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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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(Mark One)



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

For the fiscal year ended March 31, 2007

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



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APPLIED MICRO CIRCUITS CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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Securities registered pursuant to
Section 12(b) of the Act:



|                              |  |                                     
|----------------------------- |  | ------------------------------------
|Title of Each Class           |  | Name of Exchange on Which
Registered
|Common Stock, $0.01 par value |  | The Nasdaq Stock Market             

Securities registered pursuant to Section 12(g) of the Act: None



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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No ̈

Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act

Large accelerated filer  x                    Accelerated
filer ̈Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2).    Yes ̈No  x

The aggregate market value of the voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the
Registrants common stock on September 29, 2006 (the last business day of the registrants second quarter of fiscal 2007) as reported on the Nasdaq Global Select Market, was approximately $810,671,000. Shares of common stock held by
each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The registrant has no non-voting common stock.

There were 283,211,191 shares of the registrants
Common Stock issued and outstanding as of April 30, 2007.



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APPLIED MICRO CIRCUITS CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED

MARCH 31, 2007

TABLE OF CONTENTS



|                     |  |                                                                                                              |  |     
|-------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                     |  |                                                                                                              |  | Page
|                     |  | PART I                                                                                                       |  |     
|                     |  |                                                                                                             
|Item 1.              |  | Business                                                                                                     |  | 1   
|                     |  |                                                                                                             
|Item 1A.             |  | Risk Factors                                                                                                 |  | 13  
|                     |  |                                                                                                             
|Item 1B.             |  | Unresolved Staff Comments                                                                                    |  | 31  
|                     |  |                                                                                                             
|Item 2.              |  | Properties                                                                                                   |  | 31  
|                     |  |                                                                                                             
|Item 3.              |  | Legal Proceedings                                                                                            |  | 31  
|                     |  |                                                                                                             
|Item 4.              |  | Submission of Matters to a Vote of Security Holders                                                          |  | 32  
|                     |  |                                                                                                             
|                     |  | PART II                                                                                                      |  |     
|                     |  |                                                                                                             
|Item 5.              |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 33  
|                     |  |                                                                                                             
|Item 6.              |  | Selected Financial Data                                                                                      |  | 35  
|                     |  |                                                                                                             
|Item 7.              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 37  
|                     |  |                                                                                                             
|Item 7A.             |  | Quantitative and Qualitative Disclosure about Market Risk                                                    |  | 56  
|                     |  |                                                                                                             
|Item 8.              |  | Financial Statements and Supplementary Data                                                                  |  | 56  
|                     |  |                                                                                                             
|Item 9.              |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 57  
|                     |  |                                                                                                             
|Item 9A.             |  | Controls and Procedures                                                                                      |  | 57  
|                     |  |                                                                                                             
|Item 9B.             |  | Other Information                                                                                            |  | 59  
|                     |  |                                                                                                             
|                     |  | PART III                                                                                                     |  |     
|                     |  |                                                                                                             
|Item 10.             |  | Directors, Executive Officers and Corporate Governance                                                       |  | 59  
|                     |  |                                                                                                             
|Item 11.             |  | Executive Compensation                                                                                       |  | 59  
|                     |  |                                                                                                             
|Item 12.             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 59  
|                     |  |                                                                                                             
|Item 13.             |  | Certain Relationships and Related Transactions                                                               |  | 59  
|                     |  |                                                                                                             
|Item 14.             |  | Principal Accountant Fees and Services                                                                       |  | 59  
|                     |  |                                                                                                             
|                     |  | PART IV                                                                                                      |  |     
|                     |  |                                                                                                             
|Item 15.             |  | Exhibits and Financial Statement Schedules                                                                   |  | 60  
|                     | 
|Signatures           |  | 63                                                                                                          
|                     | 
|Financial Statements |  | F-1                                                                                                         



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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are 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 the Risk Factors section in Item 1A and elsewhere in this report. We update our descriptions of the risks and
uncertainties facing us in our periodic reports filed with the U.S. Securities and Exchange Commission, known as the SEC, in which we report our financial condition and results for the quarter and fiscal year to date. 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.

In this annual report on Form 10-K, Applied Micro Circuits Corporation, AMCC, the Company, we,
us and our refer to Applied Micro Circuits Corporation and all of our consolidated subsidiaries.

PART I



|Item    1. | Business.
|---------- | ---------

Applied Micro Circuits Corporation was
incorporated and commenced operations in California in 1979. AMCC was reincorporated in Delaware in 1987. Our principal executive offices are located at 215 Moffett Park Drive, Sunnyvale, California 94089, and our phone number is 408-542-8600. Our
website is located at www.amcc.com. The information that can be accessed on or through our website is not intended to be part of this report. Various documents concerning us that are electronically filed with or furnished to the SEC, including our
annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K are available, free of charge, on our website. You may read and copy materials that we file with or furnish to the SEC at the SECs Public Reference
Room at 450 Fifth Street, NW, Washington DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains the reports, proxy statements and other
information that we file or furnish. The address of the SEC website is http://www.sec.gov. Our common stock trades on the Nasdaq Global Select Market under the symbol AMCC.

Overview

AMCC is a leader in semiconductors and printed circuit board assemblies (PCBAs)
for the communications and storage markets. We design, develop, market and support high-performance integrated circuit (IC) products, embedded processors, and storage components, which are essential for the processing, transporting and
storing of information worldwide. In the communications market, we utilize a combination of design expertise coupled with system-level knowledge and multiple technologies to offer IC products and PCBAs for wireline and wireless communications
equipment such as wireless base stations, edge switches, routers, and gateways, metro transport platforms and core switches and routers. We generate revenues in the communications market primarily through sales of our IC products, embedded
processors and PCBAs to original equipment manufacturers (OEMs) such as Alcatel-Lucent, Ciena, Cisco, Ericsson, Brocade, Fujitsu, Hitachi, Huawei, Juniper, NEC, Nokia, Nokia Siemens Networks, Nortel, and Tellabs, who in turn supply their
equipment principally to communications service providers. In the storage market, we blend systems and software expertise with high-performance, high-bandwidth silicon integration to deliver high-performance, high capacity Serial Advanced Technology
Attachment (SATA) Redundant Array of Integrated Disks (RAID) controllers for emerging storage applications such as disk-to-disk backup, near-line storage, network-attached storage (NAS),



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video and high-performance computing. We generate revenues in the storage market primarily through sales of our SATA RAID controllers through our
distribution channel partners who in turn sell to enterprises, small and mid-size businesses, value added resellers (VARs), systems integrators and retail consumers.

Industry Background

The Communications Industry

Communications technology has evolved considerably over the last decade due to the substantial growth in the Internet and wireless communications. The
emergence of new applications, such as wireless web devices, Voice over Internet Protocol (VoIP), video-on-demand, third generation (3G) wireless services, as well as the increase in demand for higher speed, higher bandwidth
and remote network access, have increased network bandwidth requirements and complexity. The continuing adoption of broadband technology, such as email, instant messaging and e-commerce, and the increasing availability of next-generation wireless
devices that incorporate features such as internet browsing, cameras and video recorders is expected to drive additional data traffic through the network infrastructure in the future. The different types of data transmitted at various speeds over
the Internet require service providers and enterprises to invest in multi-service equipment that can securely and efficiently process and transport the varied types of network traffic, regardless of whether it is voice traffic or data traffic. To
achieve the performance and functionality required by such systems, OEMs must utilize more complex ICs to address both the cost and functionality of a system. As a result of the pace of new product introductions, the proliferation of standards to be
accommodated and the costs and difficulty of designing and producing the required ICs, equipment suppliers have increasingly outsourced these ICs to semiconductor firms with specialized expertise. These trends have created a significant opportunity
for IC suppliers that can design cost-effective solutions for the processing and transport of data. OEMs require IC suppliers that possess system-level expertise and can quickly bring to market high-performance, highly reliable, power-efficient ICs.

The increase in volume and complexity of network traffic has led to the development of new technologies for more efficient networks. These
technologies provide substantially greater transmission capacity, are less error prone and are easier to maintain than copper networks. These more efficient networks carry high-speed traffic in the form of electrical and optical signals that are
transmitted and received by complex networking equipment. To ensure that this equipment and the various networks can communicate with each other, OEMs and makers of semiconductors have developed numerous communications standards and protocols for
the industry. For example, the Synchronous Optical Network (SONET) standard in North America and Japan and the Synchronous Data Hierarchy (SDH) standard in the rest of the world, became the standards for the transmission of
signals over optical fiber. The SONET/SDH standards facilitate high data integrity and improved network reliability, while reducing maintenance and other operation costs by standardizing interoperability among equipment from different vendors. With
data and video traffic being added in abundance to voice traffic, Optical Transport Network (OTN) emerged as a transmission protocol complementary to SONET/SDH to optimize bandwidth utilization. Many service providers deploy equipment
that handles this protocol because it can support a higher volume of voice, data, video and multimedia applications simultaneously at a lower infrastructure cost. With exponential increases in data traffic and very modest increases in voice traffic,
data has become the dominant traffic over all networks today. Internet Protocol (IP) is a popular packet based transport protocol that maintains network information and routes packets across networks. IP is becoming increasingly popular
as the quality of service for time sensitive packets improves. In addition, access technologies such as 10 Gigabit Ethernet and passive optical networking (PON) are increasing the complexity and bandwidth requirements of the network.

The Storage Industry

Storage
spending represents a significant percentage of information technology (IT) budgets for most enterprises. New regulations such as those issued under the Sarbanes-Oxley Act of 2002, the Health Insurance Portability and Accountability Act
of 1996 (HIPAA) and those governing the finance industry have driven continued strong demand for high-capacity storage within the enterprise and within a wide variety of vertical markets. The volume of data generated and stored digitally
has grown dramatically over the last decade and



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managing that data is one of the most difficult challenges facing IT organizations today. The enormous growth in storage capacities is also impacting the
type of storage being implemented. IT managers across industries are considering less expensive storage technologies to stretch their budgets by reassessing their storage needs and implementing topologies and technologies that are appropriate to the
criticality of their stored information. New drive interface technologies such as SATA, provide a much lower cost alternative to traditional enterprise drives. SATA disk drives are rapidly being deployed in secondary storage applications such as
back up, archival and near-line storage or the storage of infrequently accessed data.

All high-performance storage systems implement RAID
technology, which manages the storage and retrieval of information to and from the disk drives in the server or storage device. With the need to ensure data availability for many years beyond its creation, RAID has become a critical application in
the data compliance life-cycle. RAID is a technology in which data is stored in a distributed manner across multiple disk drives to improve system performance and to enhance fault tolerance and the ability to survive a hard drive failure. RAID
dramatically improves disk access times and provides real time data recovery, with uninterrupted access, and can increase system uptime and continuous network availability even when a hard drive failure occurs.

AMCC Strategy

AMCC provides the essential building
blocks for the processing, transporting and storing of information worldwide. AMCC is a leader in network and embedded Power Architecture processing, optical transport and storage solutions. Our products enable the development of converged IP-based networks offering high-speed secure
data, high-definition video and high-quality voice for carrier, metropolitan, access and enterprise applications. AMCC provides networking equipment vendors with industry-leading network and communications processing, Ethernet, SONET/SDH and switch
fabric solutions.

We have focused our product development efforts on high growth opportunities for processing, transporting, and storing
information. Our strategy for each of these areas is as follows:

Processing

We are continuing to invest in products based on the Power Architecture. This standard processor architecture, developed by IBM, is the leading
architecture within the communications market for high-performance embedded systems. Many of our customers products require embedded processing solutions for management, control and data plane functionality. Our products combine the embedded
central processing unit (CPU) core with peripheral functionality to create optimum solutions for applications such as wireless base-stations, storage controllers, WiFi access points, and network switch and routing products. We also have
substantial expertise in special purpose network processing architectures for data path processing. Products based on these architectures are broadly deployed and continue to be designed into major telecommunications and networking equipment. We are
developing integrated products that leverage the general purpose embedded processing capabilities of the Power Architecture with the high performance and specialized capabilities of our network processing architectures to create combined data and
control plane solutions that are ideally suited for converged IP-based networks. Additionally, due to the general-purpose nature of our processors many of our processing products find their way into auxiliary markets such as printers, storage
devices and other consumer electronic devices.

Transporting

Our transport technology products historical focus has been on the SONET/SDH optical telecommunications infrastructure where we are a leading vendor. Currently, AMCCs transport products sell into both the
Telecom and Datacom markets. In the Telecom Market, emerging Metro Ethernet and Residential Triple Play applications such as internet protocol television (IPTV) and OTN are driving substantial investments in optical infrastructure
deployments. These new deployments are increasingly based on Metro or Carrier Class Ethernet.



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In the Datacom market, the data center enterprise networks are migrating from Gigabit Ethernet
(GE) to 10GE. Their transition is still early but is expected to grow exponentially once the technology is proven.

We are
focusing our current transport investments on these high growth market opportunities while continuing to service the SONET/SDH market with a broad portfolio of physical layer (PHY), clock and data recovery (CDR), forward
error correction (FEC) and SONET/SDH mapper.

Storing

The storage technology products deliver high-port count SATA RAID controllers and RAID processors for high-performance, high-capacity storage applications
that demand very high levels of data protection. AMCC blends systems and software expertise to deliver highly reliable storage solutions for emerging storage applications such as disk-to-disk backup, near-line storage, NAS, video, external storage
and high-performance computing.

Products and Customers

Integrated Communications Products

Our integrated communications products are used in a wide
variety of communications equipment, including routers, optical and digital cross connects, next-generation voice and media gateways, add/drop multiplexers, multi service provisioning platforms, multi service switches, digital subscriber line access
multiplexers (DSLAMs) and wireless base stations and access points. We provide our customers with a complete portfolio of IC products, including physical layer products such as transceivers, overhead processing products such as framers
and mappers, and higher layer products such as Power Architecture based embedded processors, network processors, traffic managers and switch fabrics.

Physical Layer Products:     The Open System Interconnect (OSI) model defines a networking framework for implementing protocols in seven layers. Control is passed from one layer
to the next, starting at the application layer in one station, proceeding to the bottom layer, over the channel to the next station and back up the hierarchy. Our PHY ICs, transmit and receive signals in a very high-speed serial format that reduces
overall system noise through the inclusion of highly efficient dispersion compensation methodologies. This low noise capability permits the transmission of signals over greater distances with fewer errors. Our PHY ICs also convert
high-speed serial formats to low-speed parallel formats for the framing layer and vice versa. We introduced our first generation of physical layer products in 1993. We have since developed several generations of these products improving cost, power,
functionality, and performance. The past year saw a tremendous increase in growth of our 2.5GHz and 10GHz PHY products. Our market growth in this area is significant and was led by our S19235, S19237, S19250 and S19252 10G Telecom PHY products.
These devices are not only market leaders in the established SONET/SDH network infrastructure but also play well in the emerging OTN network infrastructure. These products set a new standard for performance and power consumption in the industry.

AMCC also expanded into the Datacom 10GE optical space with our acquisition of Quake Technologies, the worldwide leader in 10GE PHY
solutions. Quakes products are targeted to the higher volume 10G Datacom marketplace served by system vendors such as Cisco, Force-10, Extreme Networks, Juniper Networks and others. This past year saw the former Quake team introduce two
extremely important products. The QT2035S is the industrys first PHY designed to enable 10G transmission over a standard back plane inside a blade server and 10GE switch. QT2035 and QT1215 are the industrys first family of PHYs designed
specifically to operate with the new Small Form-factor Pluggable+ (SFP+) 10G optical transceiver.

Between the traditional AMCC
10G Telecom Optical PHYs and our new products from Quake, we are well positioned to be the leading supplier in the 10G space. Our current customers for physical layer products include Alcatel-Lucent, Ciena, Cisco, Ericsson, Fujitsu, Hitachi, JDS
Uniphase, Opnext, Optium, Intel, Adva, Juniper, Nortel, Tellabs, Huawei, and ZTE.

Framer and Pointer Processor
Products:    Our framing layer ICs transmit and receive signals to and from the physical layer in a parallel format and are used in high-speed transmission equipment such as multi-service



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provisioning platforms (MSPPs), add drop multiplexors (ADMs), digital and optical cross-connects, edge and core routers, and dense
wave division multiplexors (DWDM). These ICs support a number of functions, including framing, overhead processing payload synchronization, performance monitoring, forward error correction, and mapping the data payload to/from the
transmission format. The framing layer ICs then pass the data either directly to a switch fabric product, which switches the information to its destination, or to a network processor, which further processes the data prior to forwarding it to a
switch fabric product. Framing layer ICs also process signals received from the network processing and switching layers for transmission to the physical layer on their return to the optical network. In the past year we experienced extended design
win growth for the Rubicon OTN device and the Volta Ethernet Over SONET/SDH device. This past year saw these devices gain design wins in the emerging Carrier Class Ethernet space as well as in the OTN space. The growth of both of these kinds of
platforms has been significant in the past year, and the 10GE mapping techniques in the Rubicon chip has make it the de-facto choice in the marketplace for OTN transport. In the past calendar year we also introduced the Drava chip, a highly
integrated 2.5G SONET/SDH Pointer Processor. Our current customers for framing layer products include Adva, Alcatel-Lucent, Ciena, Cisco, Ericsson, NEC, Nortel, Tellabs, Fujitsu, Huawei, and ZTE.

Packet Processing Products:    Our packet processor ICs are programmable processors that receive and transmit signals to and
from the framing layer and perform the processing of packet and cell headers, including such functions as real-time parsing, matching and table look-up, as well as bit stream manipulations, such as adding, deleting, substituting, appending and
pre-pending. They can perform intelligent packet classification for policy-based network services. Our packet processors have an integrated, hardware-based, traffic management co-processor that performs the queuing and buffering functions required
on packets and cells to provide quality of service support to networks. During fiscal 2007, we released the nP3705 OC-24 integrated packet processor and traffic manager, which is targeted at accessing multi-service applications, and the nP3665
packet processor, which is targeted at accessing applications in mobile infrastructure. The architecture of AMCCs packet processor product family integrates multiple network-optimized programmable co-processors architected to deliver
wire-speed performance while processing complex nested protocol stacks and mixed ATM/Packet payloads. Our current customers for packet processors include Alcatel-Lucent, Cisco, Fujitsu, Nortel, Huawei and Juniper.

Cell Switching Products:    Our switch fabric ICs switch information in the proper priority and to the proper destinations.
Our switch fabric product portfolio includes our packet routing switch (PRS) fabric devices such as the PRS 80G, Q-80G and queuing managers like universal data serial link (UDASL) C48 and C192. Our current customers for
switching layer products include Alcatel-Lucent, Fujitsu, Huawei, Ericsson, Ericsson/Entrisphere, Nortel, Hammerhead/Fujitsu and Tellabs.

Embedded Processor Products:    We are a leading supplier of embedded processors, third in market share behind Freescale and Intel in 2006 (IDC 2006). Our embedded processors are widely deployed in a variety of
critical applications in target markets such as Wireless Infrastructure, Wireless LAN and High-end Storage. In Wireless Infrastructure, our embedded processors are used in base station controllers by leading suppliers of WCDMA and GSM equipment. In
networking equipment such as edge, core and enterprise routers, our embedded processors handle overall system maintenance and management functions and also deal with exception conditions in the data path. In WLAN applications, our embedded
processors are installed in a significant share of all Enterprise class Access Points shipped worldwide. Our embedded processor products currently utilize IBMs PowerPC 4xx processor cores in various speed grades, together with many different
functions, to perform numerous tasks in products sold by our customers. These cores are integrated with peripheral functionality to create specialized system on a chip (SoC) product solutions. We offer multiple product lines of embedded
processor products, each targeted at specific market opportunities. As carrier and metro networks transition to Ethernet and IP-based networks, the need for high performance general purpose embedded processing increases. These embedded processors
are high performance devices enabling high-speed computations and data movement that help identify, optimize and control the flow of data within the network. Our Power Architecture product line of embedded processors enable complex applications such
as deep content switching, routing and load balancing



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to be performed at wire speed. Versions of our processors are also targeted at large opportunities in RAID storage processing, multi-function printers and a
variety of other embedded applications. In fiscal 2007, we brought to production the 440EPx and 440GRx embedded processors with support for Gigabit Ethernet and integrated security processing acceleration, as well as versions or our 440SP and 440SPe
storage processors with RAID 6 support. RAID 6 technology enables storage systems to recover from the failure of two drives in a RAID system. Also in fiscal 2007, we introduced the 405EZ, our first offering in the industrial controls market place.

Storage Products

Our storage products include serial and parallel Advanced Technology Attachment (ATA) RAID controllers.

RAID Controllers:    Through our acquisition of 3ware, we design,
manufacture and sell an extensive family of peripheral component interconnect (PCI) based RAID controllers. These RAID controllers are installed in a PCI slot on a motherboard and deliver high performance, highly reliable storage for
servers and network attached storage devices. A single controller can manage up to 24 hard disk drives allowing up to 18 terabytes of data storage for Linux and Windows operating environments. Our proprietary packet-switched RAID architecture,
StorSwitchTM, delivers best of class performance that we believe has secured AMCC a leadership position in the high
performance SATA RAID marketplace. In fiscal 2007, we began shipments of the 9650SE family of RAID 6 enabled SATA II RAID controllers, which deliver enterprise-class features, combined with cost effective SATA storage.

Embedded Processors:    The PowerPC 440SP and 440SPe processors, members of the PPC440 embedded processor family, offer
exceptional performance, high bandwidth, design flexibility, and robust features geared to demanding embedded storage and networking applications. The PowerPC 440SP and 440SPe processors are ideally suited for RAID controllers and storage area
network (SAN) equipment. Our customers in the storage market utilize these products in controller, switches, adapters, servers, and RAID systems.

Automated Test Equipment, Military and High-Speed Computing Products

We are not currently developing new products
for the automated test equipment (ATE) or military markets, but we continue to sell Application Specific IC products to customers such as Northrop Grumman, Raytheon, and Teradyne. The majority of these products were manufactured in our
internal wafer manufacturing facility, which closed in fiscal 2003. During fiscal 2007, we continued to fill last-time-buy orders for these products. We will continue to sell these products for the foreseeable future. The revenue from such products
is expected to be modest.

Technology

We utilize our technological and design competencies to solve the problems of high-speed analog, digital and mixed-signal circuit designs and provide the essential products for the transporting, processing and storing of information
worldwide. We blend systems and software expertise with high-performance, high-bandwidth silicon integration to deliver communications ICs and software for global communication networks and hardware and software solutions for high-growth storage
markets such as SATA RAID. Our embedded processor product line delivers performance and a rich mix of features for Internet, communication, data storage, consumer and imaging applications.

Knowledge of Communications and Storage Systems

Our systems architects, design engineers, technical marketing and applications engineers have a thorough understanding of the fiber optic communications and enterprise storage systems for which we design and build



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application specific standard products (ASSPs). Using this systems expertise, we develop semiconductor and storage connectivity devices to meet
the OEMs high-bandwidth requirements. By understanding the systems into which our products are designed, we believe that we are better able to anticipate and develop solutions optimized for the various cost, power and performance trade-offs
faced by our customers. We believe that our systems knowledge also enables us to develop more comprehensive, interoperable solutions. This allows us to develop products that fulfill customers system needs from fiber-through-switch fabrics,
enabling faster integration into their products.

Design of Communications ICs and Storage Solutions

We have developed multiple generations of products that integrate both analog and digital elements on the same IC, while balancing the difficult
trade-offs of speed, power and timing inherent in very dense high-speed applications. We were one of the first companies to embed analog phase locked loops in bipolar chips with digital logic for high-speed data transmission and receiver
applications. Since the introduction of our first on-chip clock recovery and clock synthesis products in 1993, we have refined these products and have successfully integrated multiple analog functions and multiple channels on the same IC. The mixing
of digital and analog signals poses difficult challenges for IC designers, particularly at high frequencies. We have gained significant expertise in mixed-signal IC designs through the development of multiple product generations. We will continue to
apply these competencies in the development of more complex products in the future.

We have developed storage connectivity products that
interoperate with server and storage topologies and major operating systems and interfaces. We intend to continue working closely with leaders in the storage, networking and computing industries to design and develop new and enhanced storage
connectivity products. We believe that establishing strategic relationships with technology partners is essential to ensure that we continue to design and develop competitive products that integrate well with solutions from other leading
participants in the storage markets.

Research and Development

Our research and development expertise and efforts are focused on the development of high-performance analog, digital and mixed-signal ICs for the communications and storage markets, and PCBAs and software solutions
for storage markets such as SATA RAID. We also develop high-performance libraries and design methodologies that are optimized for these applications. Our primary research and development facilities are located in Sunnyvale and San Diego, California,
Raleigh, North Carolina, Austin, Texas, and Andover, Massachusetts in the United States; Ottawa, Canada; and Manchester, England. During the fiscal years ended March 31, 2007, 2006, and 2005, we expended $96.4 million, $93.8 million, and $122.1
million, respectively, on research and development activities.

Our IC product development is focused on building high-performance,
high-gate-count digital and analog-intensive designs that are incorporated into well-documented blocks that can be reused for multiple products. We have made, and will continue to make, significant investments in advanced design tools to leverage
our engineering staff. Our product development is driven by the imperatives of reducing design cycle time, increasing first-time design correctness, adhering to disciplined, well documented design processes, and continuing to be responsive to
customer needs. We are also developing high-performance final assembly packages for our products in collaboration with our packaging suppliers and our customers.

Our PCBA product development efforts are focused on building high-performance SATA RAID adapters, and related software drivers, tools and products and advanced telecom computing architecture (ATCA) boards
and software for our switch fabric, network processors and embedded PowerPC processors for the communications market. Before a new product is developed, our research and development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and commercially released, our engineers continue to work with customers on early design-in efforts to understand requirements for future generations and upgrades.



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Manufacturing

Manufacturing of Integrated Circuits

The manufacturing of ICs requires a combination of competencies in advanced
silicon technologies, package design and manufacturing, and high speed test and characterization. We have obtained access to advanced Complementary Metal-Oxide Semiconductor (CMOS) and Silicon Germanium (SiGe) processes
through foundry relationships. We have substantial experience in the development and use of plastic and ceramic packages for high-performance applications. The selection of the optimal package solution is a vital element of the delivery of
high-performance products and involves balancing cost, size, thermal management, and technical performance. We purchase our ceramic packages from several vendors including IBM and Kyocera America and our plastic packaging from Advanced Semiconductor
Engineer (ASE), ASAT and IBM.

Wafer Fabrication

During fiscal 2003, we closed our internal wafer fabrication facility in San Diego. As a result, we are a fabless company, meaning we do not own or
operate foundries for the production of silicon wafers from which our products are made. We will continue to use external foundries such as IBM, Taiwan Semiconductor Manufacturing Corporation (TSMC) and United Microelectronics
Corporation (UMC) for a majority of our production of silicon wafers. Subcontracting our manufacturing requirements eliminates the high fixed cost of owning and operating a semiconductor wafer fabrication facility and enables us to focus
our resources on design and test applications where we believe we have greater core competencies and competitive advantages.

Assembly and Testing

Our wafer probe and other product testing is conducted at our internal testing facility as well
as at independent test subcontractors. After testing is complete, the majority of our products are sent to multiple subcontractors located in Asia and the United States for assembly. Following assembly, some of the devices are tested at the
subcontractors and returned to us ready for shipment to our customers or to us for final testing and marking prior to shipment to customers. Certain of these services are available from a limited number of sources and lead times are occasionally
extended.

Manufacturing of Printed Circuit Board Assemblies

We believe most component parts used in our RAID adapters and ATCA evaluation boards are standard off-the-shelf items that can be purchased from two or more sources, other than our proprietary Application-Specific
Integrated Circuits (ASICs) and certain ICs. We select suppliers on the basis of functionality, manufacturing capacity, quality and cost. Whenever possible and practicable, we strive to have at least two manufacturing locations for each
product. We encourage our contract manufacturers to purchase the components for our products, and assemble them to our specifications.

Sales and
Marketing

Our sales and marketing strategy is to develop strong, engineering-intensive relationships with the design teams of the
market leading platforms at our customers. We maintain close working relationships with these customers so our marketing team can focus on identifying and developing new products that will meet their needs in the future, involving us in the early
stages of our customers plans to design new equipment. We sell our products both directly and through a network of independent manufacturers representatives and distributors. Our direct sales force is technically trained. Expert
technical support is critical to our customers success and we provide such support through our field applications engineers, technical marketing team and engineering staff, as well as through our extranet technical support web site.

We augment this strategic account sales approach with domestic and foreign distributors that service primarily smaller accounts purchasing
standard ICs and PCBAs. Typically, these distributors handle a wide variety of products, including those that compete with our products, and fill orders for many customers. For our



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RAID products we primarily use the distribution model and spend a good deal of our sales time supporting their efforts. We use marketing programs to augment
the distribution effort to reach many of our customers. Most of our sales to distributors are made under agreements allowing for price protection and stock rotation of unsold merchandise. Our sales headquarters is located in Sunnyvale, California.
We maintain sales offices throughout the world. Net revenues generated from each category of our products as well as information regarding net revenue generated from each of our significant customers, and a geographic breakdown of our net revenues
is summarized in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.

Backlog

Our sales are made primarily pursuant to standard purchase orders for the delivery of products. Quantities of our products to be
delivered and delivery schedules are frequently revised to reflect changes in customers needs; customer orders generally can be cancelled or rescheduled without significant penalty to the customer. For these reasons, our backlog as of any
particular date is not representative of actual sales for any succeeding period, and therefore, we believe that backlog is not necessarily a good indicator of future revenue.

Competition

In the communications IC markets, we compete primarily against companies such as LSI,
Broadcom, Intel, Mindspeed, PMC-Sierra, and Vitesse. Our principal competitors in the RAID controller market are Adaptec, Areca, Hewlett-Packard, LSI, and Promise. In the embedded processor market, we compete with other large technology companies
such as Freescale Semiconductor, IBM and Intel. In addition, certain of our customers and potential customers have internal IC or storage design or manufacturing capability with which we compete.

The communications IC and storage markets are highly competitive and are subject to rapid technological change. The nature of the communications IC
market is that design cycles are often measured in years. As such, an IC suppliers timing of delivery to market is critical as once an IC suppliers product is designed into a customers products, the IC supplier can often enjoy
sales of the product for several years. Conversely, if a supplier misses a design cycle or develops an uncompetitive product, the supplier may never generate significant revenues from the product. We typically face competition at the design stage
when our customers are selecting which components to use in their next generation equipment. In the storage market, our products can be qualified by customers more quickly than in the IC market, and our storage products are generally distinguished
by a combination of pricing, features and reliability. We believe that the principal factors of competition for the markets we serve include: product performance, quality, reliability, integration, price, and time-to-market, as well as our
reputation and level of customer support. Our ability to successfully compete in these markets depends on our ability to design and subcontract the manufacture of new products that implement new technologies and gain end-market acceptance in a
time-efficient and cost-effective manner.

Proprietary Rights

We rely in part on patents to protect our intellectual property. We have been issued approximately 235 patents, which principally cover certain aspects of the design and architecture of our IC and enterprise storage
products. In addition, we have over 80 inventions in various stages of the patenting process in the United States and abroad. There can be no assurance that any of our pending patent applications or any future applications will be approved, or that
any issued patents will provide us with competitive advantages or will not be challenged by third parties or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability
to do business. There can be no assurance that others will not 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 a 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.



