control can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our internal control over financial reporting may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our management has concluded, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of March 31, 2010. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal control in the future. A material weakness in our internal control over financial reporting would require management and our independent registered public accounting firm to report our internal control as ineffective. If our internal control over financial reporting is not considered effective, we may experience a restatement like we have in the past of our financial statements and/or a loss of public confidence, either of which could have an adverse effect on our business and on the market price of our common stock.

Our future success depends in part on the continued service of our key senior management, design engineering, sales, marketing, and manufacturing personnel, our ability to identify, hire and retain additional, qualified personnel and successful succession planning.

Our future success depends to a significant extent upon the continued service of our senior management personnel and successful succession planning. The loss of key senior executives could have a material adverse effect on our business. There is intense competition for qualified personnel in the semiconductor industry; in particular design, product and test engineers, and we may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business, or to replace engineers or other qualified personnel who may leave our employment in the future. There may be significant costs associated with recruiting, hiring and retaining personnel. Periods of contraction in our business may inhibit our ability to attract and retain our personnel. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product development or other aspects of our business.

To manage operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate, and manage our employees. The integration of future acquisitions would require significant additional management, technical and administrative resources. We cannot guarantee that we would be able to manage our expanded operations effectively.

Our ability to supply a sufficient number of products to meet demand could be severely hampered by a shortage of water, electricity or other supplies, or by natural disasters or other catastrophes.

The manufacture of our products requires significant amounts of water. Previous droughts have resulted in restrictions being placed on water use by manufacturers. In the event of a future drought, reductions in water use may be mandated generally and our external foundries’ ability to manufacture our products could be impaired.

Several of our facilities, including our principal executive offices, are located in California. California has experienced prolonged energy alerts and blackouts caused by disruption in energy supplies. As a consequence, businesses and other energy consumers in California continue to experience substantially increased costs of electricity and natural gas. We are unsure whether energy alerts and blackouts will reoccur or how severe they may become in the future. Many of our customers and suppliers are also headquartered or have substantial operations in California. If we or any of our major customers or suppliers located in California experience a sustained disruption in energy supplies, our results of operations could be materially and adversely affected.

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A significant portion of our manufacturing operations are located in Asia. These areas are subject to natural disasters such as earthquakes or floods. We do not have earthquake or business interruption insurance for these facilities, because adequate coverage is not offered at economically justifiable rates. A significant natural disaster or other catastrophic event could have a material adverse impact on our business, financial condition and operating results.

The effects of war, acts of terrorism or global threats, including, but not limited to, the outbreak of epidemic disease, could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to local and global economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials.

We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. These regulations could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993, we have been named as a PRP along with more than 100 other companies that used Omega Chemical Corporation waste treatment facility in Whittier, California. The U.S. Environmental Protection Agency (“EPA”) has alleged that Omega failed to properly treat and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain on-going remediation efforts at the Omega Chemical Corporation site. To date, our payment obligations with respect to these funding efforts have not been material, and although we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results, we cannot guarantee this result. In 2007, the PRPs were sued by a downstream chemical company; that action has been stayed since March 2008 to allow for further delineation of the regional groundwater. In 2009, the U.S. Supreme Court decidedU.S. v. Burlington Northern & Santa Fe Railway Co., 129 S.Ct. 1870, which determined that hazardous substance cleanup liability need not be joint and several in all cases. As a result of this decision, the liability is potentially divisible among the PRP at an earlier stage in superfund cases such as Omega. At this point we do not know and can not predict the full impact of this decision on our liability, however, to protect against an unfavorable impact, we have joined the recently formed Omega Allocation Committee in order to limit such exposure. Although we believe that we have been and currently are in material compliance with applicable environmental laws and regulations, we cannot guarantee that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega Chemical Corporation site, will not have a material adverse effect on our business.

Environmental laws and regulations could cause a disruption in our business and operations.

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union (“EU”) member countries. For example, the EU has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and the Waste Electrical and Electronic Equipment (“WEEE”) directives. RoHS prohibits the use of lead and other substances in semiconductors and other products put on the market after July 1, 2006. The WEEE directive obligates parties that place electrical and electronic equipment on the market in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment, and provide a mechanism to take back and properly dispose of the equipment. There can be no assurance that similar programs will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.