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As a general matter, the semiconductor and enterprise storage industries are characterized by substantial
litigation regarding patent and other intellectual property rights. In the past we have been, and in the future may be, notified that we may be 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. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of our
products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business, financial condition or operating results. In the event of any adverse
ruling in any such matter, we could be required to pay substantial damages, which could include treble damages, cease the manufacture, 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. There can be no assurance that a license would be available on reasonable terms or at all. Any limitations on our ability to market our products, any delays and costs associated
with redesigning our products or payments of license fees to third parties or any failure by us to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition
and operating results.

Environmental Matters

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 that were 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. Such 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 potentially responsible party (PRP) along with a large number of other companies that used Omega Chemical Corporation in
Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega Chemical site, which efforts are ongoing. For more information
see our risk factor titled We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials in Item 1A below.

Employees

As of March 31, 2007, we had 619 full-time employees: 63 in administration, 342 in
research and development, 76 in operations, and 138 in marketing and sales. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees are covered by a collective bargaining agreement, nor have
we ever experienced any work stoppage.

Executive Officers of the Registrant

Our executive officers and their ages as of March 31, 2007, are as follows:



|                  |  |     |  |                                                                               
|----------------- |  | --- |  | ------------------------------------------------------------------------------
|Name              |  | Age |  | Position                                                                      
|Kambiz Hooshmand  |  | 45  |  | President and Chief Executive Officer, Member of the Board of Directors       
|Robert G. Gargus  |  | 55  |  | Senior Vice President and Chief Financial Officer                             
|Robert Bagheri    |  | 50  |  | Senior Vice President, Operations and Quality                                 
|Onchuen Daryn Lau |  | 42  |  | Senior Vice President, General Manager Integrated Communications Products, ICP
|Barbara Murphy    |  | 43  |  | Senior Vice President, General Manager, Storage                               
|Cynthia Moreland  |  | 47  |  | Vice President, General Counsel and Secretary                                 
|Roger Wendelken   |  | 40  |  | Vice President, World Wide Sales                                              
|Scott Dawson      |  | 52  |  | Vice President, Treasury and Investor Relations                               



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Kambiz Hooshmand joined us as President and Chief Executive Officer and as a member of our Board
of Directors in March 2005. Prior to March 2005 he was with Cisco Systems, where he most recently served as Vice President and General Manager of Ciscos Optical and Broadband Transport Technology group. At Cisco, Mr. Hooshmand held
several executive-level positions in Multi-Service Switching, Digital Subscriber Line (DSL), Carrier Core and Multi-Service, and Optical and Broadband Transport business units. He joined Cisco as a director of engineering as part of the
StrataCom acquisition in 1996. Mr. Hooshmand has over two decades of experience in core routing, VoIP, ATM, access and transport technologies. Mr. Hooshmand holds a Master of Science degree in Engineering Management from Stanford
University and a Bachelor of Science degree in Electrical Engineering from California State University at Chico.

Robert G. Gargusjoined us in October 2005 as Senior Vice President and Chief Financial Officer. From May 2005 to October 2005, he was Chief Financial Officer of Open-Silicon, a privately held fabless ASIC company. From October 2001 to April 2005, he was Chief
Financial Officer of Silicon Image, a public semiconductor company specializing in high-speed serial communications technology, where the company experienced significant growth, a return to solid profitability, and a ten-fold improvement in their
market cap. Mr. Gargus served as President and CEO of Telcom Semiconductor, a supplier of semiconductor products for the wireless market, from April 2000 to April 2001 and as CFO from May 1998 to April 2000. Under his leadership, Telcom
Semiconductor was selected by Forbes Magazine in October 2000 as one of the 200 Best Small Companies. Prior to Telcom Semiconductor, Mr. Gargus held various financial and general management positions with Tandem Computers, Atalla
Corporation, and Unisys Corporation. Mr. Gargus holds a Master of Business Administration degree in Finance and a Bachelor of Science degree in Accounting from the University of Detroit.

Robert Bagheri, Senior Vice President, Operations and Quality, joined us in November 2005. Before November 2005, he was Executive Vice President,
Central Engineering and Operations and Quality and Reliability at Silicon Image, Inc., a public semiconductor company specializing in high-speed serial communications technology, since February 2003. At Silicon Image Mr. Bagheri was responsible
for several manufacturing and engineering disciplines as well as quality and reliability functions, strategic business direction, long-range planning and technology and foundry selection. From January 1997 to January 2003, Mr. Bagheri held
senior positions at SiRF Technology Inc., a developer of software and semiconductor products designed to provide location awareness capabilities. Prior to SiRF Technology, Mr. Bagheri held various product engineering and management positions at
S3 Inc., and Zoran Corporation. Mr. Bagheri received a diploma in electronics engineering from the Cleveland Institute of Electronics.

Onchuen Daryn Lau joined us in May 2005 as Vice President and General Manager, Communications Business Unit and was named Senior Vice President in October 2005. Before May 2005, Mr. Lau was Vice President and General Manager for
the serial switching division of Integrated Device Technology (IDT), a semiconductor company for advanced network services. In October 1999, Mr. Lau co-founded ZettaCom, a supplier of high-performance network semiconductor solutions
and served as President and Chief Executive Officer. ZettaCom was acquired by IDT in May 2004. Prior to his executive role at ZettaCom, Mr. Lau spent seven years at Cisco Systems where he held various technical positions in both enterprise and
service provider business units. Prior to Cisco, Mr. Lau led the ASIC development group NET, a telecom equipment vendor and, at Amdahl, the mainframe division of Fujitsu. Mr. Lau holds a Bachelor of Science degree in Electrical Engineering
from University of California, Berkeley.

Barbara Murphy joined us in April 2004 as Vice President and General Manager, Storage when
we acquired 3ware, Inc. and was promoted to Senior Vice President and General Manager, Storage in March 2007. Ms. Murphy most recently served as Vice President of Marketing at 3ware, Inc. Ms. Murphy has over 15 years experience in the
communications and storage industry. Prior to joining 3ware, Ms. Murphy worked as a marketing consultant since 2001 developing business plans and go-to-market strategies for various technology companies. Ms. Murphy was also the Senior
Director of Product Marketing at Roxio (a spin-out from Adaptec, Inc., a manufacturer of high-performance Small Computer System Interface (SCSI) connectivity and network



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products), where she was responsible for all product management and demand-generation for Roxios software product line. Prior to Roxio, Ms. Murphy
spent over five years at Adaptec, Inc., holding numerous marketing management positions in the SCSI server and desktop groups. Before joining Adaptec, Ms. Murphy was a marketing manager for British Telecom, North America and earlier she worked
as an engineer for GEC Plessey Telecommunications. Ms. Murphy holds a Bachelor of Engineering degree from the University of Limerick, Ireland and a Masters in Business Administration from Santa Clara University, California.

Cynthia Moreland joined us in July 2005 with over 20 years legal experience working with technology companies as both outside and in-house
counsel. Prior to July 2005, Ms. Moreland served as Of Counsel with McGlinchey Stafford, PLLC where she focused on commercial transactions and litigation, intellectual property, government contracts and corporate compliance. From
19892001, Ms. Moreland served in a number of increasingly responsible positions at Motorola including three years as head of legal for Motorolas Semiconductor Products Sector (now Freescale, Inc.). Ms. Moreland started her
legal career in Washington DC, with Steptoe & Johnson. Ms. Moreland earned a Bachelor of Arts degree from the University of Mississippi, magna cum laude and her Juris Doctor from the University of Mississippi, cum laude. She is a past
chair of the Legal Issues Committee of the Intelligent Transportation Society of America and a former instructor of government contracts at the University of Phoenix.

Roger Wendelken joined us in May 2006. Prior to joining us, Mr. Wendelken was Vice President of Sales for the Communications and Consumer Group of Marvell Technology Group, a provider of mixed-signal and
digital signal processing integrated circuits to broadband digital data networking markets, since September 2003. From October 2001 to September 2003, Mr. Wendelken was Vice President of Worldwide Sales for Accelerant Networks, a fabless
semiconductor company, which develops CMOS, based transceivers. Mr. Wendelkens 16 years of semiconductor sales experience also includes various positions at Advanced Micro Devices, IBM Microelectronics Group, and Metalink Broadband.
Mr. Wendelkens semiconductor sales experience encompasses a number of technology market segments. Mr. Wendelken holds a Bachelors of Science degree in Electrical Engineering from Georgia Institute of Technology.

Scott Dawson joined us in February 2000 as Director of Treasury. Mr. Dawson was promoted to Director of Investor Relations in July 2005 and
then to Vice President of Investor Relations and Treasury in January 2006. Prior to July 2005, Mr. Dawson held various positions in Financial Planning and Analysis with us. Prior to February 2000, Mr. Dawson held several senior financial
and operations management positions in the mortgage banking and real estate industries. He began his career in public accounting with Ernst & Young. Mr. Dawson holds a Bachelor of Science degree in Business Administration with an
emphasis in Accounting from San Diego State University and is a Certified Public Accountant in the State of California.



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|Item 1A. | Risk Factors.
|-------- | -------------

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 your investment.

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 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 amounts and timing of costs associated with warranties and product returns;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the amounts and timing of investments in research and development;
| | - |  | ------------------------------------------------------------------



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



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| |  |  | 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, including the rule requiring the recognition of expense related to share-based payments to employees, such as grants
of stock options and restricted stock units;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic 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 at 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; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 makes 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 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.

The technology equipment industry is cyclical and has experienced significant and extended downturns in the past. 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. OEMs and other customers that buy our storage products are similarly dependent on continued internet growth and information technology spending. If there is an economic slowdown or reduction in
capital spending, 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. Continued reductions, delays and cancellation of orders from our key customers or the
loss of one or more key customers could significantly further 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 new significant 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | customers or prospective customers may not incorporate our products in their future product designs;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | design wins with customers may not result in sales to such customers;
| | - |  | ---------------------------------------------------------------------



| |  |  | the introduction of new products by customers may be later or less successful in the market than planned;
| | - |  | ---------------------------------------------------------------------------------------------------------



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



| |  |  | sales of customer product lines using our products may rapidly decline or the product lines may be phased out;
| | - |  | --------------------------------------------------------------------------------------------------------------



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



| |  |  | many of our customers have pre-existing relationships with current or potential competitors that may cause them to switch from our products to 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; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | the continued viability of these customers.
| | - |  | -------------------------------------------

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

In addition, before we can sell our storage products to an OEM, either directly or through the OEMs associated distribution channel, that OEM must certify our products. The certification process can take up to
12 months. This process requires the commitment of OEM personnel and test equipment, and we compete with other suppliers for these resources. Any delays in obtaining these certifications or any failure to obtain these certifications would adversely
affect our ability to sell our storage products.

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, 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.

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 product. 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, reduced sales prices, inventory write-downs and increased product obsolescence.

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 against the risk of inventory obsolescence because of changing technology and customer requirements.



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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 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 three to more than six months to test, evaluate and adopt our product and an additional three to more than nine months 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 assure you that the customer will ultimately market and sell
its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy design cycle increase 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 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 continue our focus on the markets for communications and storage equipment. If we are unable to further expand our share of
these markets, our revenues may not grow and could decline.

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 could 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.

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.



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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 strong relationships with network equipment vendors, our business, financial condition and results of
operations would be materially and adversely affected.

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 and other barriers;
| | - |  | ---------------------------



| |  |  | timing and availability of export licenses;
| | - |  | -------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | difficulties in accounts receivable collections;
| | - |  | ------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | difficulties in managing distributors;
| | - |  | --------------------------------------



| |  |  | difficulties in obtaining governmental approvals for communications and other products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | reduced or uncertain protection for intellectual property rights in some countries;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | longer payment cycles to collect accounts receivable in some countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | the burden of complying with a wide variety of complex foreign laws and treaties; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

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 receivable,
accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations.



18



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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 cash and cash equivalents and 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. 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.

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. Employees whose positions were
eliminated in connection with these restructuring plans may seek future employment with our customers or competitors. Although all employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you 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 assure you that we will not undertake additional restructuring activities, that any future 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 any 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;
| | - |  | ------------------------------



| |  |  | evolving and competing industry standards;
| | - |  | ------------------------------------------



| |  |  | changing customer needs;
| | - |  | ------------------------



| |  |  | frequent new product introductions 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, storage 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



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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 introducing 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 and financial results.

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.

In the communications IC markets, we compete
primarily against companies such as LSI, Broadcom, Intel, Mindspeed, PMC-Sierra and Vitesse. In the storage market, we primarily compete against companies such as Adaptec, Areca, Hewlett-Packard, LSI, and Promise. Our embedded processor products
compete against products



20



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from Freescale Semiconductor, IBM and Intel. Many of these companies 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 the storage market, 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.

The storage market continues to mature and become commoditized. To the extent that commoditization leads to significant
pricing declines, whether initiated by us or by a competitor, we will be required to increase our product volumes and reduce our costs of goods sold to avoid resulting pressure on our profit margin for these products, and we cannot assure you that
we will be successful in responding to these competitive pricing pressures.

We do not have an internal wafer fabrication capability, which could result
in unanticipated liability and reduced revenues.

During fiscal 2003, we closed our internal wafer fabrication facility and no longer
have the ability to manufacture products internally. As a result, we are subject to substantial risks, including:



| |  |  | if we have not effectively stored certain products manufactured in our internal facility before its closure, we may incur liability to those customers to whom we
have committed to deliver such products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to repair or replace such products.
| | - |  | ----------------------------------------------------

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.

We depend upon third parties to manufacture, assemble or package 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 very 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



21



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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 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 and materially impact our ability to deliver our products on time.

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.

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 revalued. 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.



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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 .13 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. 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.

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

Our future success will depend upon our ability to improve
existing IC process technologies or acquire 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 improve our process technologies or otherwise gain access to new process technologies in a timely or affordable manner. Products based on these 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.



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

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal
controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal controls 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, managements assessment of our internal controls over financial reporting.

Our management, including our chief executive officer and chief financial officer, does not expect that our internal controls 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 controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls 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, controls 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, 2007. In connection with the investigation of our historical stock
option grant practices, we did identify material weaknesses in our internal control over financial reporting that existed in fiscal years prior to fiscal 2005. We cannot assure you that we or our independent registered public accounting firm will
not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal
controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience another restatement and/or a loss of public confidence, which could have an adverse effect on our business and on the market
price of our common stock.

If we are unable to transition our accounting function smoothly, our ability to report our financial results accurately or
on a timely basis may be adversely affected.

We are in the process of completing the transition of most of our accounting functions
from San Diego to Sunnyvale. We also have open employment positions in the accounting department that will remain in San Diego. If we are unable to complete the transition to the new team in an effective manner, it could adversely impact our ability
to report our financial results accurately and/or in a timely manner. The inability to transition to the new accounting team in an effective manner could also have an adverse impact on our internal control environment. This could cause us to have
material weaknesses in our internal controls over our financial reporting and consequently could cause our management or our independent registered public accounting firm to determine our internal controls are ineffective. If this were to occur, it
could have an adverse impact on our business and could cause us to lose public confidence and may jeopardize the continued listing of our common stock, which could have an adverse impact 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 and our
ability to identify, hire and retain additional, qualified personnel.

Our future success depends to a significant extent upon the
continued service of our senior management personnel. The loss of key senior executives could have a material adverse effect on our business. There is



24



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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 retention of 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 assure you 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. In 2001, California experienced prolonged energy alerts
and blackouts caused by disruption in energy supplies. As a consequence, California continues to experience substantially increased costs of electricity and natural gas. We are unsure whether these 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.

A portion of our test and assembly facilities are
located in our San Diego, California location and 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 have been named as a party to several
derivative action lawsuits arising from our internal option review, and we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses and may result in an
unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to a number of lawsuits purportedly on behalf of Applied Micro Circuits Corporation against certain of our current and former executive officers and board members, and we may become the subject of additional private or
government actions. The expense of defending such litigation may be significant. The



25



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amount of time to resolve these lawsuits is unpredictable and defending ourselves may divert managements attention from the day-to-day operations of
our business, which could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows.

As a result of our option review and restatement, we are subject to investigations by the SEC and Department of Justice (DOJ), which may
not be resolved favorably and has required, and may continue to require, a significant amount of management time and attention and accounting and legal resources, which could adversely affect our business, results of operations and cash flows.

The SEC and the DOJ are currently conducting investigations relating to our historical stock option grant practices. We have been
responding to, and continue to respond to, inquiries from the SEC and DOJ. The period of time necessary to resolve the SEC and DOJ investigations is uncertain, and these matters could require significant management and financial resources which
could otherwise be devoted to the operation of our business. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, we could be required to pay damages or penalties or have other remedies imposed upon us. The
restatement of our financial statements, the ongoing SEC and DOJ investigations and any negative outcome that may occur from these investigations could impact our relationships with customers and our ability to generate revenue. In addition,
considerable legal and accounting expenses related to these matters have been incurred to date and significant expenditures may continue to be incurred in the future. The SEC and DOJ investigations, and any negative outcome that may result from such
investigation, could adversely affect our business, results of operations, financial position and cash flows.

The process of restating our financial
statements, making the associated disclosures, and complying with SEC requirements was subject to uncertainty and evolving requirements.

We worked with our independent registered public accounting firm and the SEC to make our filings comply with all related requirements. The issues surrounding the historical stock option grant practices are complex and the regulatory
guidelines or requirements continue to evolve. There can be no assurance that further SEC and other requirements will not evolve and that we will not be required to further amend this filing. In addition to the cost and time to amend financial
reports, such an amendment may have a material adverse effect on our investors confidence and our common stock price.

If we do not maintain
compliance with Nasdaq listing requirements, our common stock could be delisted, which could have a material adverse effect on the trading price of our common stock and cause some investors to lose interest in our company.

As a result of our option investigation, we were delinquent in filing certain of our periodic reports with the SEC, and consequently we were not in
compliance with Nasdaqs Marketplace Rules. As a result, we underwent a review and hearing process with Nasdaq to determine our listing status. Once we filed the delinquent periodic reports with the SEC, Nasdaq permitted our securities to
remain listed on the Nasdaq Global Select Market, but our securities could be delisted in the future if we do not maintain compliance with applicable listing requirements. Being delisted could affect our access to the capital markets and our ability
to raise capital through alternative financing sources on terms acceptable to us or at all and could cause our investors, suppliers, customers and employees to lose confidence in us.

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 that were used in our
manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the



26



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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 potentially responsible party (PRP) along with a large number of other companies that used Omega Chemical Corporation in Whittier,
California to handle 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 site. To date, our payment obligations with respect to
these funding efforts have not been material, and 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. Although we believe that we are
currently in material compliance with applicable environmental laws and regulations, we cannot assure you 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 site, will not have a material adverse effect on our business. In 2003, we closed our wafer fabrication facility in San Diego, and the property was returned to the landlord.

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 European Union 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 cost were to become prohibitive.

Our business strategy may contemplate 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.

Acquiring products, technologies or businesses from third parties is part of our 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;
| | - |  | ------------------------------------



| |  |  | failure to retain or integrate key personnel;
| | - |  | ---------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | costs associated with acquisitions or mergers;
| | - |  | ----------------------------------------------



| |  |  | difficulties associated with the integration of acquired companies, products or technologies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | difficulties competing in markets that are unfamiliar to us;
| | - |  | ------------------------------------------------------------



27



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| |  |  | ability of the acquired companies to meet their financial projections; and
| | - |  | --------------------------------------------------------------------------



| |  |  | assumption of unknown liabilities, or other unanticipated events or circumstances.
| | - |  | ----------------------------------------------------------------------------------

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. At March 31, 2007, we had $415.6 million of goodwill and purchased intangible assets. We cannot assure you that we will not be required to take additional significant charges as
a result of an impairment to the carrying value of these assets, due to further declines in market conditions.

Any acquisitions we make could disrupt
our business and harm our results of operation and financial condition.

In August 2006, we acquired Quake Technologies, Inc.
(Quake), and we may make additional investments in or acquire other companies, products or technologies. These acquisitions involve numerous risks, including:



| |  |  | problems combining or integrating the purchased operations, technologies or products;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | unanticipated costs;
| | - |  | --------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risks associated with entering markets in which we have no or limited prior experience; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | potential loss of key employees, particularly those of the acquired organizations.
| | - |  | ----------------------------------------------------------------------------------

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.
| | - |  | -------------------------------------

We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire. For example, with the acquisition of Quake, we acquired the technology necessary to introduce 10
Gigabit Ethernet physical layer chips and advance our efforts in the enterprise part of the market. 10 Gigabit Ethernet is an emerging technology, and we cannot assure you that this technology will be successful. In addition, several of our
competitors have introduced similar products in the last quarter. If our customers do not purchase our new power amplifier modules, our development and integration efforts will have been unsuccessful, and our business may suffer.



28



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Our subsidiary has been named as a defendant in litigation that could result in substantial costs and divert
managements attention and resources.

JNI Corporation, which we acquired in October 2003, has a number of pending lawsuits
relating to alleged securities law violations and alleged breaches of fiduciary duty. We believe that the claims pending against JNI are without merit, and we have engaged in a vigorous defense against such claims. If we are not successful in our
defense against such claims, we could be forced to make significant payments to the plaintiffs and their lawyers, and such payments could have a material adverse effect on our business, financial condition and results of operations if not covered by
our insurance carriers. Even if such claims are not successful, the litigation could result in substantial costs including, but not limited to, attorney and expert fees, and divert managements attention and resources, which could have an
adverse effect on our business. Although insurers have paid defense costs to date, we cannot assure you that insurers will continue to pay such costs, judgments or other expenses associated with the lawsuit.

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, 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 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



29



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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.

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.

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 2,000,000 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



30



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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 1B. | Unresolved Staff Comments.
|-------- | --------------------------

Not applicable.



|Item 2. | Properties.
|------- | -----------

Our corporate headquarters are located
in an approximately 150,000 square foot building in Sunnyvale, California that we own. The facility contains administration, sales and marketing, research and development and operations functions. We also lease a 90,000 square foot facility in San
Diego, California for administration, sales, research and development and operation functions, which we plan on vacating when the lease expires in September 2007. We also lease a 62,000 square foot building in San Diego that is currently sub-leased
to another company. This sublease expires in May 2007, after which we plan to re-occupy this space when we vacate our other San Diego leased facility which expires in September 2007. In addition to these facilities, we lease additional domestic
design facilities in Andover, Massachusetts, Austin, Texas, and Raleigh, North Carolina.

In February 2007, we sold the 50,000 square foot
building and adjacent land we owned in Andover, Massachusetts for approximately $4.8 million.

Our foreign leased locations consist of
the following: Ottawa, Canada; Manchester and Cheshire, United Kingdom; Munich, Germany; Tokyo, Japan; Beijing, Shenzhen and Shanghai, the Peoples Republic of China; and Taipei, Taiwan.

The leased facilities comprise an aggregate of approximately 200,000 square feet. These facilities have lease terms expiring between 2007 and 2011. We
believe that the facilities under lease by us will be adequate for at least the next 12 months.

For additional information regarding our
obligations under property leases, see the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.



|Item 3. | Legal Proceedings.
|------- | ------------------

The information set forth under
Note 12 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, is incorporated herein by reference.



31



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|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

We held our annual meeting of stockholders on March 9, 2007. Of the 281,906,732 shares of our common stock that could be voted at the annual meeting, 262,269,941 shares, or 93.03% were represented at the meeting in person or by proxy,
which constituted a quorum. Voting results were as follows:

Election of the following persons to our Board of Directors to hold office
until the next annual meeting of stockholders:



|                   |  |             |  |            
|------------------ |  | ----------- |  | -----------
|                   |  | For         |  | Withheld   
|Cesar Cesaratto    |  | 230,646,599 |  | 31,623,342 
|Kambiz Hooshmand   |  | 239,573,310 |  | 22,696,631 
|Niel Ransom        |  | 230,745,870 |  | 31,524,071 
|Fred Shlapak       |  | 239,615,857 |  | 22,654,084 
|Arthur B. Stabenow |  | 161,193,115 |  | 101,076,826
|Julie H. Sullivan  |  | 239,612,013 |  | 22,657,928 

Approval of the proposed exchange of certain outstanding stock options for a reduced number of
restricted stock units to be granted under our 2000 Equity Incentive Plan:



|            |  |            |  |         |  |                 
|----------- |  | ---------- |  | ------- |  | ----------------
|For         |  | Against    |  | Abstain |  | Broker Non-Votes
|151,160,245 |  | 27,252,763 |  | 513,348 |  | 83,343,585      

Approval of the amendment and restatement of our 1992 Stock Option Plan, thereafter to be referred
to as our 1992 Equity Incentive Plan:



|            |  |            |  |         |  |                 
|----------- |  | ---------- |  | ------- |  | ----------------
|For         |  | Against    |  | Abstain |  | Broker Non-Votes
|123,296,393 |  | 55,140,244 |  | 489,718 |  | 83,343,586      

Approval of amendments to our Certificate of Incorporation to effect a reverse stock split at the
discretion of our Board of Directors:



|            |  |            |  |        
|----------- |  | ---------- |  | -------
|For         |  | Against    |  | Abstain
|222,358,552 |  | 38,982,629 |  | 928,760

Ratification of the appointment of Ernst & Young LLP as our independent auditors for the
fiscal year ending March 31, 2007:



|            |  |           |  |        
|----------- |  | --------- |  | -------
|For         |  | Against   |  | Abstain
|260,958,997 |  | 1,057,117 |  | 253,827



32



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PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|------- | -------------------------------------------------------------------------------------------------------------

Our common stock is traded on the Nasdaq Global Select Market under the symbol AMCC. The following table sets forth the high and low sales prices of our
common stock as reported by Nasdaq for the periods indicated.



|                                 |  |      |      |     |   |     
|-------------------------------- |  | ---- | ---- | --- | - | ----
|Fiscal year ended March 31, 2007 |  | High |      | Low
|First Quarter                    |  | $    | 4.07 |     | $ | 2.38
|Second Quarter                   |  | $    | 2.96 |     | $ | 2.09
|Third Quarter                    |  | $    | 3.80 |     | $ | 2.79
|Fourth Quarter                   |  | $    | 3.97 |     | $ | 3.25
|                                 |  |     
|Fiscal year ended March 31, 2006 |  | High |      | Low
|First Quarter                    |  | $    | 3.35 |     | $ | 2.50
|Second Quarter                   |  | $    | 3.37 |     | $ | 2.57
|Third Quarter                    |  | $    | 3.08 |     | $ | 2.32
|Fourth Quarter                   |  | $    | 4.30 |     | $ | 2.51

At April 30, 2007, there were approximately 707 holders of record of our common stock.

Dividend Policy

We have never declared or paid cash dividends on shares of our common stock. We currently intend to retain all of our earnings, if any, for use in our business, for the purchases of our common stock or for the acquisitions of other
businesses, assets, products or technologies. We do not anticipate paying any cash dividends in the foreseeable future.

Recent Sales
of Unregistered Securities

There were no sales of equity securities by us that were not registered under the Securities Act of
1933, as amended, during fiscal 2007.

Securities Authorized for Issuance under Equity Compensation Plans

The information included in Part III, Item 12 of this report, is hereby incorporated herein by reference. For additional information on our stock
incentive plans and activity, see Note 5 of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Report.

Issuer Purchases of Equity Securities

There were no repurchases of our equity securities during the fourth quarter
of fiscal 2007.

The following graph compares the cumulative 5-year total return to shareholders on Applied Micro Circuits
Corporations common stock relative to the cumulative total returns of the S & P 500 index, the NASDAQ Composite index, the NASDAQ Telecommunications index and the NASDAQ Electronic Components index. The graph assumes that the value of the
investment in the companys common stock and in each of the indexes (including reinvestment of dividends) was $100 on March 31, 2002 and tracks it through March 31,2007.



33



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LOGO



|                                   |  |                             |  |       |  |        |  |        |  |        |  |       
|---------------------------------- |  | --------------------------- |  | ----- |  | ------ |  | ------ |  | ------ |  | ------
|                                   |  | Fiscal Year Ended March 31,
|                                   |  | 2002                        |  | 2003  |  | 2004   |  | 2005   |  | 2006   |  | 2007  
|Applied Micro Circuits Corporation |  | 100.00                      |  | 40.75 |  | 71.38  |  | 41.00  |  | 50.88  |  | 45.63 
|S & P 500                          |  | 100.00                      |  | 75.24 |  | 101.66 |  | 108.47 |  | 121.19 |  | 135.52
|NASDAQ Composite                   |  | 100.00                      |  | 72.11 |  | 109.76 |  | 111.26 |  | 132.74 |  | 139.65
|NASDAQ Telecommunications          |  | 100.00                      |  | 66.61 |  | 134.44 |  | 119.59 |  | 154.00 |  | 166.81
|NASDAQ Electronic Components       |  | 100.00                      |  | 51.88 |  | 87.71  |  | 72.78  |  | 80.12  |  | 72.63 

The stock price performance included in this graph is not necessarily indicative of future
stock price performance.



34



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|Item 6. | Selected Financial Data.
|------- | ------------------------

The following table sets
forth selected financial data for each of our last five fiscal years ended March 31, 2007. You should read the selected financial data set forth in the attached table together with the Consolidated Financial Statements and related Notes, as
well as Managements Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.



|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                                    |  | Year Ended March 31,                     |        
|                                                                    |  | 2007                                     |         |   | 2006 |   |          | 2005 |  |   | 2004     |   |  | 2003 |         
|                                                                    |  | (in thousands, except per share amounts) |        
|Consolidated Statements of Operations Data:                         |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Net revenues                                                        |  | $                                        | 292,852 |   |      | $ | 261,844  |      |  | $ | 253,756  |   |  | $    | 131,177  |   |  | $ | 101,591  |  
|Cost of revenues                                                    |  |                                          | 140,714 |   |      |   | 122,392  |      |  |   | 123,253  |   |  |      | 57,604   |   |  |   | 62,496   |  
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Gross profit                                                        |  |                                          | 152,138 |   |      |   | 139,452  |      |  |   | 130,503  |   |  |      | 73,573   |   |  |   | 39,095   |  
|Operating expenses:                                                 |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Research and development                                            |  |                                          | 96,418  |   |      |   | 93,770   |      |  |   | 122,072  |   |  |      | 129,083  |   |  |   | 210,329  |  
|Selling, general and administrative                                 |  |                                          | 67,971  |   |      |   | 62,157   |      |  |   | 65,080   |   |  |      | 50,325   |   |  |   | 119,053  |  
|Acquired in-process research and development                        |  |                                          | 13,300  |   |      |   |         |      |  |   | 13,400   |   |  |      | 21,800   |   |  |   |         |  
|Amortization of goodwill and purchased intangibles                  |  |                                          | 4,995   |   |      |   | 4,588    |      |  |   | 6,960    |   |  |      | 1,097    |   |  |   |         |  
|Restructuring charges                                               |  |                                          | 1,291   |   |      |   | 12,602   |      |  |   | 9,622    |   |  |      | 22,325   |   |  |   | 7,250    |  
|Option investigation                                                |  |                                          | 5,344   |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Purchased intangible asset impairment charges                       |  |                                          |        |   |      |   |         |      |  |   | 27,330   |   |  |      |         |   |  |   | 204,284  |  
|Goodwill impairment charges                                         |  |                                          |        |   |      |   | 131,216  |      |  |   |         |   |  |      |         |   |  |   | 186,389  |  
|Litigation settlement, net                                          |  |                                          |        |   |      |   |         |      |  |   | 29,250   |   |  |      |         |   |  |   |         |  
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Total operating expenses                                            |  |                                          | 189,319 |   |      |   | 304,333  |      |  |   | 273,714  |   |  |      | 224,630  |   |  |   | 727,305  |  
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Operating loss                                                      |  |                                          | (37,181 | ) |      |   | (164,881 | )    |  |   | (143,211 | ) |  |      | (151,057 | ) |  |   | (688,210 | )
|Interest income, net                                                |  |                                          | 13,125  |   |      |   | 15,617   |      |  |   | 18,699   |   |  |      | 35,007   |   |  |   | 47,719   |  
|Other income (expense), net                                         |  |                                          | 250     |   |      |   | 256      |      |  |   |         |   |  |      | 8,340    |   |  |   | (11,952  | )
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Loss before income taxes and cumulative effect of accounting change |  |                                          | (23,806 | ) |      |   | (149,008 | )    |  |   | (124,512 | ) |  |      | (107,710 | ) |  |   | (652,443 | )
|Income tax expense (benefit)                                        |  |                                          | 402     |   |      |   | (636     | )    |  |   | 2,861    |   |  |      | (1,776   | ) |  |   |         |  
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Loss before cumulative effect of accounting change                  |  |                                          | (24,208 | ) |      |   | (148,372 | )    |  |   | (127,373 | ) |  |      | (105,934 | ) |  |   | (652,443 | )
|Cumulative effect of accounting change                              |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   | (102,229 | )
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Net loss                                                            |  | $                                        | (24,208 | ) |      | $ | (148,372 | )    |  | $ | (127,373 | ) |  | $    | (105,934 | ) |  | $ | (754,672 | )
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Basic and diluted net loss per share:                               |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Loss per share before cumulative effect of accounting change        |  | $                                        | (0.09   | ) |      | $ | (0.49    | )    |  | $ | (0.41    | ) |  | $    | (0.35    | ) |  | $ | (2.17    | )
|Cumulative effect of accounting change                              |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   | (0.33    | )
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Net loss per share                                                  |  | $                                        | (0.09   | ) |      | $ | (0.49    | )    |  | $ | (0.41    | ) |  | $    | (0.35    | ) |  | $ | (2.50    | )
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Shares used in calculating basic and diluted net loss per share     |  |                                          | 284,303 |   |      |   | 300,841  |      |  |   | 309,456  |   |  |      | 306,476  |   |  |   | 301,252  |  
|                                                                    |  |                                          |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  



35



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|                                                                       |  |           |         |      |   |         |  |      |           |      |   |           |  |   |          
|---------------------------------------------------------------------- |  | --------- | ------- | ---- | - | ------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                       |  | March 31,
|                                                                       |  | 2007      |         | 2006 |   | 2005    |  | 2004 |           | 2003
|Consolidated Balance Sheet Data:                                       |  |           |         |      |   |         |  |      |           |      |   |           |  |   |          
|Working capital                                                        |  | $         | 307,062 |      | $ | 336,930 |  | $    | 396,258   |      | $ | 841,467   |  | $ | 1,021,175
|Goodwill and intangible assets, net                                    |  |           | 415,644 |      |   | 381,066 |  |      | 534,514   |      |   | 240,193   |  |   | 88,219   
|Total assets                                                           |  |           | 816,512 |      |   | 825,426 |  |      | 1,102,395 |      |   | 1,188,103 |  |   | 1,223,588
|Long-term debt and capital lease obligations including current portion |  |           |        |      |   |        |  |      | 34        |      |   | 303       |  |   | 1,265    
|Total stockholders equity                                             |  |           | 760,822 |      |   | 762,808 |  |      | 977,198   |      |   | 1,120,547 |  |   | 1,172,188



36



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|Item    7. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|---------- | --------------------------------------------------------------------------------------

Managements discussion and analysis of financial condition and results of operations, or 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 fiscal years ended March 31,
2007. 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

This section should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere 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 the Risk Factors section in Item 1A and elsewhere in this report. We update our
descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC in which we report our financial condition and results for the quarter and fiscal year-to-date. 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

We are a leader in semiconductors and PCBAs, for the communications and storage markets. We design, develop, market and support
high-performance ICs, embedded processors and storage components, which are essential for the processing, transporting and storing of information worldwide. In the communications market, we utilize a combination of design expertise coupled with
system-level knowledge and multiple technologies to offer IC products and PCBAs, for wireline and wireless communications equipment such as wireless base stations, edge switches and gateways, metro transport platforms and core switches and routers.
In the storage market, we blend systems and software expertise with high-performance, high-bandwidth silicon integration to deliver high-performance, high capacity SATA RAID controllers for emerging storage applications such as disk-to-disk backup,
near-line storage, NAS, video, and high-performance computing. Our corporate headquarters are located in Sunnyvale, California. Sales and engineering offices are located throughout the world.



37



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The following tables present a summary of our results of operations for the fiscal years ended
March 31, 2007 and 2006 (dollars in thousands):



|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  
|------------------------------ |  | --------------------------- | ------- | - | --------------- | ----- | -- | ------ | - | -------- | --------------- |  | ----- | ------------------- |  | - | -------- | - |  | ----- | -
|                               |  | Fiscal Year Ended March 31, |         |   |                 |       |    |        |  
|                               |  | 2007                        |         |   | 2006            |       |    |        |   |          |                 | 
|                               |  | Amount                      |         |   | % of NetRevenue |       |    | Amount |   |          | % of NetRevenue |  |       | Increase (Decrease) |  |   | Change   |  
|Net revenues                   |  | $                           | 292,852 |   |                 | 100.0 | %  |        | $ | 261,844  |                 |  | 100.0 | %                   |  | $ | 31,008   |   |  | 11.8  | %
|Cost of revenues               |  |                             | 140,714 |   |                 | 48.0  |    |        |   | 122,392  |                 |  | 46.7  |                     |  |   | 18,322   |   |  | 15.0  |  
|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  
|Gross profit                   |  |                             | 152,138 |   |                 | 52.0  |    |        |   | 139,452  |                 |  | 53.3  |                     |  |   | 12,686   |   |  | 9.1   |  
|Total operating expenses       |  |                             | 189,319 |   |                 | 64.7  |    |        |   | 304,333  |                 |  | 116.3 |                     |  |   | (115,014 | ) |  | (37.8 | )
|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  
|Operating loss                 |  |                             | (37,181 | ) |                 | (12.7 | )  |        |   | (164,881 | )               |  | (63.0 | )                   |  |   | 127,700  |   |  | 77.4  |  
|Interest and other income, net |  |                             | 13,375  |   |                 | 4.5   |    |        |   | 15,873   |                 |  | 6.1   |                     |  |   | (2,498   | ) |  | (15.7 | )
|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  
|Loss before income taxes       |  |                             | (23,806 | ) |                 | (8.2  | )  |        |   | (149,008 | )               |  | (56.9 | )                   |  |   | 125,202  |   |  | 84.0  |  
|Income tax expense (benefit)   |  |                             | 402     |   |                 | 0.1   |    |        |   | (636     | )               |  | (0.2  | )                   |  |   | 1,038    |   |  | 163.2 |  
|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  
|Net loss                       |  | $                           | (24,208 | ) |                 | (8.3  | )% |        | $ | (148,372 | )               |  | (56.7 | )%                  |  | $ | 124,164  |   |  | 83.7  | %
|                               |  |                             |         |   |                 |       |    |        |   |          |                 |  |       |                     |  |   |          |   |  |       |  

The following tables present a summary of our results of operations for the fiscal years ended
March 31, 2006 and 2005 (dollars in thousands):



|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   
|------------------------------ |  | --------------------------- | -------- | - | --------------- | ----- | -- | ------ | - | -------- | --------------- |  | ----- | ------------------ |  | - | ------- | - |  | ------ | --
|                               |  | Fiscal Year Ended March 31, |          |   |                 |       |    |        |  
|                               |  | 2006                        |          |   | 2005            |       |    |        |   |          |                 | 
|                               |  | Amount                      |          |   | % of NetRevenue |       |    | Amount |   |          | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change  |  
|Net revenues                   |  | $                           | 261,844  |   |                 | 100.0 | %  |        | $ | 253,756  |                 |  | 100.0 | %                  |  | $ | 8,088   |   |  | 3.2    | % 
|Cost of revenues               |  |                             | 122,392  |   |                 | 46.7  |    |        |   | 123,253  |                 |  | 48.6  |                    |  |   | (861    | ) |  | (0.7   | ) 
|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   
|Gross profit                   |  |                             | 139,452  |   |                 | 53.3  |    |        |   | 130,503  |                 |  | 51.4  |                    |  |   | 8,949   |   |  | 6.9    |   
|Total operating expenses       |  |                             | 304,333  |   |                 | 116.3 |    |        |   | 273,714  |                 |  | 107.9 |                    |  |   | 30,619  |   |  | 11.2   |   
|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   
|Operating loss                 |  |                             | (164,881 | ) |                 | (63.0 | )  |        |   | (143,211 | )               |  | (56.4 | )                  |  |   | (21,670 | ) |  | (15.1  | ) 
|Interest and other income, net |  |                             | 15,873   |   |                 | 6.1   |    |        |   | 18,699   |                 |  | 7.4   |                    |  |   | (2,826  | ) |  | (15.1  | ) 
|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   
|Loss before income taxes       |  |                             | (149,008 | ) |                 | (56.9 | )  |        |   | (124,512 | )               |  | (49.1 | )                  |  |   | (24,496 | ) |  | (19.7  | ) 
|Income tax expense (benefit)   |  |                             | (636     | ) |                 | (0.2  | )  |        |   | 2,861    |                 |  | 1.1   |                    |  |   | (3,497  | ) |  | (122.2 | ) 
|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   
|Net loss                       |  | $                           | (148,372 | ) |                 | (56.7 | )% |        | $ | (127,373 | )               |  | (50.2 | )%                 |  | $ | (20,999 | ) |  | (16.5  | )%
|                               |  |                             |          |   |                 |       |    |        |   |          |                 |  |       |                    |  |   |         |   |  |        |   

Net Revenue.    We generate revenues primarily through sales of our IC
products, embedded processors and PCBAs 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. In the storage market we generate revenues primarily through sales of our SATA RAID controllers to our distribution channel partners who in turn sell to enterprises, small and mid-size businesses, VARs, systems
integrators and retail consumers.

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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



38



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| |  |  | 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; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | combinations of companies in our customer base, may result in the resulting combined company choosing our competitors IC standardization other than our
supported product platforms.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For these and other reasons, our net revenue and results of operations in 2007 and prior
periods may not necessarily be indicative of future net revenue and results of operations.

Based on direct shipments, net revenues to
customers that exceeded 10% of total net revenues in any of the three years ended March 31, 2007 were as follows:



|            |  |      |   |  |      |   |  |      |  
|----------- |  | ---- | - |  | ---- | - |  | ---- | -
|            |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Avnet       |  | 23   | % |  | 21   | % |  | 16   | %
|SanminaSCI |  | *    |   |  | 10   | % |  | *    |  



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

On July 5, 2005, Avnet acquired Insight Electronics. For purposes of the table above, the shipments to Insight Electronics and Avnet were retroactively combined for all periods presented.

Looking through product shipments to distributors and subcontractors to the end customers, to the best of our knowledge, net revenues to end customers
that exceeded 10% of total net revenues in any of the three years ended March 31, 2007 were as follows:



|                            |  |      |  |      |   |  |      |  
|--------------------------- |  | ---- |  | ---- | - |  | ---- | -
|                            |  | 2007 |  | 2006 |   |  | 2005 |  
|Nortel Networks Corporation |  | *    |  | 12   | % |  | 11   | %



|* | 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 in fiscal 2008 and for the foreseeable future.

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



|                         |  |                              |         |      |   |         |  |   |        
|------------------------ |  | ---------------------------- | ------- | ---- | - | ------- |  | - | -------
|                         |  | Fiscal Years Ended March 31,
|                         |  | 2007                         |         | 2006 |   | 2005   
|United States of America |  | $                            | 127,226 |      | $ | 115,043 |  | $ | 121,527
|Other North America      |  |                              | 24,214  |      |   | 27,686  |  |   | 21,003 
|Europe and Israel        |  |                              | 50,780  |      |   | 47,246  |  |   | 50,124 
|Asia                     |  |                              | 89,571  |      |   | 70,951  |  |   | 59,748 
|Other                    |  |                              | 1,061   |      |   | 918     |  |   | 1,354  
|                         |  |                              |         |      |   |         |  |   |        
|                         |  | $                            | 292,852 |      | $ | 261,844 |  | $ | 253,756
|                         |  |                              |         |      |   |         |  |   |        

All of our revenue has been denominated in U.S. dollars.

In addition, in an effort to diversify our customer base and markets that we serve, we have also made several acquisitions. In April 2004, we completed
the acquisition of 3ware, Inc., a provider of high-performance, high-capacity SATA storage solutions, for a purchase price of approximately $145 million in cash. In May 2004 and



39



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December 2004, we acquired intellectual property and a portfolio of assets associated with IBMs 400 series of embedded PowerPC® standard products for approximately $232 million in
cash. The PowerPC 400 series product line targets Internet, communication, data storage, consumer and imaging applications. In August 2006, we acquired Quake Technologies, Inc., a leader in 10 Gigabit Ethernet (10GE) physical layer
technology for approximately $81 million in cash.

Net Loss.    Our net loss 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:



| |  |  | stock-based compensation expense;
| | - |  | ---------------------------------



| |  |  | amortization of purchased intangibles;
| | - |  | --------------------------------------



| |  |  | acquired in-process research and development (IPR&D);
| | - |  | -------------------------------------------------------



| |  |  | litigation settlement costs;
| | - |  | ----------------------------



| |  |  | restructuring charges;
| | - |  | ----------------------



| |  |  | goodwill impairment charges;
| | - |  | ----------------------------



| |  |  | combinations of companies within our customer base;
| | - |  | ---------------------------------------------------



| |  |  | purchased intangible asset impairment charges; and
| | - |  | --------------------------------------------------



| |  |  | income tax expenses (benefits).
| | - |  | -------------------------------

Since the start of fiscal 2005, we have invested a total of approximately $312.0 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 and storage 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 and, as a result of restructuring activities, we discontinued development of several products that were in process and slowed down development of others as we realized that demand for these products would not materialize as originally
anticipated.



40



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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 warranty liabilities, which
affects our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which affects our amortization and impairments of goodwill and other intangibles; the valuation of restructuring liabilities, which affects the amount
and timing of restructuring charges; and the valuation of deferred income taxes, which affects our income tax expense and benefit. We also have other key accounting policies, such as our policies for stock-based compensation, revenue recognition,
including the deferral of a portion of revenues on sales to distributors, and allowance for bad debts. The methods, estimates and judgments we use in applying these most 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 and Warranty Liabilities

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, reducing our future demand estimate to six months could increase our current reserve balance
by approximately $6.6 million as of March 31, 2007. Alternatively, increasing our future demand forecast to 18 months could reduce our exposure by approximately $0.5 million below the current reserve, as of March 31, 2007.

Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized.
Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure and changes to master
purchase agreements with our larger customers. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce our gross margin. Additional
change to negotiated master purchase agreements could result in increased warranties reserves and unfavorably impact present and future gross margins.

Goodwill and Intangible Asset Valuation

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, including IPR&D. 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, and the amount assigned to IPR&D is expensed immediately. 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



41



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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.

We are required to assess goodwill impairment
annually using the methodology prescribed by Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill be tested for impairment at the reporting unit
level on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units and determining the fair value of each reporting unit. In fiscal 2007 and 2006, in accordance with SFAS 142, we determined that there were three reporting units to be tested. The goodwill impairment test
compares the implied fair value of the reporting unit with the carrying value of the reporting unit. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill
is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such
charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting
the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is possible that the plans and estimates used to
value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment
charges.

For fiscal 2007, the discounted cash flows for each reporting unit were based in discrete ten-year financial forecasts developed
by management for planning purposes. Cash flows beyond the discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 13% to 20% for the reporting units during the discrete forecast period
and the future cash flows were discounted to present value using a discount rate of 16% and terminal growth rates of 4%. We did not recognize any goodwill impairment as a result of performing this annual test. A variance in the discount rate or the
estimated revenue growth rate could have had a significant impact on the estimated fair value of the reporting unit and consequently the amount of identified goodwill impairment. For example, a 2% - 3% increase in the discount rate would have
resulted in an indication of possible impairment that would have led us to further quantify the impairment and potentially record a charge to write-down these assets in fiscal 2007.

For fiscal 2006, the discounted cash flows for each reporting unit were based on discrete ten-year financial forecasts developed by management for
planning purposes. Cash flows beyond the discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 15% to 17% for the reporting units during the discrete forecast period and the future
cash flows were discounted to present value using a discount rate of 16% and terminal growth rates of 4%. Upon completion of the annual impairment test for fiscal 2006, we determined that there was an indication of impairment because the estimated
carrying values of two of the three reporting units exceeded their respective fair values. As a result, we performed additional analysis as required by SFAS 142. 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. Any variance in the assumptions
used to value the unrecognized intangible assets could have a significant impact on the estimated fair value of the unrecognized intangible assets



42



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and consequently the amount of identified goodwill impairment. As a result of the additional analysis performed, we recorded a charge for $131.2 million in
the fourth quarter of fiscal 2006 which primarily relates to the deterioration of revenues associated with the products we acquired in the JNI acquisition.

For fiscal 2005, the discounted cash flows for each reporting unit were based on discrete five-year financial forecasts developed by management for planning purposes. Cash flows beyond the five-year discrete forecasts
were estimated using terminal value calculations. The sales compound annual growth rates ranged from 15% to 33% for the reporting units during the discrete forecast period and the future cash flows were discounted to present value using a discount
rate of 17% and terminal growth rates of 7.5%. We did not recognize any goodwill impairment as a result of performing this annual test. A variance in the discount rate or the estimated revenue growth rate would have had a significant impact on the
estimated fair value of the reporting unit and consequently the amount of identified goodwill impairment. For example, a 1% - 2% increase in the discount rate would have resulted in an indication of possible impairment that would have led us to
further quantify the impairment and potentially record a charge to write-down these assets in fiscal 2005.

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. In calculating the charges for our excess facilities, we
have to estimate the timing of exiting certain facilities. Our assumptions for exiting and/or reoccupying certain facilities may be incorrect, which could result in the need to record additional costs or reduce estimated amounts previously charged
to restructuring expense. For example, in fiscal 2007, when we decided to reoccupy a previously restructured facility, we eliminated the liability which reduced our restructuring expense. Our policies require us to periodically evaluate, at least
semiannually, the adequacy of the remaining liabilities under our restructuring initiatives. In fiscal 2007, we recorded restructuring charges of $1.3 million associated with our restructuring actions. For a full description of our restructuring
activities, refer to our discussion of restructuring charges in the Results of Operations section.

Valuation of Deferred Income Taxes

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies, including reversals of deferred tax liabilities, in assessing the need for a valuation allowance. If we were to determine that we will
not realize all or part of our deferred tax assets in the future, we would make an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we were to determine that we will realize a
deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit or as an adjustment to stockholders equity, for tax assets related to stock options, or
goodwill, for tax assets related to acquired businesses.

Stock-Based Compensation Expense for Fiscal 2007 and Thereafter

Effective April 1, 2006 we adopted revised Statement of Financial Accounting Standards No. 123 (SFAS 123(R)), Share-Based Payment,
SFAS 123(R) requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under
this standard, 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. The Black-Scholes model meets the requirements of SFAS 123(R) but the fair values generated by the model may not be indicative of the actual fair values of our stock-based awards as it does not



43



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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 are based on the fair market value of our
common stock on the date of grant. Stock-based compensation expense recognized in our financial statements in fiscal 2007 and thereafter is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense in
fiscal 2007 and thereafter will be reduced for estimated forfeitures based on historical experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. We will 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 options will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we considered the award to be probable, expense is recorded over the estimated service
period. To the extent 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. Had we adopted SFAS 123(R) in prior periods, the magnitude of the
impact of that standard on our results of operations would have approximated the pro forma number impact of Statement of Financial Accounting Standards No. 123 (SFAS 123), Share-Based Payment, described in Note 1 of our
Notes to Consolidated Financial Statements under stock-based compensation.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 (SAB 101) Revenue Recognition in Financial
Statements, as well as SAB 104, Revenue Recognition. These pronouncements require that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is
fixed or determinable; and 4) collectibility 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 all customers 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,
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 shipping point. If actual returns
or pricing adjustments exceed our estimates, we would record additional reductions to revenue.

Allowance for Bad Debt

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance
for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customers credit worthiness
deteriorates, or our customers actual defaults exceed our historical experience, our estimates could change and impact our reported results.



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RESULTS OF OPERATIONS

Comparison of the Year Ended March 31, 2007 to the Year Ended March 31, 2006

Net
Revenues.    Net revenues for the year ended March 31, 2007 were approximately $292.9 million, representing an increase of 11.8% from the net revenues of approximately $261.8 million for the year ended March 31,
2006. We classified our revenues into three categories based on markets that the underlying products serve. The categories are Integrated Communication Products (ICP), which consists of communications and embedded products, Storage and
Other. We use this information to analyze our performance and success in these markets. See the following tables (dollars in thousands):



|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|----------------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------ | - |  | ----- | -
|                  |  | Fiscal Years Ended March 31, |         |                 |       |   |        |   |                
|                  |  | 2007                         |         |                 | 2006  |   |        |   |                 |  |       |                   
|                  |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change |  
|Communications    |  | $                            | 138,134 |                 | 47.2  | % |        | $ | 131,135         |  | 50.1  | %                  |  | $ | 6,999  |   |  | 5.3   | %
|Embedded products |  |                              | 99,853  |                 | 34.1  |   |        |   | 73,546          |  | 28.1  |                    |  |   | 26,307 |   |  | 35.8  |  
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|ICP subtotal      |  |                              | 237,987 |                 | 81.3  |   |        |   | 204,681         |  | 78.2  |                    |  |   | 33,306 |   |  | 16.3  |  
|Storage           |  |                              | 50,861  |                 | 17.4  |   |        |   | 51,255          |  | 19.6  |                    |  |   | (394   | ) |  | (0.8  | )
|Other             |  |                              | 4,004   |                 | 1.3   |   |        |   | 5,908           |  | 2.2   |                    |  |   | (1,904 | ) |  | (32.2 | )
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|                  |  | $                            | 292,852 |                 | 100.0 | % |        | $ | 261,844         |  | 100.0 | %                  |  | $ | 31,008 |   |  | 11.8  | %
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  

The net revenue increase for the fiscal year ended March 31, 2007 was largely due to an
increase in sales of our ICP products and in particular, an increase in sales of our embedded products. The increase was offset by a marginal decline in storage revenues due to supply issues in the fourth quarter of fiscal 2007 and the effect of the
discontinuance of our Fibre Channel host bus adapter (HBA) business. The decline in storage revenues was offset by new product introductions and our efforts to enhance our sales channels in Europe. The decrease in other revenues was due
to our focus on new product development. We will continue to see our other revenues decline as we focus our efforts on new product development.

As a result of our efforts to reduce ongoing operating expenses, we have refocused our product development efforts on higher growth opportunities (focus products) and away from certain legacy products (nonfocus
products). Product areas we have focused on are products that process, transport and store information. Our process technology products focus on utilizing our sixth generation of network processor cores and our Power Architecture portfolio to meet
the needs of the converged internet protocol (IP)/Ethernet network while the transport technology products focus on Metro Ethernet, Triple Play access technologies and error correction solutions. The storage technology products address
the needs of mass storage based on high-performance sequential input/output (I/O). The nonfocus product areas are our legacy switching products, application-specific integrated circuits (ASICs), Fibre Channel HBAs, storage
area network (SAN) ICs, pointer processors, and legacy framers. We expect the revenues from our nonfocus products to continue to decline in the future.

The following table illustrates revenue from our focus and nonfocus areas (dollars in thousands):



|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  
|-------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------- | - |  | ----- | -
|         |  | Fiscal Years Ended March 31, |         |                 |       |   |        |   |                
|         |  | 2007                         |         |                 | 2006  |   |        |   |                 |  |       |                   
|         |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change  |  
|Focus    |  | $                            | 254,066 |                 | 86.8  | % |        | $ | 207,331         |  | 79.2  | %                  |  | $ | 46,735  |   |  | 22.5  | %
|Nonfocus |  |                              | 38,786  |                 | 13.2  |   |        |   | 54,513          |  | 20.8  |                    |  |   | (15,727 | ) |  | (28.8 | )
|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  
|         |  | $                            | 292,852 |                 | 100.0 | % |        | $ | 261,844         |  | 100.0 | %                  |  | $ | 31,008  |   |  | 11.8  | %
|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  



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Gross Profit.    The following table presents net revenues, cost of revenues
and gross profit for the fiscal years ended March 31, 2007 and 2006 (dollars in thousands):



|                 |  |                              |         |                 |       |   |        |   |                 |  |       |          |  |        |        |  |      |  
|---------------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | -------- |  | ------ | ------ |  | ---- | -
|                 |  | Fiscal Years Ended March 31, |         |                 |       |   |        |  
|                 |  | 2007                         |         |                 | 2006  |   |        |   |                 |  |      
|                 |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase |  | Change |       
|Net revenues     |  | $                            | 292,852 |                 | 100.0 | % |        | $ | 261,844         |  | 100.0 | %        |  | $      | 31,008 |  | 11.8 | %
|Cost of revenues |  |                              | 140,714 |                 | 48.0  |   |        |   | 122,392         |  | 46.7  |          |  |        | 18,322 |  | 15.0 |  
|                 |  |                              |         |                 |       |   |        |   |                 |  |       |          |  |        |        |  |      |  
|Gross profit     |  | $                            | 152,138 |                 | 52.0  | % |        | $ | 139,452         |  | 53.3  | %        |  | $      | 12,686 |  | 9.1  | %
|                 |  |                              |         |                 |       |   |        |   |                 |  |       |          |  |        |        |  |      |  

The increase in gross profit for the fiscal year ended March 31, 2007 was primarily
attributable to the overall increase in net revenues. The gross profit percentage for the fiscal year ended March 31, 2007 declined to 52.0% compared to 53.3% for the fiscal year ended March 31, 2006. This decline was primarily due to
price erosion and product mix changes offset by cost improvements, $1.4 million reduction in warranty reserves and $2.0 million in additional gross profit relating to an arrangement with a customer to buy down a part of its future commitment to
purchase products from us.

The amortization of purchased intangible assets included in cost of revenues during the year ended
March 31, 2007 was $17.4 million compared to $17.6 million for the year ended March 31, 2006. Based on the amount of capitalized purchased intangibles on the balance sheet as of March 31, 2007, we expect amortization expense for
purchased intangibles charged to cost of revenues to be $18.4 million in fiscal 2008, $17.8 million in fiscal 2009 and $23.5 million for fiscal periods thereafter. Future acquisitions of businesses may result in substantial additional charges, which
would impact the gross margin 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 fiscal years ended March 31, 2007 and 2006 (dollars in thousands):



|                                    |  |                              |        |                 |      |   |        |   |                 |  |      |          |  |        |       |  |     |  
|----------------------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | ---- | -------- |  | ------ | ----- |  | --- | -
|                                    |  | Fiscal Years Ended March 31, |        |                 |      |   |        |  
|                                    |  | 2007                         |        |                 | 2006 |   |        |   |                 |  |     
|                                    |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |      | Increase |  | Change |      
|Research and development            |  | $                            | 96,418 |                 | 32.9 | % |        | $ | 93,770          |  | 35.8 | %        |  | $      | 2,648 |  | 2.8 | %
|Selling, general and administrative |  | $                            | 67,971 |                 | 23.2 | % |        | $ | 62,157          |  | 23.7 | %        |  | $      | 5,814 |  | 9.4 | %

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 2.8% for the fiscal year ended March 31, 2007, compared to the fiscal year ended March 31, 2006, was primarily due to an increase of $5.4 million in technology access fees, $1.2
million in personnel expenses related to the acquisition of Quake, $1.2 million in outside contractors, $1.1 million in stock-based compensation expenses and $0.9 million in other expenses, offset by a decrease of $2.9 million in foundry expenses,
$1.4 million in testing costs, $0.7 million in packaging costs, $0.5 million in software expenses and $1.6 million increase in credits from order settlements. We believe that a continued commitment to R&D is vital to our goal of maintaining a
leadership position with innovative ICP and storage products. Currently, R&D expenses are focused on the development of ICP and storage products and we expect to continue this focus. We expect R&D expenses to increase in dollars as we
continue to invest in our product road map but decrease as a percent of revenues as sales of our newly introduced products begin to ramp. Future acquisitions of businesses may result in substantial additional on-going 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.



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The increase in SG&A expenses of 9.4% for fiscal year ended March 31, 2007 compared to the fiscal year ended March 31, 2006, was primarily due
to an increase of $3.0 million in outside contractors, $2.3 million in personnel-related expenses, $2.2 million in stock based compensation, $1.4 million in external sales commissions, $1.0 in marketing communications, and $0.5 in travel expenses,
offset by a decrease of $1.8 million in facilities cost, $1.3 million in indirect material and services, $1.0 million in corporate allocations and $0.5 million in corporate donations. We expect SG&A expenses to remain consistent next year, as a
percentage of revenues. Future acquisitions of businesses may result in substantial additional on-going costs.

Stock-Based
Compensation.    The following table presents stock-based compensation expense for the fiscal years ended March 31, 2007 and 2006, which was included in the tables above (dollars in thousands):



|                                    |  |                              |        |                 |      |   |        |   |                 |  |     |          |  |        |       |  |       |  
|----------------------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | --- | -------- |  | ------ | ----- |  | ----- | -
|                                    |  | Fiscal Years Ended March 31, |        |                 |      |   |        |  
|                                    |  | 2007                         |        |                 | 2006 |   |        |   |                 |  |    
|                                    |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | Increase |  | Change |      
|Costs of revenues                   |  | $                            | 594    |                 | 0.2  | % |        | $ | 89              |  | 0.1 | %        |  | $      | 505   |  | 567.4 | %
|Research and development            |  |                              | 3,765  |                 | 1.3  |   |        |   | 2,690           |  | 1.0 |          |  |        | 1,075 |  | 39.9  |  
|Selling, general and administrative |  |                              | 5,994  |                 | 2.0  |   |        |   | 3,761           |  | 1.4 |          |  |        | 2,233 |  | 59.4  |  
|                                    |  |                              |        |                 |      |   |        |   |                 |  |     |          |  |        |       |  |       |  
|                                    |  | $                            | 10,353 |                 | 3.5  | % |        | $ | 6,540           |  | 2.5 | %        |  | $      | 3,813 |  | 58.3  | %
|                                    |  |                              |        |                 |      |   |        |   |                 |  |     |          |  |        |       |  |       |  

The amounts included in the fiscal year ended March 31, 2007 reflect the adoption of
SFAS 123(R). In accordance with the modified prospective transition method, our consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). See Note 1 of
the Notes to Consolidated Financial Statements.