Any dispositions we make could disrupt our business and harm our results of operations and financial condition.

We may dispose of assets or businesses that represent a significant portion of our business. We completed the sale of our 3ware storage adapter business, a significant portion of our storage business, to LSI Corporation on April 21, 2009. As a result, we now expect to generate all of our sales from our remaining business, which we would be required to grow in order to achieve profitability. Economic and other factors may prevent us from growing our remaining business. If we fail to grow our remaining business, it could have a material adverse impact on our business, financial condition and operating results. Future dispositions may involve numerous risks, including:

• problems carving out or disposing of assets, operations, technologies and products;

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• the disposal of such assets or businesses could have an unanticipated adverse effect on the remaining business;

• unanticipated costs;

• diversion of management’s attention from core ongoing operations;

• potential adverse effects on existing business relationships with suppliers and customers; and

• if we do not structure the disposition properly and scale expenses according to the size of the remaining business, we could continue to incur expenses that could be unsustainable given the scope of the remaining business.

We may not be able to protect our intellectual property adequately.

We rely in part on patents to protect our intellectual property. We cannot assure you that our pending patent applications or any future applications will be approved, or that any issued patents will adequately protect the intellectual property in our products and processes, will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, any such patent will be found to be valid or enforceable. Others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.

To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements, and licensing arrangements. Despite these efforts, we cannot assure you that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. A failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and operating results.

We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Also, former employees may seek employment with our business partners, customers or competitors and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, former employees or third parties could attempt to penetrate our network to misappropriate our proprietary information or interrupt our business. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. As a result, our technologies and processes may be misappropriated, particularly in foreign countries where laws may not protect our proprietary rights as fully as in the United States.

We could be harmed by litigation involving patents, proprietary rights or other claims.

Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or misappropriation. The semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. Such litigation could result in substantial costs and diversion of resources, including the attention of our management and technical personnel, and could have a material adverse effect on our business, financial condition and results of operations. We may be accused of infringing on the intellectual property rights of third parties. We have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. We cannot assure you that infringement claims by third parties or claims for indemnification by customers or end users resulting from infringement claims will not be asserted in the future, or that such assertions will not harm our business.

Any litigation relating to the intellectual property rights of third parties would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms or at all.

From time to time, we may be involved in litigation relating to other claims arising out of our operations in the normal course of business. We cannot assure you that the ultimate outcome of any such matters will not have a material, adverse effect on our business, financial condition or operating results.

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Our stock price is volatile.

The market price of our common stock has fluctuated significantly. In the future, the market price of our common stock could be subject to significant fluctuations due to general economic and market conditions and in response to quarter-to-quarter variations in:

• our anticipated or actual operating results;

• announcements or introductions of new products by us or our competitors;

• anticipated or actual operating results of our customers, peers or competitors;

• technological innovations or setbacks by us or our competitors;

• conditions in the semiconductor, communications or information technology markets;

• the commencement or outcome of litigation or governmental investigations;

• changes in ratings and estimates of our performance by securities analysts;

• announcements of merger or acquisition transactions;

• management changes;

• our inclusion in certain stock indices; and

• other events or factors.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies. In some instances, these fluctuations appear to have been unrelated or disproportionate to the operating performance of the affected companies. Any such fluctuation could harm the market price of our common stock. In addition, the current decline of the financial markets and related factors beyond our control, including the credit and mortgage crisis in both the U.S. and worldwide, may cause our stock price to decline rapidly and unexpectedly.

The anti-takeover provisions of our certificate of incorporation and of the Delaware general corporation law may delay, defer or prevent a change of control.

Our board of directors has the authority to issue up to 2.0 million shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could have a dilutive effect on our stockholders.

If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.

We have a significant number of authorized and unissued shares of our common stock available. These shares will provide us with the flexibility to issue our common stock for proper corporate purposes, which may include making acquisitions through the use of stock, adopting additional equity incentive plans and raising equity capital. Any issuance of our common stock may result in immediate dilution of our stockholders.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

None.