The increase in stock-based compensation expense for the year ended March 31, 2007
compared to the year ended March 31, 2006 is primarily due to the impact of the adoption of SFAS 123(R). The stock-based compensation expense recorded for the year ended March 31, 2006 relates primarily to the amortization of deferred
compensation related to acquisitions. Deferred compensation is the difference between the fair value of our common stock at the date of each acquisition and the exercise price of the unvested stock options assumed in the acquisition. The adoption of
SFAS 123(R) will continue to have a significant adverse impact on our reported results of operations, although it will have no impact on our overall liquidity. The amount of unearned stock-based compensation currently estimated to be expensed
from now through fiscal 2011 related to unvested share-based payment awards at March 31, 2007 is $18.4 million. This expense relates to equity instruments already issued and will not be affected by our future stock price. The
weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 1.2 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. We anticipate we will continue to grant additional
employee stock options and restricted stock units in fiscal 2008 and thereafter. 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.

Acquired In-process Research and Development.    For the fiscal year ended March 31, 2007, we recorded
$13.3 million of acquired IPR&D resulting from the acquisition of Quake Technologies, Inc. This amount was expensed on the acquisition date because the acquired technology had not yet reached technological feasibility and had no future
alternative uses. The IPR&D charge related to the Quake acquisition was made up of two projects that were 76% and 35% complete at the date of acquisition. The estimated cost to complete these projects was $2.5 million and $2.0 million,
respectively, and the discount rate applied to calculate the IPR&D charge was 23% and 29%, respectively. We did not acquire any companies in fiscal 2006 and as a result we did not have any IPR&D expense.



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Goodwill and Purchased Intangible Asset Impairment Charges.    To coincide
with our annual long-range planning process, we assess goodwill for impairment annually in the fourth quarter, or more frequently if the indicators of impairment are present. Our impairment analysis in the fourth quarter of fiscal 2007 did not
result in any impairment charges. Based upon an analysis performed in the fourth quarter of fiscal 2006, which included a discounted cash flow analysis, as well as market comparables, we recorded a charge for the impairment of goodwill of $131.2
million, which was recorded in operating expenses in the consolidated statement of operations.

Restructuring
Charges.    The following table presents restructuring charges for the fiscal years ended March 31, 2007 and March 31, 2006 (dollars in thousands):



|                      |  |                              |       |                 |      |   |        |   |                 |  |     |            |  |         |        |  |       |   
|--------------------- |  | ---------------------------- | ----- | --------------- | ---- | - | ------ | - | --------------- |  | --- | ---------- |  | ------- | ------ |  | ----- | --
|                      |  | Fiscal Years Ended March 31, |       |                 |      |   |        |   |                
|                      |  | 2007                         |       |                 | 2006 |   |        |   |                 |  |     |           
|                      |  | Amount                       |       | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | (Decrease) |  |         | Change | 
|Restructuring charges |  | $                            | 1,291 |                 | 0.4  | % |        | $ | 12,602          |  | 4.8 | %          |  | (11,311 | )      |  | (89.8 | )%

In April 2003, we announced a restructuring program. The April 2003 restructuring program
consisted of a workforce reduction of 185 employees, consolidation of excess facilities and fixed asset disposals. We recognized a total of $23.8 million in restructuring costs related to the plan. The restructuring costs consisted of approximately
$5.7 million for employee severances, $7.2 million representing the discounted cash flow of lease payments on exited facilities, $3.4 million for the disposal of certain software licenses, and $7.5 million for the write off of leasehold improvements
and property and equipment. This restructuring charge was offset by a $2.6 million restructuring benefit, in November 2003, related to the reoccupation of a portion of a building in San Diego and an adjustment for overestimated severance to be paid.
During fiscal 2007, this restructuring accrual was reduced by $0.8 million to zero due to the planned reoccupation of this building prior to September 2007.

In July 2005, we implemented another restructuring program. The July 2005 restructuring program was implemented to reduce job redundancies and reduce ongoing operating expenses. The restructuring program consisted of
the elimination of approximately 40 employees, the disposal of idle fixed assets, and the consolidation of San Diego facilities. As a result of the July 2005 restructuring, we recorded a charge of approximately $5.0 million, consisting of
$1.4 million for employee severances, $2.6 million for property and equipment write-offs and $1.0 million representing expenses relating to the consolidation of facilities. During fiscal 2007, this restructuring accrual was reduced by
$0.8 million to zero due to the planned reoccupation of this building prior to September 2007.

In March 2006, we communicated and began
implementation of a plan to exit our operations in France and India and reorganize part of our manufacturing operations. The restructuring program included the elimination of approximately 68 employees. In fiscal 2006, we recorded a charge of
approximately $7.6 million, consisting of $6.0 million for employee severance, $1.0 million for operating leases write-offs, and $0.6 million for asset impairments. During fiscal 2007, we recorded additional net charges of approximately $2.5
million, consisting of $0.2 million for excess lease liability, $0.1 million for operating lease commitments and $2.8 million for asset impairments, offset by $0.6 million in workforce reduction liability adjustments.

In June 2006, we implemented another restructuring program. The June 2006 restructuring program was implemented to reduce job redundancies. This
restructuring program consisted of the elimination of approximately 20 employees. As a result of the June 2006 restructuring, we recorded a net charge of approximately $0.4 million, consisting of employee severances. We anticipate saving
approximately $4.0 million annually as a result of this restructuring program.

Option investigation.    During
the fiscal year ended March 31, 2007, we initiated a review of our historical stock option granting policies and incurred $5.3 million in professional and legal fees as a result of our self-initiated



48



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review. For more information, refer to Note 1 of the Notes to Consolidated Financial Statements and our annual report on Form 10-K filed on
January 10, 2007.

Interest and Other Income.    The following table presents interest and other income for
the fiscal years ended March 31, 2007 and 2006 (dollars in thousands):



|                     |  |                              |        |                 |      |   |        |   |                 |  |     |            |  |   |        |   |  |       |   
|-------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | --- | ---------- |  | - | ------ | - |  | ----- | --
|                     |  | Fiscal Years Ended March 31, |        |                 |      |   |        |   |                
|                     |  | 2007                         |        |                 | 2006 |   |        |   |                 |  |     |           
|                     |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | (Decrease) |  |   | Change |  
|Interest income, net |  | $                            | 13,125 |                 | 4.5  | % |        | $ | 15,617          |  | 6.0 | %          |  | $ | (2,492 | ) |  | (16.0 | )%
|Other income, net    |  | $                            | 250    |                 | 0.1  | % |        | $ | 256             |  | 0.1 | %          |  | $ | (6     | ) |  | (2.3  | )%

Interest Income,net.    Net interest income, net of management
fees, reflects interest earned on cash and cash equivalents and short-term investment balances as well as realized gains and losses from the sale of short-term investments, less interest expense on our debt. The decrease for fiscal year ended
March 31, 2007 is primarily due to the impact of lower cash and short-term investment balances.

Other Income,
net.    Other income (expense), net for the fiscal ended March 31, 2007 and 2006 includes income from subleased property, realized losses on foreign currency hedges and net gains on disposals of property and equipment

Income Taxes.    The following table presents our income tax expense (benefit) for the fiscal years ending
March 31, 2007 and 2006 (dollars in thousands):



|                             |  |                              |     |                 |      |   |        |   |      |                 |  |      |          |  |        |       |  |       |  
|---------------------------- |  | ---------------------------- | --- | --------------- | ---- | - | ------ | - | ---- | --------------- |  | ---- | -------- |  | ------ | ----- |  | ----- | -
|                             |  | Fiscal Years Ended March 31, |     |                 |      |   |        |  
|                             |  | 2007                         |     |                 | 2006 |   |        |   |      |                 | 
|                             |  | Amount                       |     | % of NetRevenue |      |   | Amount |   |      | % of NetRevenue |  |      | Increase |  | Change |      
|Income tax expense (benefit) |  | $                            | 402 |                 | 0.1  | % |        | $ | (636 | )               |  | (0.2 | )%       |  | $      | 1,038 |  | 163.2 | %

The federal statutory income tax rate was 35% for the fiscal years ended March 31, 2007 and
2006. Our income tax expense in fiscal 2007 and 2006 primarily reflects estimated foreign taxes and alternative minimum taxes. Our income tax benefit in fiscal year ended March 31, 2006 relates to the reversal of a $1.1 million tax contingency
accrual at our Israeli subsidiary. The contingency was originally set up in fiscal 2005 when we violated the terms of a tax holiday when we decided to exit our operations in Israel. As a result of a letter we received from the Israeli authorities
which cleared us of any tax exposure, we reversed the contingent accrual.



49



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Comparison of the Year Ended March 31, 2006 to the Year Ended March 31, 2005

Net Revenues.    Net revenues for the year ended March 31, 2006 were approximately $261.8 million, representing an
increase of 3.2% from the net revenues of approximately $253.8 million for the year ended March 31, 2005. During most of fiscal 2006, we classified our revenues into three categories based on markets that the underlying products serve. The
categories were communication, storage and embedded. We used this information to analyze the performance and success in these markets. The increase in total net revenues was primarily attributable to an increase in our communications and embedded
product revenues, offset by decreases in our storage and other revenues. In December 2005, we combined the categories of communications and embedded to form the ICP category. See the following tables (dollars in thousands):



|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|----------------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------ | - |  | ----- | -
|                  |  | Fiscal Years Ended March 31, |         |                 |       |   |        |   |                
|                  |  | 2006                         |         |                 | 2005  |   |        |   |                 |  |       |                   
|                  |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change |  
|Communications    |  | $                            | 131,135 |                 | 50.1  | % |        | $ | 128,900         |  | 50.8  | %                  |  | $ | 2,235  |   |  | 1.7   | %
|Embedded products |  |                              | 73,546  |                 | 28.1  |   |        |   | 64,474          |  | 25.4  |                    |  |   | 9,072  |   |  | 14.1  |  
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|ICP subtotal      |  |                              | 204,681 |                 | 78.2  |   |        |   | 193,374         |  | 76.2  |                    |  |   | 11,307 |   |  | 5.8   |  
|Storage           |  |                              | 51,255  |                 | 19.6  |   |        |   | 51,423          |  | 20.3  |                    |  |   | (168   | ) |  | (0.3  | )
|Other             |  |                              | 5,908   |                 | 2.2   |   |        |   | 8,959           |  | 3.5   |                    |  |   | (3,051 | ) |  | (34.1 | )
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  
|                  |  | $                            | 261,844 |                 | 100.0 | % |        | $ | 253,756         |  | 100.0 | %                  |  | $ | 8,088  |   |  | 3.2   | %
|                  |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |  

The communication revenue increased largely due to an increase in the volume of our communication
products and the embedded products increased primarily due to the introduction of new products and to an increase in average price of the products sold. Storage revenue decreased due to the phase out of the Fibre Channel HBA products offset by an
increase in volume of our RAID products. In fiscal 2005, we discontinued our Fibre Channel HBA products. These products accounted for a significant portion of our storage revenues in fiscal 2005 and though we continue to ship these products, the
revenue from sales of these products has declined significantly and is expected to continue to decline.

The following table illustrates
revenue from our focus and nonfocus areas (dollars in thousands):



|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  
|-------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------- | - |  | ----- | -
|         |  | Fiscal Years Ended March 31, |         |                 |       |   |        |   |                
|         |  | 2006                         |         |                 | 2005  |   |        |   |                 |  |       |                   
|         |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change  |  
|Focus    |  | $                            | 207,331 |                 | 79.2  | % |        | $ | 185,165         |  | 73.0  | %                  |  | $ | 22,166  |   |  | 12.0  | %
|Nonfocus |  |                              | 54,513  |                 | 20.8  |   |        |   | 68,591          |  | 27.0  |                    |  |   | (14,078 | ) |  | (20.5 | )
|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  
|         |  | $                            | 261,844 |                 | 100.0 | % |        | $ | 253,756         |  | 100.0 | %                  |  | $ | 8,088   |   |  | 3.2   | %
|         |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |         |   |  |       |  

Gross Profit.    The following table presents net revenues, cost of
revenues and gross profit for fiscal years ended March 31, 2006 and 2005 (dollars in thousands):



|                 |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |      |  
|---------------- |  | ---------------------------- | ------- | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------ | - |  | ---- | -
|                 |  | Fiscal Years Ended March 31, |         |                 |       |   |        |   |                
|                 |  | 2006                         |         |                 | 2005  |   |        |   |                 |  |       |                   
|                 |  | Amount                       |         | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change |  
|Net revenues     |  | $                            | 261,844 |                 | 100.0 | % |        | $ | 253,756         |  | 100.0 | %                  |  | $ | 8,088  |   |  | 3.2  | %
|Cost of revenues |  |                              | 122,392 |                 | 46.7  |   |        |   | 123,253         |  | 48.6  |                    |  |   | (861   | ) |  | (0.7 | )
|                 |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |      |  
|Gross profit     |  | $                            | 139,452 |                 | 53.3  | % |        | $ | 130,503         |  | 51.4  | %                  |  | $ | 8,949  |   |  | 6.9  | %
|                 |  |                              |         |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |      |  



50



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The increase in gross profit for the year ended March 31, 2006 was primarily attributable to the
increase in revenues and to the decrease of $5.7 million of amortization in purchased intangibles and $2.2 million of purchased inventory fair value adjustment included in our cost of revenues partially offset by an unfavorable change in the mix of
our products sold.

The amortization of purchased intangible assets included in cost of revenues during the year ended March 31, 2006
was $17.6 million compared to $23.3 million for the year ended March 31, 2005.

Research and Development and
Selling,    General and Administrative Expenses. The following table presents research and development and selling, general and administrative expenses for fiscal years ended March 31, 2006 and March 31, 2005
(dollars in thousands):



|                                    |  |                              |        |                 |      |   |        |   |                 |  |      |            |  |   |         |   |  |       |   
|----------------------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | ---- | ---------- |  | - | ------- | - |  | ----- | --
|                                    |  | Fiscal Years Ended March 31, |        |                 |      |   |        |   |                
|                                    |  | 2006                         |        |                 | 2005 |   |        |   |                 |  |      |           
|                                    |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |      | (Decrease) |  |   | Change  |  
|Research and development            |  | $                            | 93,770 |                 | 35.8 | % |        | $ | 122,072         |  | 48.1 | %          |  | $ | (28,302 | ) |  | (23.2 | )%
|Selling, general and administrative |  | $                            | 62,157 |                 | 23.7 | % |        | $ | 65,080          |  | 25.6 | %          |  | $ | (2,923  | ) |  | (4.5  | )%

Research and Development.    The decrease in R&D of 23.2% for the
year ended March 31, 2006 was primarily due to lower payroll and the related benefits expense of $22.9 million, lower design costs and software and equipment depreciation costs of $4.7 million resulting from our restructuring initiatives, and
$0.7 million in stock-based compensation expense.

Selling, General and Administrative.    The decrease in
SG&A expenses of 4.5% for the year ended March 31, 2006 were primarily due to lower facilities rents, lower equipment and software costs, lower professional services of $5.1 million, and a $1.5 million decrease in stock compensation expense
offset by an increase in payroll and related expenses of $3.2 million.

Stock-Based Compensation.    The
following table presents stock-based compensation expense for the fiscal years ended March 31, 2006 and 2005, all of which was included in the tables above (dollars in thousands):



|                                    |  |                              |       |                 |      |   |        |   |                 |  |     |            |  |   |        |   |  |       |   
|----------------------------------- |  | ---------------------------- | ----- | --------------- | ---- | - | ------ | - | --------------- |  | --- | ---------- |  | - | ------ | - |  | ----- | --
|                                    |  | Fiscal Years Ended March 31, |       |                 |      |   |        |   |                
|                                    |  | 2006                         |       |                 | 2005 |   |        |   |                 |  |     |           
|                                    |  | Amount                       |       | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | (Decrease) |  |   | Change |  
|Costs of revenues                   |  | $                            | 89    |                 | 0.1  | % |        | $ | 674             |  | 0.3 | %          |  | $ | (585   | ) |  | (86.8 | )%
|Research and development            |  |                              | 2,690 |                 | 1.0  |   |        |   | 3,407           |  | 1.3 |            |  |   | (717   | ) |  | (21.0 | ) 
|Selling, general and administrative |  |                              | 3,761 |                 | 1.4  |   |        |   | 5,259           |  | 2.1 |            |  |   | (1,498 | ) |  | (28.5 | ) 
|                                    |  |                              |       |                 |      |   |        |   |                 |  |     |            |  |   |        |   |  |       |   
|                                    |  | $                            | 6,540 |                 | 2.5  | % |        | $ | 9,340           |  | 3.7 | %          |  | $ | (2,800 | ) |  | (30.0 | )%
|                                    |  |                              |       |                 |      |   |        |   |                 |  |     |            |  |   |        |   |  |       |   

Stock-based compensation charges were $6.5 million for the year ended March 31, 2006,
compared to $9.3 million for the year ended March 31, 2005. The decrease in stock-based compensation expense in 2006 related primarily to a reduction in the amortization of deferred compensation resulting from assumed unvested equity
compensation instruments becoming fully vested and the elimination of deferred compensation as a result of the termination of employment of certain employees.

Acquired In-process Research and Development.    We did not acquire any companies in fiscal 2006 and as result did not have any IPR&D expense. However, for the fiscal year ended
March 31, 2005, we recorded $13.4 million of acquired IPR&D resulting from the acquisitions of 3ware and the embedded products business. These amounts were expensed on the acquisition dates because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. The IPR&D charge related to the 3ware acquisition



51



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was made up of two projects that were 42% and 25% complete at the date of acquisition. The estimated cost to complete these projects was $650,000 and $2.3
million, respectively, and the discount rate applied to calculate the IPR&D charge was 30% and 35%, respectively. The IPR&D charge related to the embedded products business acquisition was made up of three projects, which were between 42%
and 69% complete at the date of acquisition. The estimated aggregate cost to complete these projects was $9.1 million. The discount rate applied to calculate the IPR&D charge ranged from 25% to 30%.

Goodwill and Purchased Intangible Asset Impairment Charges.    Based upon an analysis performed in the fourth quarter of
fiscal 2006, which included a discounted cash flow analysis, as well as market comparables, we recorded a charge for the impairment of goodwill of $131.2 million which is recorded in operating expenses in the consolidated statement of operations.

Restructuring Charges.    The following table presents restructuring charges for the fiscal years ended
March 31, 2006 and March 31, 2005 (dollars in thousands):



|                      |  |                              |        |                 |      |   |        |   |                 |  |     |          |  |        |       |  |      |  
|--------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | --- | -------- |  | ------ | ----- |  | ---- | -
|                      |  | Fiscal Years Ended March 31, |        |                 |      |   |        |  
|                      |  | 2006                         |        |                 | 2005 |   |        |   |                 |  |    
|                      |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | Increase |  | Change |      
|Restructuring charges |  | $                            | 12,602 |                 | 4.8  | % |        | $ | 9,622           |  | 3.8 | %        |  | $      | 2,980 |  | 31.0 | %

Interest and Other Income.    The following table presents interest and
other income for the fiscal years ended March 31, 2006 and 2005 (dollars in thousands):



|                     |  |                              |        |                 |      |   |        |   |                 |  |     |                    |  |   |        |   |  |       |   
|-------------------- |  | ---------------------------- | ------ | --------------- | ---- | - | ------ | - | --------------- |  | --- | ------------------ |  | - | ------ | - |  | ----- | --
|                     |  | Fiscal Years Ended March 31, |        |                 |      |   |        |   |                
|                     |  | 2006                         |        |                 | 2005 |   |        |   |                 |  |     |                   
|                     |  | Amount                       |        | % of NetRevenue |      |   | Amount |   | % of NetRevenue |  |     | Increase(Decrease) |  |   | Change |  
|Interest income, net |  | $                            | 15,617 |                 | 6.0  | % |        | $ | 18,699          |  | 7.4 | %                  |  | $ | (3,082 | ) |  | (16.5 | )%
|Other income, net    |  | $                            | 256    |                 | 0.1  | % |        | $ |                |  |    | %                  |  | $ | 256    |   |  |      | % 

Interest Income,net.    The decrease for the year ended
March 31, 2006 is primarily due to lower cash and short-term investment balances as well as lower net realized gains on the portfolio.

Other Income, net.    Other income (expense), net for the year ended March 31, 2006 includes net gains on sale of strategic equity investments and the disposals of property and equipment offset by realized
losses on foreign currency hedges.

Income Taxes.    The following table presents our income tax expense
(benefit) for the fiscal years ending March 31, 2006 and 2005 (dollars in thousands):



|                             |  |                              |      |   |                 |      |    |        |   |                 |  |     |          |  |        |       |  |       |  
|---------------------------- |  | ---------------------------- | ---- | - | --------------- | ---- | -- | ------ | - | --------------- |  | --- | -------- |  | ------ | ----- |  | ----- | -
|                             |  | Fiscal Years Ended March 31, |      |   |                 |      |    |       
|                             |  | 2006                         |      |   | 2005            |      |    |        |   |                 | 
|                             |  | Amount                       |      |   | % of NetRevenue |      |    | Amount |   | % of NetRevenue |  |     | Increase |  | Change |      
|Income tax expense (benefit) |  | $                            | (636 | ) |                 | (0.2 | )% |        | $ | 2,861           |  | 1.1 | %        |  | $      | 3,497 |  | 122.2 | %

The federal statutory income tax rate was 35% for the fiscal years ending March 31, 2006 and
2005. The net income tax benefit in fiscal 2006 primarily relates to the reversal of the $1.1 million tax contingency related to our Israeli subsidiary.



52



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FINANCIAL CONDITION AND LIQUIDITY

As of March 31, 2007, our principal source of liquidity consisted of $284.5 million in cash, cash equivalents and short-term investments. Working capital as of March 31, 2007 was $307.1 million. Total cash,
cash equivalents, and short-term investments decreased by $51.2 million during the year ended March 31, 2007 primarily as a result of net cash paid for the acquisition of Quake Technologies offset by cash flows from operations, funds received
from structured stock repurchase agreements (including gains) and proceeds from the sale of real estate. At March 31, 2007, we had contractual obligations not included on our balance sheet totaling $68.7 million, primarily related to facility
leases, engineering design software tool licenses and inventory purchase commitments.

For the fiscal year ended March 31, 2007, we
generated $12.5 million in cash from our operations compared to using $4.6 million for our operations in the fiscal year ended March 31, 2006. Our net loss of $24.2 million for fiscal year ended March 31, 2007 included $59.7 million of
non-cash charges such as $8.4 million of depreciation, $24.8 million of amortization of purchased intangibles, $13.3 million in acquired IPR&D and development, $10.4 million of stock-based compensation charges recorded in accordance with SFAS
123(R) and $2.8 million in non-cash restructuring charges. The remaining change in operating cash flows for fiscal year ended March 31, 2007 primarily reflected increases in our accounts receivable, inventories, other assets, and accounts
payable and decreases in accrued payroll and other accrued liabilities and deferred revenue. The increase in our accounts receivable balance is attributable primarily to increased revenues and timing of receivables. Our overall days sales
outstanding increased to 42 days for the period ended March 31, 2007, compared to 35 days for the period ended March 31, 2006. The increase in our inventory is attributable to purchases to support our longer term revenue goals.

Net cash used for operations for the fiscal year ended March 31, 2006 primarily reflects our operating results before non-cash charges and
changes in operating assets and liabilities. Although we had a net loss of $148.4 million for the fiscal year ended March 31, 2006, there were $176.6 million of non-cash charges including $12.9 million of depreciation, $22.2 million of
amortization of purchased intangibles, $131.2 million of goodwill impairment charges, $6.5 million of stock-based compensation charges, $4.4 million of non-cash restructuring charges and $0.7 million gain of strategic equity investments. The
remaining change in operating cash flows for the fiscal year ended March 31, 2006 primarily reflects increases in inventory and accounts payable offset by decreases in accounts receivable, other assets, accrued payroll and other accrued
liabilities.

We used $9.9 million of cash in investing activities during the fiscal year ended March 31, 2007, compared to generating
cash of $46.5 million during the fiscal year ended March 31, 2006. During the fiscal year ended March 31, 2007, we used $72.0 million net cash for the Quake Technologies acquisition, $1.5 million for strategic investments and $6.7 million
for the purchase of property, equipment and other assets, offset by net proceeds of $65.5 million from short-term investment activities and $4.8 million from the sale of real estate. The net change in short-term investments includes a $4.3 million
equity investment that we reclassified from other non-current assets.

The generation of cash from investing activities for the fiscal year
ended March 31, 2006 primarily reflects net proceeds of $57.2 million from the sales and maturities of short-term investments and $0.7 million from the sale of a strategic investment offset by $7.9 million in purchases of property, equipment
and other assets, and the purchase of strategic investments for $3.5 million.

We used $0.1 million of cash in financing activities during
the fiscal year ended March 31, 2007, compared to using $68.2 million for the fiscal year ended March 31, 2006. The major financing use of cash for the fiscal year ended March 31, 2007 was open market repurchase of our common stock
for $20.1 million offset by net funds received from structured stock repurchase programs of $17.6 million and the sales of common stock through employee stock options of $2.9 million.



53



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The use of $68.2 million of cash for financing activities for the fiscal year ended March 31, 2006
primarily reflects the net funding of our structured stock repurchase program of $64.9 million and open market repurchase our common stock for $9.9 million, offset by the issuance of common stock through the exercise of employee stock options for
$6.7 million.

In August 2006, we acquired Quake Technologies. Under the terms of the Merger Agreement, we acquired Quakes net
tangible assets and intellectual property for $81.2 million in cash including merger costs. Of the amount paid, $12.0 million was placed in escrow for at least one year in order to secure the indemnification obligations of Quake.

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. During the year ended March 31, 2007, we repurchased 6.2 million shares of our common stock for approximately $20.1 million on the
open market. During the year ended March 31, 2006, we repurchased 4.0 million shares of our common stock for approximately $9.9 million on the open market. From the time the program was first implemented through March 31, 2007, we
have repurchased on the open market a total of 15.6 million shares at a weighted average price of $3.01 per share. All repurchased shares were retired upon delivery to us. At March 31, 2007, $85.5 million remained available to
repurchase shares under the authorized program, as amended. We expect repurchases to continue under our stock repurchase program.

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 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 an
increase to additional paid in capital on the balance sheet in accordance with the guidance issued in the Emerging Issues Task Force No. (EITF) 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Companys Own Stock.

During the year ended March 31, 2007, we received $27.0 million in cash and 7.7 million in
shares of our common stock at an effective purchase price of $3.06 per share from open structured stock repurchase programs. During the year ended March 31, 2006, we entered into structured stock repurchase agreements totaling
$105.0 million. Upon settlement of the underlying agreements, we received $40.1 million in cash and 12.8 million shares of our common stock at an effective purchase price of $2.72 per share. At March 31, 2007, we had no structured
stock repurchase agreements open. From the time of the stock repurchase program inception through March 31, 2007, we have entered into structured stock repurchase agreements totaling $174.0 million. Upon settlement of these underlying
agreements, we have received $115.5 million in cash and 23.0 million shares of our common stock at an effective purchase price of $2.55 per share.



54



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The table below is a summary of our repurchase program share activity for the years ended March 31,
2007 and 2006 (in thousands, except per share data):



|                                                     |  |                            |        |      |   |       
|---------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------
|                                                     |  | Fiscal Year EndedMarch 31,
|                                                     |  | 2007                       |        | 2006
|Open market repurchases:                             |  |                            |        |      |   |       
|Aggregate repurchase price                           |  | $                          | 20,137 |      | $ | 9,947 
|Repurchased shares                                   |  |                            | 6,242  |      |   | 4,000 
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.23   |      | $ | 2.49  
|                                                     |  |                            |        |      |   |       
|Structured agreements:                               |  |                            |        |      |   |       
|Shares acquired in settlement                        |  |                            | 7,695  |      |   | 12,787
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.06   |      | $ | 2.72  
|                                                     |  |                            |        |      |   |       
|Total shares acquired by repurchase or in settlement |  |                            | 13,937 |      |   | 16,787
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.13   |      | $ | 2.66  
|                                                     |  |                            |        |      |   |       

The following table summarizes our contractual operating leases and other purchase commitments as
of March 31, 2007 (in thousands):



|                              |  |                 |        |                          |   |        |  |   |       
|----------------------------- |  | --------------- | ------ | ------------------------ | - | ------ |  | - | ------
|                              |  | OperatingLeases |        | OtherPurchaseCommitments |   | Total 
|Fiscal Years Ending March 31, |  |                 |        |                          |   |        |  |   |       
|2008                          |  | $               | 16,142 |                          | $ | 32,640 |  | $ | 48,782
|2009                          |  |                 | 12,010 |                          |   |       |  |   | 12,010
|2010                          |  |                 | 7,225  |                          |   |       |  |   | 7,225 
|2011                          |  |                 | 681    |                          |   |       |  |   | 681   
|2012 and thereafter           |  |                 |       |                          |   |       |  |   |      
|                              |  |                 |        |                          |   |        |  |   |       
|Total minimum payments        |  | $               | 36,058 |                          | $ | 32,640 |  | $ | 68,698
|                              |  |                 |        |                          |   |        |  |   |       

We did not have any off-balance sheet arrangements as at March 31, 2007.

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 such additional debt or equity financing will be available on commercially
reasonable terms or at all.



55



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|Item 7A. | Quantitative and Qualitative Disclosure 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. 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 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 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, except for investments managed by one investment manager who utilizes U.S. Treasury bond futures options
(futures options) as a protection against the impact of increases in interest rates on the fair value of preferred stocks managed by that investment manager.

We are exposed to market risk as it relates to changes in the market value of our investments. At March 31, 2007, our investment portfolio included fixed-income securities classified as available-for-sale
investments with a fair market value of $232.9 million and a cost basis of $233.0 million. These securities are subject to interest rate risk, as well as credit risk, and will decline in value if interest rates increase or an issuers credit
rating or financial condition is decreased. The following table presents the hypothetical changes in fair value of our short-term investments held at March 31, 2007 (in thousands):



|                               |  |                                                                                 |         |                             |   |                                                                                 |  |   |         |  |         |         |         |   |         |  |   |         |  |   |        
|------------------------------ |  | ------------------------------------------------------------------------------- | ------- | --------------------------- | - | ------------------------------------------------------------------------------- |  | - | ------- |  | ------- | ------- | ------- | - | ------- |  | - | ------- |  | - | -------
|                               |  | Valuation of Securities Given anInterest Rate Decrease ofX Basis Points
(BPS) |         | FairValue asofMarch 31,2007 |   | Valuation of Securities Given anInterest Rate Increase ofX Basis Points
(BPS)
|                               |  | (150 BPS)                                                                       |         | (100 BPS)                   |   | (50 BPS)                                                                        |  |   | 50 BPS  |  | 100 BPS |         | 150 BPS
|Available-for-sale investments |  | $                                                                               | 246,222 |                             | $ | 241,619                                                                         |  | $ | 237,147 |  | $       | 232,875 |         | $ | 228,781 |  | $ | 224,797 |  | $ | 220,963
|                               |  |                                                                                 |         |                             |   |                                                                                 |  |   |         |  |         |         |         |   |         |  |   |         |  |   |        

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.

We 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 entered into forward currency exchange
contracts to hedge our overseas monthly operating expenses when deemed appropriate. 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 statement of operations in the current period. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on our financial condition or results of operations.



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

Refer
to the Index to the Financial Statements on Page F-l.



56



---

|Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures.
|-------- | ------------------------

Conclusion Regarding the Effectiveness
of Disclosure 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 Securities and Exchange Commission (the SEC) pursuant to the Securities and Exchange Act of 1934, as amended, 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 SEC 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 the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2007.

Managements Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation using the criteria inInternal ControlIntegrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2007.

Our managements assessment of the effectiveness of our internal control over financial reporting as of March 31, 2007 has been audited by an
independent registered public accounting firm, as stated in their report, which is included herein.

Changes in Internal Control Over Financial
Reporting

There was no change in our internal controls 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.



57



---

Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting

The
Board of Directors and Stockholders

Applied Micro Circuits Corporation

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Applied Micro Circuits Corporation maintained effective internal
control over financial reporting as of March 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Applied Micro
Circuits Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that Applied Micro Circuits Corporation maintained effective internal control over financial reporting as of
March 31, 2007, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Applied Micro Circuits Corporation maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Applied Micro Circuits Corporation as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each of
the three years in the period ended March 31, 2007 of Applied Circuits Corporation and our report dated May 25, 2007 expressed an unqualified opinion thereon.

/S/    ERNST & YOUNG LLP

San Diego, California

May 25, 2007



58



---

|Item 9B. | Other Information.
|-------- | ------------------

None.

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

(a) Executive OfficersSee the section entitled Executive Officers of the Registrant in Part I, Item 1 of this report.

(b) DirectorsThe information required by this Item is contained in the section entitled Election of Directors in the Proxy Statement and is incorporated herein by reference.

Additional information required by this Item is incorporated by reference to the section entitled Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated herein by reference.

We have adopted a code of business conduct and ethics
that all executive officers and management employees must review and abide by (including our principal executive officer, principal financial officer and principal accounting officer), which we refer to as our Code of Business Conduct and Ethics.
The Code of Business Conduct and Ethics is available on our website at http://www.amcc.com in the Investor Information section under the heading Corporate Governance. We will promptly disclose on our website (1) the nature of any
amendment to the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any
waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics that is granted to one of these specified officers and the name of such person who is granted the waiver.



|Item 11. | Executive Compensation.
|-------- | -----------------------

The information required
by this item is incorporated herein by reference from the section entitled Executive Compensation in the Proxy Statement.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

The information required by this item is incorporated herein by reference from the section entitled Security Ownership of Certain Beneficial Owners
and Management in the Proxy Statement.

The information required by this Item is incorporated by reference to the sections entitled
Common Stock Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the Proxy Statement.



|Item 13. | Certain Relationships and Related Transactions.
|-------- | -----------------------------------------------

The information required by this Item is incorporated by reference to the section entitled Certain Transactions in the Proxy Statement.



|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------

The
information required by this Item is contained in the section entitled Audit and Other Fees, in the Proxy Statement and is incorporated herein by reference.



59



---

PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------

(a)
The following documents are filed as part of this report:

(1) Financial Statements

The financial statements of the Company are included herein as required under Item 8 of this report. See Index to Financial
Statements on page F-l.

(2) Financial Statement Schedules

For the three fiscal years ended March 31, 2007Schedule II Valuation and Qualifying Accounts

Schedules not listed above have been omitted because information required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.

(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)

See Item 15(b) below.

(b) The following exhibits are filed or incorporated by reference into this report:



|      |      |  |                                                                                                                                 
|----- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------
|      |     
|3.1   | (1)  |  | Amended and Restated Certificate of Incorporation of the Company.                                                               
|      |     
|3.2   | (2)  |  | Amended and Restated Bylaws of the Company.                                                                                     
|      |     
|4.1   | (3)  |  | Specimen Stock Certificate.                                                                                                     
|      |     
|10.1  | (3)  |  | Form of Indemnification Agreement between the Company and each of its officers and directors.                                   
|      |     
|10.2  |      |  | *Form of Restricted Stock Unit Agreement under the 1992 Equity Incentive Plan.                                                  
|      |     
|10.3  |      |  | *Form of Option Agreement under the 1992 Equity Incentive Plan.                                                                 
|      |     
|10.4  |      |  | *1992 Equity Incentive Plan.                                                                                                    
|      |     
|10.5  | (11) |  | *1997 Directors Stock Option Plan, as amended, and form of Option Agreement.                                                   
|      |     
|10.6  | (3)  |  | *401(k) Plan effective April 1, 1985 and form of Enrollment Agreement.                                                          
|      |     
|10.9  | (3)  |  | Industrial Real Estate Lease dated October 29, 1996 between the Company and ADI Mesa Partners AMCC, L.P.                        
|      |     
|10.24 | (5)  |  | *1998 Employee Stock Purchase Plan and form of Subscription Agreement.                                                          
|      |     
|10.26 | (4)  |  | *1998 Stock Incentive Plan of Cimaron Communications Corporation, as amended.                                                   
|      |     
|10.30 | (6)  |  | Lease of Engineering Building by and between Kilroy Realty, L.P. and the Company dated February 17, 1999.                       
|      |     
|10.32 | (9)  |  | Amendment No. 1 to Lease of Engineering Building by and between Kilroy Realty, L.P. and the Company dated November 30, 1999.    
|      |     
|10.33 | (4)  |  | *2000 Equity Incentive Plan, as amended, and form of Option Agreement.                                                          
|      |     
|10.34 |      |  | *Form of Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan.                                                  
|      |     
|10.35 | (7)  |  | Lease of Facilities in Andover, Massachusetts between 200 Minuteman Limited Partnership and Registrant dated September 13, 2000.



60



---

|      |      |  |                                                                                                                                           
|----- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|10.37 | (5)  |  | MMC Networks, Inc. 1997 Stock Plan and form of Option Agreement.                                                                          
|      |     
|10.38 | (4)  |  | *AMCC Deferred Compensation Plan.                                                                                                         
|      |     
|10.42 | (10) |  | +Patent License Agreement between the Company and IBM dated September 28, 2003.                                                           
|      |     
|10.43 | (10) |  | +Intellectual Property Agreement between the Company and IBM dated September 28, 2003.                                                    
|      |     
|10.47 | (12) |  | *Offer of Employment dated February 22, 2005 by and between the Company and Kambiz Hooshmand.                                             
|      |     
|10.52 | (13) |  | *Amendment to Offer of Employment dated February 8, 2006 by and between the Company and Kambiz Hooshmand.                                 
|      |     
|10.53 | (14) |  | *Offer of Employment dated September 14, 2005 by and between the Company and Robert Gargus.                                               
|      |     
|10.54 | (14) |  | *Offer of Employment dated April 27, 2005, by and between the Company and Daryn Lau.                                                      
|      |     
|10.55 | (14) |  | *Employment and Non-Solicitation Agreement dated May 24, 2004 by and between the Company and Brian Wilkie.                                
|      |     
|10.56 | (14) |  | *Employment and Non-Solicitation Agreement dated February 25, 2004 by and between the Company and Faye Pairman.                           
|      |     
|10.57 |      |  | *Employment and Non-Solicitation Agreement dated March 17, 2004 by and between the Company and Barbara Murphy.                            
|      |     
|11.1  | (8)  |  | Computation of Per Share Data under SFAS 128.                                                                                             
|      |     
|21.1  |      |  | Subsidiaries of the Registrant.                                                                                                           
|      |     
|23.1  |      |  | Consent of Independent Registered Public Accounting Firm.                                                                                 
|      |     
|24.1  |      |  | Power of Attorney (see page 63).                                                                                                          
|      |     
|31.1  |      |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, 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, 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.

---

|* | Management contract or compensatory plan.
|- | -----------------------------------------

|+ | The Company has been granted confidential treatment for certain portions of these agreements and certain terms and conditions have been redacted from the exhibits.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to Exhibit 3.2 filed with the Companys Registration Statement (No. 333-37609) filed October 10, 1997, and as amended by Exhibit 3.3 filed with
the Companys Registration Statement (No. 333-45660) filed September 12, 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to identically numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to identically numbered exhibit filed with the Companys Registration Statement (No. 333-37609) filed October 10, 1997, or with any amendments
thereto, which registration statement became effective November 24, 1997.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to identically numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



61



---

|(5) | Incorporated by reference to identically numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended March 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to identically numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended March 31, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to identically numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | The Computation of Per Share Data under SFAS 128 is included in the Notes to the Consolidated Financial Statements included in this Report.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to identically numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended March 31, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to identically numbered exhibit filed with the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Effective March 31, 2005, our Board of Directors terminated our 1997 Directors Stock Option Plan (the Directors Plan). The Directors Plan provided for the
automatic grant of stock options to our non-employee directors upon initial election to the Board of Directors and annually thereafter. The termination of the Directors Plan will not affect any stock options previously granted pursuant to the
Directors Plan.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to identically numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended March 31, 2005.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to Exhibit 99.1 filed with the Companys Current Report on Form 8-K filed March 3, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to identically numbered exhibit filed with the Companys Annual Report on Form 10-K for the year ended March 31, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------



62



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



APPLIED MICRO CIRCUITS CORPORATIONBy:

/s/    KAMBIZ HOOSHMANDKambiz Hooshmand President and Chief Executive Officer


Date: May 30, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS
BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kambiz Hooshmand and Robert G. Gargus, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities,
to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                             |  |                                                                                                |  |             
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------
|Signature                                    |  | Title                                                                                          |  | Date        
|                                             |  |                                                                                               
|/s/    KAMBIZ
HOOSHMAND Kambiz Hooshmand     |  | Chief Executive Officer, President and Director (Principal Executive Officer)                  |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    ROBERT G.
GARGUS Robert G. Gargus     |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    CESAR
CESARATTO Cesar Cesaratto       |  | Chairman of the Board                                                                          |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    NIEL RANSOM
Niel Ransom               |  | Director                                                                                       |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    FRED
SHLAPAK Fred Shlapak             |  | Director                                                                                       |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    ARTHUR B.
STABENOW Arthur B. Stabenow |  | Director                                                                                       |  | May 30, 2007
|                                             |  |                                                                                               
|/s/     JULIE H.
SULLIVAN Julie H. Sullivan  |  | Director                                                                                       |  | May 30, 2007
|                                             |  |                                                                                               
|/s/    DONALD COLVIN Donald Colvin           |  | Director                                                                                       |  | May 30, 2007



63



---

INDEX TO FINANCIAL STATEMENTS



|                                                                                                         |  |     
|-------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                         |  | Page
|Report of Independent Registered Public Accounting Firm                                                  |  | F-2 
|                                                                                                         | 
|Consolidated Balance Sheets as of March 31, 2007 and 2006                                                |  | F-3 
|                                                                                                         | 
|Consolidated Statements of Operations for the fiscal years ended March 31, 2007, 2006 and 2005           |  | F-4 
|                                                                                                         | 
|Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2007, 2006 and 2005           |  | F-5 
|                                                                                                         | 
|Consolidated Statements of Stockholders Equity for the fiscal years ended March 31, 2007, 2006 and 2005 |  | F-6 
|                                                                                                         | 
|Notes to Consolidated Financial Statements                                                               |  | F-7 



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Applied Micro Circuits Corporation

We have audited the accompanying consolidated balance sheets of Applied Micro Circuits Corporation as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each
of the three years in the period ended March 31, 2007. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Applied Micro Circuits Corporation at March 31, 2007 and 2006, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), on April 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Applied Micro Circuits Corporations internal control over financial reporting as of March 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 25, 2007 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

San
Diego, California

May 25, 2007



F-2



---

APPLIED MICRO CIRCUITS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)



|                                                                                      |  |           |            |   |      |   |            |  
|------------------------------------------------------------------------------------- |  | --------- | ---------- | - | ---- | - | ---------- | -
|                                                                                      |  | March 31, |           
|                                                                                      |  | 2007      |            |   | 2006 |  
|ASSETS                                                                                |  |           |            |   |      |   |            |  
|Current assets:                                                                       |  |           |            |   |      |   |            |  
|Cash and cash equivalents                                                             |  | $         | 51,595     |   |      | $ | 49,125     |  
|Short-term investments-available-for-sale                                             |  |           | 232,875    |   |      |   | 286,540    |  
|Accounts receivable, net                                                              |  |           | 32,558     |   |      |   | 26,324     |  
|Inventories                                                                           |  |           | 31,286     |   |      |   | 24,941     |  
|Other current assets                                                                  |  |           | 14,438     |   |      |   | 12,618     |  
|                                                                                      |  |           |            |   |      |   |            |  
|Total current assets                                                                  |  |           | 362,752    |   |      |   | 399,548    |  
|Property and equipment, net                                                           |  |           | 27,150     |   |      |   | 36,127     |  
|Goodwill and purchased intangibles, net                                               |  |           | 415,644    |   |      |   | 381,066    |  
|Other assets                                                                          |  |           | 10,966     |   |      |   | 8,685      |  
|                                                                                      |  |           |            |   |      |   |            |  
|Total assets                                                                          |  | $         | 816,512    |   |      | $ | 825,426    |  
|                                                                                      |  |           |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                  |  |           |            |   |      |   |            |  
|Current liabilities:                                                                  |  |           |            |   |      |   |            |  
|Accounts payable                                                                      |  | $         | 26,893     |   |      | $ | 24,656     |  
|Accrued payroll and related expenses                                                  |  |           | 10,021     |   |      |   | 7,409      |  
|Other accrued liabilities                                                             |  |           | 16,383     |   |      |   | 27,017     |  
|Deferred revenue                                                                      |  |           | 2,393      |   |      |   | 3,536      |  
|                                                                                      |  |           |            |   |      |   |            |  
|Total current liabilities                                                             |  |           | 55,690     |   |      |   | 62,618     |  
|Stockholders equity:                                                                 |  |           |            |   |      |   |            |  
|Preferred stock, $0.01 par value:                                                     |  |           |            |   |      |   |            |  
|Authorized shares2,000, none issued and outstanding                                  |  |           |           |   |      |   |           |  
|Common stock, $0.01 par value:                                                        |  |           |            |   |      |   |            |  
|Authorized shares630,000 at March 31, 2007 and 2006                                  |  |           |            |   |      |   |            |  
|Issued and outstanding shares282,976 at March 31, 2007 and 295,440 at March 31, 2006 |  |           | 2,830      |   |      |   | 2,954      |  
|Additional paid-in capital                                                            |  |           | 5,954,223  |   |      |   | 5,945,555  |  
|Deferred compensation, net                                                            |  |           |           |   |      |   | (2,087     | )
|Accumulated other comprehensive income (loss)                                         |  |           | 224        |   |      |   | (11,367    | )
|Accumulated deficit                                                                   |  |           | (5,196,455 | ) |      |   | (5,172,247 | )
|                                                                                      |  |           |            |   |      |   |            |  
|Total stockholders equity                                                            |  |           | 760,822    |   |      |   | 762,808    |  
|                                                                                      |  |           |            |   |      |   |            |  
|Total liabilities and stockholders equity                                            |  | $         | 816,512    |   |      | $ | 825,426    |  
|                                                                                      |  |           |            |   |      |   |            |  

See Accompanying Notes to Financial Statements



F-3



---

APPLIED MICRO CIRCUITS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                |  | Fiscal Years Ended March 31, |        
|                                                                |  | 2007                         |         |   | 2006 |   |          | 2005 | 
|Net revenues                                                    |  | $                            | 292,852 |   |      | $ | 261,844  |      |  | $ | 253,756  |  
|Cost of revenues                                                |  |                              | 140,714 |   |      |   | 122,392  |      |  |   | 123,253  |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Gross profit                                                    |  |                              | 152,138 |   |      |   | 139,452  |      |  |   | 130,503  |  
|Operating expenses:                                             |  |                              |         |   |      |   |          |      |  |   |          |  
|Research and development                                        |  |                              | 96,418  |   |      |   | 93,770   |      |  |   | 122,072  |  
|Selling, general and administrative                             |  |                              | 67,971  |   |      |   | 62,157   |      |  |   | 65,080   |  
|Acquired in-process research and development                    |  |                              | 13,300  |   |      |   |         |      |  |   | 13,400   |  
|Amortization of purchased intangible assets                     |  |                              | 4,995   |   |      |   | 4,588    |      |  |   | 6,960    |  
|Restructuring charges                                           |  |                              | 1,291   |   |      |   | 12,602   |      |  |   | 9,622    |  
|Option investigation                                            |  |                              | 5,344   |   |      |   |         |      |  |   |         |  
|Purchased intangible asset impairment charges                   |  |                              |        |   |      |   |         |      |  |   | 27,330   |  
|Goodwill impairment charges                                     |  |                              |        |   |      |   | 131,216  |      |  |   |         |  
|Litigation settlement, net                                      |  |                              |        |   |      |   |         |      |  |   | 29,250   |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Total operating expenses                                        |  |                              | 189,319 |   |      |   | 304,333  |      |  |   | 273,714  |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Operating loss                                                  |  |                              | (37,181 | ) |      |   | (164,881 | )    |  |   | (143,211 | )
|Interest income, net                                            |  |                              | 13,125  |   |      |   | 15,617   |      |  |   | 18,699   |  
|Other income, net                                               |  |                              | 250     |   |      |   | 256      |      |  |   |         |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Loss before income taxes                                        |  |                              | (23,806 | ) |      |   | (149,008 | )    |  |   | (124,512 | )
|Income tax expense (benefit)                                    |  |                              | 402     |   |      |   | (636     | )    |  |   | 2,861    |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Net loss                                                        |  | $                            | (24,208 | ) |      | $ | (148,372 | )    |  | $ | (127,373 | )
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per share:                           |  |                              |         |   |      |   |          |      |  |   |          |  
|Net loss per share                                              |  | $                            | (0.09   | ) |      | $ | (0.49    | )    |  | $ | (0.41    | )
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  
|Shares used in calculating basic and diluted net loss per share |  |                              | 284,303 |   |      |   | 300,841  |      |  |   | 309,456  |  
|                                                                |  |                              |         |   |      |   |          |      |  |   |          |  

See Accompanying Notes to Financial Statements



F-4



---

APPLIED MICRO CIRCUITS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                          |  | Fiscal Years Ended March 31, |         
|                                                                                          |  | 2007                         |          |   | 2006 |   |            | 2005 | 
|Operating activities:                                                                     |  |                              |          |   |      |   |            |      |  |   |            |  
|Net loss                                                                                  |  | $                            | (24,208  | ) |      | $ | (148,372   | )    |  | $ | (127,373   | )
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities |  |                              |          |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                                             |  |                              | 8,410    |   |      |   | 12,902     |      |  |   | 18,113     |  
|Amortization of purchased intangibles                                                     |  |                              | 24,751   |   |      |   | 22,232     |      |  |   | 30,283     |  
|Acquired in-process research and development                                              |  |                              | 13,300   |   |      |   |           |      |  |   | 13,400     |  
|Goodwill and purchased intangible asset impairment charges                                |  |                              |         |   |      |   | 131,216    |      |  |   | 27,330     |  
|Stock-based compensation expense:                                                         |  |                              |          |   |      |   |            |      |  |   |            |  
|Stock options                                                                             |  |                              | 10,211   |   |      |   | 6,540      |      |  |   | 9,340      |  
|Restricted stock units                                                                    |  |                              | 142      |   |      |   |           |      |  |   |           |  
|Non-cash restructuring charges                                                            |  |                              | 2,798    |   |      |   | 4,395      |      |  |   | 4,187      |  
|Net gain on strategic equity investments                                                  |  |                              |         |   |      |   | (672       | )    |  |   |           |  
|Net loss (gain) on disposals of property                                                  |  |                              | 120      |   |      |   | (4         | )    |  |   |           |  
|Changes in operating assets and liabilities:                                              |  |                              |          |   |      |   |            |      |  |   |            |  
|Accounts receivables                                                                      |  |                              | (4,790   | ) |      |   | 2,277      |      |  |   | (3,692     | )
|Inventories                                                                               |  |                              | (5,307   | ) |      |   | (6,927     | )    |  |   | (4,574     | )
|Other assets                                                                              |  |                              | (1,336   | ) |      |   | 34,388     |      |  |   | (35,124    | )
|Accounts payable                                                                          |  |                              | 1,214    |   |      |   | 640        |      |  |   | 3,921      |  
|Accrued payroll and other accrued liabilities                                             |  |                              | (11,566  | ) |      |   | (62,782    | )    |  |   | 53,797     |  
|Deferred revenue                                                                          |  |                              | (1,230   | ) |      |   | (403       | )    |  |   | (929       | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Net cash provided by (used for) operating activities                                      |  |                              | 12,509   |   |      |   | (4,570     | )    |  |   | (11,321    | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Investing activities:                                                                     |  |                              |          |   |      |   |            |      |  |   |            |  
|Proceeds from sales and maturities of short-term investments                              |  |                              | 468,570  |   |      |   | 1,082,451  |      |  |   | 3,264,961  |  
|Purchases of short-term investments                                                       |  |                              | (403,080 | ) |      |   | (1,025,274 | )    |  |   | (3,094,094 | )
|Purchase of property, equipment and other assets                                          |  |                              | (6,732   | ) |      |   | (7,933     | )    |  |   | (27,493    | )
|Proceeds from the sale of strategic equity investments                                    |  |                              |         |   |      |   | 672        |      |  |   |           |  
|Purchase of strategic investment                                                          |  |                              | (1,500   | ) |      |   | (3,500     | )    |  |   |           |  
|Proceeds from sale of real estate                                                         |  |                              | 4,788    |   |      |   |           |      |  |   |           |  
|Proceeds from sale of property, equipment and other assets                                |  |                              |         |   |      |   | 101        |      |  |   |           |  
|Net cash paid for acquisitions                                                            |  |                              | (71,971  | ) |      |   |           |      |  |   | (368,386   | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Net cash provided by (used for) investing activities                                      |  |                              | (9,925   | ) |      |   | 46,517     |      |  |   | (225,012   | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Financing activities:                                                                     |  |                              |          |   |      |   |            |      |  |   |            |  
|Proceeds from issuance of common stock                                                    |  |                              | 2,850    |   |      |   | 6,745      |      |  |   | 10,153     |  
|Repurchase of company stock                                                               |  |                              | (20,137  | ) |      |   | (9,947     | )    |  |   | (16,933    | )
|Funding of structured stock repurchase agreements                                         |  |                              | (9,398   | ) |      |   | (105,000   | )    |  |   | (59,516    | )
|Funds received from structured stock repurchase agreements including gains                |  |                              | 26,963   |   |      |   | 40,144     |      |  |   | 48,335     |  
|Payments on long-term debt                                                                |  |                              | (289     | ) |      |   | (34        | )    |  |   | (68        | )
|Payments on capital lease obligations                                                     |  |                              |         |   |      |   |           |      |  |   | (201       | )
|Other                                                                                     |  |                              | (103     | ) |      |   | (126       | )    |  |   | 797        |  
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Net cash used for financing activities                                                    |  |                              | (114     | ) |      |   | (68,218    | )    |  |   | (17,433    | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                              | 2,470    |   |      |   | (26,271    | )    |  |   | (253,766   | )
|Cash and cash equivalents at beginning of year                                            |  |                              | 49,125   |   |      |   | 75,396     |      |  |   | 329,162    |  
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of year                                                  |  | $                            | 51,595   |   |      | $ | 49,125     |      |  | $ | 75,396     |  
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|                                                                                          |  |                              |         
|Supplementary cash flow disclosure:                                                       |  |                              |          |   |      |   |            |      |  |   |            |  
|Cash paid for:                                                                            |  |                              |          |   |      |   |            |      |  |   |            |  
|Interest                                                                                  |  | $                            | 4        |   |      | $ | 86         |      |  | $ | 35         |  
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Income taxes                                                                              |  |                              | 369      |   |      |   | 884        |      |  |   | 764        |  
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  
|Unrealized net gain/(loss) on available for sale securities                               |  | $                            | 11,823   |   |      | $ | (4,279     | )    |  | $ | (13,016    | )
|                                                                                          |  |                              |          |   |      |   |            |      |  |   |            |  

See Accompanying Notes to Financial Statements



F-5



---

APPLIED MICRO CIRCUITS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|---------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------- | ----- | - | -------------------- | - | --------- | -------------------------------------------- |  | - | ------------------ | - |  | ------------------------- | ------- | - |  | - | ---------- | - |  | - | --------- | -
|                                                                                   |  | Common Stock |   |  | Additional Paidin
Capital |       |   | DeferredCompensation |   |           | Accumulated Other ComprehensiveIncome
(Loss) |  |   | AccumulatedDeficit |   |  | Total StockholdersEquity |        
|                                                                                   |  | Shares       |   |  | Amount                    |       |   |                      |   |           |                                             
|Balance, March 31, 2004                                                            |  | 310,985      |   |  | $                         | 3,110 |   |                      | $ | 6,011,886 |                                              |  | $ | (3,299             | ) |  | $                         | 5,352   |   |  | $ | (4,896,502 | ) |  | $ | 1,120,547 |  
|Issuance of common stock                                                           |  | 5,201        |   |  |                           | 52    |   |                      |   | 10,101    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 10,153    |  
|Repurchase of common stock                                                         |  | (5,380       | ) |  |                           | (54   | ) |                      |   | (16,879   | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (16,933   | )
|Funding of structured stock repurchase agreements                                  |  | (2,478       | ) |  |                           | (25   | ) |                      |   | (59,491   | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (59,516   | )
|Funds received from structured stock repurchases agreements including gains        |  |             |   |  |                           |      |   |                      |   | 48,335    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 48,335    |  
|Stock-based compensation expense                                                   |  |             |   |  |                           |      |   |                      |   | 95        |                                              |  |   | 9,245              |   |  |                           |        |   |  |   |           |   |  |   | 9,340     |  
|Deferred compensation related to stock options assumed as a result of acquisitions |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   | (19,024            | ) |  |                           |        |   |  |   |           |   |  |   | (19,024   | )
|Value of assumed options related to acquisition                                    |  |             |   |  |                           |      |   |                      |   | 23,888    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 23,888    |  
|Elimination of deferred compensation related to terminations                       |  |             |   |  |                           |      |   |                      |   | (3,977    | )                                            |  |   | 3,977              |   |  |                           |        |   |  |   |           |   |  |   |          |  
|Comprehensive loss:                                                                |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Net loss                                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   | (127,373   | ) |  |   | (127,373  | )
|Foreign currency translation gain                                                  |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | 797     |   |  |   |           |   |  |   | 797       |  
|Unrealized loss on short-term investments, net of tax                              |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | (13,016 | ) |  |   |           |   |  |   | (13,016   | )
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Total comprehensive loss                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (139,592  | )
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Balance, March 31, 2005                                                            |  | 308,328      |   |  |                           | 3,083 |   |                      |   | 6,013,958 |                                              |  |   | (9,101             | ) |  |                           | (6,867  | ) |  |   | (5,023,875 | ) |  |   | 977,198   |  
|Issuance of common stock                                                           |  | 3,863        |   |  |                           | 39    |   |                      |   | 6,706     |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 6,745     |  
|Repurchase of common stock                                                         |  | (3,964       | ) |  |                           | (40   | ) |                      |   | (9,907    | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (9,947    | )
|Funding of structured stock repurchase agreements                                  |  | (12,787      | ) |  |                           | (128  | ) |                      |   | (104,872  | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (105,000  | )
|Funds received from structured stock repurchases agreements including gains        |  |             |   |  |                           |      |   |                      |   | 40,144    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 40,144    |  
|Stock-based compensation expense                                                   |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   | 6,540              |   |  |                           |        |   |  |   |           |   |  |   | 6,540     |  
|Elimination of deferred compensation related to terminations                       |  |             |   |  |                           |      |   |                      |   | (474      | )                                            |  |   | 474                |   |  |                           |        |   |  |   |           |   |  |   |          |  
|Comprehensive loss:                                                                |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Net loss                                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   | (148,372   | ) |  |   | (148,372  | )
|Foreign currency translation loss                                                  |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | (221    | ) |  |   |           |   |  |   | (221      | )
|Unrealized loss on short-term investments, net of tax                              |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | (4,279  | ) |  |   |           |   |  |   | (4,279    | )
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Total comprehensive loss                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (152,872  | )
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Balance, March 31, 2006                                                            |  | 295,440      |   |  |                           | 2,954 |   |                      |   | 5,945,555 |                                              |  |   | (2,087             | ) |  |                           | (11,367 | ) |  |   | (5,172,247 | ) |  |   | 762,808   |  
|Issuance of common stock                                                           |  | 1,473        |   |  |                           | 15    |   |                      |   | 2,835     |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 2,850     |  
|Repurchase of common stock                                                         |  | (6,242       | ) |  |                           | (62   | ) |                      |   | (20,075   | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (20,137   | )
|Funding of structured stock repurchase agreements                                  |  | (7,695       | ) |  |                           | (77   | ) |                      |   | (9,321    | )                                            |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (9,398    | )
|Funds received from structured stock repurchases agreements including gains        |  |             |   |  |                           |      |   |                      |   | 26,963    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 26,963    |  
|Stock-based compensation expense                                                   |  |             |   |  |                           |      |   |                      |   | 10,353    |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | 10,353    |  
|Elimination of deferred compensation related to adoption of SFAS 123(R)            |  |             |   |  |                           |      |   |                      |   | (2,087    | )                                            |  |   | 2,087              |   |  |                           |        |   |  |   |           |   |  |   |          |  
|Comprehensive loss:                                                                |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Net loss                                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   | (24,208    | ) |  |   | (24,208   | )
|Foreign currency translation loss                                                  |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | (232    | ) |  |   |           |   |  |   | (232      | )
|Unrealized gain on short-term investments, net of tax                              |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           | 11,823  |   |  |   |           |   |  |   | 11,823    |  
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Total comprehensive loss                                                           |  |             |   |  |                           |      |   |                      |   |          |                                              |  |   |                   |   |  |                           |        |   |  |   |           |   |  |   | (12,617   | )
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  
|Balance, March 31, 2007                                                            |  | 282,976      |   |  | $                         | 2,830 |   |                      | $ | 5,954,223 |                                              |  | $ |                   |   |  | $                         | 224     |   |  | $ | (5,196,455 | ) |  | $ | 760,822   |  
|                                                                                   |  |              |   |  |                           |       |   |                      |   |           |                                              |  |   |                    |   |  |                           |         |   |  |   |            |   |  |   |           |  

See Accompanying Notes to Financial Statements



F-6



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Business

Applied Micro Circuits Corporation (AMCC or the Company) provides semiconductor and board level products
that are used for the processing, transporting and storing of information worldwide. The Company blends systems and software expertise with high-performance, high-bandwidth silicon integration to deliver silicon, hardware and software solutions for
global wide area networks (WAN), embedded applications such as PowerPC and programmable system-on-a-chip (SOC) architectures, storage area networks (SAN), and high-growth storage markets such as SATA RAID. AMCCs corporate
headquarters are located in Sunnyvale, California. Sales and engineering offices are located throughout the world.