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ITEM 5. OTHER INFORMATION

On October 27, 2010, the Board of Directors of the Company approved an amendment to the Company’s Bylaws, to be effective November 3, 2010, that includes a new Section 8.13 which provides that unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the General Corporation Law of Delaware or the corporation’s certificate of incorporation or Bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine.

The Amended and Restated Bylaws of the Company reflecting this amendment are filed as Exhibit 3.2 to this report.

ITEM 6. EXHIBITS

2.1(1)+*	Agreement and Plan of Merger between the Company, Espresso Acquisition Corporation and Veloce Technologies, Inc., dated May 17, 2009.
2.2^*	Stock Purchase Agreement among the Company, TPack A/S, Slottsbacken Fund II KY, Slottsbaken Fund Two KB, Vaekstfonden and Novi A/S, and the Sellers’ Representative named therein, dated as of August 17, 2010.
2.3^	Amendment No. 1 to Stock Purchase Agreement by and among the Company and Vaekstfonden, as Sellers’ Representative, dated September 17, 2010.
3.1(2)	Amended and Restated Certificate of Incorporation of the Company.
3.2	Amended and Restated Bylaws of the Company.
4.1(3)	Specimen Stock Certificate.
10.65(4)	Employment agreement dated December 29, 2009 by and between the Company and William Caraccio.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company has furnished supplementally to the SEC copies of the omitted schedules.

^ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

(1) Incorporated by reference to identically numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q/A (No. 000-23193) for the quarter ended June 30, 2009.

(2) Incorporated by reference to Exhibit 3.2 filed with the Company’s Registration Statement on Form S-1 (No. 333-37609) filed October 10, 1997, and as amended by Exhibit 3.3 filed with the Company’s Registration Statement on Form S-4 (No. 333-45660) filed September 12, 2000 and Exhibit 3.1 filed with the Company’s Current Report on Form 8-K on December 11, 2007.

(3) Incorporated by reference to identically numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 333-37609) filed October 10, 1997, or with any amendments thereto.

(4) Incorporated by reference to identically numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q (No. 000-23193) for the quarter ended June 30, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 3, 2010

APPLIED MICRO CIRCUITS CORPORATION
By:	/S/    ROBERT G. GARGUS
	Robert G. Gargus
	Senior Vice President and Chief Financial Officer
	(Duly Authorized Signatory and Principal Financial and Accounting Officer)

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Exhibit Index

2.1(1)+*	Agreement and Plan of Merger between the Company, Espresso Acquisition Corporation and Veloce Technologies, Inc., dated May 17, 2009.
2.2^*	Stock Purchase Agreement among the Company, TPack A/S, Slottsbacken Fund II KY, Slottsbacken Fund Two KB, Vaekstfonden and Novi A/S, and the Sellers’ Representative named therein, dated as of August 17, 2010.
2.3^	Amendment No. 1 to Stock Purchase Agreement by and among the Company and Vaekstfonden, as Sellers’ Representative, dated September 17, 2010.
3.1(2)	Amended and Restated Certificate of Incorporation of the Company.
3.2	Amended and Restated Bylaws of the Company.
4.1(3)	Specimen Stock Certificate.
10.65(4)	Employment agreement dated December 29, 2009 by and between the Company and William Caraccio.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company has furnished supplementally to the SEC copies of the omitted schedules.

^ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

(1) Incorporated by reference to identically numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q/A (No. 000-23193) for the quarter ended June 30, 2009.

(2) Incorporated by reference to Exhibit 3.2 filed with the Company’s Registration Statement on Form S-1 (No. 333-37609) filed October 10, 1997, and as amended by Exhibit 3.3 filed with the Company’s Registration Statement on Form S-4 (No. 333-45660) filed September 12, 2000 and Exhibit 3.1 filed with the Company’s Current Report on Form 8-K on December 11, 2007.

(3) Incorporated by reference to identically numbered exhibit filed with the Company’s Registration Statement on Form S-1 (No. 333-37609) filed October 10, 1997, or with any amendments thereto.

(4) Incorporated by reference to identically numbered exhibit filed with the Company’s Quarterly Report on Form 10-Q (No. 000-23193) for the quarter ended June 30, 2010.

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