Basis of Presentation

The consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

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 amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. The Company regularly evaluates estimates and assumptions related to allowances for doubtful
accounts, sales returns and allowances, warranty reserves, inventory reserves, goodwill and purchased intangible asset valuations and useful life, deferred income tax asset valuation allowances, share-based compensation and restructuring costs. 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.

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 101 Revenue Recognition in Financial Statements,
as well as SAB No. 104, Revenue Recognition. The Company recognizes product revenue when the following fundamental criteria are met: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectibility is reasonably assured. The Company recognizes revenue upon determination that all criteria for revenue recognition have been met. In addition, the Company does not recognize revenue until all customers
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. Revenue from shipments to distributors subject to rights of return is deferred until the
agreed upon percentage return or cancellation privileges lapse. Revenue from shipments to distributors without return rights is recognized upon shipment. In addition, the Company records reductions to revenue, at the time of shipment, for estimated
allowances such as returns, 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 or free
carrier shipping point. If actual returns or pricing adjustments exceed the Companys estimates, additional reductions to revenue would result.



F-7



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of 90 days or less to be cash equivalents.

Short-Term Investments

The Company defines short-term investments as income-yielding
securities that can be readily converted to cash. Short-term investments consist of U.S. Treasury securities and agency bonds, corporate bonds, mortgage-backed and asset back securities, preferred stocks, publicly traded equity securities and
closed-end bond funds. The Company accounts for its short-term investments under Statement of Financial Accounting Standard No. (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities. Management
determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. The investments which are classified as available-for-sale are adjusted to market value at each
period end with the offsetting unrealized gain or loss reflected as a separate component of stockholders equity, net of tax. These investments are adjusted for amortization of premiums and discounts to maturity and such amortization is
included in interest income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the consolidated statements of operations.

Fair Value of Financial Instruments

The
Companys financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities. The Company believes all of the financial instruments recorded values
approximate current values because of their nature and respective durations.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of available-for-sale securities and
trade receivables. The Company believes that the credit risk in its trade receivables is mitigated by the Companys credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not
require collateral and losses on trade receivables have historically been within managements expectations.

The Company invests its
excess cash in debt instruments of the U.S. Treasury, corporate bonds, mortgage-backed securities, asset-backed securities, preferred stocks, and closed-end bond funds primarily with investment grade credit ratings. The Company has 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 trends in yields and interest rates. The Company has not experienced
any significant losses on its short-term investments.

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Lower of cost or market adjustments reduce the carrying
value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. These adjustments are done on a part-by-part basis. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.



F-8



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Warranty Reserves

The Company generally provides a one year warranty on production released IC products and up to three years on board level products. Estimated expenses for warranty obligations are accrued as revenue is recognized.
Reserve estimates are adjusted periodically to reflect actual experience and/or changes to contracted obligations entered into with our customers.

The following table summarizes warranty reserve activity for fiscal years 2007 and 2006:



|                                               |  |                      |        |   |      |   |       |  
|---------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ----- | -
|                                               |  | Years EndedMarch 31, |       
|                                               |  | 2007                 |        |   | 2006 |  
|                                               |  | (In thousands)       |       
|Beginning balance                              |  | $                    | 4,066  |   |      | $ | 4,636 |  
|Charged to costs and expenses                  |  |                      | 708    |   |      |   | 75    |  
|Acquired Quake Technologies warranty liability |  |                      | 202    |   |      |   |      |  
|Payments                                       |  |                      | (897   | ) |      |   | (645  | )
|Reductions to estimated liability              |  |                      | (1,387 | ) |      |   |      |  
|                                               |  |                      |        |   |      |   |       |  
|Ending balance                                 |  | $                    | 2,692  |   |      | $ | 4,066 |  
|                                               |  |                      |        |   |      |   |       |  

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets ranging from 3 to 31.5 years using the straight line method. Leasehold improvements are stated at cost and
amortized over the shorter of the term of the related lease or its estimated useful life.

Goodwill and Purchased Intangible Assets

Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identified net tangible and
intangible assets acquired. Other purchased intangible assets, including such items as developed technology and trademarks, are amortized on a straight-line basis over the estimated remaining useful lives of the respective assets, ranging from one
to ten years.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company
performs its annual impairment review at the reporting unit level during the fourth quarter each fiscal year or more frequently if the Company believes indicators of impairment are present. SFAS 142 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



F-9



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 as well as market comparisons. The determination of fair values require significant judgment and estimates. For the years ended March 31, 2007, 2006 and 2005 we recorded goodwill impairment charges of zero, $131.2 million and
zero, respectively.

The Company accounts for long-lived assets, including other purchased intangible assets, in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. Reviews
are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value,
which is typically calculated using: (i) quoted market prices and/or (ii) discounted expected future cash flows. Impairment is based on the excess of the carrying amount over the fair value of those assets.

Research and Development

Research and
development costs are expensed as incurred. Substantially all research and development expenses are related to new product development and designing significant improvements to existing products.

Advertising Cost

Advertising costs of $1.7
million, $0.5 million and $0.5 million were expensed as incurred for each fiscal years ending March 31, 2007, 2006 and 2005, respectively.

Income Taxes

The Company utilizes the liability method of accounting for income taxes as set forth in SFAS
No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A
valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. The Company also determines its tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies(SFAS 5). The Company records estimated tax liabilities to the extent the contingencies are probable and can be reasonably estimated.

Stock-Based Compensation

Effective April 1, 2006, the Company adopted SFAS 123(R), using the modified
prospective method. This method does not require a revision of prior periods for comparative purposes. No change to the value of the awards granted prior to the adoption of SFAS 123(R) is required. However, awards granted and still unvested on the
date of adoption have been and will be attributed to expense under SFAS 123(R), including the application of the forfeiture rate on a prospective basis. The Companys Consolidated Financial Statements for the fiscal year ended March 31,
2007 reflect the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for the fiscal year ended March 31, 2007 was $10.4 million.

The company also adopted the alternative transition method provided in Financial Accounting Standards Board (FASB) Staff Position No. FAS 123(R)-3,Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee
stock-based compensation which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R).



F-10



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and
directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, as permitted under SFAS 123. Under SFAS 123, stock-based compensation
expense had been disclosed but not recognized in the Companys Consolidated Statement of Operations. In the Companys pro forma disclosure required under SFAS 123 for the periods prior to fiscal 2007, the Company accounted for forfeitures
as they occurred. Stock-based compensation expense recognized under APB 25 for fiscal years ended March 31, 2006 and 2005 was $6.5 million and $9.3 million, respectively.

SFAS 123(R) requires companies to estimate the fair value of stock-based compensation on the date of grant using an option-pricing model. The Company
uses the Black-Scholes model to value stock-based compensation. This is the same model which it previously used in preparing its pro forma disclosure required under SFAS 123. 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 determined in accordance with SFAS 123(R) and Staff Accounting Bulletin No. 107 (SAB 107), Share-Based Payment, using an option-pricing model, that
value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The following table
summarizes stock-based compensation expense related to stock options and restricted stock units under SFAS 123(R) for the fiscal year ended March 31, 2007 and under APB 25 for fiscal years ended March 31, 2006 and 2005, which is allocated
as follows (in thousands, except per share data):



|                                                   |  |                             |        |      |   |       |  |   |      
|-------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ----- |  | - | -----
|                                                   |  | Fiscal Year Ended March 31,
|                                                   |  | 2007                        |        | 2006 |   | 2005 
|Stock-based compensation expense by type of awards |  |                             |        |      |   |       |  |   |      
|Stock options                                      |  | $                           | 10,211 |      | $ | 6,540 |  | $ | 9,340
|Restricted stock units                             |  |                             | 142    |      |   |      |  |   |     
|                                                   |  |                             |        |      |   |       |  |   |      
|Total stock-based compensation expense             |  | $                           | 10,353 |      | $ | 6,540 |  | $ | 9,340
|                                                   |  |                             |        |      |   |       |  |   |      

The fair value of the options granted is estimated as of the grant date using the Black-Scholes
option-pricing model assuming the weighted-average assumptions listed in the following table:



|                            |  |                             |      |   |                               |   |      |      |  |   |       |   |  |      |      |   |      |   |      |   |  |   |      |  
|--------------------------- |  | --------------------------- | ---- | - | ----------------------------- | - | ---- | ---- |  | - | ----- | - |  | ---- | ---- | - | ---- | - | ---- | - |  | - | ---- | -
|                            |  | Employee Stock Options      |      |   | Employee Stock Purchase Plans |  
|                            |  | Fiscal Years EndedMarch 31, |      |   | Fiscal Years EndedMarch 31,   |  
|                            |  | 2007                        |      |   | 2006                          |   |      | 2005 |  |   | 2007* |   |  | 2006 |      |   | 2005 |  
|Expected life (years)       |  |                             | 4.4  |   |                               |   | 3.2  |      |  |   | 4.0   |   |  |      | 0.5  |   |      |   | 1.3  |   |  |   | 1.3  |  
|Risk-free interest rate     |  |                             | 4.7  | % |                               |   | 4.1  | %    |  |   | 3.8   | % |  |      | 5.2  | % |      |   | 2.9  | % |  |   | 2.2  | %
|Volatility                  |  |                             | 0.55 |   |                               |   | 0.52 |      |  |   | 0.77  |   |  |      | 0.43 |   |      |   | 0.64 |   |  |   | 0.80 |  
|Dividend yield              |  |                             |     | % |                               |   |     | %    |  |   |      | % |  |      |     | % |      |   |     | % |  |   |     | %
|Weighted average fair value |  | $                           | 1.93 |   |                               | $ | 1.15 |      |  | $ | 2.16  |   |  | $    | 0.98 |   |      | $ | 1.50 |   |  | $ | 1.83 |  



|* | In fiscal 2007, the Company reduced its offering period under its employee stock purchase plan from 24 months to 6 months.
|- | --------------------------------------------------------------------------------------------------------------------------



F-11



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Compensation Amortization Period.    All stock-based compensation is
amortized over the requisite service period of the awards, which is generally the same as the vesting period of the awards. Generally, the Company amortizes the fair value on a straight-line basis over the service periods.

Expected Life.    The expected life of stock options granted represents the expected weighted average period of time from the
date of grant to the estimated date that the stock option would be fully exercised. To calculate the expected term, the Company assumes that unexercised stock options would be exercised at the midpoint of the valuation date of its analysis and
the full contractual term of the option.

Expected Volatility.    Expected volatility is a measure of the amount
by which the stock price is expected to fluctuate. The Company estimates the expected volatility of its stock options at their grant date by equally weighting the historical volatility and the implied volatility of its stock. The
historical volatility is calculated using the weekly stock price of its stock over a recent historical period equal to its expected life. The implied volatility is calculated from the implied market volatility of exchange-traded call options on
its common stock.

Risk-Free Interest Rate.    The risk-free interest rate is the implied yield currently
available on zero-coupon government issues with a remaining term equal to the expected life.

Expected Dividends.The Company
has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero percent in valuation models.

Expected Forfeitures.As stock-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal year ended
March 31, 2007 is based on awards that are ultimately expected to vest, it should be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be 5.73% for all stock options granted in fiscal 2007 based upon the average of expected forfeitures data using the Companys current demographics
and standard probabilities of employee turnover and the annual forfeiture rate based on the Companys historical forfeiture rates.

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



|                                                       |  |                             |        |      |   |       |  |   |      
|------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ----- |  | - | -----
|                                                       |  | Fiscal Year Ended March 31,
|                                                       |  | 2007                        |        | 2006 |   | 2005 
|Stock-based compensation included in various expenses: |  |                             |        |      |   |       |  |   |      
|Cost of revenues                                       |  | $                           | 594    |      | $ | 89    |  | $ | 674  
|Research and development                               |  |                             | 3,765  |      |   | 2,690 |  |   | 3,407
|Selling, general and administrative                    |  |                             | 5,994  |      |   | 3,761 |  |   | 5,259
|                                                       |  |                             |        |      |   |       |  |   |      
|Total stock-based compensation expense                 |  | $                           | 10,353 |      | $ | 6,540 |  | $ | 9,340
|                                                       |  |                             |        |      |   |       |  |   |      

The weighted average fair value per share of the restricted stock units awarded in the fiscal year
ended March 31, 2007 was $3.44, calculated based on the fair market value of the Companys common stock on the respective grant dates.

The adoption of SFAS 123(R) will continue to have a significant adverse impact on the Companys reported results of operations, although it will have no impact on its overall financial position. The amount of unearned



F-12



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



stock-based compensation currently estimated to be expensed from now through fiscal 2011 related to unvested share-based payment awards at March 31,
2007 is $18.4 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 1.2 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.

In accordance with the
requirements of the disclosure-only alternative of SFAS 123 and Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based CompensationTransition and Disclosure, set forth below is a pro
forma illustration of the effect on net loss and net loss per share computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25 in the
fiscal years ended March 31, 2006 and 2005 (in thousands, except per share data):



|                                                                                         |  |                              |          |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                         |  | Fiscal Years Ended March 31, |         
|                                                                                         |  | 2006                         |          |   | 2005 |  
|Net loss                                                                                 |  | $                            | (148,372 | ) |      | $ | (127,373 | )
|                                                                                         |  |                             
|Add:                                                                                     |  |                              |          |   |      |   |          |  
|Stock based employee compensation expense included in net loss, net of tax               |  |                              | 6,540    |   |      |   | 9,340    |  
|                                                                                         |  |                             
|Deduct:                                                                                  |  |                              |          |   |      |   |          |  
|Compensation expense determined under fair value based method for all awards, net of tax |  |                              | (41,843  | ) |      |   | (95,055  | )
|                                                                                         |  |                              |          |   |      |   |          |  
|Pro forma net loss                                                                       |  | $                            | (183,675 | ) |      | $ | (213,088 | )
|                                                                                         |  |                              |          |   |      |   |          |  
|Basic loss per share:                                                                    |  |                              |          |   |      |   |          |  
|Net loss                                                                                 |  | $                            | (0.49    | ) |      | $ | (0.41    | )
|                                                                                         |  |                              |          |   |      |   |          |  
|Net losspro forma                                                                       |  | $                            | (0.61    | ) |      | $ | (0.69    | )
|                                                                                         |  |                              |          |   |      |   |          |  
|                                                                                         |  |                             
|Diluted loss per share:                                                                  |  |                              |          |   |      |   |          |  
|Net loss                                                                                 |  | $                            | (0.49    | ) |      | $ | (0.41    | )
|                                                                                         |  |                              |          |   |      |   |          |  
|Net losspro forma                                                                       |  | $                            | (0.61    | ) |      | $ | (0.69    | )
|                                                                                         |  |                              |          |   |      |   |          |  

Comprehensive Income (Loss)

The FASBs Statement of Financial Accounting Standards No. 130 (SFAS 130), Comprehensive Income (Loss), establishes rules for
the reporting and display of comprehensive income (loss) and its components. SFAS 130 requires the change in net unrealized gains or losses on short-term investments and foreign currency translation gains and losses be included in comprehensive
income (loss). Comprehensive income (loss) is included in our Consolidated Statements of Stockholders Equity.

Litigation and Settlement Costs

From time to time, the Company is involved in disputes, litigation and other legal actions. In accordance with SFAS 5, the Company
records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that
an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.



F-13



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Segments of a Business Enterprise

The Company operates in one reportable operating segment, communications. SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information,(SFAS 131), establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although the Company had three operating
segments at March 31, 2007, under the aggregation criteria set forth in SFAS 131, the Company operates in only one reportable operating segment, communications.

Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of
SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:



| |  |  | the nature of products and services;
| | - |  | ------------------------------------



| |  |  | the nature of the production processes;
| | - |  | ---------------------------------------



| |  |  | the type or class of customer for their products and services; and
| | - |  | ------------------------------------------------------------------



| |  |  | the methods used to distribute their products or provide their services.
| | - |  | ------------------------------------------------------------------------

Because the Company meets each of the criteria set forth in SFAS 131 and the three operating segments as of March 31, 2007 share similar
economic characteristics, the Company aggregates its results of operations into one reportable operating segment.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements, the impact of a tax position, if that position
is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company in the first quarter of fiscal 2008, with the cumulative effect, if any, of the change in
accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In September 2006, the SEC released Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on the SECs views regarding the process of quantifying the materiality of financial statement misstatements.
SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Companys consolidated financial statements.

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.



F-14



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair
Value Option for Financial Assets and Financial Liabilitieswhich permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 159 on its consolidated financial statements.

2.     Investments

Short-Term Investments

The Company classifies its short-term investments as available-for-sale and records such assets at the estimated fair
value with unrealized gains and losses excluded from earnings and reported, net of tax, in comprehensive income (loss). The basis for computing realized gains or losses is by specific identification.

The following is a summary of available-for-sale securities (in thousands):



|                                            |  |                |         |                  |        |                     |  |   |        |  |   |        
|------------------------------------------- |  | -------------- | ------- | ---------------- | ------ | ------------------- |  | - | ------ |  | - | -------
|                                            |  | Amortized Cost |         | Gross Unrealized |        | EstimatedFair Value
|                                            |  |                | Gains   |                  | Losses |                    
|At March 31, 2007:                          |  |                |         |                  |        |                     |  |   |        |  |   |        
|U.S. Treasury securities and agency bonds   |  | $              | 39,700  |                  | $      | 39                  |  | $ | 314    |  | $ | 39,425 
|Corporate bonds                             |  |                | 21,175  |                  |        | 31                  |  |   | 328    |  |   | 20,878 
|Mortgage-backed and asset-backed securities |  |                | 62,021  |                  |        | 100                 |  |   | 1,301  |  |   | 60,820 
|Closed-end bond funds                       |  |                | 86,902  |                  |        | 874                 |  |   | 2,524  |  |   | 85,252 
|Preferred stock and options                 |  |                | 22,649  |                  |        | 50                  |  |   | 496    |  |   | 22,203 
|Marketable equity securities*               |  |                | 600     |                  |        | 3,697               |  |   |       |  |   | 4,297  
|                                            |  |                |         |                  |        |                     |  |   |        |  |   |        
|                                            |  | $              | 233,047 |                  | $      | 4,791               |  | $ | 4,963  |  | $ | 232,875
|                                            |  |                |         |                  |        |                     |  |   |        |  |   |        
|At March 31, 2006:                          |  |                |         |                  |        |                     |  |   |        |  |   |        
|U.S. Treasury securities and agency bonds   |  | $              | 46,506  |                  | $      |                    |  | $ | 1,131  |  | $ | 45,375 
|Corporate bonds                             |  |                | 34,740  |                  |        | 67                  |  |   | 1,202  |  |   | 33,605 
|Mortgage-backed and asset-backed securities |  |                | 114,921 |                  |        | 51                  |  |   | 3,666  |  |   | 111,306
|Closed-end bond funds                       |  |                | 80,276  |                  |        | 188                 |  |   | 5,782  |  |   | 74,682 
|Preferred stock and options                 |  |                | 22,092  |                  |        | 11                  |  |   | 531    |  |   | 21,572 
|                                            |  |                |         |                  |        |                     |  |   |        |  |   |        
|                                            |  | $              | 298,535 |                  | $      | 317                 |  | $ | 12,312 |  | $ | 286,540
|                                            |  |                |         |                  |        |                     |  |   |        |  |   |        

---

|* | Marketable equity securities represents the Companys equity investment in Mellanox Technologies, Ltd., an Israeli company listed on the Nasdaq Stock Market. The amortized cost
value of this investment was reclassed from other assets to short-term investments in fiscal 2007.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At March 31, 2007, the
cost and estimated fair values of available-for-sale securities by contractual maturity are as follows (in thousands):



|                      |  |         |  |           
|--------------------- |  | ------- |  | ----------
|                      |  | Cost    |  | Fair Value
|Less than 1 year      |  | 21,993  |  | 21,768    
|Mature in 1  2 years |  | 23,226  |  | 22,874    
|Mature in 3  5 years |  | 88,598  |  | 86,937    
|Mature after 5 years  |  | 75,981  |  | 74,796    
|                      |  |         |  |           
|                      |  | 209,798 |  | 206,375   
|                      |  |         |  |           



F-15



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has the intent and ability to hold these investments until maturity. The following is a
summary of gross unrealized losses as of March 31, 2007 (in thousands):



|                                            |  |                                         |        |                                       |   |                    |  |                       |         |                    |   |                       |  |   |         |  |   |      
|------------------------------------------- |  | --------------------------------------- | ------ | ------------------------------------- | - | ------------------ |  | --------------------- | ------- | ------------------ | - | --------------------- |  | - | ------- |  | - | -----
|                                            |  | Less than 12 months ofunrealized losses |        | 12 months or more ofunrealized losses |   | Total             
|                                            |  | EstimatedFairValue                      |        | GrossUnrealizedLosses                 |   | EstimatedFairValue |  | GrossUnrealizedLosses |         | EstimatedFairValue |   | GrossUnrealizedLosses
|U.S. Treasury securities and agency Bonds   |  | $                                       |       |                                       | $ |                   |  | $                     | 32,387  |                    | $ | 314                   |  | $ | 32,387  |  | $ | 314  
|Corporate bonds                             |  |                                         | 3,153  |                                       |   | 45                 |  |                       | 13,280  |                    |   | 283                   |  |   | 16,433  |  |   | 328  
|Mortgage-backed and asset-backed securities |  |                                         | 4,301  |                                       |   | 72                 |  |                       | 45,862  |                    |   | 1,230                 |  |   | 50,163  |  |   | 1,301
|Closed-end bond funds                       |  |                                         | 17,462 |                                       |   | 202                |  |                       | 32,034  |                    |   | 2,322                 |  |   | 49,496  |  |   | 2,524
|Preferred stock and options                 |  |                                         | 20,341 |                                       |   | 495                |  |                       |        |                    |   |                      |  |   | 20,341  |  |   | 496  
|                                            |  |                                         |        |                                       |   |                    |  |                       |         |                    |   |                       |  |   |         |  |   |      
|                                            |  | $                                       | 45,257 |                                       | $ | 814                |  | $                     | 123,563 |                    | $ | 4,149                 |  | $ | 168,820 |  | $ | 4,963
|                                            |  |                                         |        |                                       |   |                    |  |                       |         |                    |   |                       |  |   |         |  |   |      

Strategic Equity Investments

The Company has entered into certain equity investments in privately held businesses for the promotion of business and strategic objectives, and typically
does not attempt to reduce or eliminate the inherent market risks on these investments. 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 fair value. These investments are included in other
assets on the Companys balance sheet and are carried at fair value or cost, as appropriate. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and
writes down investments to their fair value when an other-than-temporary decline has occurred. For the years ended March 31, 2007, 2006 and 2005, the Company recognized gains of zero, $0.7 million and zero when the privately held companies in
which the Company had an equity investment were sold. At March 31, 2007 and 2006, the balance of these investments included in other assets was $5.0 million and $4.1 million, respectively.

3.    Certain Financial Statement Information

Accounts receivable:



|                              |  |                |        |   |      |   |        |  
|----------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                              |  | March 31,      |       
|                              |  | 2007           |        |   | 2006 |  
|                              |  | (in thousands) |       
|Accounts receivable           |  | $              | 34,116 |   |      | $ | 27,678 |  
|Less: allowance for bad debts |  |                | (1,558 | ) |      |   | (1,354 | )
|                              |  |                |        |   |      |   |        |  
|                              |  | $              | 32,558 |   |      | $ | 26,324 |  
|                              |  |                |        |   |      |   |        |  

Inventories:



|                |  |                |        |      |   |       
|--------------- |  | -------------- | ------ | ---- | - | ------
|                |  | March 31,     
|                |  | 2007           |        | 2006
|                |  | (in thousands)
|Finished goods  |  | $              | 16,691 |      | $ | 17,883
|Work in process |  |                | 9,630  |      |   | 5,277 
|Raw materials   |  |                | 4,965  |      |   | 1,781 
|                |  |                |        |      |   |       
|                |  | $              | 31,286 |      | $ | 24,941
|                |  |                |        |      |   |       



F-16



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other current assets:



|                    |  |                |        |      |   |       
|------------------- |  | -------------- | ------ | ---- | - | ------
|                    |  | March 31,     
|                    |  | 2007           |        | 2006
|                    |  | (in thousands)
|Deposits            |  | $              | 1,247  |      | $ | 933   
|Prepaid expenses    |  |                | 10,435 |      |   | 8,882 
|Interest receivable |  |                | 1,104  |      |   | 1,630 
|Other               |  |                | 1,652  |      |   | 1,173 
|                    |  |                |        |      |   |       
|                    |  | $              | 14,438 |      | $ | 12,618
|                    |  |                |        |      |   |       

Property and equipment:



|                                                |  |            |      |                |          |      |  |   |          |  
|----------------------------------------------- |  | ---------- | ---- | -------------- | -------- | ---- |  | - | -------- | -
|                                                |  | UsefulLife |      | March 31,      |         
|                                                |  |            | 2007 |                |          | 2006 | 
|                                                |  | (in years) |      | (in thousands) |         
|Machinery and equipment                         |  | 5-7        |      | $              | 43,084   |      |  | $ | 41,634   |  
|Leasehold improvements                          |  | 1-15       |      |                | 10,156   |      |  |   | 11,225   |  
|Computers, office furniture and equipment       |  | 3-7        |      |                | 76,809   |      |  |   | 74,760   |  
|Buildings                                       |  | 31.5       |      |                | 2,756    |      |  |   | 5,860    |  
|Land                                            |  | N/A        |      |                | 11,302   |      |  |   | 12,202   |  
|                                                |  |            |      |                |          |      |  |   |          |  
|                                                |  |            |      |                | 144,107  |      |  |   | 145,681  |  
|Less: accumulated depreciation and amortization |  |            |      |                | (116,957 | )    |  |   | (109,554 | )
|                                                |  |            |      |                |          |      |  |   |          |  
|                                                |  |            |      | $              | 27,150   |      |  | $ | 36,127   |  
|                                                |  |            |      |                |          |      |  |   |          |  

Goodwill and purchased intangible assets:

Goodwill and other acquisition-related intangibles were as follows (in thousands):



|                                          |  |                |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |        
|----------------------------------------- |  | -------------- | --------- | ---------------------------------------- | - | ---------- | --- |  | ----- | ------- | ---------------------------------------- | - | --------- | --- | - | ---------- | - |  | - | -------
|                                          |  | March 31, 2007 |           | March 31, 2006                          
|                                          |  | Gross          |           | Accumulated Amortization and Impairments |   |            | Net |  | Gross |         | Accumulated Amortization and Impairments |   |           | Net
|Goodwill                                  |  | $              | 4,441,259 |                                          | $ | (4,105,402 | )   |  | $     | 335,857 |                                          | $ | 4,401,662 |     | $ | (4,105,402 | ) |  | $ | 296,260
|Developed technology                      |  |                | 425,000   |                                          |   | (365,411   | )   |  |       | 59,589  |                                          |   | 413,500   |     |   | (348,675   | ) |  |   | 64,825 
|Backlog/customer relationships            |  |                | 6,330     |                                          |   | (4,288     | )   |  |       | 2,042   |                                          |   | 3,600     |     |   | (3,480     | ) |  |   | 120    
|Patents/core technology rights/ tradename |  |                | 62,305    |                                          |   | (44,149    | )   |  |       | 18,156  |                                          |   | 59,200    |     |   | (39,339    | ) |  |   | 19,861 
|                                          |  |                |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |        
|                                          |  | $              | 4,934,894 |                                          | $ | (4,519,250 | )   |  | $     | 415,644 |                                          | $ | 4,877,962 |     | $ | (4,496,896 | ) |  | $ | 381,066
|                                          |  |                |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |        



|                                          |  |                              |         |      |   |          |      |  |   |         |  
|----------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------- | ---- |  | - | ------- | -
|                                          |  | Fiscal Years Ended March 31, |        
|                                          |  | 2007                         |         | 2006 |   |          | 2005 | 
|Goodwill beginning balance                |  | $                            | 296,260 |      | $ | 427,476  |      |  | $ | 192,541 |  
|Goodwill related to acquisitions (Note 4) |  |                              | 39,597  |      |   |         |      |  |   | 238,279 |  
|Acquired lease liability adjustment       |  |                              |        |      |   |         |      |  |   | (3,344  | )
|Impairment charges (Note 8)               |  |                              |        |      |   | (131,216 | )    |  |   |        |  
|                                          |  |                              |         |      |   |          |      |  |   |         |  
|Goodwill ending balance                   |  | $                            | 335,857 |      | $ | 296,260  |      |  | $ | 427,476 |  
|                                          |  |                              |         |      |   |          |      |  |   |         |  



F-17



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The estimated future amortization expense of purchased intangible assets charged to cost of sales and
operating expenses as of March 31, 2007, is as follows (in thousands):



|                              |  |              |        |                   |   |        |  |   |       
|----------------------------- |  | ------------ | ------ | ----------------- | - | ------ |  | - | ------
|                              |  | Cost ofSales |        | OperatingExpenses |   | Total 
|Fiscal years ending March 31, |  |              |        |                   |   |        |  |   |       
|2008                          |  | $            | 18,428 |                   | $ | 5,301  |  | $ | 23,729
|2009                          |  |              | 17,823 |                   |   | 5,260  |  |   | 23,083
|2010                          |  |              | 12,097 |                   |   | 4,040  |  |   | 16,137
|2011                          |  |              | 10,500 |                   |   | 4,040  |  |   | 14,540
|2012                          |  |              | 875    |                   |   | 861    |  |   | 1,736 
|Thereafter                    |  |              |       |                   |   | 562    |  |   | 562   
|                              |  |              |        |                   |   |        |  |   |       
|Total                         |  | $            | 59,723 |                   | $ | 20,064 |  | $ | 79,787
|                              |  |              |        |                   |   |        |  |   |       

Other Assets:



|                                        |  |                |        |      |   |      
|--------------------------------------- |  | -------------- | ------ | ---- | - | -----
|                                        |  | March 31,     
|                                        |  | 2007           |        | 2006
|                                        |  | (in thousands)
|Non-current portion of prepaid expenses |  | $              | 3,386  |      | $ | 1,997
|Equity investments                      |  |                | 5,000  |      |   | 4,100
|Other                                   |  |                | 2,580  |      |   | 2,588
|                                        |  |                |        |      |   |      
|                                        |  | $              | 10,966 |      | $ | 8,685
|                                        |  |                |        |      |   |      

Other accrued liabilities:



|                                         |  |                |        |      |   |       
|---------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                         |  | March 31,     
|                                         |  | 2007           |        | 2006
|                                         |  | (in thousands)
|Warranty and excess purchase commitments |  | $              | 3,253  |      | $ | 5,407 
|Executive deferred compensation          |  |                | 3,422  |      |   | 3,294 
|Employee related liabilities             |  |                | 2,732  |      |   | 2,871 
|Current income taxes                     |  |                | 1,212  |      |   | 1,177 
|Professional fees                        |  |                | 1,199  |      |   | 1,106 
|Other taxes                              |  |                | 918    |      |   | 863   
|Restructuring liabilities                |  |                | 350    |      |   | 7,644 
|Other                                    |  |                | 3,297  |      |   | 4,655 
|                                         |  |                |        |      |   |       
|                                         |  | $              | 16,383 |      | $ | 27,017
|                                         |  |                |        |      |   |       

Interest income, net:



|                                                   |  |                              |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | Fiscal Years Ended March 31, |       
|                                                   |  | 2007                         |        |   | 2006 |   |        | 2005 | 
|                                                   |  | (in thousands)               |       
|Interest income                                    |  | $                            | 13,982 |   |      | $ | 16,463 |      |  | $ | 16,408 |  
|Net realized gain (loss) on short-term investments |  |                              | (853   | ) |      |   | (760   | )    |  |   | 2,326  |  
|Interest expense                                   |  |                              | (4     | ) |      |   | (86    | )    |  |   | (35    | )
|                                                   |  |                              |        |   |      |   |        |      |  |   |        |  
|                                                   |  | $                            | 13,125 |   |      | $ | 15,617 |      |  | $ | 18,699 |  
|                                                   |  |                              |        |   |      |   |        |      |  |   |        |  



F-18



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other income, net:



|                                         |  |                              |     |   |      |   |      |      |  |   |  
|---------------------------------------- |  | ---------------------------- | --- | - | ---- | - | ---- | ---- |  | - | -
|                                         |  | Fiscal Years Ended March 31,
|                                         |  | 2007                         |     |   | 2006 |   |      | 2005
|                                         |  | (in thousands)              
|Gain on strategic equity investments     |  | $                            | 21  |   |      | $ | 672  |      |  | $ | 
|Net (loss) gain on disposals of property |  |                              | (61 | ) |      |   | 4    |      |  |   | 
|Net foreign currency gain (loss)         |  |                              | 87  |   |      |   | (543 | )    |  |   | 
|Other                                    |  |                              | 203 |   |      |   | 123  |      |  |   | 
|                                         |  |                              |     |   |      |   |      |      |  |   |  
|                                         |  | $                            | 250 |   |      | $ | 256  |      |  | $ | 
|                                         |  |                              |     |   |      |   |      |      |  |   |  

Net loss per share:

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



|                                                                 |  |                              |         |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                 |  | Fiscal Years Ended March 31, |        
|                                                                 |  | 2007                         |         |   | 2006 |   |          | 2005 | 
|Net loss                                                         |  | $                            | (24,208 | ) |      | $ | (148,372 | )    |  | $ | (127,373 | )
|Shares used in basic and diluted net loss per share computation: |  |                              |         |   |      |   |          |      |  |   |          |  
|Weighted average common shares outstanding                       |  |                              | 284,303 |   |      |   | 300,841  |      |  |   | 309,456  |  
|                                                                 |  |                              |         |   |      |   |          |      |  |   |          |  
|Shares used in basic and diluted net loss per share computation  |  |                              | 284,303 |   |      |   | 300,841  |      |  |   | 309,456  |  
|                                                                 |  |                              |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per share:                            |  |                              |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per share                             |  | $                            | (0.09   | ) |      | $ | (0.49    | )    |  | $ | (0.41    | )
|                                                                 |  |                              |         |   |      |   |          |      |  |   |          |  

Because the Company incurred losses in the fiscal years ended March 31, 2007, 2006 and 2005,
the effect of dilutive securities totaling 1,399, 1,689 and 3,471 equivalent shares (in thousands), respectively, have been excluded from the loss per share computation as their impact would be antidilutive.



|4. | Acquisitions
|-- | ------------

The Company completed three
acquisitions during the three fiscal years ended March 31, 2007 using the purchase method of accounting. The accompanying consolidated financial statements include the results of operations of each business acquired from the date of
acquisition. Details of the acquired business are as follows:

Fiscal 2007

Quake Technologies, Inc. On August 25, 2006, the Company acquired Quake Technologies, Inc. (Quake), a provider of 10 Gigabit
Ethernet physical layer chips, for $81.2 million in cash including merger costs. Of the amount paid, $12.0 million was placed in escrow for at least one year in order to secure the indemnification obligations of Quake to the Company. In addition,
the Company assumed unvested stock options covering 1.7 million shares of the Companys common stock that had a fair value of $3.5 million. The fair value of the unvested options was calculated using a Black-Scholes method and is being
recorded as stock-based compensation over the requisite service period.



F-19



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fiscal 2006

None.

Fiscal 2005

3ware, Inc.On April 1, 2004, the Company completed the acquisition of 3ware, Inc. for approximately $145.0
million in cash and assumed options to purchase approximately 4.3 million shares of AMCCs common stock. 3ware is a provider of high-performance, high-capacity Serial ATA storage solutions for emerging storage applications such as
disk-to-disk backup, near-line storage, network-attached storage, video, and high-performance computing.

Embedded Products
BusinessOn May 5, 2004, the Company completed the acquisition of the assets and intellectual property associated with IBMs 400 series of embedded PowerPC® standard products for approximately $227.9 million in cash. On December 6, 2004, the Company exercised an option
to purchase additional related assets located in France for $4.1 million.

In connection with these transactions, the Company conducted
valuations of the intangible assets acquired in order to allocate the purchase price in accordance with SFAS No. 141, Business Combinations, (SFAS 141). In accordance with SFAS 141, the Company has allocated the excess
purchase price over the fair value of net tangible assets acquired to the identifiable intangible assets. The purchase price in each transaction was allocated as follows (in thousands):



|                                          |  |             |        |             |   |                          |  |       |         |  |   |        
|----------------------------------------- |  | ----------- | ------ | ----------- | - | ------------------------ |  | ----- | ------- |  | - | -------
|                                          |  | Fiscal 2007 |        | Fiscal 2005
|                                          |  | Quake       |        | 3ware       |   | EmbeddedProductsBusiness |  | Total
|Net tangible assets                       |  | $           | 8,411  |             | $ | 10,113                   |  | $     | 3,700   |  | $ | 13,813 
|In-process research and development       |  |             | 13,300 |             |   | 8,000                    |  |       | 5,400   |  |   | 13,400 
|Developed technology                      |  |             | 11,500 |             |   | 14,500                   |  |       | 73,500  |  |   | 88,000 
|Backlog/customer relationships            |  |             | 2,800  |             |   | 300                      |  |       | 1,900   |  |   | 2,200  
|Patents/core technology rights/tradename  |  |             | 3,200  |             |   | 6,100                    |  |       | 20,700  |  |   | 26,800 
|Purchased inventory fair value adjustment |  |             | 2,395  |             |   | 1,465                    |  |       | 739     |  |   | 2,204  
|Stock-based compensation                  |  |             | 3,417  |             |   | 19,024                   |  |       |        |  |   | 19,024 
|Goodwill                                  |  |             | 39,597 |             |   | 110,218                  |  |       | 128,061 |  |   | 238,279
|                                          |  |             |        |             |   |                          |  |       |         |  |   |        
|Total consideration                       |  | $           | 84,620 |             | $ | 169,720                  |  | $     | 234,000 |  | $ | 403,720
|                                          |  |             |        |             |   |                          |  |       |         |  |   |        

The total consideration issued in the acquisitions was as follows (in thousands):



|                          |  |             |        |             |   |                          |  |       |         |  |   |        
|------------------------- |  | ----------- | ------ | ----------- | - | ------------------------ |  | ----- | ------- |  | - | -------
|                          |  | Fiscal 2007 |        | Fiscal 2005
|                          |  | Quake       |        | 3ware       |   | EmbeddedProductsBusiness |  | Total
|Cash paid and merger fees |  | $           | 81,203 |             | $ | 145,832                  |  | $     | 234,000 |  | $ | 379,832
|Value of assumed options  |  |             | 3,417  |             |   | 23,888                   |  |       |        |  |   | 23,888 
|                          |  |             |        |             |   |                          |  |       |         |  |   |        
|Total consideration       |  | $           | 84,620 |             | $ | 169,720                  |  | $     | 234,000 |  | $ | 403,720
|                          |  |             |        |             |   |                          |  |       |         |  |   |        

The purchased inventory fair value adjustment represents the difference between the carrying value
of work in process and finished goods inventory and the estimated selling price less costs to sell the related inventory at the date of acquisition.



F-20



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



No supplemental pro forma information is presented for the acquisition due to the immaterial effect
of the acquisitions on the Companys results of operations.

In-Process Research and Development

In-process research and development (IPR&D) totaled $13.3 and $13.4 million for acquisitions completed in fiscal 2007 and 2005,
respectively. The amounts allocated to IPR&D were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached
technological feasibility and no alternative future uses existed. In accordance with SFAS No. 2, Accounting for Research and Development Costs,as clarified by FIN No. 4, Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, an Interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to expense as part of the allocation of the purchase price.

The fair value of the purchased IPR&D for the above acquisitions represents the present value of the estimated after-tax cash flows
expected to be generated by the purchased technology, which, at the acquisition dates, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of relevant market sizes and growth factors,
expected industry trends, the anticipated nature and timing of new product introductions by the Company and its competitors, individual product sales cycles and the estimated life of each products underlying technology. Estimated operating
expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Estimated operating expenses included cost of goods sold, marketing and selling expenses, general and administrative expenses and
research and development expenses, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue.

The IPR&D charge includes only the fair value of IPR&D performed as of the respective acquisition dates. The fair value of developed technology is included in identifiable purchased intangible assets, and
future research and development is included in goodwill. The Company believes the amounts recorded as IPR&D, as well as developed technology, represent the fair values and approximate the amounts an independent party would pay for these projects
at the time of the respective acquisition dates.

The following table summarizes the significant assumptions at the acquisition dates
underlying the valuations for the Companys significant acquisitions completed in fiscal 2007 and 2005:



|                           |  |                             |  |                |  |                  |  |                            |  |                           |  |                               
|-------------------------- |  | --------------------------- |  | -------------- |  | ---------------- |  | -------------------------- |  | ------------------------- |  | ------------------------------
|Company Acquired           |  | Development Projects        |  | IPR&D Charge   |  | NumberofProjects |  | Range ofEstimated%Complete |  | Estimated Costto Complete |  | Range ofAdjustedDiscount Rates
|                           |  |                             |  | (in thousands) |  |                  |  |                            |  | (in thousands)            |  |                               
|Fiscal 2007:               |  |                             |  |                |  |                  |  |                            |  |                           |  |                               
|Quake Technologies.        |  | Serial physical layer       |  | $13,300        |  | 2                |  | 35% - 76%                  |  | $4,536                    |  | 23% - 29%                     
|                           |  |                             |  |                |  |                 
|Fiscal 2005:               |  |                             |  |                |  |                  |  |                            |  |                           |  |                               
|3ware, Inc.                |  | SATA Raid controller cards  |  | 8,000          |  | 2                |  | 25   - 42                  |  | 2,950                     |  | 30   - 35                     
|Embedded Products Business |  | Embedded processor products |  | 5,400          |  | 3                |  | 42   - 69                  |  | 9,100                     |  | 25   - 30                     



F-21



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|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 March 31, 2007 the Company had 630.0 million shares authorized for issuance. At March 31, 2007 and 2006, there were approximately
283.0 million shares and 295.4 million shares issued and outstanding, respectively.

In March 2007, the Companys
stockholders approved a proposal that allows the Board of Directors to implement a reverse stock split on the common stock using any one of three approved ratios: 1-for-2, 1-for-3 or 1-for-4. The Board of Directors has not yet implemented any
reverse stock split and is not required to implement any of the approved splits. If the Board of Directors implements a 1-for-3 reverse stock split, the authorized number of shares of common stock will be reduced to 500,000,000 shares. If the Board
of Directors implements a 1-for-4 reverse stock split, the authorized number of shares of common stock will be reduced to 375,000,000 shares. The Board of Directors authority to implement any of the reverse stock splits approved in March 2007
expires on March 8, 2008.

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 repurchase agreements. During the year ended March 31, 2007, the Company repurchased 6.2 million shares on the open market at a weighted
average price of $3.23 per share. From the time the program was implemented through March 31, 2007, the Company has repurchased a total of 15.6 million shares on the open market at a weighted average price of $3.01 per share. All
repurchased shares were retired upon delivery to the Company. At March 31, 2007, $85.5 million remained available to repurchase shares under the stock repurchase program, as amended.

The Company also utilizes structured stock repurchase agreements to buy back shares which are prepaid written put options on the Companys 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 the Companys common stock on the
expiration date of the agreement. Upon expiration of each agreement, if the closing market price of the Companys common stock is above the pre-determined price, the Company will have its 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. Any cash received, including the premium, is treated as an increase to additional paid in capital on the
balance sheet in accordance with the guidance issued in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.

During the year ended March 31, 2007, the Company received $27.0 million in cash and 7.7 million in shares of its common stock at an effective
purchase price of $3.06 per share from open structured stock



F-22



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



repurchase programs. During the year ended March 31, 2006, the Company entered into structured stock repurchase agreements totaling $105.0 million.
Upon settlement of the underlying agreements, the Company received $40.1 million in cash and 12.8 million shares of our common stock at an effective purchase price of $2.72 per share. At March 31, 2007, the Company had no outstanding
structured stock repurchase agreements open. From the time of the stock repurchase program inception through March 31, 2007, the Company entered into structured stock repurchase agreements totaling $174.0 million. Upon settlement of these
underlying agreements, the Company received $115.5 million in cash and 23.0 million shares of its common stock at an effective purchase price of $2.55 per share.

The table below is a summary of the Companys repurchase program share activity for the years ended March 31, 2007 and 2006 (in thousands, except per share data):



|                                                     |  |                            |        |      |   |       
|---------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------
|                                                     |  | Fiscal YearEnded March 31,
|                                                     |  | 2007                       |        | 2006
|Open market repurchases:                             |  |                            |        |      |   |       
|Aggregate repurchase price                           |  | $                          | 20,137 |      | $ | 9,947 
|Repurchased shares                                   |  |                            | 6,242  |      |   | 4,000 
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.23   |      | $ | 2.49  
|                                                     |  |                            |        |      |   |       
|                                                     |  |                           
|Structured agreements:                               |  |                            |        |      |   |       
|Shares acquired in settlement                        |  |                            | 7,695  |      |   | 12,787
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.06   |      | $ | 2.72  
|                                                     |  |                            |        |      |   |       
|Total shares acquired by repurchase or in settlement |  |                            | 13,937 |      |   | 16,787
|                                                     |  |                            |        |      |   |       
|Average price per share                              |  | $                          | 3.13   |      | $ | 2.66  
|                                                     |  |                            |        |      |   |       

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 approved a stock option exchange program to permit eligible employees to exchange outstanding stock options with exercise prices equal to or greater than $4.90 per share for a reduced number of
restricted stock units to be granted under the 2000 Equity Incentive Plan.

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 share reserve under the plan by 9,000,000 shares, (v) to serve as a successor plan to the 2000 Equity Incentive Plan, which will no longer be used for equity awards following completion of the
stock option exchange described above, 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) are added to the share reserve under the 1992 Equity Incentive Plan.



F-23



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. In fiscal 2006, stock options covering 5.1 million shares were granted with a 2.5-year vesting schedule. 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.

In connection with its annual review of officer compensation in April 2006, the Compensation Committee granted to each of
the Companys executive officers performance options that vest based on pre-determined Company goals. There are two types of performance options. The first type vests in 48 equal monthly installments beginning one month after the grant date;
provided, however, if the Company achieves specific goals under its fiscal 2007 operating plan, the vesting of the option will accelerate such that the option will be fully exercisable at the end of two years instead of four years. The Company did
not achieve these goals so the vesting on these options was not accelerated. The second type of performance options becomes exercisable only if the Company achieves specific revenue and non-GAAP pre-tax profit targets in any fiscal quarter before
fiscal 2010.

At March 31, 2007, 2006, and 2005 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.

A summary of the Companys stock
option activity and related information is as follows (options in thousands):



|                                 |  |                              |   |      |                              |      |         |         |   |                              |   |         |  |         |                                 |  |   |     
|-------------------------------- |  | ---------------------------- | - | ---- | ---------------------------- | ---- | ------- | ------- | - | ---------------------------- | - | ------- |  | ------- | ------------------------------- |  | - | ----
|                                 |  | Fiscal Years Ended March 31,
|                                 |  | 2007                         |   | 2006 |                              | 2005
|                                 |  | Options                      |   |      | WeightedAverageExercisePrice |      | Options |         |   | WeightedAverageExercisePrice |   | Options |  |         | Weighted Average Exercise Price
|Outstanding at beginning of year |  | 54,096                       |   |      | $                            | 5.82 |         | 66,714  |   |                              | $ | 6.64    |  | 63,762  |                                 |  | $ | 7.63
|Granted and assumed              |  | 7,014                        |   |      |                              | 3.09 |         | 9,638   |   |                              |   | 2.95    |  | 17,481  |                                 |  |   | 2.77
|Exercised                        |  | (1,463                       | ) |      |                              | 1.95 |         | (1,810  | ) |                              |   | 0.82    |  | (2,725  | )                               |  |   | 1.06
|Forfeited                        |  | (9,702                       | ) |      |                              | 6.28 |         | (20,446 | ) |                              |   | 7.60    |  | (11,804 | )                               |  |   | 7.65
|                                 |  |                              |   |      |                              |      |         |         |   |                              |   |         |  |         |                                 |  |   |     
|Outstanding at end of year       |  | 49,945                       |   |      | $                            | 5.46 |         | 54,096  |   |                              | $ | 5.82    |  | 66,714  |                                 |  | $ | 6.64
|                                 |  |                              |   |      |                              |      |         |         |   |                              |   |         |  |         |                                 |  |   |     
|Vested at end of year            |  | 39,577                       |   |      | $                            | 6.08 |         | 43,727  |   |                              | $ | 6.50    |  | 45,255  |                                 |  | $ | 7.89
|                                 |  |                              |   |      |                              |      |         |         |   |                              |   |         |  |         |                                 |  |   |     



F-24



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is a further breakdown of the options outstanding at March 31, 2007 (options in
thousands):



|                         |  |                     |  |                                             |  |                                 |       |                     |        |                                 |   |      
|------------------------ |  | ------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------- | ------ | ------------------------------- | - | -----
|Range of Exercise Prices |  | Options Outstanding |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |       | Options Exercisable |        | Weighted Average Exercise Price
|$  0.05$  3.21          |  | 11,766              |  | 6.48                                        |  | $                               | 2.58  |                     | 6,206  |                                 | $ | 2.54 
|3.22    3.85            |  | 10,957              |  | 7.07                                        |  |                                 | 3.57  |                     | 6,771  |                                 |   | 3.57 
|3.86    6.48            |  | 11,537              |  | 5.96                                        |  |                                 | 5.17  |                     | 10,915 |                                 |   | 5.24 
|6.54    6.54            |  | 12,293              |  | 3.31                                        |  |                                 | 6.54  |                     | 12,293 |                                 |   | 6.54 
|6.55  87.24             |  | 3,392               |  | 3.55                                        |  |                                 | 18.61 |                     | 3,392  |                                 |   | 18.61
|                         |  |                     |  |                                             |  |                                 |       |                     |        |                                 |   |      
|$  0.05$87.24           |  | 49,945              |  | 5.51                                        |  | $                               | 5.46  |                     | 39,577 |                                 | $ | 6.08 
|                         |  |                     |  |                                             |  |                                 |       |                     |        |                                 |   |      

As of March 31, 2007, the aggregate pre-tax intrinsic value of options outstanding and exercisable
was $7.7 million and options outstanding was $13.9 million. The aggregate pre-tax intrinsic value of options exercised during fiscal 2007 was 2.3 million.

Restricted Stock Units

The Company 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 and non-employee members of the Companys Board. 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. Following the
amendment and restatement of the 1992 Stock Option Plan as the 1992 Equity Incentive Plan and the completion of the stock option exchange program, the Company has discontinued making restricted stock unit awards from the 2000 Equity Incentive Plan.
In the future, all restricted stock unit awards will be made from the 1992 Equity Incentive Plan.

A summary of the Companys
restricted stock unit activity and related information in the fiscal year ended March 31, 2007 is as follows (options in thousands):



|                             |  |                                    |  
|---------------------------- |  | ---------------------------------- | -
|                             |  | Restricted Stock Units Outstanding |  
|                             |  | Number of Shares (in thousands)    |  
|Balance at beginning of year |  |                                   |  
|Awarded during the year      |  | 777                                |  
|Vested during the year       |  | (13                                | )
|Cancelled during the year    |  | (29                                | )
|                             |  |                                    |  
|Balance at end of year       |  | 735                                |  
|                             |  |                                    |  

The weighted average grant-date fair value per share for the restricted stock units was $3.44, and
the weighted average remaining contractual term for the restricted stock units outstanding as of March 30, 2007 was 1.8 years.

Based on
the closing price of the Companys common stock of $3.65 on March 31, 2007, the total pretax intrinsic value of all outstanding restricted stock units on that date was $2.7 million.

Employee Stock Purchase Plan

The Company has
in effect an employee stock purchase plan under which 19.2 million shares of common stock have been reserved for issuance. Under the terms of this plan, purchases are made semiannually and the



F-25



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. At March 31, 2007, approximately 10.0 million shares had been issued under this plan and approximately 9.2 million shares were available for future issuance.

Common Shares Reserved for Future Issuance

At March 31, 2007, the Company has the
following shares of common stock reserved for issuance upon the exercise of equity instruments (in thousands):



|                                          |  |        
|----------------------------------------- |  | -------
|Stock Options and Restricted Stock Units: |  |        
|Granted and outstanding                   |  | 49,945 
|Restricted Stock Units                    |  | 735    
|Authorized for future grants              |  | 57,719 
|Stock purchase plan                       |  | 9,199  
|                                          |  |        
|                                          |  | 117,598
|                                          |  |        



|6. | Income Taxes
|-- | ------------

Pre-tax income (loss) consists of the
following (in thousands):



|                   |  |                              |         |   |      |   |          |      |  |   |          |  
|------------------ |  | ---------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                   |  | Fiscal Years Ended March 31, |        
|                   |  | 2007                         |         |   | 2006 |   |          | 2005 | 
|Pre-tax loss:      |  |                              |         |   |      |   |          |      |  |   |          |  
|Domestic           |  | $                            | (25,374 | ) |      | $ | (150,802 | )    |  | $ | (126,716 | )
|Foreign            |  |                              | 1,568   |   |      |   | 1,794    |      |  |   | 2,204    |  
|                   |  |                              |         |   |      |   |          |      |  |   |          |  
|Total pre-tax loss |  | $                            | (23,806 | ) |      | $ | (149,008 | )    |  | $ | (124,512 | )
|                   |  |                              |         |   |      |   |          |      |  |   |          |  

Income tax expense (benefit) consists of the following (in thousands):



|               |  |                              |     |      |   |      |      |  |   |       |  
|-------------- |  | ---------------------------- | --- | ---- | - | ---- | ---- |  | - | ----- | -
|               |  | Fiscal Years Ended March 31, |    
|               |  | 2007                         |     | 2006 |   |      | 2005 | 
|Current:       |  |                              |     |      |   |      |      |  |   |       |  
|Federal        |  | $                            |    |      | $ |     |      |  | $ |      |  
|Foreign        |  |                              | 314 |      |   | (939 | )    |  |   | 3,023 |  
|State          |  |                              | 88  |      |   | 303  |      |  |   | (162  | )
|               |  |                              |     |      |   |      |      |  |   |       |  
|Total current  |  |                              | 402 |      |   | (636 | )    |  |   | 2,861 |  
|Deferred:      |  |                              |     |      |   |      |      |  |   |       |  
|Federal        |  |                              |    |      |   |     |      |  |   |      |  
|State          |  |                              |    |      |   |     |      |  |   |      |  
|Total deferred |  |                              |    |      |   |     |      |  |   |      |  
|               |  |                              |     |      |   |      |      |  |   |       |  
|               |  | $                            | 402 |      | $ | (636 | )    |  | $ | 2,861 |  
|               |  |                              |     |      |   |      |      |  |   |       |  



F-26



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The provision for income taxes reconciles to the amount computed by applying the federal statutory
rate (35%) to income before income taxes as follows (in thousands):



|                                    |  |                              |        |   |      |     |    |      |   |         |   |  |     |   |  |   |         |   |  |     |   
|----------------------------------- |  | ---------------------------- | ------ | - | ---- | --- | -- | ---- | - | ------- | - |  | --- | - |  | - | ------- | - |  | --- | --
|                                    |  | Fiscal Years Ended March 31, |       
|                                    |  | 2007                         |        |   | 2006 |     |    | 2005 |  
|                                    |  | $                            |        |   | %    |     |    | $    |   |         | % |  |     | $ |  |   | %       |  
|Tax at federal statutory rate       |  | $                            | (8,332 | ) |      | 35  | %  |      | $ | (52,153 | ) |  | 35  | % |  | $ | (43,580 | ) |  | 35  | % 
|In-process research and development |  |                              | 5,152  |   |      | (22 | )  |      |   |        |   |  |    |   |  |   | 3,099   |   |  | (2  | ) 
|Goodwill                            |  |                              |       |   |      |    |    |      |   | 31,566  |   |  | (21 | ) |  |   |        |   |  |    |   
|Tax exempt interest                 |  |                              |       |   |      |    |    |      |   | (851    | ) |  |    |   |  |   | (594    | ) |  |    |   
|State taxes, net of federal benefit |  |                              | (889   | ) |      | 4   |    |      |   | (5,565  | ) |  | 4   |   |  |   | (4,650  | ) |  | 4   |   
|Federal tax credits                 |  |                              | (4,858 | ) |      | 20  |    |      |   | (4,858  | ) |  | 3   |   |  |   | (5,616  | ) |  | 5   |   
|State tax credits                   |  |                              | (1,561 | ) |      | 7   |    |      |   | (1,579  | ) |  | 1   |   |  |   | (1,825  | ) |  | 1   |   
|Valuation allowance                 |  |                              | 9,995  |   |      | (42 | )  |      |   | 31,772  |   |  | (21 | ) |  |   | 50,807  |   |  | (40 | ) 
|Change in contingency reserve       |  |                              |       |   |      |    |    |      |   | (1,475  | ) |  | 1   |   |  |   | 1,924   |   |  | (2  | ) 
|Other                               |  |                              | 895    |   |      | (4  | )  |      |   | 2,507   |   |  | (2  | ) |  |   | 3,296   |   |  | (3  | ) 
|                                    |  |                              |        |   |      |     |    |      |   |         |   |  |     |   |  |   |         |   |  |     |   
|                                    |  | $                            | 402    |   |      | (2  | )% |      | $ | (636    | ) |  |    | % |  | $ | 2,861   |   |  | (2  | )%
|                                    |  |                              |        |   |      |     |    |      |   |         |   |  |     |   |  |   |         |   |  |     |   

Significant components of the Companys deferred tax assets and liabilities for federal and
state income taxes are as shown below (in thousands):



|                                                               |  |           |          |   |      |   |          |  
|-------------------------------------------------------------- |  | --------- | -------- | - | ---- | - | -------- | -
|                                                               |  | March 31, |         
|                                                               |  | 2007      |          |   | 2006 |  
|Deferred tax assets:                                           |  |           |          |   |      |   |          |  
|Net operating loss carryforwards                               |  | $         | 351,959  |   |      | $ | 323,919  |  
|Research and development credit carryforwards                  |  |           | 114,969  |   |      |   | 109,083  |  
|Inventory write-downs and other reserves                       |  |           | 18,501   |   |      |   | 25,352   |  
|Capitalization of inventory and research and development costs |  |           | 17,220   |   |      |   | 22,990   |  
|Intangible assets                                              |  |           | 24,660   |   |      |   | 26,573   |  
|Other                                                          |  |           | 21,125   |   |      |   | 17,582   |  
|                                                               |  |           |          |   |      |   |          |  
|Total deferred tax assets                                      |  |           | 548,434  |   |      |   | 525,499  |  
|                                                               |  |          
|Deferred tax liabilities:                                      |  |           |          |   |      |   |          |  
|Depreciation and amortization                                  |  |           | (5,287   | ) |      |   | (503     | )
|Purchase accounting                                            |  |           | (7,391   | ) |      |   | (3,552   | )
|                                                               |  |           |          |   |      |   |          |  
|Total deferred tax liabilities                                 |  |           | (12,678  | ) |      |   | (4,055   | )
|                                                               |  |           |          |   |      |   |          |  
|Net deferred tax assets before valuation allowance             |  |           | 535,756  |   |      |   | 521,444  |  
|Valuation allowance                                            |  |           | (535,756 | ) |      |   | (521,444 | )
|                                                               |  |           |          |   |      |   |          |  
|Net deferred tax assets                                        |  | $         |         |   |      | $ |         |  
|                                                               |  |           |          |   |      |   |          |  

At March 31, 2007, the Company has federal and state research and development tax credit
carryforwards of approximately $84.9 million and $46.3 million, respectively, which will begin to expire in fiscal 2010 unless previously utilized. The Company also has federal and state net operating loss carryforwards of approximately $941.0
million and $404.7 million, respectively, which will begin to expire in fiscal 2012 and fiscal 2007, respectively. Federal and state laws impose restrictions on the utilization of net operating loss and tax credit



F-27



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



carryforwards in the event of an ownership change for tax purposes as defined by Section 382 of the Internal Revenue Code. As a result,
utilization of the portion of the Companys net operating loss and tax credit carryforwards may be restricted.

As a result of the
adoption of SFAS 123(R), the Company recognizes tax benefits associated with the exercise of stock options directly to stockholders equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss
carryforwards resulting from tax benefits occurring from April 1, 2006 onward. A windfall tax benefit occurs when the actual tax benefit realized upon an employees disposition of a share-based award exceeds the deferred tax asset, if
any, associated with the award. At March 31, 2007, deferred tax assets do not include $1.7 million of excess tax benefits from stock-based compensation.

The Company has established a valuation allowance against its net deferred tax assets, due to uncertainty regarding their future realization. In assessing the realizability of its deferred tax assets, management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable and the
full utilization of the Companys loss carryback potential, management concluded that a full valuation allowance should be recorded in 2007, 2006 and 2005.

The tax benefits relating to any reversal of the valuation allowance on deferred tax assets at March 31, 2007 will be accounted for as follows: approximately $193.1 million will be recognized as a reduction of
income tax expense, $261.2 million will be recognized as an increase in shareholders equity for certain tax deductions from employee stock options, and $81.4 million will be recognized as a reduction of goodwill.



|7. | Goodwill and Purchased Intangible Asset Impairments:
|-- | ----------------------------------------------------

The Company performed the annual impairment assessments of the carrying value of the goodwill recorded in connection with various acquisitions as required under SFAS 142. In accordance with SFAS 142, the Company compared the carrying
value of each of its reporting units that existed at those times to their estimated fair values. In performing the tests the Company had three reporting units. The Company determined and identified those reporting units in accordance with SFAS 142.

For fiscal 2007, the discounted cash flows for each reporting unit were based on discrete ten-year financial forecasts developed by
management for planning purposes. Cash flows beyond the discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 13% to 20% for the reporting units during the discrete forecast period
and the future cash flows were discounted to present value using a discount rate of 16% and terminal growth rates of 4%. We did not recognize any goodwill impairment as a result of performing this annual test. A variance in the discount rate or the
estimated revenue growth rate could have a significant impact on the estimated fair value of the reporting unit and consequently the amount of identified goodwill impairment.

For fiscal 2006, the discounted cash flows for each reporting unit were based on discrete ten-year financial forecasts developed by management for
planning purposes. Cash flows beyond the discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 15% to 17% for the reporting units during the discrete forecast period and the future
cash flows were discounted to present value using a discount rate of 16% and terminal growth rates of 4%. Upon completion of the annual impairment test for fiscal 2006, the Company determined that there was an indication of impairment because the
estimated carrying values of two of the three reporting units exceeded their respective fair values. As a result, we performed a step two analysis as required by SFAS 142. The second step of the goodwill impairment test



F-28



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. As a result of the analysis performed in step two the Company recorded a charge for $131.2 million in the fourth quarter of fiscal 2006.

For fiscal 2005, the discounted cash flows for each reporting unit were based on discrete five-year financial forecasts developed by management for
planning purposes. Cash flows beyond the five-year discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 15% to 33% for the reporting units during the discrete forecast period and the
future cash flows were discounted to present value using a discount rate of 17% and terminal growth rates of 7.5%. We did not recognize any goodwill impairment as a result of performing this annual test. A variance in the discount rate or the
estimated revenue growth rate could have a significant impact on the estimated fair value of the reporting unit and consequently the amount of identified goodwill impairment.

In November 2004, following a workforce reduction and restructuring plan, the Company determined that indicators of impairment existed for certain
purchased intangible assets associated with the JNI acquisition. In accordance with SFAS 144, the Company performed an impairment analysis of the identified intangible assets. Based on this assessment, the Company recorded a charge of $27.3 million
in December 2004 to write down the value of the identified intangible assets acquired in the JNI acquisition to zero. The Company also tested the goodwill associated with the related reporting unit for impairment in accordance with SFAS 142 in the
third quarter. Upon completion of the impairment test for the related reporting unit consistent with the methodology used for the annual test, the Company determined that the estimated fair value of the reporting unit exceeded the carrying values at
that time.



|8. | Restructuring Charges
|-- | ---------------------

The Company accounts for
restructuring costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that costs associated with exit or disposal activities be recognized 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 restructuring
programs initiated by the Company is as follows (in thousands):



|                                  |  |                     |        |   |                                                          |   |        |                                  |  |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------- | ------ | - | -------------------------------------------------------- | - | ------ | -------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                  |  | Workforce Reduction |        |   | Facilities Consolidation and Operating
Lease Commitments |   |        | PropertyandEquipment Impairments |  |   | Total  |  
|Liability, March 31, 2005         |  | $                   | 697    |   |                                                          | $ | 2,002  |                                  |  | $ |       |   |  |   | 2,699  |  
|Charged to expense                |  |                     | 7,450  |   |                                                          |   | 2,004  |                                  |  |   | 3,174  |   |  |   | 12,628 |  
|Cash payments                     |  |                     | (2,010 | ) |                                                          |   | (1,252 | )                                |  |   |       |   |  |   | (3,262 | )
|Noncash charges                   |  |                     |       |   |                                                          |   | (1,029 | )                                |  |   | (3,366 | ) |  |   | (4,395 | )
|Reductions to estimated liability |  |                     | (307   | ) |                                                          |   | 89     |                                  |  |   | 192    |   |  |   | (26    | )
|                                  |  |                     |        |   |                                                          |   |        |                                  |  |   |        |   |  |   |        |  
|Liability, March 31, 2006         |  |                     | 5,830  |   |                                                          |   | 1,814  |                                  |  |   |       |   |  |   | 7,644  |  
|Charged to expense                |  |                     | 500    |   |                                                          |   | 328    |                                  |  |   | 2,794  |   |  |   | 3,622  |  
|Cash payments                     |  |                     | (5,287 | ) |                                                          |   | (504   | )                                |  |   |       |   |  |   | (5,791 | )
|Noncash charges                   |  |                     |       |   |                                                          |   |       |                                  |  |   | (2,794 | ) |  |   | (2,794 | )
|Reductions to estimated liability |  |                     | (693   | ) |                                                          |   | (1,638 | )                                |  |   |       |   |  |   | (2,331 | )
|                                  |  |                     |        |   |                                                          |   |        |                                  |  |   |        |   |  |   |        |  
|Liability, March 31, 2007         |  | $                   | 350    |   |                                                          | $ |       |                                  |  | $ |       |   |  | $ | 350    |  
|                                  |  |                     |        |   |                                                          |   |        |                                  |  |   |        |   |  |   |        |  



F-29



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables provide detailed activity related to the four most recent restructuring programs
during the fiscal year ended March 31, 2007 (in thousands):



|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------- | ------ | - | -------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                    |  | Workforce Reduction |        |   | Facilities Consolidation and Operating
Lease Commitments |   |        | Propertyand Equipment Impairments |  |   | Total  |  
|April 2003 Restructuring Program    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2005           |  | $                   |       |   |                                                          | $ | 1,801  |                                   |  | $ |       |   |  | $ | 1,801  |  
|Cash payments                       |  |                     |       |   |                                                          |   | (685   | )                                 |  |   |       |   |  |   | (685   | )
|Reductions to estimated liability   |  |                     |       |   |                                                          |   | (209   | )                                 |  |   |       |   |  |   | (209   | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2006           |  |                     |       |   |                                                          |   | 907    |                                   |  |   |       |   |  |   | 907    |  
|Cash payments                       |  |                     |       |   |                                                          |   | (88    | )                                 |  |   |       |   |  |   | (88    | )
|Reductions to estimated liability   |  |                     |       |   |                                                          |   | (819   | )                                 |  |   |       |   |  |   | (819   | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2007           |  | $                   |       |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ |       |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|November 2004 Restructuring Program |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2005           |  | $                   | 697    |   |                                                          | $ | 201    |                                   |  | $ |       |   |  | $ | 898    |  
|Cash payments                       |  |                     | (313   | ) |                                                          |   | (303   | )                                 |  |   |       |   |  |   | (616   | )
|Noncash charges                     |  |                     |       |   |                                                          |   |       |                                   |  |   | (192   | ) |  |   | (192   | )
|Reductions to estimated liability   |  |                     | (384   | ) |                                                          |   | 102    |                                   |  |   | 192    |   |  |   | (90    | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2006           |  | $                   |       |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ |       |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|July 2005 Restructuring Program     |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Charged to expense                  |  | $                   | 1,450  |   |                                                          | $ | 975    |                                   |  | $ | 2,612  |   |  | $ | 5,037  |  
|Cash payment                        |  |                     | (1,527 | ) |                                                          |   | (264   | )                                 |  |   |       |   |  |   | (1,791 | )
|Noncash charges                     |  |                     |       |   |                                                          |   |       |                                   |  |   | (2,612 | ) |  |   | (2,612 | )
|Reductions to estimated liability   |  |                     | 77     |   |                                                          |   | 196    |                                   |  |   |       |   |  |   | 273    |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2006           |  |                     |       |   |                                                          |   | 907    |                                   |  |   |       |   |  |   | 907    |  
|Cash payments                       |  |                     |       |   |                                                          |   | (88    | )                                 |  |   |       |   |  |   | (88    | )
|Reductions to estimated liability   |  |                     |       |   |                                                          |   | (819   | )                                 |  |   |       |   |  |   | (819   | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2007           |  | $                   |       |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ |       |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|March 2006 Restructuring Program    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Charged to expense                  |  | $                   | 6,000  |   |                                                          | $ | 1,029  |                                   |  | $ | 562    |   |  | $ | 7,591  |  
|Cash payment                        |  |                     | (170   | ) |                                                          |   |       |                                   |  |   |       |   |  |   | (170   | )
|Noncash charges                     |  |                     |       |   |                                                          |   | (1,029 | )                                 |  |   | (562   | ) |  |   | (1,591 | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2006           |  |                     | 5,830  |   |                                                          |   |       |                                   |  |   |       |   |  |   | 5,830  |  
|Charged to expense                  |  |                     |       |   |                                                          |   | 328    |                                   |  |   | 2,794  |   |  |   | 3,122  |  
|Cash payments                       |  |                     | (4,917 | ) |                                                          |   | (328   | )                                 |  |   |       |   |  |   | (5,245 | )
|Noncash charge                      |  |                     |       |   |                                                          |   |       |                                   |  |   | (2,794 | ) |  |   | (2,794 | )
|Reductions to estimated liability   |  |                     | (613   | ) |                                                          |   |       |                                   |  |   |       |   |  |   | (613   | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2007           |  | $                   | 300    |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ | 300    |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|June 2006 Restructuring Program     |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Charged to expense                  |  | $                   | 500    |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ | 500    |  
|Cash payments                       |  |                     | (370   | ) |                                                          |   |       |                                   |  |   |       |   |  |   | (370   | )
|Reductions to estimated liability   |  |                     | (80    | ) |                                                          |   |       |                                   |  |   |       |   |  |   | (80    | )
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  
|Liability, March 31, 2007           |  | $                   | 50     |   |                                                          | $ |       |                                   |  | $ |       |   |  | $ | 50     |  
|                                    |  |                     |        |   |                                                          |   |        |                                   |  |   |        |   |  |   |        |  



F-30



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In April 2003, the Company announced a restructuring program. The April 2003 restructuring program
consisted of a workforce reduction of 185 employees, consolidation of excess facilities and fixed asset disposals. The Company recognized a total of $23.8 million in restructuring costs related to this restructuring program. The restructuring costs
consisted of approximately $5.7 million for employee severances, $7.2 million representing the discounted cash flow of lease payments on exited facilities, $3.4 million for the disposal of certain software licenses, and $7.5 million for the
write-off of leasehold improvements and property and equipment. This restructuring charge was offset by a $2.6 million restructuring benefit in November 2003 related to the reoccupation of a portion of a building in San Diego and an adjustment for
overestimated severance to be paid. During fiscal 2007, this restructuring accrual was reduced by $0.8 million to zero due to the planned reoccupation of this building prior to September 2007.

In July 2005, the Company implemented another restructuring program. The July 2005 restructuring program was implemented to reduce job redundancies and
reduce ongoing operating expenses. This restructuring program consisted of the elimination of approximately 40 employees, the disposal of idle fixed assets, and the consolidation of San Diego facilities. As a result of the July 2005 restructuring
program, the Company recorded a charge of approximately $5.0 million, consisting of $1.4 million for employee severances, $2.6 million for property and equipment write-offs and $1.0 million representing expenses relating to the consolidation of
facilities. During fiscal 2007, this restructuring accrual was reduced by $0.8 million to zero due to the planned reoccupation of this building prior to September 2007.

In March 2006, the Company communicated and began implementation of a plan to exit its operations in France and India and reorganize part of its manufacturing operations. The restructuring program included the
elimination of approximately 68 employees. In fiscal 2006, the Company recorded a charge of approximately $7.6 million, consisting of $6.0 million for employee severances, $1.0 million for operating lease write-offs, and $0.6 million for asset
impairments. During fiscal 2007, the Company recorded additional net charges of approximately $2.5 million, consisting of $0.2 million for excess lease liability, $0.1 million for operating lease commitments and $2.8 million for asset impairments,
offset by $0.6 million in workforce reduction liability adjustments.

In June 2006, the Company implemented another restructuring program.
The June 2006 restructuring program was implemented to reduce job redundancies. This restructuring program consisted of the elimination of approximately 20 employees. As a result of the June 2006 restructuring program, the Company recorded a net
charge of approximately $0.4 million, consisting of employee severances.



|9. | Commitments
|-- | -----------

The Company leases certain of its
facilities under long-term operating leases, which expire at various dates through fiscal 2013. The lease agreements frequently include renewal or other provisions, which require the Company to pay taxes, insurance, maintenance costs or defined rent
increases. The Company also leases certain engineering design software tools under non-cancelable operating leases expiring through fiscal 2009. Other purchase commitments relate primarily to non-cancelable inventory purchase commitments.



F-31



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes our contractual operating leases and other purchase commitments as of
March 31, 2007 (in thousands):



|                              |  |                 |        |                          |   |        |  |   |       
|----------------------------- |  | --------------- | ------ | ------------------------ | - | ------ |  | - | ------
|                              |  | OperatingLeases |        | OtherPurchaseCommitments |   | Total 
|Fiscal Years Ending March 31, |  |                 |        |                          |   |        |  |   |       
|2008                          |  | $               | 16,142 |                          | $ | 32,640 |  | $ | 48,782
|2009                          |  |                 | 12,010 |                          |   |       |  |   | 12,010
|2010                          |  |                 | 7,225  |                          |   |       |  |   | 7,225 
|2011                          |  |                 | 681    |                          |   |       |  |   | 681   
|2012 and thereafter           |  |                 |       |                          |   |       |  |   |      
|                              |  |                 |        |                          |   |        |  |   |       
|Total minimum payments        |  | $               | 36,058 |                          | $ | 32,640 |  | $ | 68,698
|                              |  |                 |        |                          |   |        |  |   |       

The Company did not have any off balance sheet arrangements at March 31, 2007.

Rent expense (including short-term leases and net of sublease income) for the years ended March 31, 2007, 2006, and 2005 was $2.6 million, $4.1
million, and $5.7 million, respectively.



|10. | Employee Retirement Plan
|--- | ------------------------

Effective January 1,
1986, the Company established a 401(k) defined contribution retirement plan (Retirement Plan) covering all full-time employees. The Retirement Plan provides for voluntary employee contributions from 1% to 20% of annual compensation,
subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company may contribute such amounts as determined by the Board of Directors. Employer contributions vest to participants at a rate of 33% per year of service. The
total contributions under the plan charged to operations totaled $1.0 million, $0.8 million, and $1.2 million for the years ended March 31, 2007, 2006 and 2005, respectively.



|11. | Significant Customer and Geographic Information
|--- | -----------------------------------------------

Based on direct shipments, net revenues to customers that exceeded 10% of total net revenues in any of the three years ended March 31, 2007 were as follows:



|            |  |      |   |  |      |   |  |      |  
|----------- |  | ---- | - |  | ---- | - |  | ---- | -
|            |  | 2007 |   |  | 2006 |   |  | 2005 |  
|Avnet       |  | 23   | % |  | 21   | % |  | 16   | %
|SanminaSCI |  | *    |   |  | 10   | % |  | *    |  

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

On July 5, 2005, Avnet acquired Insight Electronics. For purposes of the table above, the shipments to Insight Electronics and Avnet were retroactively combined for all periods presented.

Looking through product shipments to distributors and subcontractors to the end customers, net revenues to end customers that exceeded 10% of total net
revenues in any of the three years ended March 31, 2007 were as follows:



|                            |  |      |  |      |   |  |      |  
|--------------------------- |  | ---- |  | ---- | - |  | ---- | -
|                            |  | 2007 |  | 2006 |   |  | 2005 |  
|Nortel Networks Corporation |  | *    |  | 12   | % |  | 11   | %



F-32



---

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                         |  |                              |         |      |   |         |  |   |        
|------------------------ |  | ---------------------------- | ------- | ---- | - | ------- |  | - | -------
|                         |  | Fiscal Years Ended March 31,
|                         |  | 2007                         |         | 2006 |   | 2005   
|United States of America |  | $                            | 127,226 |      | $ | 115,043 |  | $ | 121,527
|Other North America      |  |                              | 24,214  |      |   | 27,686  |  |   | 21,003 
|Europe and Israel        |  |                              | 50,780  |      |   | 47,246  |  |   | 50,124 
|Asia                     |  |                              | 89,571  |      |   | 70,951  |  |   | 59,748 
|Other                    |  |                              | 1,061   |      |   | 918     |  |   | 1,354  
|                         |  |                              |         |      |   |         |  |   |        
|                         |  | $                            | 292,852 |      | $ | 261,844 |  | $ | 253,756
|                         |  |                              |         |      |   |         |  |   |        



|12. | Contingencies
|--- | -------------

Legal Proceedings

In April 2001, a series of similar federal complaints were filed against JNI Corporation (JNI) and certain of its
officers and directors. These complaints were consolidated into a single proceeding in U.S. District Court for the Southern District of California. Osher v. JNI, lead case no. 01 cv 0557 J (NLS). The first consolidated and amended complaint
contained allegations that between July 13, 2000 and March 28, 2001 JNI and the individual defendants made false statements about JNIs business and operating results in violation of the Securities

Exchange Act of 1934, as amended (Exchange Act) and also included allegations that defendants made false statements in JNIs public offering of common
stock in October 2000. In March 2003, the court dismissed the action with prejudice. In April 2004, plaintiffs filed a notice of appeal. The appeal was orally argued in December 2005. In May 2006, the Ninth Circuit Court of Appeals issued an order
affirming the March 2003 order dismissing plaintiffs complaint, but remanding back to the District Court to consider whether to allow plaintiffs to file another amended complaint or to articulate specific reasons why an amendment should not be
allowed. In August 2006, the District Court issued an order reaffirming its dismissal with prejudice. The time for plaintiffs to appeal that ruling passed without a notice of appeal being filed, thus resulting in a final judgment in the
defendants favor.

In October 2001, a shareholder derivative lawsuit was filed against JNI and certain of its former officers and
directors in the Superior Court of the State of California in the County of San Diego, case no. GIC 775153. The complaint alleged that between October 16, 2000 and January 24, 2001, the defendants breached their fiduciary duty by failing
to adequately oversee the activities of management and that JNI allegedly made false statements about its business and results causing its stock to trade at artificially inflated levels. The court sustained JNIs demurrers to each of the
plaintiffs complaints and dismissed the complaint in June 2002. In June 2002, the court granted Sik-Lin Huangs motion to intervene. Huang filed a complaint in intervention in July 2002. In September 2002, JNIs board of directors
appointed a special litigation committee to investigate the allegations. In February 2003, the special litigation committee issued a report of its investigation, which concluded that it was not in JNIs best interests to pursue the litigation.
In November 2003, the court dismissed the complaint with prejudice. In January 2004, the plaintiff filed a notice of appeal. A motion to dismiss the appeal was filed by the defendants on the grounds that the plaintiff had lost standing because he no
longer owned JNI shares. In October 2005, the court dismissed the appeal, finding the plaintiff had no standing to maintain the lawsuit. The California Supreme Court granted review of the Court of Appeals decision in January 2006. In
April 2006, plaintiff filed his opening brief. The Company filed its answer brief in May 2006. Plaintiffs reply brief was filed in August 2006. No date has been set for a hearing on this appeal.

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,



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



case no. 01 Civ 10740 (SAS). The complaint alleges that defendants violated 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. In June 2003, a proposed partial global settlement, subsequently approved by JNIs board of directors,
was announced between the issuer defendants and the plaintiffs that would guarantee at least $1 billion to investors who are class members from the insurers of the issuers. The proposed settlement, if approved by the District Court and by the
issuers, would be funded by insurers of the issuers, and would not result in any payment by JNI or the Company. The District Court granted its preliminary approval of settlement subject to defendants agreement to modify certain provisions of
the settlement agreements regarding contractual indemnification. JNI accepted the District Courts proposed modifications. The District Court held a hearing for final approval of the settlement in April 2006. In December 2006, the U.S.
Court of Appeals for the Second Circuit vacated the District Courts decision certifying as class actions the six lawsuits designated as focus cases. The Circuit Court ordered a stay of all proceedings in all of the lawsuits pending
the outcome of plaintiffs petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition but clarified that the
plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the stay remains in place.

In September 2003,
Silvaco Data Systems filed a complaint against the Company in the Superior Court of the State of California in the County of Santa Clara, Silvaco Data Systems v. Applied Micro Circuits Corporation, case no. 103CV005696. In its complaint,
Silvaco claimed that the Company misappropriated trade secrets and engaged in unfair business practices by using software licensed to the Company by Circuit Semantics, Inc. The Company filed an answer denying Silvacos allegations. In October
2006, the parties agreed to settle the lawsuit. Under the terms of the agreement, the Company paid Silvaco $150,000 and Silvaco released and dismissed all of its claims against the Company.

In April 2005, Cicada Semiconductor Corporation, a wholly owned subsidiary of Vitesse Semiconductor Corporation, filed a complaint against the Company
and other unknown defendants in the Superior Court of the State of California in the County of San Diego. Cicada Semiconductor Corporation v. Applied Micro Circuits Corporation, case no. GIC 845887. In its complaint, Cicada alleged that the
Company breached a contract to purchase assets from Cicada by failing to make installment payments due under the contract. Cicadas complaint sought $2 million in damages plus interest and its attorneys fees and costs. In June 2005, the
Company filed a crosscomplaint against both Cicada and Vitesse. The parties agreed to settle the complaint and crosscomplaint effective June 1, 2006. Under the terms of the settlement agreement: (i) Vitesse paid the Company the
sum of $221,661 in delayed product payments and interest, released and dismissed all claims against the Company and granted the Company a royaltyfree license to the Line Interface Unit technology that was the subject of the original contract
between Cicada and the Company; and (ii) the Company paid Vitesse the sum of $700,000 and released and dismissed its counterclaims against Cicada and Vitesse.

Various current and former directors and officers of the Company have been named as defendants in two consolidated stockholder derivative actions filed in the United States District Court for the Northern District of
California, captioned In re Applied Micro Circuits Derivative Litigation(N.D. Cal.) (The Federal Action); and four substantially similar consolidated stockholder derivative actions filed in the Superior Court of the State of
California in the County of Santa Clara, captioned In re Applied Micro Circuits Corporation Shareholder Derivative Litigation(the State Action). Plaintiffs in the Federal and State Actions allege that the defendant directors and
officers backdated stock option grants during the period from 1997 through 2005. Both actions assert claims for breach of fiduciary duty, gross mismanagement, waste of corporate assets, unjust enrichment, imposition of a constructive trust over the
option contracts, and violations of Section 25402 of the California Corporations Code. The Federal Action also alleges that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and
Section 20(a) of the Exchange Act. Both actions seek to recover



F-34



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



unspecified monetary damages against the individual defendants on behalf of the Company, restitution, rescission of the option contracts, disgorgement of
profits and benefits, equitable relief and attorneys fees and costs. The Company is named as a nominal defendant in both the Federal and State Actions; thus no recovery against the Company is currently sought. The Company and the individual
defendants have filed motions to dismiss in both the Federal and State Actions. The hearing on the motion to dismiss, or in the alternative stay, the State Action was held on March 2, 2007. The hearing on the motions to dismiss in the Federal
Action is currently scheduled for June 21, 2007. The Company has also moved to stay discovery in the State Action, and discovery is currently stayed in the Federal Action. No trial date has been set in either Action.

Regulatory Proceedings

In
June 2006, the Company received a request from the SEC to produce voluntarily certain documents concerning our historical stock option grant practices. The Company produced responsive documents and indicated its intent to cooperate fully with the
SECs investigation.

In June 2006, the Company announced in a press release that it had received a Grand Jury subpoena from the U.S.
Attorneys Office for the Northern District of California relating to its historical stock option practices and that a parallel investigation had been initiated by the U.S. Attorneys Office for the Southern District of California. The
U.S. Attorneys Office for the Northern District of California subsequently deferred the criminal investigation to the Southern District of California and withdrew its Grand Jury subpoena. In July 2006, the U.S. Attorneys Office for the
Southern District of California served the Company with a Grand Jury subpoena substantially similar to the subpoena previously issued by the Northern District of California.

The Company has been cooperating with the SEC and Department of Justice in connection with their investigations, including through in-person and
telephone meetings between Company representatives and the staff of the SEC and Department of Justice, and through the provision of information and documents.



|13. | Related Party Transactions
|--- | --------------------------

Prior to the fiscal
year ended March 31, 2006 from time to time the Company chartered an aircraft for business travel from an aircraft charter company, which managed an aircraft owned by a company that AMCCs former chief executive officer controlled. The
Company expensed a total of zero, zero and $(0.1) million for such charters during the years ended March 31, 2007, 2006, and 2005, respectively. These amounts were within the limits on such expenses approved by the Board of Directors.



F-35



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|14. | Quarterly Information (unaudited)
|--- | ---------------------------------

The following
table sets forth consolidated statements of operations data for each of our last eight quarters. This quarterly information is unaudited and has been prepared on the same basis as the annual consolidated financial statements. In our opinion, this
quarterly information reflects all adjustments necessary for a fair presentation of the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.



|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---------------- | - | ------- | ----- |  | - | ------- | - |  | ----- | ------- | - | ----- | - | ------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                                               |  | Fiscal Year 2007                      |         |   | Fiscal Year 2006 |  
|                                                               |  | Q1(1)                                 |         |   | Q2(2)            |   |         | Q3(3) |  |   | Q4(4)   |   |  | Q1(5) |         |   | Q2(6) |   |         | Q3(7) |  |   | Q4(8)   |  
|                                                               |  | (in thousands, except per share data) |        
|Net revenues                                                   |  | $                                     | 69,679  |   |                  | $ | 76,364  |       |  | $ | 76,642  |   |  | $     | 70,167  |   |       | $ | 64,673  |       |  | $ | 64,935  |   |  | $ | 65,243  |   |  | $ | 66,993   |  
|Cost of revenues                                               |  |                                       | 31,528  |   |                  |   | 35,536  |       |  |   | 37,799  |   |  |       | 35,851  |   |       |   | 30,833  |       |  |   | 31,093  |   |  |   | 30,017  |   |  |   | 30,449   |  
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Gross profit                                                   |  |                                       | 38,151  |   |                  |   | 40,828  |       |  |   | 38,843  |   |  |       | 34,316  |   |       |   | 33,840  |       |  |   | 33,842  |   |  |   | 35,226  |   |  |   | 36,544   |  
|Total operating expenses                                       |  |                                       | 42,193  |   |                  |   | 58,072  |       |  |   | 46,023  |   |  |       | 43,031  |   |       |   | 41,272  |       |  |   | 43,628  |   |  |   | 40,897  |   |  |   | 178,536  |  
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Operating loss                                                 |  |                                       | (4,042  | ) |                  |   | (17,244 | )     |  |   | (7,180  | ) |  |       | (8,715  | ) |       |   | (7,432  | )     |  |   | (9,786  | ) |  |   | (5,671  | ) |  |   | (141,992 | )
|Interest and other income                                      |  |                                       | 3,365   |   |                  |   | 3,429   |       |  |   | 3,121   |   |  |       | 3,460   |   |       |   | 3,404   |       |  |   | 3,537   |   |  |   | 4,940   |   |  |   | 3,992    |  
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Loss before income taxes                                       |  |                                       | (677    | ) |                  |   | (13,815 | )     |  |   | (4,059  | ) |  |       | (5,255  | ) |       |   | (4,028  | )     |  |   | (6,249  | ) |  |   | (731    | ) |  |   | (138,000 | )
|Income tax expense (benefit)                                   |  |                                       | 140     |   |                  |   | 74      |       |  |   | 113     |   |  |       | 75      |   |       |   | 176     |       |  |   | 175     |   |  |   | (1,315  | ) |  |   | 328      |  
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net income (loss)                                              |  | $                                     | (817    | ) |                  | $ | (13,889 | )     |  | $ | (4,172  | ) |  | $     | (5,330  | ) |       | $ | (4,204  | )     |  | $ | (6,424  | ) |  | $ | 584     |   |  | $ | (138,328 | )
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Diluted net income (loss) per share                            |  | $                                     | (0.00   | ) |                  | $ | (0.05   | )     |  | $ | (0.01   | ) |  | $     | (0.02   | ) |       | $ | (0.01   | )     |  | $ | (0.02   | ) |  | $ | 0.00    |   |  | $ | (0.47    | )
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  
|Shares used in calculating diluted net income (loss) per share |  |                                       | 291,178 |   |                  |   | 281,762 |       |  |   | 281,799 |   |  |       | 282,472 |   |       |   | 306,327 |       |  |   | 305,476 |   |  |   | 299,049 |   |  |   | 294,442  |  
|                                                               |  |                                       |         |   |                  |   |         |       |  |   |         |   |  |       |         |   |       |   |         |       |  |   |         |   |  |   |         |   |  |   |          |  

---

|(1) | The consolidated operating results for the first quarter of fiscal 2007 include a $1.2 million restructuring charge and $0.6 million for option investigation expenses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The consolidated operating results for the second quarter of fiscal 2007 include a $13.3 million in-process research and development charge related to the Quake acquisition, a $1.4
million restructuring charge and $1.1 million for option investigation expenses.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The consolidated operating results for the third quarter of fiscal 2007 include a $0.1 million restructuring charge and $2.7 million for option investigation expenses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The consolidated operating results for the fourth quarter of fiscal 2007 include a $1.4 million reduction in restructuring charge and $0.9 million for option investigation expenses.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The consolidated operating results for the first quarter of fiscal 2006 include a $1.5 million charge for stock based compensation expense related to the purchases of JNI and 3ware,
Inc.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The consolidated operating results for the second quarter of fiscal 2006 includes a $3.6 million restructuring charge.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(7) | The consolidated operating results for the third quarter of fiscal 2006 include a $1.3 million restructuring charge, and a $1.3 million tax benefit.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | The consolidated operating results for the fourth quarter of fiscal 2006 include a $7.7 million restructuring charge and a $131.2 million charge for the impairment of goodwill.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|15. | Subsequent Events (Unaudited)
|--- | -----------------------------

In March 2007, the
Companys stockholders approved a stock option exchange program to permit eligible employees to exchange outstanding stock options with exercise prices equal to or greater than $4.90 per share for a reduced number of restricted stock units to
be granted under the 2000 Equity Incentive Plan. The Company completed the exchange on May 15, 2007. Pursuant to the exchange, the Company accepted for exchange options to purchase an aggregate of 7,863,873 shares of common stock from 208
eligible participants and issued restricted stock units covering an aggregate of 1,751,164 shares of common stock.



F-37



---

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



|                                |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|------------------------------- |  | ----------------------------- | ----- | --------------------------- | - | ----------------------- |  | - | ---------- | --- |  | ---------------------- | --- | --- |  | - | -----
|Description                     |  | Balance at Beginning ofPeriod |       | Charged toCosts andExpenses |   | Charged toOtherAccounts |  |   | Deductions |     |  | BalanceAt End OfPeriod
|                                |  | (in thousands)               
|Year ended March 31, 2007:      |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|Allowance for doubtful accounts |  | $                             | 1,354 |                             | $ |                        |  | $ | 204        |     |  | $                      |    |     |  | $ | 1,558
|                                |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|Year ended March 31, 2006:      |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|Allowance for doubtful accounts |  | $                             | 1,784 |                             | $ |                        |  | $ |           |     |  | $                      | 430 | (1) |  | $ | 1,354
|                                |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|Year ended March 31, 2005:      |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      
|Allowance for doubtful accounts |  | $                             | 1,710 |                             | $ |                        |  | $ | 74         | (2) |  | $                      |    |     |  | $ | 1,784
|                                |  |                               |       |                             |   |                         |  |   |            |     |  |                        |     |     |  |   |      

---

|(1) | Reserve adjustment.
|--- | -------------------

|(2) | Recovery of amounts written off.
|--- | --------------------------------



F-38